BEIJING - After a chilly 2006 for domestic companies, China's ice cream
industry is expected to see more consolidation due to rising costs of raw
materials and increasing competition, although overall growth should continue.
Last year, the domestic ice cream industry entered a period when large brands
from home and abroad, including Yili, Mengniu,
Nestle and Wall's, rose to key positions by utilizing advantages in capital,
advanced technology, management and marketing.
It was a very different picture from 10 years ago when the number of companies
reached a peak of more than 3,000.
The rising costs of the major four ingredients used to make ice cream - milk
powder, sugar, chocolate and palm oil - caused a number of small- and mid-sized
enterprises (SMEs) to go bankrupt.
Price increases since 2003 for sugar were the sharpest, at some 111%. Milk
powder has also become more costly, increasing in price 20% over three years,
while chocolate prices have risen about 22%.
All of this caused severe problems for SMEs. Few of them survived and grew, due
to insufficient capital, inefficient distribution and immature management
skills. But surviving players have opportunities in the coming years.
In 2006, the industry generated sales revenue worth 27 billion yuan (US$3.4
billion), with an output of 2.2 million tons of ice cream. Sales and output
volume are estimated to grow to more than 30 billion yuan and 2.5 million tons.
Despite the positive figures, ice cream consumption in China still lags that of
the developed nations. Sales per capita is currently 1.7 kilograms, which
contrasts sharply with that of Western nations, ranging in consumption from 11
to 23 kilograms per person per year.
Such a gap leaves room for growth and raises interest from investors at home
and abroad. But companies should exercise caution due to raw material costs and
fierce competition. Although the prices for sugar and palm oil are expected to
fall by 10%, costs for raw materials in general will see a rise in 2007.
In recent years, international players like Nestle and Wall's, which were
targeting high-end markets, have either expanded their product lines or reduced
prices in order to reach mid-range customers selling items at prices between 2
and 5 yuan and even the least affluent, who pay below 1 to 2 yuan for their ice
cream.
In early 1998, Wall's cut prices on five products between 17% and 38%. It also
increased the ratio of low-end items, which are now more than 50% of its
business.
The company's efforts have paid off. Wall's has seen a growth rate of 200% in
market share in Beijing and Shanghai. For most domestic companies this is not
good news, but there are ways to rise to the challenges they face.
Increasing investment in research and development in mid-range products
emphasizing taste, ingredients and packaging is one solution. It is also
important for an ice cream brand to fix the proportion of new products to its
overall product line at 30% to 40%.
This year, innovation could go into health - and nutrition - oriented ice cream
as well, milk-flavored ice creams will enjoy continued popularity, more so than
vegetable-flavored and egg-roll ice creams, whose market share is falling.
It is also critical for major companies like Mengniu and Yili to expand
networks to distribute to high-end outlets like airports, clubs and pubs.
Smaller players should focus on sharpening brand impact in the standard
markets.
For advertising, rather than spending more, ice cream companies should
diversify the media they use, expanding from television to print, outdoor and
auto ads.
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