Tapping poultry’s vast market opportunity in China

Explosive growth in China’s emerging middle class presents U.S. poultryproducers with an unprecedented market opportunity. Tapping it will requireadjustments in trade policy and marketing.

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"You are sitting on top of the No. 1 business in the world with fantastic and phenomenal growth," Matt Tripodi, Euromonitor International, told listeners at the USA Poultry & Egg Export Council winter meeting in Washington D.C.

Tripodi was speaking of the market opportunity for U.S. poultry and egg producers in China. In a word, the opportunity for poultry is vast. Literally hundreds of millions of consumers will be attaining incomes in the next 10 years that allow them to purchase poultry.

Per capita poultry consumption was 11.2 kilograms in 2012 for mainland China, but it is increasing.

"There is a tipping point in developing economies, about $5,000 disposable income, at which the consumption engine really cranks up. China is right about there. So we haven't seen the top of this market opportunity yet," he said.

China's vast market for poultry

How big is the market opportunity for poultry in China? The explosive growth of China's emerging middle class represents enormous economic demand as huge numbers of consumers become able to afford poultry. By 2022, more than 75 percent of China's urban consumers will earn CNY60,000 to CNY229,000 ($9,000 to $34,000) a year, according to McKinsey & Company estimates.

"As recently as 2000, only 4 percent of urban households in China were middle class; by 2012, that share had soared to over two-thirds. And by 2022, China's middle class should number 630 million -- that is, three-quarters of urban Chinese households and 45 percent of the entire population. The rise of the middle class is essentially an urban phenomenon. Average per capita urban income in China is roughly triple that in the countryside -- and there are set to be 170 million new urbanites between now and 2022," according to  Dominic Barton, global managing director, McKinsey & Company.

China's poultry market today

How does the poultry and egg market in China today compare with the U.S. market? The U.S. poultry and egg market size in 2012 was $61.6 billion. Mainland China and Hong Kong SAR market size in 2012 was $2 billion. This means the opportunity is still untapped.

What's more, China's domestic poultry industry won't be able to service the population's needs. China's importance as a trading partner, therefore, is only going to grow.

"China isn't just 'a' partner -- it is 'the' partner in U.S. agricultural trade," Tripodi said.

"From 2011 to 2012 U.S ag exports to China grew over $7 billion,  unprecedented single ‚Äź year growth.  From 2007 to 2012, China represented nearly 35 percent of total U.S. ag export growth. This is a whopping $17.7 billion out of $51.4 billion," he noted.  

U.S. poultry and poultry products trade with China set another record to top $6.5 billion in 2013. China is expected to be the third-largest market for U.S. exports in 2013. Key growth sectors include broilers, live poultry, chicken paws and feet and fresh chicken eggs.  

The business of doing poultry business in China

Euromonitor International's Tripodi provided USAPEEC members with analysis of the opportunity in China, as well as the business of doing poultry business there. His bottom-line conclusion: the China opportunity is, indeed, vast, but U.S. poultry needs increased market relevance. 

U.S. poultry producers need to increase market relevancy in China in order to seize a bigger share of the chicken, turkey and egg business unfolding there now. Tripodi recommendations to USAPEEC members included the following:

 

  • Develop flavored chicken paws for a China market that is looking for new value-added products
  • Market Halal poultry drums to China's large Muslim population
  • Cultivate stronger political and one-on-one business relationships in China 

There's urgency to the recommendations, because there is a global grab for shelf space and China is the leading growth market up for grabs. 

Political and trade relations are challenging

U.S.-China trade friction in poultry has been a real negative. In August and September of 2010 China imposed antidumping duties of between 50.3 percent and 105.4 percent on U.S. poultry. Countervailing duties of between 4 percent and 30.3 percent also were imposed. The WTO ruled against China's antidumping and countervailing duties in September of 2013, but political and trade relations must now be repaired.

"The losses to the U.S. broiler industry due to this trade dispute were somewhere near a billion dollars. So having this dispute decided is significant," Tripodi said.

Tripodi said the U.S.-China dispute illustrated two things. First, duties have a big impact on trade volume. Secondly, political relationships matter a lot in China. "Before the dispute Brazil was sending about $7 million of poultry products to China. Following the dispute, Brazil's poultry exports to China jumped to $548 million. With the antidumping duties and the countervailing duties, Brazil became the leader in both Mainland China and Hong Kong," he said.

He confirmed for listeners what they already know. Political and trade relationships are hugely significant for the Chinese. "Our research teams in China confirmed that trade is very heavily politically driven, and deals happen due to relationships at a political level," he said. 

Legislative and regulatory changes in China  

PEST (political, economic, social, technological) analysis performed by Euromonitor International identified legislative and regulatory changes in China to which U.S. producers must adjust:  

    • Licensing system  to regulate broiler import companies
    • Requirement of i nspection and quarantine approvals  and i mport licenses
    • S tricter l abeling requirements  (with both Chinese and English logos)
    • Requirement on o riginal packaging  with h ygiene certificate   and c ustoms seal
    • O ther quarantine and inspection regulations on imports  

In Hong Kong, legislation and regulation included the following:

    • Requirement of import license issued by the Hong Kong Food and Environmental Hygiene Department
    • Extend the coverage of HK Food Safety regulations to apply to imported poultry and egg products
    • New laws to better trace food sources in case of problematic issues

Markets evolving in China and Hong Kong  

Steady economic growth in Mainland China and Hong Kong has kept poultry and egg consumption stable, Tripodi said. There has been r apid and steady GDP growth in mainland China. Mainland China's CAGR in GDP in the 2008 to 2012 period was 13.4 percent. Meanwhile, urbanization in China has continued to increase and surpassed 50 percent in 2010.

Per capita poultry consumption was 11.2 kg for 2012 in mainland China, and still is increasing. There's still room for growth in poultry imports there. Annual poultry imports of mainland China were between 400,000 and 800,000 tons in the last five years.  

Hong Kong's growth has been stable, with GDP growing by 4.6 percent in the 2008 to 2012 period. The economy there was affected by the global financial crisis more severely, especially in 2009.

Hong Kong's importance as a poultry trading hub  

Hong Kong is a trading hub in Asia for poultry and eggs, and that market depends on imports. Hong Kong is situated to serve the Asia Pacific, where regional disposable income is expected to grow faster than anywhere else in the world through 2020. Per capita in disposable income in the region is expected to grow by $1,339 by 2020.  

"Estimates show that some 20 percent to 30 percent of this additional income will be spent on food. Asia Pacific represents more than a trillion dollar opportunity for the food industry," Tripodi said.

China's unique consumption habits are an opportunity

In the Mainland China and Hong Kong markets, consumption habits are somewhat unique, with insufficient domestic supply and demand for imports. There is high demand for chicken paws, feet, wings, etc. There is insufficient domestic supply of these items.

Mainland China's consumers are easily affected by negative reports about food safety issues due to a lack of relevant knowledge, Tripodi said. Consumers there are concerned about some locally produced poultry and egg products.

In Hong Kong, frozen chicken is already becoming a more mainstream product with consumer because of the convenience and food safety factors. It is also beginning to be seen as more westernized. At some point, frozen chicken could become more mainstream in Mainland for the same reasons.

"These things are evolving in the market place." Tripodi said. "As the barriers to products like frozen chicken begin to fall there will be an uptick in consumption of imported poultry."

Technological advancements playing a role

Technological advancement will play a role in the markets and the domestic industry's competitiveness in China, Tripodi said. As domestic producers adopt more advanced technologies, they become more efficient and competitive. The domestic industry is also beginning to adopt contract production.

Advances in container shipping and cold storage should also play a role in the market. This would result in a reduction in storage and logistics pressure, less attrition, lower cost and larger geographic coverage, he noted. 

Tripodi said technological factors promise to further industrialize China's poultry industry. Advances in logistics, shipment and storage will result in higher capacity to meet fast-growing demand.

Consumption increases and import trends

China's consumption of broiler meat is expected to rise from 8,802.2 thousand tons in 2010 to 10,409.2 thousand tons in 2015.

Mainstream poultry imports are expected to maintain growth momentum in the future, Tripodi said. Chicken paws, feet and wings will see further growth. Turkey will see rapid growth due to its current low market penetration.

High-added-value products have great market potential, he said. There is increasing demand for more convenient, ready-to-cook products for consumption.

US and Brazil are China's top poultry trade partners

China's top import partners are the U.S. and Brazil. Each of these competitors has strengths and weaknesses, according to Tripodi.

 

The U.S. has the following advantages:

    • An early entry in the China and Hong Kong markets with a good reputation for consistent quality
    • Abundant supply due to high level of industrialization of poultry and egg industry in the U.S.
    • U.S. chicken paws have unique texture and taste
    • The U.S. has more mature and convenient logistics, compared to Brazil

Brazil has advantages, too, including the following:

    • Prices are very competitive due to low labor cost
    • Good classification packaging and low water content in frozen products
    • Brazilian products, especially wings, have established reputation of similar quality to the U.S. products among importers in recent years
    • Brazil has good government and trade relations with China

How can U.S. poultry producers build their market share in China? Put the focus on market relevancy, Tripodi told listeners. U.S. poultry producers need to increase their relevancy up and down the supply chain to consumers, to importers, and to government officials. It is important to do so now because of the grab for shelf space going on now in the marketplace. 

"China is an evolving marketplace that is becoming more sophisticated. Consumers there are concerned more and more about food safety. As a result, new legislation and regulation is coming on line. This will make China a better marketplace for poultry. The net effect will be a more developed market which recognizes quality, and one in which U.S. poultry will compete on a more even footing," he said.

 

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