2016 China Food Industry Development Trend Report

The 2016 China Food Industry Development Trend Report (hereinafter referred to as the 'Report') was jointly released by Bright Food Group and Rabobank, detailing future development trends in China's food industry. The report points out that the 'new normal' economy brings structural changes to the food industry. For example, despite the overall slowdown in dairy consumption, high-end products have emerged strongly in recent years; the trend towards high-end infant formula and import preference is evident and will continue. Meanwhile, with the intensifying aging of the domestic population and consumers' greater focus on quality of life, healthy beverages will become one of the main themes in the future. The Report shows that Chinese FMCG companies, including food and beverage enterprises, are reallocating marketing and sales resources towards small and medium-sized cities; simultaneously, they are shifting from offline to online, with a rapid rise in vertical food e-commerce platforms in recent years. Additionally, due to changes in the downstream landscape, investment capital is actively exploring the blue ocean of fresh food e-commerce and cold chain logistics. The report specifically identifies 9 major development trends for China's food industry in 2016. The full content is as follows: 2016 China Food Industry Development Trend Report The 2016 China Food Industry Development Trend Report is the result of a joint study by Bright Food Group, a renowned food enterprise, and Rabobank, which focuses on the global food and agriculture sector. This collaboration combines Chinese experience with international perspectives, conducting in-depth research on new changes in China's food industry. Foreword Over the three decades since the implementation of reform and opening-up in 1978, China's macro economy has maintained an average annual growth rate of over 10%. Its GDP has successively surpassed Italy, the UK, France, Germany, and Japan, and it has now become the world's second-largest economy. Since the financial crisis, especially after 2013, China's economy has entered a 'new normal': economic growth is transitioning from being driven by government investment and exports to domestic consumption, and the growth rate has shifted from high-speed to medium-high speed. Although China's economic growth has slowed, it does not mean economic contraction; its GDP and growth rate remain higher than the vast majority of countries in the world. In the medium to long term, China's ongoing urbanization, the rise of the middle class, the gradual emergence of the 'Millennials' as the main consumer force, and expected income growth will continue to drive food consumption growth: Ongoing urbanization: China's urbanization process has advanced rapidly over the past three decades. By 2014, the urban population accounted for 54%. According to government targets, this figure will reach 60% by 2020. Thus, in the next five years, there is still considerable room for improvement in China's urbanization rate. Ongoing urbanization is an important factor driving the purchasing power of Chinese residents, and demand for dairy, meat, aquatic products, fresh vegetables, and fruits will continue to be supported. Rise of the middle class: With economic growth, the proportion of the middle class in the national population will continue to increase over the next five years. The rise of the middle class is conducive to China's successful transition to a 'consumption-driven' economy. Demand for high-quality food will also be strongly supported. 'Millennials' and the relaxation of the 'two-child policy': Currently, the 'Millennials' already account for 30% of the national population and are gradually becoming the main consumer force. Next, with the full relaxation of the 'two-child policy', this will help improve China's overall population structure. The new population will become an important force driving food consumption growth, especially providing greater growth space for healthy foods and dairy products. Part 1 China's economy enters the 'new normal', with expected slowdown in food and agriculture demand growth; future development will rely more on 'value-driven' growth. As China's economy shifts from external demand to domestic demand, the quality and sustainability of economic growth will also improve. Overall, future food and agriculture demand growth, similar to overall economic growth, will gradually shift from 'quantity-driven' to 'value-driven', from 'eating more' to 'eating better'. Looking at the entire food industry, in the coming period, due to downward economic pressure, the growth rate and profitability of the food industry will decline. Taking 73 listed companies in the food and beverage industry on China's A-share market as an example, analysis of changes in food enterprise operating data over more than three years reveals that both revenue and net profit growth have shown a downward trend. In 2014, the 73 listed companies had revenue of 373.1 billion yuan, a year-on-year increase of 1%, and net profit of 48.7 billion yuan, a year-on-year decrease of 8%. Compared with previous years, the industry's development speed has declined noticeably. Specifically: Both sales revenue and net profit growth have slowed; profitability continues to decline, with gross margin, net margin, and ROE indicators falling, and overall expense ratio rising; inventory as a proportion of revenue has increased, and cash flow quality has declined. From the perspective of food and agriculture sub-sectors, the 'new normal' brings structural changes to sub-industries: (1) In grain and oilseed consumption, rice and wheat remain flat overall, while corn and soybeans continue to grow but at a slower pace. Rice and wheat, as staple food crops, have low income elasticity of demand, so total volume will not fluctuate significantly; however, B2B specialty flour, especially for bakery products, has greater growth potential than general-purpose flour for household use. Corn, as the main energy feed, is expected to see slower demand growth in the future. On one hand, meat consumption has passed its high-growth period, and the base is already large. On the other hand, improvements in breed breeding, feeding technology, and scale can effectively increase the feed conversion ratio. Compared with developed countries, China's feed input per unit of animal protein output is still relatively high and has room to decline. In addition to feed, a considerable amount of corn is used to produce alcohol, starch, and derivatives. The downstream industries of such industrial consumption have a strong positive correlation with GDP growth; as the economy slows, this part of demand will be significantly affected. Soybean meal, as the main protein feed, has similar reasons for slowing growth as corn. Additionally, China's per capita consumption of edible vegetable oil has exceeded the world average, and future growth is expected to slow. Domestic oil and oilseed imports rely on overseas supply, especially soybeans and palm oil. The slowdown in demand also indicates that future import volumes will shift from high-speed growth to stable medium-speed growth. (2) In meat consumption, per capita pork consumption has reached a relatively high level, and its growth is basically saturated; future consumption growth will mainly come from beef and poultry, with poultry consumption possibly growing significantly due to relatively lower prices. The pork consumption market is shifting from a pursuit of quantity to a pursuit of quality. Food safety, product diversification, nutrition, and convenience are increasingly valued by consumers. Future market value growth will far exceed the growth rate of quantity. China's per capita poultry consumption is still very low, and the poultry market has significant growth potential. Currently, the poultry market structure needs further adjustment, and market channels need product innovation to broaden. At present, the bottleneck for poultry consumption in China is mainly consumers' misunderstanding of industrially produced poultry products. If this bottleneck is broken, growth may be faster than other meat types. Per capita beef consumption is still very low, and with rising incomes, there is still significant room for growth. Beef consumption is currently mainly in restaurants and fast food, but with the development of e-commerce and chain retail, beef is gradually entering household consumption. (3) Dairy consumption will continue to increase, but overall consumption growth will slow. Considering the differences in per capita dairy consumption between urban and rural areas due to urbanization and income levels, new differentiation will emerge under the expectation of slowing total consumption: high-income consumers will become the main driver of consumption upgrading, thereby driving the growth of dairy consumption value; middle-income consumers will gradually join the upgrading trend, driving value and volume growth; while low-income consumers' consumption will grow from nothing to something, mainly driving volume growth. Against the backdrop of overall slowing dairy consumption, the trend towards high-end dairy products has been very obvious in recent years, including imported milk, cheese, and domestic high-end milk; in the infant formula sector, the trend towards high-end and import preference is particularly evident, highlighting some consumers' rising requirements for quality and safety. This momentum will continue in the future. (4) Other industries downstream in the food chain, due to greater income elasticity of demand, show more diversified structural changes in market segments. Alcoholic beverages such as baijiu and beer have entered single-digit growth, and will still face certain challenges in product structure and channels in the future. Wine, benefiting from a low base and improved living standards, still has broad growth space. With the intensification of domestic aging and consumers' attention to quality of life, healthy beverages will become one of the main themes in the non-alcoholic beverage market in the future. The decline of carbonated drinks and the rise of bottled water and plant protein beverages are in line with this trend. Additionally, as the 'Millennials' become the main consumer group, diversified demand requires companies to enhance innovation capabilities and explore more sub-categories. The recent popularity of pre-mixed drinks and light beverages is in line with the trend of market segmentation. In the catering industry, affected by economic slowdown and the anti-corruption 'Eight Regulations', high-end catering has been severely impacted. After two years of transformation and upgrading, the catering industry is recovering. In the first eight months of 2015, catering revenue increased by 12.4% year-on-year, returning to double-digit growth, mainly due to the stable development of mid-range catering for the public. With the further development of the domestic cold chain market, food companies will increase investment in central kitchens to produce customized products for the catering industry. Food companies, facing many catering clients, have economies of scale, with costs lower than restaurants' own central kitchens. Benefiting from China's aging population and the continued expansion of the convenience store market, the boxed meal market will continue to rise, and the needs of white-collar workers will also drive industry development. Part 2 Domestic food consumption is continuously upgrading and gradually maturing, with clear differentiation in categories, channels, and regions. With fundamental changes in domestic supply and demand, and the continuous upgrading of domestic food consumption, under the new economic normal, food will show differentiation in consumption categories, channels, and regions. First, differentiation in food consumption categories. As the food consumption market matures, the proportion of spending on basic, subsistence items is gradually decreasing, while the proportion of spending reflecting quality of life and lifestyle is increasing year by year. In the past two years, in terms of price, high-end products related to health or improving consumer quality of life have seen average annual price increases exceeding the inflation rate of 2.5%. Mass consumer products, such as carbonated drinks, have seen price increases significantly below inflation, with some even experiencing negative growth. In terms of consumption behavior, within the same category, consumers are increasingly choosing high-end items, i.e., items priced 20% above the average price of the same category. In food and beverages, yogurt, beer, and bottled water have all seen consumption upgrading, with the market share of high-end items rising significantly. For example, 38% of yogurt sales come from high-end items. Imported products also account for a large portion of these high-end items and are growing faster than domestic products. Additionally, in recent years, healthy, functional, and organic foods have become industry favorites, with some companies growing into giants in sub-sectors by relying on healthy food and beverages. Second, differentiation in food consumption channels. Over the past three decades, in the food retail sector, the continuous expansion of new channels has eroded the share of traditional channels. Currently, sales growth in traditional grocery stores and hypermarkets is generally slowing; in contrast, supermarkets, small supermarkets, and convenience stores are doing better, with growth rates as high as 9%. The rise of e-commerce has put enormous pressure on supermarkets and hypermarkets, and although it has been less than a decade, it shows tremendous vitality. Third, differentiation in food consumption regions. China's first-tier cities remain important strongholds for FMCG, but they are no longer the fastest-growing places. FMCG growth in first- and second-tier cities has slowed significantly. In 2014, the compound annual growth rate of the retail market in first- and second-tier cities was only 2%, while in small and medium-sized cities (third-, fourth-, and fifth-tier), it was as high as 7.7%. FMCG companies, including food and beverage enterprises, are reallocating marketing and sales resources towards small and medium-sized cities. Additionally, comparing urban and rural residents' food consumption, rural residents' food consumption is growing faster than urban residents, with huge growth potential. Part 3 Expectations of RMB appreciation may reverse, with varying impacts on food and agriculture enterprises. In the past 18 to 24 months, China's economic slowdown has had a certain impact on the development of the food and agriculture industry. At the same time, the reversal of RMB appreciation expectations will have varying impacts on the future development of China's food and agriculture industry in many aspects, including agricultural product import demand, raw material costs, domestic and foreign financing, and overseas mergers and acquisitions. Food companies, especially those whose main raw materials come from overseas, must bear a new round of cost fluctuations. However, due to fierce competition in downstream industries, these cost increases are difficult to pass on to end-product prices. In grains and oilseeds, RMB depreciation has limited impact on demand for grains and oilseeds. Due to high self-sufficiency rates and government trade quota protection policies, China's grain imports are not large. In contrast, China's oilseeds are heavily dependent on imports. Although the impact on total import volume is limited, changes in the RMB exchange rate may alter the composition of import sources. Taking soybeans as an example, due to the strength of the US dollar, many manufacturers will turn to South America for soybean purchases. The depreciation of the Brazilian and Argentine currencies makes South American soybeans more price-competitive. In terms of import value, affected by the recent drop in crude oil prices, soybean and vegetable oil prices are at low levels. For commodities, on one hand, RMB depreciation makes imported goods more expensive domestically; on the other hand, the strength of the US dollar is often negatively correlated with commodity prices because commodities are priced in US dollars, and a strong dollar weakens US export competitiveness. Additionally, the plunge in oil prices has made international shipping cheaper than in previous years. In dairy products, the slowdown in the dairy industry in recent years is mainly due to high prices in 2013/14, market maturity, and the spillover effects of government anti-corruption measures. A slight RMB depreciation has not had much impact on dairy import demand. In the first half of the year, milk powder imports decreased by 50% year-on-year, mainly due to excessive imports in the previous period that needed time to digest, bringing inventories back to reasonable levels. Dairy imports are more affected by domestic consumers' confidence in product quality and domestic structural shortages. In the past 4-5 years, China's dairy industry has been actively seeking foreign investment and merger opportunities, especially in major export regions. Investors should accelerate their processes before a greater depreciation of the RMB. However, the lack of suitable targets will be a challenge for these investors. In the upstream livestock sector of the dairy industry, for farms using imported alfalfa, production costs will increase due to RMB depreciation, as imported alfalfa accounts for 25% to 30% of costs. Therefore, farms need to find a better balance between domestic and international prices. In animal protein, overall, currency depreciation has limited impact on China's meat import volume. Especially for pork and poultry, imports account for a very small share of total meat consumption, and import sources are diversified, which helps importers adjust import sources in time to avoid exchange rate risks. Since 2012, due to the long-term shortage in China's domestic beef market, reliance on imported beef has increased. Global beef prices are on an upward trend, and currency depreciation will bring greater price pressure to beef imports, thus affecting the growth rate of imported beef volume. Therefore, Chinese companies have been focusing on overseas beef investment opportunities to establish long-term stable beef supply. Expectations of RMB depreciation may prompt financially strong companies to accelerate overseas investment. In beverages, in recent years, tariff reductions have strengthened the competitiveness of imported wine and have built a loyal customer base. RMB depreciation has led some wine importers to consider raising prices to gain more profit. This will bring opportunities to domestic wine brands, especially mid- to low-end wines, where consumers are relatively price-sensitive. For domestic beer manufacturers, RMB depreciation raises the price of imported barley. For example, the raw material imported barley used in Tsingtao Beer accounts for about 8% of costs, and this proportion will continue to increase. The high profit margins of the baijiu industry, coupled with the environment of RMB depreciation, make this industry favored by foreign investors. Government deregulation in this area makes baijiu assets more attractive. In packaged food, RMB depreciation has little impact on imported packaged food. In recent years, demand for imported food among high-income groups has grown rapidly, mainly due to concerns about domestic food safety, and price elasticity of demand is very low. Additionally, traditional brick-and-mortar channels are enthusiastic about selling imported food, while online channel operators are willing to sacrifice profits to increase market share. At the same time, RMB depreciation has a certain impact on the prices of raw materials for some packaged foods. For example, high-end bakery products require imported wheat or flour. In addition to raw materials, domestic food companies need to import some high-specification food packaging and processing machinery from Japan, Europe, and Taiwan, and exchange rate changes will affect procurement costs to some extent. Part 4 Greater emphasis on utilizing 'two markets, two resources'; China's food industry 'going global' process is accelerating. China has a population of 1.36 billion, accounting for nearly 20% of the world, while arable land and freshwater resources account for only about 10% and 6%, respectively. Given the limited resources, the Chinese government has always emphasized 'basic self-sufficiency in grains and absolute safety of staple foods'. Specifically, for major staple grains, namely wheat and rice, the government will adhere to and improve the minimum purchase price policy to protect farmers' interests and their enthusiasm for grain production. For other agricultural products, such as corn, soybeans, cotton, and rapeseed, the government will reduce intervention to varying degrees, place greater emphasis on utilizing both domestic and international markets and resources, and on the basis of ensuring domestic production, import moderately to effectively safeguard national food security. During the '11th Five-Year Plan' period, the trade balance of agricultural and food products shifted from a small surplus to a deficit. During the '12th Five-Year Plan' period, the trade deficit further expanded, with deficits of $19.45 billion, $33.18 billion, $37.26 billion, and $39.55 billion from 2011 to 2014. In the coming period, the agricultural and food trade deficit will continue to expand. China's resources are largely complementary to world resources. The Chinese government encourages capable enterprises with global strategies to 'go global'. Against this backdrop, some enterprises have already participated in the global supply chain through direct investment and supply chain cooperation. The government's 'Belt and Road' policy supports agriculture 'going global' and establishing cooperative relationships with resource-rich countries, thereby maintaining stability between China and global supply. It is worth noting that in recent years, a new trend has emerged: some Chinese enterprises are going global not only for the domestic market but also with a view to the global market, allocating resources globally. In the grain and oilseed sector, COFCO has acquired 51% controlling stakes in Nidera and Noble Agriculture through cash acquisitions. Through these acquisitions, COFCO has gained control of warehousing and logistics facilities in major global grain-producing regions, as well as a strong trading network. By integrating global resources, COFCO has achieved a global layout of the industrial chain, opening up international channels from overseas production areas to domestic sales markets. In the animal protein industry, especially in dairy and meat, leading domestic food companies are accelerating their pace of going global. Bright Dairy acquired New Zealand's second-largest dairy company, Synlait, in July 2010 for approximately 382 million yuan, establishing a stable supply base with high-quality raw materials and providing a market entry point and production base for the company to enter the high-end infant formula market. Yili, Mengniu, and Yashili have also set up factories in New Zealand, and Synutra has invested in a large-scale whey powder production base in France. In the past two years, due to structural supply shortages in beef, Chinese companies have actively invested overseas to supply both domestic and global markets. New Hope acquired Kilcoy, Australia's fourth-largest beef processor, in 2013. Subsequently, New Hope continued to acquire Ruprecht, a US beef processing company. In September 2015, Shanghai Maling planned to subscribe to shares of Silver Fern Farms Beef Limited, New Zealand's second-largest agricultural product exporter, through a cash capital increase, achieving a strategic layout to control high-quality foreign beef and mutton upstream resources. In October 2015, Shandong Delisi successfully signed an agreement to acquire part of the equity of Australia's seventh-largest beef processor, expanding its business from pork processing to the beef market. In the pork production sector, WH Group acquired Smithfield in 2013, becoming the world's largest pork producer. Smithfield's R&D capabilities can also help WH Group develop high-value-added products. Smithfield's global pork asset layout also provides WH Group with a global platform, allowing it to allocate resources rationally. Part 5 Food safety is increasingly valued; the government is accelerating the establishment of a full traceability system for food safety. After gradually solving the major problem of 'not having enough to eat', how to solve the situation of 'not daring to eat' has become an urgent task for the development of China's food industry. In the past few years, due to imbalanced benefit distribution among various links in the food supply chain, coupled with inadequate supervision, a series of food safety incidents have occurred, negatively impacting industry development and consumer confidence. The increasingly severe environmental problems, causing pesticide residues, heavy metal residues, and other agricultural product safety incidents, have also received increasing attention from government departments. Research shows that in 2008, Chinese consumers were shocked by the melamine incident, which directly led to a 30%-40% drop in dairy consumption in the second half of 2008. The aftermath of the crisis continued until 2009, and it was not until 2010 that consumption recovered to pre-crisis levels. This crisis also changed consumer preferences, forcing dairy companies to pay more attention to the entire supply chain in investment, production, marketing, and consumer communication. In recent years, many Chinese dairy producers have upgraded the quality of milk sources, emphasized the natural environment of dairy cows in marketing (linking this to raw milk quality), and strictly adhered to standards during feeding and processing stages. In the past few years, the growth in sales of domestic high-end milk products has been evident. Currently, high-end products account for nearly a quarter of the liquid milk market, and consumers generally regard high-end dairy products as synonymous with safer and more nutritious. At the same time, to ensure the safety of upstream raw material supply, downstream enterprises have begun to try to control upstream resources. For example, Haidilao has its own vegetable farm to supply its chain of hot pot restaurants; Metro hires professional companies to guide farms to produce fruits and vegetables for itself, ensuring traceability. Shandong Xinlengda, a central kitchen enterprise, also has its own vegetable farm. Extending the industrial chain allows companies to strengthen source control, improve food quality, and help build brand image. In addition to source control, many consumer goods companies have established cold chain systems to better monitor the transportation process, such as China Resources Vanguard's self-built fresh food distribution center to support logistics and distribution of fresh products, better ensuring food freshness. At the government regulatory level, in recent years, the Chinese government has continuously increased efforts in food safety management. Since October 1, 2015, China has officially implemented the strictest 'Food Safety Law' in history, imposing higher requirements for food safety management. The state has explicitly proposed establishing a full traceability system for food safety. It is expected that from 2015 to around 2020 will be the accelerated promotion period for the construction of meat and vegetable food traceability systems in China. On one hand, the construction and acceptance of pilot cities will be accelerated; on the other hand, governments at all levels are expected to accelerate the construction of a full-coverage circulation traceability system. It is expected that the construction of food circulation traceability will mainly have four major directions. First, expand the coverage area. Currently, meat and vegetable circulation traceability construction has been carried out in 58 pilot cities, covering important cities in most provinces of China. In the future, these 58 pilot cities will definitely be used as entry points, connecting points to form a nationwide food circulation traceability network. Second, broaden the traceability categories. In the current food circulation traceability construction, traceability work for meat, vegetables, and Chinese herbal medicines has been clearly defined. According to the Food Safety Law and the implementation of the Ministry of Commerce's policies, it is expected that circulation traceability will gradually be extended to alcoholic beverages, dairy products, fresh food, and other types of food. Third, penetrate bidirectionally along the upstream and downstream of planting, breeding, food processing, and catering. The full chain of food traceability should run through upstream planting and breeding, midstream circulation and trading, and downstream processing and manufacturing. With the gradual improvement of the traceability system in the circulation and trading link by the Ministry of Commerce, during the '13th Five-Year Plan' period, the connection of the entire traceability chain upstream and downstream will become a high-probability event. Fourth, explore model innovation. At present, the construction of traceability projects is mainly government-led with mandatory supporting measures, and all sectors of society, especially food-related enterprises, are not very enthusiastic about participation. Therefore, there will definitely be related innovations in models in the future. At present, the main ideas include: **First, combine with key links such as electronic settlement. Include large wholesale markets, especially first-level wholesale markets, in pilot projects, actively promote the implementation of electronic settlement in wholesale markets, and explore e-commerce and business integrity construction based on the traceability system. Second, strengthen data utilization and create value-added services. The traceability system collects a large amount of data. Using data resources, active exploration can be made in e-commerce and integrity construction. The strict implementation of the new Food Safety Law requires the government to invest more human and material resources. As consumers' food safety awareness further improves, food companies will also actively explore from reality and accelerate the establishment of food quality and safety assurance systems suitable for their own characteristics. In the short term, this will undoubtedly increase corporate costs, but in the long run, it will help the survival of the fittest in the industry, and leading enterprises will establish healthy brand images. Part 6 China's agricultural products and food are highly globalized, and the mutual influence of domestic and foreign markets is strengthening. As China's supply and global supply become increasingly close, fluctuations in supply, demand, and inventories at home and abroad are increasingly influencing each other. On one hand, China imports more agricultural products and food from overseas, becoming a key market for many agricultural countries and enterprises. Overall, although China's influence on global food and agricultural commodity prices is not as significant as its influence on mineral product prices, for certain specific varieties, such as soybeans, its price influence is already very close. Due to constraints of resources and environment, as well as the limitations of small-scale, dispersed agricultural production methods, the overall intrinsic competitiveness of China's agricultural products is generally weaker than that of the United States, Australia, and South American countries, which are oriented towards scale and mechanization. Taking soybeans as an example, China's production cost per ton of soybeans is twice that of the United States and 130-180% higher than Brazil. Therefore, on one hand, the state hopes to reduce production costs and increase yields through appropriately scaled and intensive management, modern agricultural technology, and market-oriented resource allocation. On the other hand, the state also recognizes that the potential for significantly increasing domestic supply is limited, while consumer demand is steadily growing driven by urbanization and consumption upgrading. Therefore, facing the expected widening supply-demand gap, it is more appropriate to fully utilize foreign markets and resources, import moderately, and effectively safeguard national food security. As a result, due to increasing dependence on imports, global supply-side conditions (such as adverse weather, logistics blockages caused by strikes, and currency exchange rate fluctuations) will be quickly transmitted to the domestic market. Changes in China's demand and adjustments in related policies will also have a significant impact on the global market. Soybeans are a very typical example: China's imported soybeans account for more than 60% of global soybean trade. It is precisely driven by China's demand growth that soybean planting areas in the United States and South America have maintained growth in recent years. At the same time, the abundance or shortage of soybeans in major producing countries will also be quickly reflected in the domestic market in the form of prices. In addition to oilseeds, in the animal protein and dairy industries, the interaction between the domestic and international markets is also increasingly evident. In beef, due to the shortage in China's domestic beef supply market, it has also had a certain impact on the global market. Since 2007, China's domestic beef production has entered a stagnant period. Although prices have continued to rise since then, due to high investment requirements and long production cycles, Chinese beef cattle farmers cannot quickly increase production to meet new demand. In 2014, the State Council issued a document allowing a moderate increase in beef imports to fill the domestic gap. As a result, in the past few years, a large amount of low-priced imported beef entered China through formal import channels and 'gray channels'. This has also caused severe impact on domestic beef enterprises. By 2025, Rabobank predicts that the market share of imported beef will increase from the current 12% to 20%. In dairy products, since 2008, the food safety crisis in China's dairy industry has prompted structural adjustments in the upstream dairy industry. The continuous exit of small and scattered households, coupled with limited initial production increases from newly invested large-scale farms, has led to a gradual widening of the domestic supply-demand gap. At the same time, due to consumers' increased preference for imports, China's dairy imports began to grow rapidly, rising from 5% of liquid milk equivalent demand before 2008 to about 20% in 2014. China has become the world's largest dairy importer, accounting for 15% of international import trade (in liquid milk equivalent). The largest category in China's dairy imports is whole milk powder and skim milk powder as milk source substitutes, accounting for 73% of total imports (in liquid milk equivalent). This huge import volume means that changes in China's domestic production and consumption, and the resulting changes in import decisions, have a significant impact on international dairy commodity market prices. In 2013, China's domestic raw milk production fell by nearly 6%, and China significantly increased dairy imports to meet domestic market demand. That year coincided with production cuts in major dairy exporting countries due to weather, and the dual factors directly pushed international dairy commodity prices to a peak in nearly two decades. Starting from the second quarter of 2014, due to the recovery of domestic production, inventory pressure from excessive imports, and slowing domestic consumption, China eventually reduced imports from the international market in the second half of the year. This process coincided with the recovery of global major dairy production, and these factors together pushed prices to a decade low in 2015. Since 2007, especially since 2008, the price volatility of dairy commodities represented by whole milk powder has become more intense than before. To avoid the damage caused by large fluctuations in international prices to the domestic industry, the state is gradually improving the collection and analysis of agricultural data by statistical departments, enhancing the independence and authority of statistical departments, regularly publishing supply and demand data, sending clear price signals to the world, and promoting stable supply with expectations. As enterprises, in addition to paying attention to the domestic market, they must also have a global perspective, not only simple supply and demand, but also the political, economic, regulatory, and exchange rate aspects of major exporting countries, and assess the potential impact on their own business. Part 7 E-commerce is restructuring China's food and agriculture to cater to the needs of 'Millennial' consumers. Compared with traditional retail channels, China's e-commerce market transaction volume is growing rapidly year by year. China's food e-commerce is gradually becoming an important part of the entire e-commerce industry. According to data analysis from Euromonitor, the shift of Chinese consumers' spending habits from offline to online increased online food and beverage sales to 66.7 billion yuan in 2014, a year-on-year increase of 49%. In China, online platforms have become the fastest-growing distribution channel. There are two main types of food e-commerce operators in China: one is comprehensive platforms, such as Taobao and JD.com, which are characterized by providing platforms to attract food and fresh food manufacturers, with inherent traffic advantages. The other is vertical e-commerce platforms, focusing on food and fresh products, with self-delivery and regional characteristics, such as COFCO Womai and Yihaodian. In recent years, a large number of vertical food e-commerce platforms like COFCO Womai have risen rapidly, providing consumers with more choices beyond platform-based e-commerce. This development trend also places new demands on all aspects of the supply chain, including logistics, warehousing, and inventory management. Among food sold on e-commerce platforms, imported food and fresh food have particularly huge growth potential. Currently, fresh food accounts for only about 1% of total online platform sales. However, in the past three years, fresh food has become a major business for many online retailers, with sales growing rapidly. Among online retailers that mainly sell food, such as Womai, Yihaodian, and Meiwei77, although fresh food currently has a small share, it is expected to become the main category in the next 3-5 years. In addition, imported food sales account for 13% of China's online food sales. Almost all major online retailers claim to be able to directly supply imported foods such as seafood, beef, and fruits from the place of origin. To ensure safe delivery, many online retailers have increased investment in their own cold chain facilities. Foreign high-end imported food companies are also paying increasing attention to the Chinese market and are increasing promotional efforts through third-party platforms. More and more food brands are gradually transitioning from offline to online retail. However, the success of e-commerce is not simply about moving products online, but also about launching personalized customized products to meet customer needs and expectations. Currently, the 'Millennials', i.e., young people born between 1980 and 2000, account for about 30% of China's total population. They have higher requirements for food quality and health and have become the main consumer group in e-commerce. To better carry out marketing, e-commerce companies need to think about how to adjust online products and how to effectively target consumer groups. This includes adjusting the packaging size, packaging design, and product formula of online channel products according to the needs of target consumers; establishing sub-brands or launching new product series for online channels; using social networks and big data for product marketing to increase consumer participation. Part 8 China's food and agriculture industry is facing comprehensive transformation pressure and needs active innovation to promote business model upgrades. Due to product homogenization, intensifying competition, and rising operating costs, China's food and agriculture industry is suffering from the double squeeze of 'rising cost floor' and 'falling price ceiling', with both industry revenue and profits declining. Taking bulk raw materials for food processing as an example, the domestic prices of rice, wheat, corn, cotton, rapeseed, and sugarcane in China are already much higher than international prices. 'Made in China' has lost its competitive advantages of low raw material prices and low labor costs, forcing China's food industry to face the most difficult transformation period in 30 years. That is, to get rid of terminal competition that relies mainly on 'homogenization and price wars', it is necessary to actively innovate to promote industrial transformation and upgrading, rely on intelligence, informatization, and networking to reconstruct corporate business models, and shift to value competition of 'integrating and optimizing the industrial chain'. The transformation of the food and agriculture business model is a long and arduous task, and some enterprises are actively exploring breakthrough directions: First, achieve breakthroughs in reducing production costs and optimizing processes. For example, Wahaha has applied industrial robots to most production equipment in its production workshops, and all robots are independently developed. The large-scale use of robots in production makes the entire process from design to production to marketing more convenient and smooth. Through the transformation of Internet information technology, production plans, material supply, and sales delivery are all embedded in the information system management, greatly improving work efficiency. At the same time, it achieves a horizontal strategic leap from food processing to high-tech equipment manufacturing. Second, integrate 'Internet+' to achieve cross-border transformation. For example, Mengniu cooperated with Baidu to launch a QR code visual traceability milk 'Selected Pasture', putting the pasture on the 'cloud'. In addition, Mengniu also carried out strategic cooperation with bicycle brand Giant, using the smart body shaping milk M-PLUS's compatible hardware product, the smart body composition analyzer, to let users know their physical condition, and push personalized training plans and protein supplement reminders to related apps through the cloud. Third, use product packaging as a carrier to reversely integrate e-commerce resources and build a consumer ecosystem. For example, JDB through the 'Gold Can JDB 2015 Gold Rush Action', reversely integrated e-commerce platforms such as JD.com, Didi Dache, Baidu Takeout, and WeChat Movie Tickets. By scanning the QR code on the can to enter the Internet, it changes the isolated state of consumers when consuming FMCG, forming an Internet life circle, focusing on the four main lines of food, entertainment, sports, and music, rising from single product consumption to lifestyle choices. Fourth, food and agriculture giants cooperate with e-commerce giants to explore the operation of the entire industrial chain ecosystem of food, agriculture, and animal husbandry. For example, New Hope cooperated with JD.com. At the business development level, the two parties will carry out joint marketing based on their respective resources in cities and rural areas, including users, suppliers, and grassroots outlets, to help expand online retail channels; at the same time, by jointly building a smart agriculture and animal husbandry comprehensive service platform, implementing logistics, finance, information, and technical services, guiding agricultural and animal husbandry production, developing production bases, and enhancing comprehensive strength. Part 9 China's food and agriculture industry has entered a stage of accelerated integration, with various sub-sectors and industry links facing new changes, and industry leaders will be in a more favorable development position. After more than a decade of rapid development, the overall scale of China's food industry has made great progress. According to the National Bureau of Statistics, by 2014, the overall revenue of China's food and beverage industry reached 3,649.4 billion yuan, with total profits of 329.6 billion yuan. At the same time, industry concentration in some food sub-sectors has reached very high levels. For example, the top 5 beer companies have a market share close to 70%, the top 5 dairy companies have a market share exceeding 60%, Moutai and Wuliangye occupy more than 90% of the high-end baijiu market, and the top 3 edible oil companies have a market share exceeding 60%. The concentration in other food and agriculture sub-sectors is also increasing, and the food industry is showing an increasingly strong Matthew effect, where the strong become stronger and the weak become weaker. To consolidate and maintain market leadership, integration and mergers have become important competitive tools for leading food companies. Taking 2014 as an example, from the acquisition of Jilin Aipeite by Feihe Dairy in January to the acquisition of Guangxi Fengtang by Bright Food Group in December, there were more than 20 mergers and acquisitions in China's food industry in 2014, with transaction amounts exceeding 30 billion yuan. Despite weak consumer confidence, the capital market of China's food industry remained highly active. From the perspective of the industrial chain, at present, the development levels of various links in China's food industry chain are not the same, and the development capabilities of each link are not matched, which determines that China's food and agriculture industry will enter a stage of accelerated integration. Taking the meat product industry chain as an example, the upstream of the industrial chain includes seed sources, feed processing, and pig breeding; the midstream includes slaughtering and processing and deep processing of meat products; and the downstream includes cold chain logistics, distribution channels, and terminal consumption, totaling roughly eight links. In the upstream of the industrial chain, Chinese food enterprises, whether in seed sources or planting and breeding, are generally in a small-scale, dispersed, and extensive production mode. Whether in product quality, quantity, or production and operation costs, it is difficult to meet the requirements of modern food processing for standardized, scaled, and balanced production. The development level and processing capacity of the midstream of China's food industry chain are basically in sync with the advanced level of international counterparts, objectively resulting in a large amount of idle food processing capacity, forming a huge contradiction between the upstream and midstream of the food industry. From the downstream of the food industry chain, food logistics, especially cold chain logistics, lags far behind the development needs of the food industry. In addition, in the construction of modern circulation channels, except for first- and second-tier cities, it is far from meeting consumer needs. At the same time, not only the meat product industry, but also the grain processing industry, sugar industry, dairy processing industry, and food and beverage industry generally have similar problems. The factors driving the integration of China's food industry in the future are multifaceted, and the various factors overlap and jointly promote the food and agriculture industry into a stage of accelerated integration. From the upstream of the industrial chain, based on considerations of food safety, regional industrial layout, and adjustment of backward industrial structures, the government will become an important force in promoting the integration of the upstream of the food industry chain. For example, in the seed industry, in April 2011, the State Council issued opinions on accelerating the development of modern crop seed industry, clearly proposing to promote mergers and reorganizations of seed enterprises, support large enterprises to enter the crop seed industry through mergers, acquisitions, and equity participation; encourage mergers and reorganizations among seed enterprises, especially encourage large advantageous seed enterprises to integrate crop seed resources, optimize resource allocation, and cultivate 'breeding, propagation, and promotion integrated' seed enterprises with core competitiveness and strong international competitiveness. In livestock breeding, in recent years, local governments in Zhejiang Province have resolutely shut down 'low, small, scattered, and chaotic' farms that seriously affect the environment, while paying attention to protecting breeding farms and standardized large-scale farms listed in the provincial-level or above livestock and poultry genetic resources protection catalog, and accelerating the construction of a number of ecological farms with appropriate scale, integration of agriculture and animal husbandry, and resource recycling, showing the determination and means of local governments to accelerate the integration of livestock breeding. In the midstream of the food industry chain, the degree of marketization, scale, and branding is relatively high. In the context of declining industry growth, leading food companies, in order to consolidate their position or enter a more growth-oriented field, will become the dominant force in promoting industrial integration. For example, in 2014, WH Group, together with Sigma, a leading North American meat and cheese processor, acquired Campofrio Food Group, Europe's largest packaged meat product manufacturer. One of the main purposes was to further enrich WH Group's product categories in cooked ham, dry sausage, dry ham, hot dog sausages, poultry products, and cold cuts, maintaining market leadership. Another example, also in 2014, Huiyuan Juice acquired Suntory's China business, mainly attracted by its tea beverage business, especially oolong tea, because after occupying the top position in medium- and high-concentration juice for many years, Huiyuan Juice needed to make new breakthroughs in new business areas. In the downstream of the food industry chain, investment capital is the leading force, actively integrating and opening up the blue ocean of fresh food e-commerce and cold chain logistics. For example, JD.com led the investment in Fruit Day, Alibaba laid out Yiguo.com, and COFCO Womai completed its C-round financing, receiving approximately $200 million in investment from Baidu and Taikang Life, among others. At the same time, Alibaba invested approximately 28.3 billion yuan in Suning Commerce's private placement, and the two sides will launch comprehensive cooperation in e-commerce, logistics, stores, O2O, and other fields; JD.com invested 4.3 billion yuan in Yonghui Superstores for a 10% stake, aiming to strengthen supply chain management and actively expand development opportunities in the O2O field. From the perspective of industry sub-sectors, sub-sectors with relatively low concentration, such as condiments, slaughtering and meat processing, cold chain logistics, snack foods, and functional beverages, all have many development opportunities for industrial integration. -END- Content Selection Click on the title below to read directly: [Line Sales Representative Practical Operation Guide (with full set of PPT download)