The Wall Street Journal recently published an article, titled “Selling Health Food to China.” The article highlighted ongoing inroads multinationals like Nestle, PepsiCo and Coca-Cola are making in China’s developing health food market and presented a picture of growth and profits for all involved. Although true for some multinationals, everyone should remember that these larger companies are using in-country facilities to produce their products, which drastically reduces manufacturing costs and logistic expenses. This also eliminates import taxes and other related fees. Furthermore, by manufacturing in China these companies can also enjoy preferential treatment to some degree for creating Chinese jobs.
 
For those small to medium-sized enterprises (SMEs) looking to export to China it is important to keep these tales of huge sales and successes in perspective. In order to tap into China’s huge consumer base, price is certainly a top concern. Products must be competitively priced regardless of where they originate. For instance, nutrition bars and energy drinks produced by domestic companies retail for the equivalent of $1 or less and in the dietary supplement range local products generally sell for around $15. Another factor that affects all involved is China’s current regulatory scheme for dietary supplements. China’s State Food and Drug Administration is in charge of policing the industry and has some of the most restrictive rules of any market. Unfortunately, regulatory barriers are causing many U.S. and other foreign SMEs to shy away from the market. 
 
But it is not all doom and gloom for companies looking to export. In fact, an imported product has some distinct advantages. For example, these products enjoy a higher level of consumer confidence. Chinese consumers normally view imported products from the U.S. as being of higher quality and safety. Over the years, ongoing food safety issues have called into question the quality and safety of domestically produced products. And this point was really driven home when China’s dairy industry was crippled by widespread melamine adulteration. Parents were scrambling to buy baby formula from New Zealand, Singapore and the U.S.—basically anywhere but China. At this point, many local companies are not just marketing to keep their customers or gain new ones, they are in fact trying to convince the masses that their brand is safe. It’s routine to see companies using foreigners in their ad campaigns wearing white lab coats to associate their products with safety and quality.
 
Another plus for imports is China’s fast-paced economic growth, which is fueling an expanding upper middle class armed with disposable income. Moreover, the appreciating Chinese currency against the U.S. dollar is marginally reducing the costs of imported products. But remember, just because you can import a product doesn’t mean it’s going to sell. Developing a sales channel that targets wealthy Chinese consumers as well expats who are willing to pay for higher ticketed imported brands is crucial. Wine is a good example. Throughout first-tier cities such as Beijing and Shanghai there are numerous specialty wine shops selling an array of global brands. Also, many high-end supermarkets have a section dedicated to imported wine, so for this industry there is a well-established channel to enter.
 
Conversely, imported dietary supplements still have a way to go toward establishing a well-developed channel. Of course, every supermarket and pharmacy across China carries dietary supplements, but they are mostly domestically produced local and multi-national brands that fit the price range of the average Chinese consumer. There are also a variety of other brands claiming to be made in the U.S. or other western countries. However, you won’t recognize any of these brands because they are specifically made for the China market and typically contract manufactured in the U.S. Some of these are legit and some are not. Many lack the proper registrations and sometimes it is difficult to discern where in fact the product originated. Higher priced imported products traditionally do not fare well in these channels; moreover, profit margins on imports aren’t typically high enough to allow for the layers of distributors needed to truly penetrate the market.
 
Too many U.S. dietary supplement companies enter the China market and soon after fail because their local partner put their products in poorly suited channels. NBTY entered the China market with its Nature’s Bounty and Met-Rx lines and quickly realized its mistake. So the company created its own sales channel from scratch by establishing kiosks in upscale shopping centers, directly targeting its consumer base.
 
The lack of well established sales channels coupled with increasing high-end consumer demand have piqued the interests of a variety of entrepreneurs, companies and firms to develop a specialty health food store channel. This channel is now in development and World Health Store (WHS) is leading the way. WHS like NBTY learned early on that it had to control its own destiny in China and invest in creating a channel. Its channel consists of brick and mortars, store-in-store concepts, an e-commerce platform and an importing arm of the company. By having all this in place, the company can control its business, from manufacturer to market. Its importing business, not only supplies its retail and e-commerce business, but it also supplies a growing number of health product kiosks, gyms and store-in-store wholesale accounts throughout China. To further strengthen the confidence in the industry’s development, 2010 saw a variety of large investment firms seeking opportunities in China’s growing natural health products industry, including the high profile potential buyout of GNC by Chinese food giant Guang Ming. In fact, by the end of 2010, I was contacted by three different investment firms looking for opportunities in China’s growing natural health product industry. Previous years haven’t seen this level of interest in developing sales channels or market investment.
 
The development of a specialty health food store channel is a strong indicator that China’s natural health product industry is moving in the right direction. The expansion of this channel is creating greater opportunities for U.S. manufacturers and marketers of natural health products and is a welcome commercial force that will assist in leveraging regulatory change. Another force for change and development that arrived in 2010 was that of the U.S.-China Health Products Association.
 
A New Trade Association
 
Although opportunities are growing in China, there still remains a lot of work to be done in moving the industry toward a more transparent and open system, which is best accomplished through a non-profit trade association working in conjunction with both industry and government.
 
U.S.-China Health Products Association’s main objectives are to work on regulatory advocacy measures, increase U.S. exports, provide market intelligence, encourage tradeshows and trade missions as well as promote quality assurance along the supply chain. These initiatives are made possible by the association’s network of long-standing relationships with U.S. and Chinese government agencies, organizations and industry.
 
Because a large percentage of ingredients used by U.S. manufacturers are sourced from China, the association sees its mission of protecting the supply chain of utmost importance. NSF, one of the association’s founding members, is an integral part of accomplishing this mission. NSF has positioned itself in China as a market leader in issuing third party GMP certifications to those suppliers who pass the organization’s rigorous audit and adhere to producing safe, high quality products. NSF has a fully staffed office in Shanghai with trained auditors and support staff, and has thus far certified more than 25 Chinese suppliers. In 2011, NSF will expand its operations in China by opening a testing facility, which will focus on Certificate of Analysis (C of A) verification and screening for contaminants such as pesticides, heavy metals and melamine. NSF’s membership with the U.S.-China Health Products Association creates a strategic package that offers unparalleled services for companies looking to find quality ingredient suppliers as well as those looking to enter the market.
 
Another important aspect of the association’s work is to offer its members business services, including trademark and product registration as well as partner matching and strategic guidance. China is already the most important global player for ingredients and it is slated to become a leading destination for finished products in the years ahead. As 2011 moves along, we as an industry should be looking forward to a prosperous new year and should work together to fully develop the opportunities in China.
 
Editor’s Note: For more information on the China market and how to become a member of the U.S.-China Health Products Association, contact the association at info@uschinahpa.org.