China is experiencing history's largest and, likely, fastest ever urban shift with more than 300 million Chinese people moving to big cities. A new, empowered middle class is rising up with higher incomes, strong educations and a desire to better understand the food chain. Social media and recent food scandals have been putting pressure on the Chinese government to better manage and make fundamental changes. Meanwhile, Chinese poultry producers must increase their production efficiency to meet the increasing demand.
The rising Chinese middle class
Today's Chinese customers are becoming more conscious of what they eat; higher quality, safe, traceable and tasty meat products are more important than ever in the Middle Kingdom. But who are these consumers? As Lyons described, they are young, educated Chinese people building a strong middle class in the huge country. These people are SMARTTM*, are living in cities and are willing to pay more for quality. And, this new generation is intensively using social media to express their concerns about the Chinese food safety.
Scandals that hit the market
Recent Chinese food scandals continue to pressure the meat industry to change the way it looks at animal production. Companies such as KFC have strongly suffered from the traceability scandal that exploded less than a year ago when the Chinese state-owned CCTV stated in a report that Yum! Brands (corporate owner of KFC) chicken were fed with chemicals and treated with antibiotics. Just as the case began to fade, the Chinese industry was hit by influenza and other health challenges at farm level. The financial loss that H7N9 caused this year is estimated to be well over RMB 40 billion. Consumers reduced their poultry consumption, the live bird markets closed in many areas and day-old chick and live-bird prices fell significantly.
As David Byrne, former EU commissioner for health and food safety, said, there are two types of companies: those that already had a crisis and those that will. Several examples from the last decade showed that most of the Chinese companies are not prepared for handling crisis. Lyons urged the industry players to have crisis management plans. As he described, every organization has to have a person or select crisis management group who is in charge of making quick decisions and communicating effectively both within the organization and outside.
The power of social media
Besides the recent food scandals, Chinese social media has been playing a vital role in the shifting consumer landscape. Sina Weibo, QQ, Qzone, WeChat and yokou are popular social media sites that are connecting close to a billion people in China. The influence of Chinese social media is so powerful that, according to a recent study, close to 40 percent of Chinese people (ages 18-34) look for information on social media before they make decisions on product purchases. In the case of last year's KFC issue, the negative story spread immediately through social media, resulting in an immediate drop in KFC's sales in the country and forcing the company to take action.
Strengthening control by the government
Chinese customers are putting increasing pressure on the government to take action and introduce stricter legislation in food safety. The Chinese State Council, for instance, implemented a national-level quality control blueprint for Chinese companies in 2012, which stressed the importance of building a strong country with high product quality by 2020.
According to the Chinese government's National Animal Husbandry Development's Five-Year Plan, more than 95 percent of feed products should meet their specifications: undesirable and/or forbidden additives in the feeds being detected must be lower than 0.1 percent; fresh milk collection stations must register with an official certificate; and the standardized supervision and safety insurance system of fresh milk processing must be realized.
"Will this year be a horrible year for us or the year we put our business into another gear?" questioned Lyons. He then challenged the audience with six ideas:
- Improved capital efficiency -- Invest your money in profitable businesses
- Improved productivity -- Use new technologies for more efficient animal production
- Rationalized supply chains -- Effective vertical integration is key
- Proactive response to consumers' demands -- Create branded functional meat products
- Develop human capital: talented leaders for the future -- Identify and support talents
- New world class innovation -- Have your unique technology
Lyons sees the future as bright for the poultry industry. He forecasts that meat prices will have a mild recovery when disease ends due to high inventory of frozen chicken. In the short term, China's economic growth is expected to return to eight percent in 2013, which will greatly support poultry consumption as institutional buyers may increase poultry purchases and QSR sales may improve. Overall, China's poultry market will remain stable in the coming year, said Lyons.