A market in the making

Functional foods are in an early stage of development in China but are making swift inroads in the packaged foods market, especially in the more developed regions of the country. Kathrin Jungbeck and Christiana Benkouider consider the role these foods and dietary supplements will play in the future

The growth of functional foods in China and Hong Kong is occurring thanks to the convergence of several critical factors. On one hand, it is currently being considered by the government as a means to tackle malnutrition in underdeveloped, poverty-stricken regions of China. Aiming to address this problem, the Centre for Public Nutrition and Development of China, a government-sponsored institution, has in recent years proposed that some necessity foods such as salt, flour, edible oils, baby foods and soy sauces be fortified.

On the other hand, dietary problems have arisen as living standards have improved in the more developed parts of the country, especially in cities where consumers eat an increasingly unbalanced diet and have hectic, yet sedentary lifestyles with little time to exercise.

The Hong Kong lifestyle is typically characterised as hectic and fast-paced. A recent study showed that more than 80 per cent of the people are deprived of sleep, which puts them at high risk for development of sickness and diseases. This risk increases as the majority are white-collar workers who are deskbound for eight hours a day.

While the traditional diet continues to consist of fresh food, due to busier lifestyles more and more consumers are less inclined to prepare traditional meals that require long preparation times. Instead, many prefer to look for simpler alternatives like fast food and microwaveable food. Demand for convenience food has also been on the rise in recent years as a result of a trend toward a nuclear family, where the time-consuming preparation of meals is considered unnecessary. As a result, an unbalanced diet is becoming more common among affluent consumers in developed regions of China.

Recent research conducted by the government shows that vitamin deficiency is one major health issue for many children in Hong Kong. The development of functional foods provides consumers, be it in less or highly developed parts of the country, with the opportunity to have a more balanced and nutritious diet. Currently, the key consumers of fortified and functional products are city dwellers living in such places as Shanghai and Guangzhou, as they tend to have higher nutrition awareness and greater media exposure to wellness products. It also makes more economic sense for producers to market their health and wellness offerings in these coastal cities where purchasing power is higher than in less-developed markets.

Focus on dairy
The development of functional foods in China and Hong Kong centres strongly around the dairy sector. Functional dairy in China accounts for nearly 10 per cent of total dairy value sales in 2004, while in Hong Kong, these products account for more than 20 per cent. This translates into per capita expenditure of $0.37 and $12 for China and Hong Kong, respectively.

Calcium enrichment and iron fortification are particularly popular as manufacturers including Nestlé, Sanlu and Yili leveraged the government?s push to raise the level of per-capita consumption of these essential minerals, by offering these health benefits in their powdered milk. Another sales driver is manufacturers? efforts to further segment the mature consumer base. For instance, Mengniu introduced powdered milk fortified with beta-carotene, iron and calcium specifically for older consumers in 2004.

The vitamin craze in sugar confectionery can be traced back to the SARS outbreak in early 2003
Foreign players such as Nestlé and Fonterra were among the first to introduce health and wellness characteristics to dairy products in China, thanks to their strong R&D capabilities and extensive product portfolio. However, pricing, limited nutrition awareness and logistics issues hampered the range and sophistication level of functional products that Nestlé and Fonterra brought into China. This allowed domestic players such as Yili and Mengniu to swiftly introduce products with similar health benefits and erode the competitive advantage enjoyed by their foreign competitors.

In Hong Kong, fortified dairy products also receive much attention from manufacturers. Most major players — such as Nestlé, Kowloon Dairy and Vitasoy — have a range of either low-fat or high-calcium milk products to offer consumers as they seek to take advantage of the rising popularity of such products. Kowloon Dairy Hi-calcium Slimilk is promoted to contain one-third more calcium than regular milk. Vitamin D content is another selling point, as it is perceived to facilitate absorption of calcium.

Expenditure on functional confectionery, such as medicated boiled sweets, confectionery with added vitamins or functional gum, is currently far below levels reached in Japan ($0.03 per capita in China, $2.80 in Hong Kong compared to $16.80 in Japan), but they have shown good growth in recent years. The market for functional confectionery grew by nearly 50 per cent between 2002 and 2004 in China, and by a lower but nevertheless positive seven per cent in Hong Kong.

In China, the vitamin craze in sugar confectionery can be traced back to the SARS outbreak in early 2003, when consumers were seeking every means possible to enhance their immune systems in order to fight the disease. Vitamin-fortified sugar confectionery met this consumer demand perfectly.

The future looks bright
Affluent consumers in China and Hong Kong will increasingly be looking for functional foods as a means to counter illnesses arising from unhealthy lifestyles and unbalanced diets. Moreover, the ageing population will be an important target for functional foods manufacturers, as many will possess strong purchasing power and will be looking to use food as a ?soft medicine? for a longer life.

Consumer education in health and nutrition, coupled with increasing purchasing power, is expected to significantly contribute to the growth of the health foods market in general and the functional foods market in particular.

Dietary supplements
China experiences a huge variety of cultural and economic differences across the vast expanse of its geographic territory. Generally, the more developed regions have a higher demand for vitamins and dietary supplements as a result of more nutritional education and advertising, as well as higher disposable incomes.

East China, centred around Shanghai, is the most economically developed region, followed by south China, which benefits from close links to Hong Kong, Macau and Taiwan, and then north and northeast China, benefiting from rich natural resources. Ninety nine per cent of Hong Kong?s population is of Chinese origin so attitudes toward food wellness and health care in China and Hong Kong are similar, despite the very different histories of these two countries over the last century.

Traditional Chinese medicine (TCM) plays a big role in both countries with ?tradition,? availability and cost-savings as the main reasons for its popularity. The general perception of herbal remedies (and TCM in particular) as being more natural and less aggressive also influences their strength, especially in urban areas where consumers have a wider choice.

Tonics dominate
Consumers in both China and Hong Kong have a strong affinity to tonics and bottled nutritive drinks, which long have been considered to provide mental and physical benefits, and are perceived to contain properties that boost the immune system, improve digestive health and enhance physical beauty. Birds nest and essence of chicken are two of the most popular products.

Supplements have benefitted from the demise of tonics in China, with protein powder popular
According to Euromonitor International, tonics and bottled nutritive drinks generated $31 million retail selling price (rsp) in Hong Kong, compared to $92 million rsp spent on vitamins and dietary supplements. By comparison, Chinese consumers spent $624 million rsp on tonics and bottled nutritive drinks and $645 million on vitamins and dietary supplements. Self-medication with vitamins for specific deficiencies is much less common in some rural Chinese areas compared to tonics, which promote overall well being.

In China, sales of tonics declined sharply between 1998 and 2002 as a result of low quality and counterfeit products swamping the market, leading to a barrage of lawsuits against manufacturers.

Euromonitor estimates there was a decline in sales of 81 per cent between 1998 and 2003, reducing the market by $2.5 billion rsp. By 2003, this decline had slowed down as a result of strong promotion, new product developments and government action to restore faith in the quality of products.

A boost to supplements
Supplements have benefitted from the demise of tonics in China, Euromonitor reports. Between 1998-2003, sales expanded by almost $0.5 billion rsp. The most popular supplement by far is protein powder, which accounted for 63 per cent of value sales and has been particularly successful, reaching $324 million in 2003 compared to merely $25 million in 1998. Calcium supplements are also popular with sales of $170 million in 2003, while ginseng, fish oils and mineral supplements enjoy only limited sales.

Dietary supplements in Hong Kong are much more varied with products such as evening primrose oil, glucosamine and co-Q10 becoming increasingly available, to the detriment of tonics, which stagnated between 1998-2003.

New product developments and innovations generally filter from the southern regions, mainly large cities, to the more rural areas. An example is American ginseng, which has gained popularity in south China since first being introduced in Hong Kong. American ginseng is believed to be better than ginseng in general because it is less ?hot,? according to TCM principles.

Following the outbreak of SARS in the spring of 2003, Hong Kong and China witnessed soaring sales of dietary supplements. Urban areas such as Beijing and Shanghai saw particular increases in sales with many retail outlets unable to meet demand.

While sales in 2004 returned to lower levels, the outbreak increased health consciousness among many consumers, bringing wellness and health issues to greater prominence.

Chinese sales of vitamins rose by more than 200 per cent to $129 million in 2003. Urban areas have the most eager consumers, who eat fewer family meals and have heightened stress levels and pollution to contend with. Multivitamins are almost exclusively sold, with single vitamins accounting for only 2.5 per cent of total sales in 2003, due to convenience and little perception of specific single-vitamin benefits. Moreover, while vitamin sales in China are almost exclusively multivitamins, Hong Kong consumers have a more sophisticated understanding. As a result less than half of all vitamin sales in Hong Kong are multivitamins. Among single vitamins, vitamin C is most popular thanks to its known immune system-enhancing abilities.

Foods join playing field
Functional foods are playing an increasing role in Hong Kong and are expected to influence the Chinese market over the next few years to a greater extent. While functional foods depend upon the same trends toward wellness and health, fortified food products are expected to impinge upon sales of dietary supplements, especially in the more advanced market of Hong Kong.

Euromonitor expects calcium-enriched foods will impact the calcium supplement market, which is forecast to grow only slightly between 2003 and 2008, despite the ageing population, which is a key consumer of calcium supplements.

The numerous existing calcium-enriched products, ranging from dairy through to biscuits, are likely to act as substitutes for calcium supplements. Consumers will have less need to purchase calcium supplements, as their diet will provide daily calcium requirements.

Nevertheless, Euromonitor predicts the future of vitamins and dietary supplements to be dynamic, experiencing growth of 66 per cent in China and 14 per cent in the more mature Hong Kong market between 2003 and 2008.

Functional Dairy Products — Per Capita Expenditure 2002, 2004, 2009

Source: Euromonitor International

Kathrin Jungbeck is OTC health care analyst, and Christiana Benkouider is global health and wellness research manager at Euromonitor International, a leading provider of global consumer market intelligence with offices in London, Chicago, Singapore and Shanghai. It specialises in researching global consumer markets and undertaking bespoke consultancy projects in industrial, high-tech, business-to-business and service industries. www.euromonitor.com
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All correspondence will be forwarded to the author.

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