Candy Could Be Sweet Deal to Chinese Importers

You may not find many chocoholics in China whose desk drawers are filled with stashes of candy bars, mints and drops.

But demand for these tasty delicacies, once considered too foreign a taste for the Chinese palate, has been steadily growing. Consumption of chocolate is the most significant development in recent years in the nearly $1-billion annual Chinese confectionery market.

Better retail and distribution conditions have gradually prolonged the chocolate and creamy toffee sales season, traditionally restricted to the winter months, and many foreign brands are now sold in shops all year round.

Influenced by imports of advanced, high-quality products from abroad, China's confectionery market is rapidly transforming, creating various opportunities for foreign exporters.

Candy occupies a special place in Chinese culture–it is a gift item of choice.

When Chinese visit family and friends, particularly during holidays like National Day (October 1), Labor Day (May 1), Children’s Day (June 1) or New Year’s Day (January 1), the most popular gift they bring for hosts is a box or a bag of candy or chocolate.

Trays with loose toffee or hard candy regularly adorn the dinner or tea table in the average Chinese home. But, more often than not, today's candy gifts are starting to include chocolate bars and boxes, soft candy, gummy candy, jelly candy and toy packages.

The Chinese New Year is the zenith of the candy sales season. Many confectionery manufacturers record up to a third of their annual revenues during the month preceding the festivities.

In 1997, Chinese confectionery manufacturers sold more than $747 million worth of product. China imported an additional $125 million worth of foreign sugar and chocolate confectionery. Imports shrank by 16 percent during the regional economic downturn in 1998.

Another driving force in the candy industry is gift candy for guests at Chinese weddings.

This tradition has practically created a niche sub-sector of the candy industry, the xi tang or "happy candy." Historically, the xi tang was a pocket-size sachet pack containing eight pieces of toffee or hard candy, all wrapped in red (or occasionally gold) with the Chinese character for double happiness as its central design element.

While this market is still dominated by the old traditional Chinese brands, it has recently been successfully penetrated by joint-venture and foreign-brand products.

China’s market for confectionery products has undergone considerable change in the past decade, influenced by rising living standards and the influx of high-quality products carrying foreign brand names.

Young girls and women, who consume nearly 80 percent of all candy in China, continue to be the primary marketing targets.

However, many marketing managers are attempting to change this trend by targeting boys as well as girls, hoping their products will become childhood favorites that the kids are likely to continue to consume as they grow up.

Traditionally, candy in China came only in bulk form. Bulk candy, perceived as cheaper, is still widely sold to retail consumers. Some department stores go so far as to tear open fancy packs and dump the chocolate kisses in the bulk candy bins because they sell better there.

However, rising health awareness is a new trend among confectionery consumers. Mothers concerned about their children’s dental health are careful not to let them eat too much sugar. Young women increasingly abstain from food products high in calories. This hurts some of the traditional confectionery producers, but on the other hand, it creates an opportunity for quality low-fat, sugar-free foreign products.

Over the past five years, foreign confectionery companies have been extensively testing their brands and products in the Chinese market. Initially, all foreign branded products were imported and distributed by local companies.

Le Conte, Mars, Wrigley and Nestle were the first to establish local representation, and later, joint venture or wholly foreign owned production facilities.

The overall trend set by the multinational companies interested in capturing a leading market share is to establish a local production facility. In this way, they not only take advantage of inexpensive skilled labor and eliminate the burden of import duties and formalities, but also are able to freely distribute their product in the domestic market.

One way to test the Chinese market is through a licensing agreement with a local confectionery manufacturer, whereby the foreign company supplies the technological know-how and intellectual property rights.

An alternative marketing option, relatively unexplored in China, is the repackaging and branding of imported bulk confectionery for use by private labels.

Although import duties are rather low (12 percent for chocolate and 15 percent for sugar confectionery), only a fraction of imported products enter China through legitimate channels.

In 1998, still a vast majority entered through Hong Kong, unaccounted for by Chinese Customs. This is particularly true for cheaper unbranded Southeast Asian products as well as higher end European products with some brand name recognition.

Most leading sources of imported sugar confectionery–Korea, Malaysia, France, Italy and Switzerland–ship through Hong Kong’s gray channels. In contrast, American, Australian and Belgian chocolatiers tend to invest more in their brand names, develop a longer-term marketing strategy and bring most of their products through legitimate channels.

Consumption trends in the candy and chocolate industry are relatively short-lived, so innovation and product improvement are major driving forces of success.

Foreign confectionery companies have a competitive edge in this market, thanks to advanced, high-tech and innovative products that have been developed and tested in the West over the past few decades.

Foreign manufacturers lure confectionery consumers with novel and unique flavors, shapes and packages. The downside is that these impulsive market fads only last for several months and local manufacturers are quick to come up with cheap counterfeits as soon as there is evidence of consumer demand.

Nevertheless, American companies have the opportunity to introduce advanced, trendy products to the Chinese mass candy market. The best products are ones that are technologically advanced enough so that they are not easily reproduced by Chinese manufacturers.

Success of companies and products is influenced by different, unique factors. Nevertheless, here are some general tips:

Confectionery Market Analysis

China’s market for confectionery products has undergone considerable changes in the past decade, mostly influenced by rising living standards and the influx of high-quality products carrying foreign brand names.

Here are a few characteristics of the market and consumer habits that are distinctive to China:

Strength

Higher living standards and health education are driving consumers towards better quality and imported confectionery.

The market for chocolate and high-quality imported candy grew steadily during 1992-97.

Candy is a preferred gift item, traditionally presented at weddings, birthdays and New Year’s celebrations.

Weakness

The "traditional" sugar candy (toffee, hard fruity handy and soft candy twist-wrapped or pillow-packaged) market has been shrinking by about 30 percent for 2 years in a row.

Chocolate is still considered a "foreign" taste by most Chinese.

The market is distinctively price-driven, both on the wholesaler and consumer level.

Candy sales are distinctly seasonal, strongest in winter.

There are too many producers in this very fragmented market.

Opportunity

Chinese producers have little or no research and design capabilities, so they are slow to introduce new/novelty candy products to the market.

Chocolate is capturing the younger, better-off Chinese consumers in a significant way, both as a trend and as a new taste.

Innovative packaging, novelty candy and cross-branding are very scarce and underdeveloped.

Good-quality foreign products that do not melt in the summer can capture market share during the traditional low season.

Outside the big cities the market is very under-supplied throughout the year, with a limited variety of quality candy products.

Threat

Copies of products appear in the marketplace as soon as a branded product is relatively successful.

A number of foreign chocolate brands have entered the market in the past 5 years and most of them have established domestic manufacturing.

Economic slowdown in 1997-98 is affecting the domestic confectionery market.

Local producers are acquiring Japanese and Korean technology for products that have had successful pilot sales in the Chinese market.

Little brand awareness and loyalty, especially outside the cities, except for the old Chinese brands such as White Rabbit.