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- Sweet rise in ice cream possible
Date: 15-Feb-2007 Sources: (Xinhua Online)
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.
Companies in the sector are expected to focus on product innovation and wiser marketing.
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.
Rising costs of the major four ingredients used to make ice cream milk powder, sugar, chocolate and palm oil led to bankruptcy for a number of small- and mid-sized enterprises (SMEs).
Price increases since 2003 of sugar were the sharpest, at some 111 percent.
Milk powder has also become more costly, increasing in price 20 percent over three years, while chocolate prices have risen about 22 percent
All of this caused severe problems for SMEs. Few of them survived and grew up, 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, 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, the consumption of ice cream 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.
Such a gap leaves room for growth in the industry, 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 percent, 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 to 38 percent. It also increased the ratio of low-end items, which are now more than 50 percent of its business.
The company's efforts have paid off. Wall's has seen a growth rate of 200 percent 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 percent.
This year innovation could go into health- and nutrition-oriented ice creams 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, it is a better choice for ice cream companies to diversify the media they use, expanding from television to print, outdoor and auto ads.
The author is a founder of Harbin QZLC Marketing Co Ltd and previously worked for PepsiCo and Wandashan.
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