As I am spending considerable time in China at the moment, it has been less convenient to write a new item on this blog. However, it is also a great opportunity to collect tons of information that will be used for new topics and updating existing blogs.
I came across interesting material providing inside information about the breakdown of the cost price of a number of food products in China in production cost, advertising cost and sales cost.
We have similar costs in our part of the world, but the proportions may differ in China. The costs of sales are notoriously high in China, which is largely due to the long list of ‘fees’ levied by retailers. A Chinese supermarket will not approach manufacturers to sell their products in their shops. The manufacturers, or more usually, their agents, will request the retailers to give them a spot on their shelves. If the retailers agree, they will not only not (immediately) pay for the goods, they will present a bill for the ‘entry fee’, that has to be paid immediately, otherwise your goods will not appear on the shelves.
Manufacturers can expect numerous other fees like ‘barcode fee’, or ‘top shelf fee’. If you would like to have your product on the top shelf, on the eye level of the customers, you need to pay extra for that location.
The production process of (health) tea is relatively simple: growing, picking, drying, fermentation, etc. Some are mixed with TCM herbs. However, each brand needs to invest considerably in advertising to make its unique properties clear to the prospects. Competition is fierce, which means that many types and brands are will contact the same outlet for a good space on its shelves. This is the reason for the very high ratio of sales costs in this category.
These are products like soy sauce, vinegar, fermented bean sauce, five spice powder, jiang, etc. They are products all consumers buy, so they need less advertising. This pushes up the ratio of the production costs for seasoning products. Sales costs are still considerable, but that is an item that will never be low in China.
The production processes of the various spirits (baijiu) are very similar. It is far from high tech, which is the reason that the production cost is relatively low. This product group can be roughly divided in two types: the nationally famous brands and local brands. Both do not require much advertising. The famous brands are already famous and the local brands are known and consumed locally. Cost of sales is expensive as usual. Especially the cost of entering into a restaurant is high, at least as high as that of entering a supermarket. Also see my special item on baijiu.
Mineral water is not simply water pumped up from the soil and bottled. It is a kind of mining business, which comes with high exploration costs. Advertisement costs are relatively low, because it is still regarded as a high-end beverage. However, insiders expect that to change within the coming 10 years. The sales costs are still considerable, but lower than average. This is due to the fact that manufacturers of mineral water delegate virtually all sales activities to wholesalers. If they would do (part of) their own sales, all profit would be lost on ‘entry fees’ of retailers alone.
This is a rather diverse product group, including carbonated drinks, fruit juice, tea beverages and sports drinks. The first two categories are low profit products. The latter two have more space for profits, but overall soft drinks are fast moving low profit goods. Most of the production cost is packaging, which needs to suit the typical way of consumption. A bottle must be as light as possible for easy carrying. The competition is killing, which pushes up the sales costs. Every player wants to get into as many sales points as possible. A particular problem for soft drinks is the enormous number of convenience stores in railroad stations, long distance bus stations and similar places. Advertising is necessary, but managing your sales channels is vital.
We have posted a dedicated item on this typical Chinese category earlier. It is an umbrella term comprising a broad range of good, including: peanuts, melon seeds, sausages, biscuits, beef jerky, fruit and vegetable chips, dried dates, and much more. This group includes a number of traditional local foods, but an even larger number of novel foods, designed to trigger the interest of Chinese travelers and tourists, who are always curious to try out something new. This is the reason for the high ratio of the production costs, which includes relatively high R&D costs. Advertising costs are lower, because these goods are purchased ‘on the run’. Sales costs are also considerably lower than for other product groups. The outlets that sell them are again the small stores at airports and railroad stations, or along freeways. These buy much smaller batches than a hypermarket like Carrefour and do so from a wholesaler, without negotiating endlessly about entry fees or shelf fees,
Milk has the highest ratio for production cost in the entire Chinese food and beverage industry. The source for these cost is located in the beginning of the value chain: the raising of dairy cattle. This is expense and a knowledge intensive industry. Advertising costs are high at the moment, as milk and dairy still have to fight with the bad image resulting from the melamine crisis in 2008. Image (re)building is more important than building the sales channels, hence the relatively low ratio for sales costs. Also see my item on traditional dairy products and formulated dairy products.
Eurasia Consult Consulting can help you embed your business in Chinese society.
Peter Peverelli is active in and with China since 1975 and regularly travels to the remotest corners of that vast nation. He is a co-author of a major book introducing the cultural drivers behind China’s economic success.