GIM 2008 -
POSTED ON: 01 Apr 2008
RESEARCHERS: Stephen Emmert, Shira Finger, and Ryan Metzger
Despite China’s long tradition of agriculture and the worldwide popularity of its cuisine, organic foods remain a small market there. This paper is a synopsis of research conducted as part of Kellogg’s Global Initiatives in Management program into the challenges facing China’s emerging organic foods. Among the challenges identified in the study, the most prominent were dilution of brands by counterfeits, certification barriers posed by the bureaucracy, and a lack of consumer education. Recommendations for overcoming these challenges are also presented.
Background on China’s Organic Foods Market
During the early 1970s, a man named Zhang Lingyu was jailed for promoting pesticide-free food. At the time, the government was emphasizing pesticide use to improve produce yields. Today China’s pesticide use, at 280 kg per hectare, is still one of the world’s highest. But recent concerns about food safety, motivated largely by international scares related to pet food, frozen foods, and milk emerging from China, have primed the domestic organic food market for growth.
China’s neighbors have already demonstrated significant demand for organic food. In Japan, this demand far outstrips supply, with consumers purchasing organic food at both supermarkets and specialty retailers. Hong Kong and Taiwan have also witnessed an increase in the consumption of organic foods through large chain stores and specialty shops such as Green Concept. In Taiwan, organics are now sold in over 1000 specialty stores, with consumers paying up to 100% more for such products.
As China’s GDP grows, such trends are expected there as well. A recent Boston Consulting Group report estimates that 37% of Chinese are looking to “trade up” on food and beverage quality, a proportion significantly higher than in the US and Europe. And greater education about environmental hazards (e.g., pollution and pesticides) is expected to escalate demand for organics. In 2005, sales of food certified as green by the Ministry of Agriculture rose 18% in China. Nonetheless, in 2006 organic food accounted for an estimated .02% of China’s total food market, a proportion up to 100 times less than those of developed countries.
Organic Retailers and Suppliers in China
Organic food retailers in China face an uphill battle. In 2005, O-Store opened in Shanghai to sell imported and local organic foods, but closed within two years due to poor sales. Some observers claimed that O-Store failed because it catered mostly to foreigners, who had trouble accessing the retailer due to its location. In contrast, Pines the Marketplace, another organics retailer, is located near a Carrefour store and an American School in Pudong, in an area of Shanghai frequented by expatriates. Pines opened in 2003 and sells almost exclusively to non-Chinese, potentially missing broader opportunity to sell to the native market. A third organics chain is Lo Hau City, which carries mostly imported products, in contrast to yet another retailer, Jenny Lou’s, which places greater emphasis on local products. According to Eva Sternfield of the China Environment and Sustainable Development Center, this domestic orientation makes Jenny Lou’s more likely to succeed.
Regarding suppliers, Shanghai Organics has been in operation since 1998, selling to high-end grocery stores, especially in the Shanghai area. Guy Wiener, current General Manager of the firm, notes that brand-building is a major challenge due to counterfeiting: each year, three to five competitors steal the brand name. Beijing Organic Farm, a second organics supplier, operates a similar business, growing from approximately $1 million in sales six years ago to $30 million currently. Both suppliers face the challenge of growing beyond their current farms, either through outside purchases, which raises quality control issues, or expansion to other farms, which the government facilitates.
Challenges in China’s Organic Food Market
Several challenges may impede the growth of China’s organic food market.
Price. The high price of organic food is perhaps the largest growth barrier. Many experts suggest that China’s price gap between organics and conventional products is greater than elsewhere. A qualitative survey of Hong Kong organics prices made clear that these products were significantly costlier than both conventional and green foods. Yet a comparison of Chinese and US organics revealed that the Chinese products’ prices were not disproportionately high. It is argued, then, that Chinese consumers likely have larger negative price elasticities, and data from the US Department of Agriculture provide support for this hypothesis.
Values and Corporate Responsibility. Despite this price elasticity in China, interviews revealed that a growing number of Chinese are turning to organics in an effort to avoid hazardous foods and to stay healthier. For example, Du Heng of Ecologia noted that consumers there may see a link between organics and lowered cancer risk. Although other motives, such as environmental benefits and animal welfare, are strong in US and European markets for organics, these are less powerful drivers in China.
According to the University of Michigan’s Ronald Inglehart, countries with “post-materialist” values emphasize intangibles such as freedoms and ideas, along with more immediate needs such as security and safety. Inglehart’s survey of multiple countries revealed that China had a lower level of post-materialist values than more developed countries, which could lead to fewer overall purchases of organics. This may change, given younger Chinese cohorts’ higher levels of idealism.
Branding. The prevalence of food safety problems in China has led to a general lack of trust of food brands among the general population there. Because organics tend to have lesser known brand names and are more vulnerable to counterfeiting, they face significant branding-related challenges. Counterfeiting can occur at both the supplier and retailer levels. For example, a given supplier may provide grocers with truly organic products, but also sell conventional products with copied organics logos and packaging. False labeling can also occur at the retail level. To mitigate supplier problems, Beijing Organic Farms and Shanghai Organics source primarily from their own farms, and Shanghai Organics only distributes through select, trusted retailers. To build its brand outside of the supermarket, Shanghai Organics also offers home delivery and gift boxes.
Certification. Layers of government bureaucracy complicate the certification process for organic foods in China. The China National Certification Administration (CNCA) oversees all certification in China; underneath the CNCA is the China National Accreditation Service (CNAS), which accredits all certification bodies, including 27 entities handling organics. These bodies all compete for contracts. The Organic Food Development Center was the first organics certification body in China; it is run through China’s State Environmental Protection Agency. But the Ministry of Agriculture, a stronger government agency, also promotes its own certification of foods as “green” and “pollution-free.” These layers and labels can be confusing for the average Chinese consumer, potentially hindering the growth of organics.
Education. Finally, a general lack of education and awareness about organics represents a growth barrier. While some organizations, such as the China Environment and Sustainable Development Reference and Research Center, distribute pamphlets about organic food, these attempts at educating the public do not have wide reach. Most organizations working within the realm of organics cited that it was up to the retailers to educate consumers on the benefits of organic food. While some retailers post store signs that educate consumers, retailers have yet to undertake any large scale efforts designed to impact consumer choices.
Given these growth barriers for organic foods in China, two strategies may be effective solutions: (1) Targeting high-income consumers (over 20,000 RMB monthly), including pregnant women in Shanghai and Beijing, may improve penetration, partly because of the “little Buddha” phenomenon that has resulted from China’s one-child policy. Parents, especially mothers, are willing to spend on products that benefit their children—especially during the prenatal phase. (2) Organics brands can be built effectively by exercising caution with partners (e.g., suppliers) and launching an education campaign focused on their health benefits. Such measures may help China-based organics fulfill the market potential they’ve realized elsewhere.