17 Feb 2017
China never fails to surprise me. Even after residing here for nearly a quarter-of-a-century, a recent conversation with James Tian, ANZ’s Beijing Branch Head provided me with a couple of eye raising moments.
He mentioned the market capitalisation of Kweichow Moutai (or ‘Moutai’), the maker of China’s most famous baijiu (or white liquor) - generally adored by locals and equally loathed and feared by most waiguo ren (foreigners) - is approaching RMB 1 trillion. To be exact, on the day of writing, it was RMB 942.78b billion - equivalent to $A190 billion.
"China has leapfrogged the developed west, going from cash to mobile payments, skipping traditional plastic payment cards.”
Kweichow Moutai’s stock rose 0.41 per cent on the day Tian and I spoke. To put that modest one-day gain into perspective, it’s equivalent to 43 per cent of the entire market value of Graincorp – one of Australia’s largest agribusiness.
Tian other surprising observation was he really doesn’t carry around any cash and hasn’t done so for more than a year. Tian, like many in China’s megalopolis, has gone cashless.
Day-to-day purchases are regularly done by Tian and another 527 million consumers via mobile payment apps like those embedded in China’s WeChat Pay or on Alipay (which account for well over 90 per cent of China’s mobile payments).
The range of goods and services paid for cashlessly range from children’s snacks to bulk seeds and pesticides - even the labour of farm workers. Trying to make a small payment using cash or a card can incite the equivalent of an eye rolling response in much of China today.
Like many times in the past, China has leapfrogged the developed west, going from cash to mobile payments, skipping traditional plastic payment cards.
The other factor driving cashless retail is China’s booming e-commerce arena. I recently moderated a discussion on Chinese retail and eCommerce with leaders from JD and Alibaba at PMA’s 2018 Fresh Connections China in Shenzhen. There were several key insights.
Firstly the pace of growth is just staggering. According to government statistics and ANZ analysis, online sales of retail goods reached RMB 7.1 trillion in calendar 2017, growing at approximately 30 per cent a year. This is underpinned by government and industry data putting China’s food delivery market at 343 million users or about 44 per cent of China’s online population.
One of the fastest growing categories is fresh food. iResearch puts the current value at $A38 billion, raising to approximately $A60 billion by 2020. That’s a tiny slice of overall fresh food sales today but the total value is large and growing very quickly indeed.
eCommerce is converging with traditional retail and is focused on ‘omni-channel delivery’. Both Alibaba and JD.com – China’s two eCommerce giants – have launched significant bricks-and-mortar formats.
The recent opening of JD.com’s 7Fresh store together with Alibaba’s Hema connect the online and offline offerings in synergistic ways.
The next steps will be a chain of ‘unmanned’ stores where technology provides a human-free shopping and check-out experience as well as a move into food service and wholesale; both have the potential to cause significant disruption.
One critically important theme for exporters to China is taste and seasonality is far more important than price.
Chairman Liu of Joy Wing Mau, one of China’s fresh produce companies, displayed a slide during his presentation which boldly stated “good product, price is not a problem!”.
During the advent of China’s eCommerce boom the view was Chinese consumers wouldn’t adapt to online purchases of food and produce as quality and safety are key in the buying process - something which historically has required physical inspection - to say nothing of a good dose of haggling.
However, as trust in China’s food production and distribution systems (including retailers) and brands grows that assumption is going the same way of other predictions, such as Chinese consumers not buying life insurance as it’s was considered gambling with one’s life, thereby bestowing bad luck.
These trends, this leapfrogging, are not going to stop. Technology such as blockchain-driven traceability will help ensure the provenance of produce and packaged food sold in China.
When fully implemented blockchain will enable consumers to track each individual product purchased all the way back to the farm or factory from where it originated.
This is paramount in China where ensuring the provenance of food products is a key concern for Chinese consumers who are focused on product authenticity and therefore safety.
Take Moutai. The trend towards online sales has even made its way to China’s very traditional liquor industry.
Moutai has evolved its retail model and now requires its distributors to sell an ever-increasing proportion of their allocations through their own eCommerce platform. Such as move conveys a number of advantages including Moutai giving away less margin to suppliers, better insight into its customer base and enhanced allocations to consumers.
eCommerce is a technology and scale game. For fresh produce and food this means China’s eCommece giants are scouring the world looking for supply.
The southern hemisphere, particularly Australia and New Zealand, are key beneficiaries given the Chinese consumer’s favorable view of such products in addition to counter-seasonal benefits.
Case in point: China’s eCommerce giant JD.com recently opened a local office in Melbourne to serve as its Australia and New Zealand regional headquarters.
JD’s choice of location was underpinned by access to an abundance of local suppliers, Australia’s only 24-hour shipping port and a supportive local government. This will allow aspiring brands and suppliers to supply JD’s platforms, a conduit for Australian and New Zealand suppliers looking to access JD’s huge user base.
The opportunity, particularly in produce, also presents a challenge in the form of creating sufficient supply to meet with local and international demand. Demand from China, coupled with other factors, continues having a significant impact on Australia and New Zealand’s fresh produce industry.
Price increases and shortages in certain categories (such as citrus) has become more pronounced particularly as exports to China increase and China’s competitiveness decreases – with both trends articulated in the two charts above.
If we chart seasonal citrus exports from Australia to China we see they have been on a rising trend for some years. So too the average FOB per kg value of citrus exports from the world’s leading suppliers relative to China.
While China was one of the world’s cost leaders a decade ago, with rare exception China’s exports are now more expensive than most leading exporters. This situation has occurred in a very short period of time and is quite unprecedented; causing strain on domestic supplies, particularly in Australia where the biggest challenge will be keeping up with the tidal wave of demand coming from China.
With larger retailers trade is more “by the book” meaning only approved imports are permitted for sale on the platform. This is important, particularly for fresh produce, where the “grey” channel makes up a significant proportion of China’s fresh fruit imports.
As more Australian produce is granted access to China and opportunities and supply challenges will continue to grow. I suspect at a much faster rate than foreign taste for moutai.
Patrick Vizzone is Head of Food, Beverage & Agribusiness, International at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
17 Feb 2017
28 Mar 2018