Broker's View

China’s packaged food industry set for stable growth in 2017, Fitch says

Food producers rely on innovative new products to attract consumers with changing preferences

PUBLISHED : Sunday, 20 November, 2016, 2:49pm
UPDATED : Sunday, 20 November, 2016, 6:36pm

China’s packaged food industry will retain its stable growth outlook in 2017 even as consumer preferences in food and beverage options undergo a shift, analysts say.

While food producers face headwinds with their core products as consumer become more conscious of health and quality, companies are making up for weaker sales by finding new ways to drive revenue, a Fitch report finds.

“Innovation and new product launches are likely to become more relevant to drive sales growth as

industry growth eases back,” Fitch analysts Yee Man Chin and Cathy Chao wrote in a report.

Taiwanese food manufacturer Want Want Holdings — known for its rice cakes and flavoured drinks — is working to diversity its products, particularly after posting soft sales in the first half.

Want Want’s rice-cracker segment was flat in the first half of 2016 and its snack food sales declined 11 per cent year on year, while dairy and beverage sales fell by over 19 per cent.

But in efforts to innovate, the company has rolled out brown-rice and “Baby Mum-Mum” rice crackers to tap into the desire for healthy snacks, and “is exploring other products to boost sales”, the Fitch report said.

The trend towards food that prioritises health and wellness has been seen globally, according to Mintel’s global food and drink analyst Jenny Zegler, who expects more healthy packaged products in 2017, particularly with plant-focused formulations.

“This year’s trends are grounded in current consumer demands for healthy, convenient and trustworthy food and drink,” she said. “Opportunities abound for companies around the world to capitalise on these trends.”

China’s packaged food industry as a whole will stabilise as middle class consumers see disposable incomes rise, subsequently becoming less price-sensitive and placing more of an emphasis on quality, according to Chin and Chao.

The “explosive growth” of China’s middle class will continue over the next few years, according to a McKinsey & Company report, with urban household income expected to at least double in the 10 years to 2022.

With more money in people’s pockets, consumer staples such as packaged goods will continue to experience “typically stable demand”, Chin and Chao said.

The industry also stands to benefit from steady margins, or the ratio of profits to costs, although producers may still see fixed operating costs eroded if sales continue to decline.

Packaged food producer Jiashili Group, which traditionally focused on the low- to mid-end market, has launched higher-end products in recent years. The company, which makes and sells biscuits, wafers, and moon cake products, has generated “strong revenue growth” from these higher-tier products, according to Fitch.

Chinese meat processing company WH Group is also expected to see higher revenue from growing demand for higher-quality pork products in China.

Greater leeway for product prices bodes well for manufacturers riding the possible cyclical upturn of the Chinese economy, said Moody’s analyst Alaistair Chan, with consumer prices on the whole rising 2.1 per cent in October, up from 1.9 per cent in September.

But food producers remain at risk from cost swings in key raw materials. Instant noodle maker Tingyi is at the mercy of palm oil prices, which in September were up 36.5 per cent compared to last year, and costs for sugar, which jumped 18.4 per cent year on year in September.

These rising prices, particularly for palm oil, could put pressure on Tingyi’s revenues for instant noodle products, according to an earlier Jefferies report.

Tingyi saw sales of its instant noodles fall 14 per cent in the first half compared to last year, while its beverage sales slipped 14 per cent as well.