"Fat China" Author Sizes Up Taiwan's Success In China's Food Market, Rising M&A

If history is a guide, the new 2014 Taiwan Rich List due this week will include food industry billionaires Tsai Eng-Meng of Want Want (last year's No. 1), along with Wei Ing-chou and his brothers who run Tingyi (last year's No. 3).  What gives these and other Taiwan food and beverage companies such staying power in the mainland in the face of competition from global giants such as Coke, Pepsi and Unilever, as well as local players such as Wahaha?

To find out more, I exchanged with Matthew Crabbe, research director for the Asia-Pacific at market research firm Mintel. Crabbe is the co-author of "Fat China: How Expanding Waistlines Are Changing a Nation" (2010).  His most recently published title out this year is "Myth-Busting China's Numbers: Understanding and Using China's Statistics."

Besides the success of Taiwan leaders, Crabbe also explained why slower economic growth in China is likely to lead to more consolidation of its food industry, and why Chinese food companies in search of quality products and innovation skills are poised to continue a recent flurry of overseas acquisitions and investments.  Excerpts follow.

Q. What accounts for the staying power of Taiwan's big food and beverage companies such as Want Want, Tingyi and Uni-President in the China market? 

A. What has set Taiwanese brands such as Want Want, Tingyi and Uni-President apart from their mainland counterparts previously is that they have established strong brand identities, and have maintained leadership in product innovation. Being listed off-shore from the mainland also arguably gives them an advantage in more easily gaining the investment needed to further fund their marketing of new and innovative products to stay ahead in the highly competitive markets they are involved in.

Q. Why is it that home-grown Chinese companies seem to have difficulty finding comparable success? 

A. Taiwanese companies hail from an island that has long had a large middle class, who demand quality of product rather than just the cheapest price, so they have grown in an environment that demands they compete in providing consumers with more value-added. Most food markets on the mainland remain highly fragmented, with a relatively small middle class until recently. This has meant most manufacturers and brands were forced to compete on being the cheapest, rather than the best in class.

The rapid recent emergence of China's middle classes has brought with it more demand for the value-added that Taiwanese companies have been able to deliver. But this has also created the market environment that encourages more mainland companies to switch away from competing on price alone, and focus more on raising levels of product quality and innovation.

Already, companies such as sauces maker Foshan Haitian (Haday) have been focusing more on higher quality and more profitable higher-end products, and shifting away from the lower end of the market. This has not only helped the company to rise to the top of the snacks market within the mainland, but also to begin exploring many export markets.

Q. As China gets used to what President Xi has called a "new normal" of slower economic growth, what are the prospects for more mergers and acquisitions among the various players in the food industry?  In what segments would there most likely be consolidation?

A. The slowing economy, coupled with rising demand for better quality goods, in already highly competitive and fragmented markets will inevitably lead to consolidation, and I expect there to be much merger and acquisition activity in the food industry, across all sectors. We have already seen this is the dairy sector, for example.

Most sectors will follow the beer market, where consolidation has come through leading brewers buying up successful regional brands to add to their portfolio (if deemed worthy of keeping) or simply to add local production capacity in new territorial markets in order to reach more consumers.

Such wider market coverage also provides opportunities for brands successful in one part of China to do well in other regions previously not covered. For example, both Snow Beer and Harbin Beer have seen good growth in southern China thanks to their marketing focus on being refreshing, which chimes well with consumers in the warm, subtropical climate of the south.

Q. What will characterize the winners in the industry in the next few years?

A. Innovation will be crucial in the coming years. Providing consumers with better quality products will not be enough. There needs to be strong marketing and an innovative approach to winning consumers' attention.

A good example is the snack food retailer Laiyifen. The snacks market is highly fragmented even by Chinese standards, with few strong national brands (apart from Want Want and Qia Qia) and where products were commoditised. Look at the snacks aisle of any Chinese supermarket, and you are greeted with a cacophony of hundreds of vying brands and varieties of products.