Why Food-Safety Scares Offer Opportunity in China

September 30, 2011
  • BSR spark

    BSR Staff

Here in BSR China, we worry about food safety. One of my colleagues refuses to eat traditional steamed buns known as “mantou” ever since an exposé revealed that one Shanghai producer used undeclared dyes, additives, and even old mantou in production. After a different case, in which used cooking oil was scooped up and sold at a low price, another colleague now only cooks with olive oil, which he believes to be at least less contaminated than other oils.

My colleagues’ behavior reflects a greater trend. As China’s middle class grows, so does their disposable income, and with that their willingness to pay for safer, healthier food.

A 2011 survey estimated that two thirds of the public do not feel safe eating food in China. It is not uncommon to hear of mainland Chinese traveling to Hong Kong for grocery shopping. Unlike in Western markets—where food-safety incidents are viewed as the exception—in China, unsafe food is starting to feel like the norm.

At the same time, China comprises a huge market (not only for the food business). This year, PepsiCo announced plans to invest US$2.5 billion in China over the next three years, and Coca-Cola followed suit, announcing a US$4 billion investment over the same period. Other companies like Yum! and Nestle are pursuing expansion through acquisitions of local Chinese firms.

And herein lies the opportunity. In an environment where demand and distrust are equally high, businesses that can maintain the trust of consumers will be rewarded.

For example, in 2008, twenty-some companies comprising more than 80 percent of the Chinese milk supply were found to have supply chains tainted with the industrial chemical melamine.  Consumers flocked to the few remaining brands not found to be contaminated. Sanyuan, a small company with tight quality control, saw demand for its products skyrocket. In contrast, Mengniu, one of China’s implicated dairy giants, lost its supplier relationship with Starbucks as buyers fled. Despite later adopting Sanyuan’s quality-control model, Mengniu has yet to recover that valuable relationship.

Rather than diminishing, food-safety scares continue. In just the past year, Chinese headlines have noted the illegal drug clenbuterol in pork, sports drinks with plasticizers, vegetables with excessive pesticides, noodles colored with ink, and even melamine again.

Against this backdrop, companies that can be the bastion of safety for consumers in a sea of scandal will be well-positioned to succeed in an expanding market. The question is: What can food companies operating in China do to preserve consumer trust?

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