The Chocolate market in China
August 8, 2013
The Battle of the bonbons
Ever since the People’s Republic of China opened up to the world in the 1980s countless foreign companies have taken their business east. Companies quickly acknowledged the opportunities to take benefit of the world’s largest potential supply market. Successes were achieved by many, who saw their sales levels grow with double digits annually. The Chinese gained access to BMW cars, Louis Vuitton bags, I-phones and Rolex watches. The chocolate market in China, however, remained dormant and in the latter half of the 20th century, chocolate was still a product that many Chinese had never tasted in their lives despite its long history. Research by Euromonitor tells us that today the average annual consumption per Chinese accounts up to only 200 grams, as opposed to over 10 kilos for many European countries. There are, however, signs that this lag won’t last for long: The world’s five largest chocolate producers (Hershey, Nestle, Cadbury, Mars, and Ferrero Rocher) are determined to claim their share.
No Chocolates for the Chinese
Its main ingredient cacao is not indigenous to China and the climate is unsuited for dairy farming due to the high humidity, therefore chocolate was traditionally not available to the Chinese people. The gradual opening up of the Chinese market during the 1980s and early 1990s seemed like the perfect moment for international chocolates giants to take advantage of the huge population and create an enormous supply market. They tried it like almost every other industry, but this time product introduction seemed too complex. It was just not the right time. But why not? The explanation for this is twofold.
Firstly, there were cultural difficulties. Chinese and Western attitudes towards food are very different, and firms first had to understand these differences before they were able to successfully launch their products. Chinese consumers perceived the product as luxury and exotic, and purchased chocolates primarily as a gift rather than for personal consumption. In anticipation of this aspect of Chinese culture, the Belgian chocolates producer Godiva successfully introduced premium chocolates gift sets. Additionally, resulting from yin and yang traditions that influence food purchasing patterns, chocolates sales are seasonal showing bottom lows in Summer.
Secondly, there were a number of logistical difficulties for companies wishing to enter this lucrative market. China’s lack of necessary chilled distribution channels dramatically affected how the Big Five formulated their China strategies. During the 1980s and early 1990s containers would often sit for days/weeks at the port and during the distribution process, non-air-conditioned vehicles and stock spaces would be used. There was almost nothing the Big Five could do to influence the distribution environment of their market; first China’s retail market needed to evolve.
Evolving of China’s retail sector:
In the early 1990s only small neighborhood shops were popular meaning that there was little opportunity for luxury and air-conditioned goods such as chocolate. But by the mid-1990s the emergence of modern retail stores in the mid-1990s granted opportunities for the Big Five. Development however occurred unevenly throughout the country, making the business more complex. China needed its retail market to enhance in order for logistics and distribution systems to adapt and facilitate air-conditioned and luxury products. Chocolate is a tricky substance – difficult to manage, sensitive to heat and cold, and with a tendency to melt. Also on top of this, the average Chinese customer has different shopping habits to their western counterparts and will spend longer at the aisle deciding on which brand to buy. Thus meaning that packaging, ingredients, weight and cost become even larger deciding factors on a purchase.
By the late 1990s 1st tier cities had enough accessible customers and distribution infrastructure to support chocolate businesses. Since then more and more cities modernized and opened up opportunities for chocolate manufacturers; that’s why China has staggered stages of chocolate development across different areas of the country. The first of the Big Five to establish a strong presence in China, Ferrero Rocher has managed to keep up its high prices and exclusivity under the foreign image. Shipping its Italian-made chocolates to Hong Kong for packaging, Ferrero Rocher has taken special care to ensure product quality after distribution. By maintaining a high quality standard Ferrero Rocher was coined “the global chocolate industry’s first ambassador to China” by Lawrence L. Allen in his book In Chocolate Fortunes: The Battle for the Hearts, Minds, and Wallets of China’s Consumers.
Of other companies trying to make chocolate a treasured yet affordable part of everyday life mars has succeeded in China. The first of the Big Five to build a chocolate plant in China, Mars markets its high end Dove brand within China as its main attempt to market chocolate to China’s everyday consumer and to capture a large portion of the gift market. After initially entering the market with M&Ms they were deemed as childish so Mars began manufacturing Dove in China, as a high quality and aesthetic brand. Dove chocolate products were genuinely luscious and were also intelligently marketed as an exotic luxury surrounded by foreign mystique. By working in this way Mars was dynamic where others were locked in routine, responsive where others were resistant to change and absolutely focused on pleasing the customer as they entered a new culture with different preferences and tastes.
Despite the 2008 market crash chocolate sales worldwide have just kept growing. Chocolate, it seems, offers consolation in the midst of crisis but how does one market chocolate to a people unfamiliar with it? How does one distribute chocolate in a vast nation with poor infrastructure and very limited ability to prevent the product from melting or freezing during shipping? Can chocolate even be sold during the summer months, when most shops are not air-conditioned? Should chocolate be imported, or should it be made in China?
The opportunity to reach a billion new customers is also the opportunity to get stuck in a costly quagmire of inefficiency and loss. This being said, the chocolate market in China is still very young and it is not too late to get a foothold whilst it is taking off.
Success in the Chinese chocolate market depends on a firm’s ability to:
use experience of 1st tier markets in 2nd tier markets
use mass media to speed up developments in 2nd tier cities
understand its competitive advantages (their foreign heritage emphasizing product quality)
cope with different products for different customers
coordinate these operations
leverage its global best practices
understand their limitations