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China Fancies Tasty Ice Cream
By John Rutledge
The Chinese ice cream market is still relatively small. Imports, mostly premium types, are a small but growing part of this market. U.S. exporters wanting to expand their market share in this unfolding market need to cultivate brand recognition.
If you make and sell ice cream products in a foreign country, refrigeration, or lack of it, can greatly influence your marketing plans. This is especially true in China where even in urban areas, only three homeowners in 100 own freezers.
Most Chinese, unaccustomed to the convenience of home freezers, prefer purchasing their ice cream in the form of small snacks, instead of large containers, and consuming them on the street.
Due to a general lack of commercial refrigeration, the ice cream industry in China is still relatively small and concentrated in the huge urban areas of Guangdong, Shanghai and Beijing.
China has about 500 large- and medium-sized ice cream and other frozen snack product factories. Half of all production is in the higher-profit-yielding pure cream products.
The frozen snack market has four distinct segments:
• Ice cream products.
• Ice cream products with nuts or other items.
• Milk ice products (milk base, but water shell).
• Water ice products.
Trade sources estimate 1994 output of all segments of domestic factories just short of 1 million tons.
The largest domestic ice cream product producer, Meiyile, is located in Guangdong Province, with annual production between 45,000 and 50,000 tons. Unilever, Nestlés and Meadow Gold, with their joint-venture factories, occupy a significant market share of the pure ice cream market in China and plan to engage in further joint ventures.
Producers Prefer Powdered Products
Due to perishability considerations, many Chinese producers, particularly in the southern regions, prefer using milk powders. Guangdong Province, the main area of southern ice cream production, has only three dairy farms. The more fortunate northern ice cream manufacturers have access to production from 4,000 dairy farms.
In the south, a spot-market arrangement exists for milk powder. Prices vary from US$2,169 to 2,651 per ton, depending on demand. Domestic milk powder tends to be of low quality and older. Higher quality imported powder is often available at an equal or lower price, but it too is often past date.
Bud’s, a U.S. company with a joint venture in Beijing, is somewhat novel in that it only uses fluid milk to produce ice cream — about 3.5 million gallons in 1995 to produce 500,000 gallons of ice cream. Current cost of the milk is about US$0.26 per liter. One consideration for ice cream producers: Chinese milk has a lower butter fat content than average U.S. milk because of the cow breeds and their nutrition.
Due to supply and quality problems, whey powder is not widely used. The New Zealand Dairy Marketing Board aggressively markets New Zealand whey and has had some success. U.S. whey powder is lower in price, but unpopular because of perceived inconsistency in quality.
Health Regulations Strictly Enforced
Chinese health authorities enforce rigorous standards for domestic ice cream and related products. They conduct many inspections and surprise checks on local producers. Health officials also survey products at the retail level.
Failure to pass inspection usually requires a company to issue a press release apologizing for the problem and to recall the product. Fines can also be imposed.
China’s National Technology Supervision Bureau recently conducted an investigation of 110 ice cream products, produced by 45 different companies. Only 56.4 percent passed quality inspections. Most samples contained unsafe bacteria counts. The products of both domestic and joint-venture operations were included in the investigation.
Refrigerated Trucks Scarce
Some companies rely on unrefrigerated trucks and motorcycles to get their goods to retail outlets. Unrefrigerated distribution of frozen products carries the risk of thawing and refreezing and consequential degradation and contamination.
Producers rely almost exclusively on trucks instead of rail for intercity transportation, and frequently experience transit delays because of the poorly developed national highway system.
Joint ventures and foreign-owned companies usually hire refrigerated trucks from third-party transport companies to distribute their products. A few companies concerned with product quality own refrigerated fleets. These companies want to prevent emissions contamination of the ice cream from other frozen foods and ensure proper temperature maintenance during the distribution process.
While producers often handle their own sales and distribution within big cities, they tend to rely on regional wholesalers outside the cities.
Wholesalers can be very demanding, wanting the producer to provide cold storage warehouses, delivery trucks and television advertising. They can also be very delinquent in paying the producer if sales go down.
With these problems inherent in the distribution system, most producers distribute only to the big cities and surrounding counties. Only Meiyile has a distribution network that covers almost every province in China.
Consumer Preferences
The peak ice cream purchasing period for consumers in southern China is between Chinese New Year (February) and Mid-Autumn Festival (September). Sales in the northern provinces peak during the six warmest months of the year.
Northern consumers exhibit greater brand loyalty. Image is important and influences their ice cream choices. Southern consumers are swayed more by product availability and traditional seasonal dietary practices.
Most ice cream and frozen snack manufacturers in China do not spend much effort on positioning brands to attract specific customer segments. An exception is Bud’s. From the beginning, they have promoted the naturalness of their product, which appeals to Western expatriate communities in China, as well as to Chinese who like natural products. However, difficulty in sourcing local ingredients has forced a reliance on imports, making their products more expensive.
Freezer Loans Promote Frozen Products
Most major ice cream producers loan ice cream freezers to retail outlets to maintain the product. The producer name is prominently displayed on the sides, and the retailer is supposed to stock only that producer’s products in the freezer. Policing retailers to ensure exclusivity has proven difficult for producers.
Other freezer problems include improper use and theft. Some stores cut power to the freezers to save money, causing the thawing-freezing cycle. Inadequate chilling plus odor emissions often ruin ice cream taste.
Hurdles: Price, Tariffs and Labeling
In the near future, domestic production will continue to outstrip imports. The prices of imports tend to be much higher than domestic products, partly because of high import duties.
China’s duty rate for imported ice cream and other frozen snacks is high, but low for some ingredients. The effective rate, including both the preferential tariff rate and the value-added tax, is approximately 93 percent for ice cream and related products compared to slightly more than 25 percent for whey and modified whey products.
The new Chinese labeling law requires extensive product labeling in the Chinese language. Only companies willing to invest in China-specific packaging can enter the market.
So where does this leave the U.S. exporter looking for new markets? Many overseas producers see export penetration as the first step in building local brand awareness before setting up a local production facility. Well-known companies involved in joint ventures with retail chains at this time include Häagen-Dazs, Baskin-Robbins, Bresler’s, Swensen’s, Dairy Queen and Ice Cream Churn.
Need More Information?
For a complete copy of the market brief on which this article was based:
Trade Assistance and Promotion Office
AgExport Services/FAS/USDA
Ag Stop 1052
1400 Independence Ave., SW
Washington, DC 20250-1052
Tel: (202) 720-7420
Fax: (202) 690-4374
For supplier lists and foreign buyer lists:
AgExport Connections
AgExport Services/FAS/USDA
Ag Stop 1052
1400 Independence Ave., SW
Washington, DC 20250-1052
Tel: (202) 720-7103
Fax: (202) 690-4374
For general information on the ice cream and frozen products market in China:
Agricultural Trade Office
American Consulate, Guangzhou
Department of State
Washington, DC 20521-4090
Tel: (011-86-20) 8667-7553
Fax: (011-86-20) 8666-0703
John Rutledge is an agricultural specialist with the Foreign Agricultural Service’s Agricultural Trade Office in Guangzhou, China. Tel. (011-86-20) 8667-7553; Fax (011-86-20) 8666-0703.
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