SUSTAINABILITY MARKET INTELLIGENCE

October 2009 Quarterly Report

The growing importance of sustainability as a market driver in some of New Zealand’s

food and beverage export markets has led the Ministry of Foreign Affairs and Trade
and New Zealand Trade and Enterprise to prepare a quarterly report for business
people highlighting trends and issues in key markets.

CHINA

SUMMARY:

• Organic and ‘green’ food seen as safer and healthier, but overpriced: Organic
and ‘green’ foods attract significant price premiums in China, but a recent
Beijing survey indicates that many see them as overpriced. Production of
‘green’ food (generally equivalent to developed country standards for non-
organic food) grew 8.43 percent in 2008, while sales for green food and
organics combined represented just under 3 percent of China’s food market.

• Foreign invested supermarket chains lead the way on food safety and
traceability: Supermarkets such as Carrefour, Walmart and Metro have been
emphasising the safety and traceability of their products, with Metro
establishing a deeply integrated standardised traceability system incorporating
international agricultural standards and providing traceability tracking codes on
individual products in stores. In line with their global corporate policies, such
stores are also leading China for other sustainability initiatives, such as store
energy/water efficiency, but domestic retail chains – the majority of the market –
lag behind.

• 2008 surge in agro-food and F&B investment: Statistics showing huge growth in
investment in agro-food processing, food production and beverage sectors
(around 20-40 percent) in 2008 represent confidence in growing incomes and
demand for product variety. Products (e.g. beverages) perceived as safe and
healthy may be well-placed to capitalise on this demand.

• Food Safety Law: A new national Food Safety Law and related regulations
came into effect in June/July, clarifying the roles of different Government
agencies, paving the way for new compulsory food safety standards, and
introducing new requirements for food safety management and records-keeping
for food companies. Whereas there may have been grey areas previously, the
Chinese authorities and public are taking a keen interest in ensuring that these
new rules are met.

CONSUMER TRENDS

Organic and ‘green’ food seen as safer and healthier, but overpriced

Organic and ‘green’ certifications for food are probably the concepts most widely
known to Chinese consumers related to the environmental credentials of food.
However, reduced environmental impact is not the primary attraction of these foods,

Sustainability market intelligence: October 2009

which are also perceived to be safer and healthier than non-certified foods. China’s
organic and ‘green’ food classification systems were covered in more detail in our
October 2008 market intelligence, but green foods basically represent an intermediate
level between ordinary products and organics, with many of the requirements for green
food being what consumers in developed countries would take for granted.

Green foods retail at 10-100 percent more than the price of normal goods, with the
premiums for organic produce even higher. Pricing also depends on factors such as
whether a product is domestically produced or imported (with the latter generally
commanding higher prices), and consumers’ confidence in the claim made (with false
claims and counterfeit goods a pervasive concern).

In a recent small survey of supermarket shoppers in Beijing, more than 50 percent

thought green food was overpriced. Fifty-two percent also thought that an acceptable
price would be no more than 10 percent higher than non-green food, while almost 28
percent said they were willing to accept a 10-40 percent price premium. Given that,
according to 2007 statistics, Chinese urban households spent around 35 percent of
their income on food (more than twice the figure for New Zealand households) this
price sensitivity is not surprising. The same survey also found a positive correlation
between higher incomes and education levels, and consumption of green foods and
concern for the environment. Women in the 30-40 age group were also the most likely
to be concerned about food safety and nutrition.

Green and organic foods represent a small but growing portion of the Chinese food
market. According to the China Green Food Development Centre, in 2008, 90 million
tonnes of green food was produced, a year on year increase of 8.43 percent. Sales of
green food and organics were RMB 227 billion/NZ$56.5 million, just under 3 percent of
the food market. Responding pragmatically to these market conditions and price
sensitivity, in China even ‘organic’ supermarket chains stock a mixture of organic,
green, and ordinary goods, with normal goods supplied at prices the market will
tolerate, and premium (organic/green) products targeting expatriates and wealthy
Chinese.

PRIVATE SECTOR ACTIVITY

Foreign invested supermarket chains lead the way on food safety and traceability

A number of food safety scares in recent years have reinforced scepticism and fears
among consumers. Even ahead of government regulation (see below), many
(particularly foreign invested) supermarkets such as Carrefour, Walmart and Metro
have instituted their own quality control/traceability systems, as well as having their
own house brands and organic/green foods sections. Walmart’s Chinese website has a
prominent “food safety” section where one can download an eight page brochure on its
quality assurance system, while Carrefour emphasises its house brands and “Quality
Line”.

Metro possibly has the deepest integration of traceability in China. This major
wholesale food company supplies the hospitality trade and increasingly is open to retail
customers. In December 2007 Metro established a wholly foreign owned enterprise
called Star Farm Consulting. Star Farm, based in Hefei, Anhui province has
established a standardised traceability system. The process covers farmers’
production, processing, packaging, logistics, and marketing operations. The system

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Sustainability market intelligence: October 2009
incorporates international agricultural standards such as HACCP (Hazard Analysis and
Critical Control Points) and GlobalGAP. Traceability tracking codes can currently be
found in stores for chilled chicken, duck, beef, fresh vegetables and herbs.

By turnover, Carrefour, Walmart and Metro ranked second, sixth and 16th respectively
in China in 2008, and combined represented about 12 percent of the market (less than
1 percent by number of stores). The majority of Chinese supermarkets have not
adopted such initiatives, and the majority of Chinese shoppers do not shop at a
supermarket (according to the Ministry of Agriculture, in 2008 around a third of
agricultural produce in large cities such as Beijing and Shanghai was sold via
supermarkets). The overall impact of these initiatives on the Chinese retail food market
is yet to be seen.

Carrefour, Walmart, Metro and Tesco have also made investments in improving the
energy efficiency and/or water efficiency of their stores in China, in line with global
trends. A report by the China Chain Store and Franchise Association indicates that
domestic retail chains are lagging behind their foreign counterparts in this respect.

2008 surge in agro-food and F&B investment

Chinese statistics recorded a surge in 2008 in investment in the agro-food processing,

food production and beverage sectors. In agro-food processing, investment in January-
July 2009 grew 38.6 percent year-on-year (to RMB 140.3 billion/NZ$29 billion), in food
production also by 38.6 percent year-on-year (to RMB$81.7 billion/NZ$16.9 billion) and
in the beverage sector by 20.7 percent (to RMB$53 billion/NZ$11 billion). This
investment represents confidence in growing incomes and with it a demand for greater
variety of products.

Products that emphasise safety and health are among those addressing this demand.
Both Coca Cola and Pepsi have tea-based products, marketed as having health
benefits. 100 percent fruit juices are another potential growth area, as highlighted by
Coca Cola’s ultimately unsuccessful bid for Huiyuan, a national brand juice producer,
earlier this year (Coca Cola has been more successful in other investments).

Corporate social responsibility highlighted, but with relatively narrow focus

Corporate social responsibility is a sustainability issue which does feature regularly in

the Chinese press. For example, the state owned English daily newspaper China Daily
allocates a page every week to corporate social responsibility, but the news is still in
the vein of firms (often foreign firms) donating money to charity. There does not appear
to be a holistic view of what corporate social responsibility involves.

GOVERNMENT ACTIVITY

Food Safety Law

In response to consumer concern over numerous food safety scares in China, a new
Food Safety Law was passed and entered into force 1 June 2009. The aim is to ensure
the safety of food from “farm to fork”. Key outcomes of the Central Government law
include:

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Sustainability market intelligence: October 2009
• Clarification of the different roles and responsibilities of the Ministries of Health,
Agriculture, Quality Supervision, Industry and Commerce.

• New compulsory food safety standards to be established covering everything

from food additives to labelling.

• Use of risk analysis in monitoring food companies and distribution networks.

• All non-approved additives banned from food production. Ministry of Health to

be responsible for assessing and approving food additives.

• Approved additives only permitted for use in the manner originally approved.
Penalties include closure of plants or revocation of licences.

Regulations passed under the law and effective 20 July, also require:

• Companies to establish their own food safety management systems, covering

raw materials to production and distribution. Firms to investigate promptly
possible breaches of regulations and retain records of their processes for at
least two years.

• Wholesalers to retain sales records for at least two years. Caterers to develop
systems to meet regulatory requirements around sourcing of raw ingredients
used for production.

• County and City governments to coordinate local departments of health,

agriculture, quality control, industry and commerce, and food and drug
administration to supervise food processors.

Companies exporting to China should seek up to date professional advice on how the
law and regulations apply to specific products.

Local governments are also able to pass their own regulations. Guangdong province
has mandated that from 1 October, all agricultural food products must be labelled with
an “ID”. This ID will include the name of the product, the date of production, origin of
the goods and the contact details of the business.

DISCLAIMER:
While the Ministry of Foreign Affairs and Trade and New Zealand Trade and Enterprise have verified the information in
this document, we make no representation as to the completeness, correctness, currency, accuracy or fitness for any
purpose of the information. The Ministry of Foreign Affairs and Trade and New Zealand Trade and Enterprise will not be
responsible for any damage or loss suffered by any person arising from the information contained in this document,
whether that damage or loss arises from negligence or otherwise.

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Sustainability market intelligence: October 2009