Soft Drinks Forecast Model Reveals Growing Headwinds in Chinese Juice
In July, I discussed the possible reasons for the slowing market for Chinese juice. This subject is important to the industry as a whole, as, over the last five years, the majority of global retail juice growth has been in China. Low-fruit-content, single-serve juice drinks in particular supported strong development of the wider Chinese soft drinks market. Recently, this growth has slowed substantially, with challenges continuing to mount.
The recent publication of Euromonitor International’s Soft Drinks Forecast Model allows us to revisit this topic, using updated quarterly forecasts to offer a deeper examination of the exact macro and consumer-led drivers influencing China’s slowing juice market. The news is not encouraging.
Quarterly update: From bad to worse?
Historically, growth in Chinese juice is strongly linked to the country’s growing GDP per capita. While this may hold true across many consumer goods categories, it is an especially impactful variable in juice, which carries a higher average unit price. In examining 5-year, long-term elasticity between GDP per capita and volume growth in the juice category, we see a stronger expected impact from this variable on category volume than in bottled water, RTD tea, carbonates or sports drinks. Setting aside other important factors, a 1% increase in GDP per capita in a single year of the forecast period should be expected to yield a 0.4% increase in off-trade juice volume: a strong and direct relationship.
Juice Drinks (Up to 24% Juice) in China: Off-trade Volume Sales 2004-2014
Source: Euromonitor International
Food safety concerns hit a leading player and anger consumers
There are several potential explanations for the dip, beginning with the recent poor performance of one of China’s largest food and beverage conglomerates. Taiwan’s Ting Hsin International Group is the number two player in Chinese juice. A safety scandal surrounding Ting Hsin’s edible oil in Taiwan in October 2014 had an overwhelmingly negative effect on consumers’ trust in the company, both in Taiwan and China. Within only a few weeks, consumers, schools and some Taiwanese companies started to boycott the company’s products. Although the company announced that no tainted products had been sold in mainland China, the news aroused suspicions about the company’s other food and beverages products. As a result, this contributed to Ting Hsin registering negative off-trade value growth in juice and its off-trade value share in the category declining by one percentage point in 2014. This episode followed other high-profile scandals affecting other companies, such as Nongfu Spring Co in bottled water, as well as suppliers of raw fruit and meat, shaking consumer faith in the food and beverage industry.
Although juices were not at the epicentre of the latest food safety crisis, this problem has mainly impacted Ting Hsin’s largest brand, Master Kong (also prominent in packaged food), which saw retail volumes of the brand’s juice drinks (up to 24% juice) plunge by double digits in 2014. Before the decline, China’s number two juice brand had been a success story, through flavour innovation within its Crystal Sugar series juice drinks, taking share away from the leading brand in the category, Minute Maid (Coca-Cola). Master Kong now faces an uphill struggle to rebuild consumer trust in the brand.
Healthier beverages winning at the expense of juice drinks
A food safety scandal is a substantial but ultimately temporary problem, with other systemic issues impacting Chinese juice that will require longer-term solutions. In general, Chinese consumers are demonstrating a greater propensity towards healthier beverage options, with better ingredients improving personal wellness. Many of the consumer behaviours observed in Western markets regarding sugary beverages and overly processed drinks are showing signs of making an impact on Chinese soft drinks development, particularly with younger soft drinks consumers. Food safety concerns may be accelerating these existing behaviours.
Healthier attitudes lifted alternative categories to standard juice drinks, as Chinese shoppers reached for healthier versions of juice or other soft drinks options. For example, as the wider category shrunk, retail volumes of reduced sugar juice grew by 5% in 2013-2014, while fortified/functional juices grew by 6%. Outside of juice, bottled water volumes grew by 12%, while RTD tea also experienced 5% volume growth. Herbal RTD tea – with healthier ingredients (in contrast to sugary or milkier teas) – is expected to exhibit strong growth prospects due to its natural ingredients and traditional, healthful positioning. Two top five players – Guangdong Jiaduobao Beverage & Food Co Ltd and Guangzhou Wanglaoji Pharmaceutical Co Ltd – have invested in the promotion of herbal tea culture and the development of national sales networks over the past year, which will further bolster the category over the forecast period.
Healthier attitudes to beverages may be a positive development for the juice industry in some respects, perhaps leading to growing preferences for higher fruit content (and higher priced) beverages, ie nectars (25-99% juice) and not from concentrate 100% juice. Despite the dip in volume sales of juice drinks (up to 24% juice) in 2014, 100% juice in China grew by 7% (from a small volume base), while nectars (25-99% juice) enjoyed a similar, strong growth performance. While these are areas of continuing growth, domestic players have been very slow to enter the premium juice segment in a meaningful way, with most innovation and marketing support behind low fruit content juice drink brands and RTD teas.
Younger, fashionable consumers are shrinking product lifecycles
Tastes, fashion and consumer preferences also appear to be changing, with product lifecycles shrinking, as China’s teenage and young adult consumers seek new flavours, brands and products. The juice category in China may be exhibiting signs of more trend sensitivity, mirroring the sort of faddish boom and bust potential that has shaped soft drinks sales in neighbouring Japan for decades. The 2012/2013 trend towards pear-flavoured juice drinks caused a temporary surge in leading brands like Master Kong, but shows signs of abating quickly in 2014/2015, with brands aggressively innovating to find the next seasonal winner. This bears a strong parallel to the 100% tomato and vegetable juice fad that took hold in Japan for a brief period in 2012 and other temporary surges in interest.
Chinese juice remains a large opportunity area in terms of sheer size, competing directly with carbonates for daily consumption occasions. The young consumer base may be more experimental and less traditional in terms of product preferences. Domestic and international brand owners – including Coca-Cola – must respond more quickly in terms of product innovation, searching for new flavours to meet changing demand. Both Uni-President Enterprises (number three in Chinese juice) and Ting-Hsin have been active on this front in recent months, with intense competition on both new citrus flavour blends and price. Lemon-flavoured juice drinks with added salt for hydration were an area of innovation for both companies in 2014/2015. Companies have also used packaging as a tool to reach new consumers, with Classmate Xiaoming – a 2015 RTD product from Uni-President – introducing colourful cartoon bottles to appeal to younger consumers. While category volume growth is no longer a given, the Chinese juice category will be an exciting area of change and innovation over the next year.