Implication of China’s Food Safety Plan for Food and Logistics Industry Players

August 6, 2012. In June 2012, the Chinese government published its Food Safety Plan for the next five years, with the intention of "˜cleaning up’ inefficiencies and aligning national with regional industry standards. This is an ambitious over-haul of the food regulatory system in China that targets to meet World Health Organization (WHO) food safety standards by 2015. What industries will be affected and what should international companies beware of?

Chinese consumers have been increasingly demanding more accountability and regulation for food producers, following the high profile Chinese milk scandal in 2008 that affected more than 300,000 people. As incomes are expected to drastically increase in China in the coming years, so is the expenditure on food. According to a survey by M-Brain (formerly Global Intelligence Alliance) amongst 67 Asian consumer and retail industry professionals in China, India, and South East Asia in November 2010, 70% said that Chinese consumers had increased their willingness to pay more for higher quality food and beverage products over the last 12-18 months.

The 2012 Food Safety Plan aims to publicly address concerns of food safety and mislabeling in China as more companies attempt to capitalize on this growing market. The State Food and Drug Administration (SFDA) has vowed to establish a set of checks and balances that will cover all aspects of China’s food industry by 2015.

Chinese Food, Beverage & Tobacco Consumption

Chinese-Food,-Beverage-and-Tabacco-Consumption_1

Source: Economist Intelligence Unit April 2012

The Food Safety Plan identified the SFDA’s current food safety program as “unable to meet the current need” and its regulations as “overlapping or contradicting each other”. As a result of multiple government agencies being given the responsibility of compiling their own standards, there are currently over 2,000 national standards, more than 2,900 industry standards, and over 1,200 local standards that food related businesses are required to conform to.

In the short term, the Policy outlines plans to formulate a national set of food safety standards. The SFDA will “revise funding to support development priorities” while granting greater government support (via subsidies) for industries that are currently unable to comply with the new standards without raising prices.

To implement these policies swiftly, the Government will look to improve “standards and inspection methods for the food safety program”, as well as improve the management mechanism of the food safety standards and strengthening supervision, inspection, and impact assessment. To achieve these goals, the government will vastly increase funding for relevant regulatory bodies in China.

Short term implications: Consumer awareness and cold chain logistics

In the short term, an increased awareness of the dangers of specific products is expected to fortify food safety concerns among consumers. The central government’s crackdown on mislabeling and dangerous food products will increase publicity of unsafe food in China and consumers who have the ability to, are expected to continue to resort to higher quality brands they trust.

Historically, other programs that have been organized at the national level and broadly implemented at a provincial and municipal level have had some success.

In 2009, the Ministry of Health proposed broad and sweeping changes to the pharmaceutical industry and stricter regulations for the entire healthcare system. The program successfully competed 90% of its goals by the targeted date. Although there were regional failures and small parts of the policy that have yet to be completed, the nationwide implementation policy to “cross the river by the feel of the stones” was highly effective. For that reason, it is plausible this policy may be executable on a national scale in the time frame given.

In February 2012, the SFDA established a centre for dealing with food complaints from consumers via a corresponding website and hotline. This is expected to vastly increase the effectiveness of the SFDA in monitoring activities, as the primary hurdle faced by the SFDA is managing inspections of the massive volume of food products in China. Moreover, the centre will be solely responsible for coordinating efforts in the event of an outbreak, as well as carrying out analysis and investigations.

Given the rate of expansion and previous dairy safety issues, the SFDA will prioritize, and initially target safety standards for dairy products. The Chinese dairy market has been growing at 10% annually, and is expected to continue at similar rates until 2020, when it is forecasted to surpass the US as the largest consumer of dairy product consumer globally. Dairy producers such as Nestle are moving to preemptively consolidate their sourcing in an effort to mitigate potential compliance issues. In 2011, Nestle decreased its milk sources in China from 30,000 to 12,000, and is transitioning to only direct sourcing from large dairies in 2012. Nestlé’s attempt to develop a comparative advantage in the market will prove to be highly effective as industry consolidation is expedited over the next three years.

Currently, only around 15% of perishable food such as fish, fruit, meat, and vegetables are transported via cold chain logistics in China, compared with 90% in more developed nations according to the Economist Intelligence Unit (EIU). With annual consumption of perishable foods in China per person at about 495 kg in 2011, this implies a great deal of waste. Consumption is expected to grow 17.2% to 583 kg per person in 2016, according to the EIU.

The development of China’s cold chain logistics will effectively reduce the percentage of food decay in transportation and will increase food safety. The utilization of cold chain logistics is expected to increase drastically, as the transition to global standards will include the adoption of more effective shipping mechanisms. The municipality of Beijing currently has one of the highest adoption rates of cold chain logistics nationally and has targeted a 100% increase in adoption by 2015, indicating even higher targets for regions currently having lower usage rates.

Medium term implications: Consumer sophistication and consolidation

More sophisticated first-tier markets should see a rapid rise in the consumption of imported foreign food products, as consumers seek food from countries with higher safety and production standards than China. Foreign operators will tend to come under greater regulatory scrutiny than local competitors.

Recently, both the American chain Wal-Mart, and the French grocery chain Carrefour have been in the Chinese media surrounding the mislabeling of organic products. Regardless, foreign brands will continue to benefit from the public’s positive perception of foreign brands as consumers are increasingly aware of product safety issues.
In the medium to long term, national authorities are expected to target both food production and food service industries. In 2009, when the Food Safety Law was passed, leading chains were forced to increase quality controls. More of the same can be expected with the new guidelines, but implementation will be more effective and penalties more frequent.

As a result of the new regulations, food retailers will be in the uncomfortable position of having to answer for the products they sell, while having little control over their sources. Foreign food retailers in China are an easy target for government officials trying to create an image of an effective regulatory system, as stiff punishments for minor infringements often make international news. This was the case in October 2011, when Wal-Mart was forced to close 13 stores for a two week period as a punishment for mislabeling a pork product as organic when in fact, it was not.

Pharmaceutical companies will likely be the best poised to respond to the new regulations. Consumer health products such as infant milk formula, vitamins, and other personal hygiene products that have hold foreign trusted brand names such as Johnson & Johnson and Pfizer will continue to experience disproportionately robust growth as a result of increased urbanization, a greying population, and strong brand reputations. Pharmaceutical companies will be able to leverage relationships and supply chain management experience to adapt quickly to the new regulations.

Industry Direct implications
Indirect implications
Agriculture and Dairy
  • Increased testing
  • Altered packaging requirements
  • Increased fixed costs
  • Unknown implications from government in the form of subsidies
The demand for increased product safety will result in multinationals driving industry consolidation possibly in the form of M&A
Food logistics
  • Increased adoption of cold chain logistics
  • Increased fixed costs resulting in opportunities for M&A
  • Industry expansion
  • Increased shipments to, previously unfeasible locations in western China
Larger regional players will be able to leverage experience and implement best practices more effectively than smaller local competitors
Food retailers
  • Minimal direct impacts
  • Increased responsibility for oversight of compliance
  • Brand differentiation likely to increase with increased scrutiny
Monitoring of multinationals will continue to be disproportionately highSales of organic and perceived safe foods will continue to increase
Pharmaceutical (consumer health products)
  • Least impacted industry
  • Will be subject to increased scrutiny
  • Some ingredients that were previously deemed safe will be banned as international standards are adopted
Best positioned to adapt to new regulations by applying previous business experiences to mitigate against negative impact

Source: M-Brain (formerly Global Intelligence Alliance)

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