Jeff Crowther12.01.09
My last column (in October) covered the historical development of the two major sales channels for dietary supplements in China: the pharmacy and direct (MLM) sales channels. Both these channels are well established and responsible for the lion’s share of the market. As regulatory reform, industry trends and consumer demands continue to shape China’s dietary supplement market, new sales channels are appearing to keep pace with the ever-changing environment. This column will discuss the following developing channels: mass market, health/beauty, health food stores and Internet.
A number of factors have led to the creation and expansion of these new channels. Consumer demand, increased foreign interest in the market and entrepreneurial spirit have all played their parts. Before proceeding, I would like to clarify “consumer demand” as it relates to this article. The consumers I’m referring to are expats and affluent residents from China’s special administrative regions and neighboring countries, such as Hong Kong, Taiwan, Singapore, South Korea, Japan, etc. In Beijing alone, this group represents 700,000 people, or roughly 4% of an estimated population of 17 million. These consumers have a clear understanding of the dietary supplement industry, as well as a desire to purchase imported dietary supplements. They do not need to be “educated” on the concept of taking dietary supplements on a daily basis for optimal health. The majority of China’s (mainland) population find it difficult to make supplementation a part of their daily health regimen for a couple of reasons. First, government regulations make marketing supplements difficult and stifle effective means of spreading education on the importance and use of dietary supplements. Second, imported dietary supplements are normally priced at more than $29 per bottle, which is an expensive purchase for an average Chinese person, whose monthly salary is in the neighborhood $500.
As more and more foreign dietary supplement manufacturers put China on their“to do” list and domestic companies expand their offerings in the dietary supplement category, there simply needs to be channels in place to accommodate the products. As noted in my last column, the pharmacy and direct (MLM) sales channels have reigned supreme. However, these channels do not always mesh with some marketing and investment strategies. The following is an introduction to the most recent channels where dietary supplements are being introduced.
Currently, most super and hyper markets such as Wal-Mart and its French competitor Carrefour have an aisle devoted to health food products. Normally there are about 20-30 products occupying the shelves. Most are domestic brands touting herbal formulas loosely based on Traditional Chinese Medicine. The only foreign brand usually mixed with these domestic players is Wyeth’s calcium supplement Caltrate. Due to the higher prices of imported products, the Wal-Marts and Carrefours of China are a difficult fit for dietary supplements.
However, during the past couple of years, domestic supermarket groups have been investing heavily in establishing premium high-end supermarkets to attract the well to do of the top tier cities. Beijing Hualian Group (BHG) is one such company. In Beijing, BHG has opened seven supermarkets named “BHG Market Place.” Another popular supermarket with a similar theme is China Resource Group’s “Ole” branded market, which has 13 locations in Beijing. Patrons of these markets are looking for high quality products, especially those imported from the U.S. and Europe, and are willing to pay a premium. The shelves reflect this trend by showcasing an inventory mix of more than 40% imports. With the type of clientele these stores attract, it is easier to justify stocking imported dietary supplements. In fact, all these stores have sections dedicated to imported health products complete with a sales person to help customers with their purchases. The design and layout of the stores is similar to what you would find in the West. Neat, clean, well-stocked and above par service have drawn much in the way of praise.
In mainland China, Hong Kong-based Watsons is the leader in the health and beauty channel. I contacted Watsons’ headquarters to discuss some of the finer points of its mainland business. Watsons opened its first store in Beijing in 1989. Since then, it has grown substantially, not only in the number of stores, but also in sales. Watsons consistently records double digit growth year on year. Currently, Watsons has more than 450 stores and expects to have 1000 by the end of 2010. Each store carries a variety of beauty, personal care and healthcare products, including dietary supplements. During my conversation with Watsons, representatives mentioned that dietary supplements in the weight loss and letter vitamin categories were their top sellers and that supplements account for approximately 10% of the company’s revenue. I asked the company why the dietary supplement industry in mainland China is not as well developed as in other Asian countries and regions in the area. Watsons said there are a few reasons. The regulatory system requires dietary supplements to register with the government as functional health food, which is a complicated process. Furthermore, the market lacks the presence of well-established brands to generate customer awareness and loyalty. These reasons have left consumers with limited knowledge about dietary supplements and their usefulness.
Expats and other consumers in China with knowledge of the industry have been waiting a long time to see the creation of specialty health food stores that sell not only dietary supplements, but also organic foods and other hard to find natural products and personal care items. Well, the wait is finally over. However, if you live outside the bustling cities of Beijing, Guangzhou or Shanghai you’ll have to wait a bit longer.
The first is Green Century Company Limited, which was the first group to invest in the retail sale of dietary supplements in China. Their stores are simply called Green Century and began operations in 2002 in the Guangzhou area. Since then, they have developed into a franchised chain store boasting 800 shops across China. The variety of supplements sold here are primarily domestic or contract manufactured Chinese brands made in the U.S. You won’t find any familiar imported brands here.
The latest to enter the health food sales channel is World Health Store (WHS), which is owned and operated by Drew Campbell. Having spent years in the natural products industry in Australia, Mr. Campbell saw an opportunity to open the first foreign owned and operated store selling dietary supplements in China. I recently spent some time with him to get some insider information on the retail scene. Currently, WHS—like the others mentioned in this column—are looking to expand. This certainly gives the impression of a vibrant and developing industry. However, as Mr. Campbell pointed out during our interview, “appropriate and clear regulations are the key to expanding this industry.”
“The current regulations for importing dietary supplements are really too restrictive and are stifling the growth potential of the industry for both domestic and foreign operations,”he added. Mr. Campbell’s sentiment is not unique and is generally resounded by all involved in the industry, including the Natural Products Association. Mr. Campbell remains confident that regulatory change is on the horizon and has set his sights on expanding not only his store’s footprint in China, but also the selection and variety of health products his shops carry. I asked him about his customer base to get an idea about who his clients are.“I opened WHS to provide high quality products and service to the expat community, knowing this group was eager to find a place they could buy their health products with confidence and at reasonable prices,” he said. “As word of our shop has spread, we are now seeing more and more local Chinese shopping here and learning about dietary supplements and the role they play in maintaining optimal health. I knew the bulk of my initial customer base would be made up of expats, but I anticipated that over time we would see our local client base grow, so I made sure to hire and train staff that are fluent in English and Chinese. To me, good service is the key to ensuring customer satisfaction and repeat business. If my staff wasn’t able to communicate with costumers, we would surely lose business. WHS’s model and sales team is unique in this respect.”
China has an estimated 253 million Internet users, which makes it number one in the world, beating out both Europe and the U.S. This number could actually be higher due to the difficulty in accounting for the millions of people using Internet cafes, which cost about $0.25 to surf the web for an hour. Let’s consider if a mere 1% of these users were considered viable online consumers. You’d have a potential customer base of more than 2.5 million. Calculations aside, this is a decent group of people and it certainly hasn’t gone unnoticed.
Although China’s web savvy have access to Google, Yahoo, MSN and a variety of other famous online services, domestic companies have developed their own alternatives, and in most cases are the sites of choice because their design suits the market. Also, foreign services tend to be less reliable due to the occasional ocean communication cable damage, government intervention, etc. I can honestly say that over the years my service has been disrupted far too many times.
In general, manufacturers and distributors use the Internet to market and brand their dietary supplements. Because the regulations on selling dietary supplements online are not completely transparent, most companies refer their online clients to call in and place orders directly, and then mail them COD. This makes tracking Internet sales challenging. The most popular place on the net to buy anything you can think of, including dietary supplements, is Taobao, which is China’s answer to eBay.
There is certainly no shortage of U.S.-made dietary supplements being sold here. However, one has to wonder how these products entered the Chinese market. I’m quite certain the U.S. manufacturers were not involved in the process. Although this channel operates in somewhat of a gray area in regard to supplements, it does actually help companies brand their products, even if they aren’t involved in the process. Many products begin to generate a buzz online well before their official arrival in China. On occasion, my Chinese friends will ask me about random U.S. brands they saw on Taobao. They are interested to know if these brands are famous in the U.S. and have good reputations.
As China’s economy and middle class continue to grow, there’s no doubt these sales channels will develop and expand outside the top tier cities of Beijing, Guangzhou and Shanghai. However, as Drew Campbell pointed out, current regulations are stifling the growth potential of the industry. This is one of the main reasons why the Natural Products Association has an office in China—to work on regulatory advocacy issues. Moving China’s regulatory environment to a more open and transparent system—like that found in the U.S.—will certainly do wonders, not only for the industry, but also for the millions of people who will benefit from an expanded variety of health-promoting products. The association’s China office is continuing to work with both U.S. and Chinese officials on regulatory advocacy and envisions a bright future for China’s dietary supplement industry.
A number of factors have led to the creation and expansion of these new channels. Consumer demand, increased foreign interest in the market and entrepreneurial spirit have all played their parts. Before proceeding, I would like to clarify “consumer demand” as it relates to this article. The consumers I’m referring to are expats and affluent residents from China’s special administrative regions and neighboring countries, such as Hong Kong, Taiwan, Singapore, South Korea, Japan, etc. In Beijing alone, this group represents 700,000 people, or roughly 4% of an estimated population of 17 million. These consumers have a clear understanding of the dietary supplement industry, as well as a desire to purchase imported dietary supplements. They do not need to be “educated” on the concept of taking dietary supplements on a daily basis for optimal health. The majority of China’s (mainland) population find it difficult to make supplementation a part of their daily health regimen for a couple of reasons. First, government regulations make marketing supplements difficult and stifle effective means of spreading education on the importance and use of dietary supplements. Second, imported dietary supplements are normally priced at more than $29 per bottle, which is an expensive purchase for an average Chinese person, whose monthly salary is in the neighborhood $500.
As more and more foreign dietary supplement manufacturers put China on their“to do” list and domestic companies expand their offerings in the dietary supplement category, there simply needs to be channels in place to accommodate the products. As noted in my last column, the pharmacy and direct (MLM) sales channels have reigned supreme. However, these channels do not always mesh with some marketing and investment strategies. The following is an introduction to the most recent channels where dietary supplements are being introduced.
Mass Market
Currently, most super and hyper markets such as Wal-Mart and its French competitor Carrefour have an aisle devoted to health food products. Normally there are about 20-30 products occupying the shelves. Most are domestic brands touting herbal formulas loosely based on Traditional Chinese Medicine. The only foreign brand usually mixed with these domestic players is Wyeth’s calcium supplement Caltrate. Due to the higher prices of imported products, the Wal-Marts and Carrefours of China are a difficult fit for dietary supplements.
However, during the past couple of years, domestic supermarket groups have been investing heavily in establishing premium high-end supermarkets to attract the well to do of the top tier cities. Beijing Hualian Group (BHG) is one such company. In Beijing, BHG has opened seven supermarkets named “BHG Market Place.” Another popular supermarket with a similar theme is China Resource Group’s “Ole” branded market, which has 13 locations in Beijing. Patrons of these markets are looking for high quality products, especially those imported from the U.S. and Europe, and are willing to pay a premium. The shelves reflect this trend by showcasing an inventory mix of more than 40% imports. With the type of clientele these stores attract, it is easier to justify stocking imported dietary supplements. In fact, all these stores have sections dedicated to imported health products complete with a sales person to help customers with their purchases. The design and layout of the stores is similar to what you would find in the West. Neat, clean, well-stocked and above par service have drawn much in the way of praise.
Health and Beauty
In mainland China, Hong Kong-based Watsons is the leader in the health and beauty channel. I contacted Watsons’ headquarters to discuss some of the finer points of its mainland business. Watsons opened its first store in Beijing in 1989. Since then, it has grown substantially, not only in the number of stores, but also in sales. Watsons consistently records double digit growth year on year. Currently, Watsons has more than 450 stores and expects to have 1000 by the end of 2010. Each store carries a variety of beauty, personal care and healthcare products, including dietary supplements. During my conversation with Watsons, representatives mentioned that dietary supplements in the weight loss and letter vitamin categories were their top sellers and that supplements account for approximately 10% of the company’s revenue. I asked the company why the dietary supplement industry in mainland China is not as well developed as in other Asian countries and regions in the area. Watsons said there are a few reasons. The regulatory system requires dietary supplements to register with the government as functional health food, which is a complicated process. Furthermore, the market lacks the presence of well-established brands to generate customer awareness and loyalty. These reasons have left consumers with limited knowledge about dietary supplements and their usefulness.
Health Food Store
Expats and other consumers in China with knowledge of the industry have been waiting a long time to see the creation of specialty health food stores that sell not only dietary supplements, but also organic foods and other hard to find natural products and personal care items. Well, the wait is finally over. However, if you live outside the bustling cities of Beijing, Guangzhou or Shanghai you’ll have to wait a bit longer.
The first is Green Century Company Limited, which was the first group to invest in the retail sale of dietary supplements in China. Their stores are simply called Green Century and began operations in 2002 in the Guangzhou area. Since then, they have developed into a franchised chain store boasting 800 shops across China. The variety of supplements sold here are primarily domestic or contract manufactured Chinese brands made in the U.S. You won’t find any familiar imported brands here.
The latest to enter the health food sales channel is World Health Store (WHS), which is owned and operated by Drew Campbell. Having spent years in the natural products industry in Australia, Mr. Campbell saw an opportunity to open the first foreign owned and operated store selling dietary supplements in China. I recently spent some time with him to get some insider information on the retail scene. Currently, WHS—like the others mentioned in this column—are looking to expand. This certainly gives the impression of a vibrant and developing industry. However, as Mr. Campbell pointed out during our interview, “appropriate and clear regulations are the key to expanding this industry.”
“The current regulations for importing dietary supplements are really too restrictive and are stifling the growth potential of the industry for both domestic and foreign operations,”he added. Mr. Campbell’s sentiment is not unique and is generally resounded by all involved in the industry, including the Natural Products Association. Mr. Campbell remains confident that regulatory change is on the horizon and has set his sights on expanding not only his store’s footprint in China, but also the selection and variety of health products his shops carry. I asked him about his customer base to get an idea about who his clients are.“I opened WHS to provide high quality products and service to the expat community, knowing this group was eager to find a place they could buy their health products with confidence and at reasonable prices,” he said. “As word of our shop has spread, we are now seeing more and more local Chinese shopping here and learning about dietary supplements and the role they play in maintaining optimal health. I knew the bulk of my initial customer base would be made up of expats, but I anticipated that over time we would see our local client base grow, so I made sure to hire and train staff that are fluent in English and Chinese. To me, good service is the key to ensuring customer satisfaction and repeat business. If my staff wasn’t able to communicate with costumers, we would surely lose business. WHS’s model and sales team is unique in this respect.”
Internet
China has an estimated 253 million Internet users, which makes it number one in the world, beating out both Europe and the U.S. This number could actually be higher due to the difficulty in accounting for the millions of people using Internet cafes, which cost about $0.25 to surf the web for an hour. Let’s consider if a mere 1% of these users were considered viable online consumers. You’d have a potential customer base of more than 2.5 million. Calculations aside, this is a decent group of people and it certainly hasn’t gone unnoticed.
Although China’s web savvy have access to Google, Yahoo, MSN and a variety of other famous online services, domestic companies have developed their own alternatives, and in most cases are the sites of choice because their design suits the market. Also, foreign services tend to be less reliable due to the occasional ocean communication cable damage, government intervention, etc. I can honestly say that over the years my service has been disrupted far too many times.
In general, manufacturers and distributors use the Internet to market and brand their dietary supplements. Because the regulations on selling dietary supplements online are not completely transparent, most companies refer their online clients to call in and place orders directly, and then mail them COD. This makes tracking Internet sales challenging. The most popular place on the net to buy anything you can think of, including dietary supplements, is Taobao, which is China’s answer to eBay.
There is certainly no shortage of U.S.-made dietary supplements being sold here. However, one has to wonder how these products entered the Chinese market. I’m quite certain the U.S. manufacturers were not involved in the process. Although this channel operates in somewhat of a gray area in regard to supplements, it does actually help companies brand their products, even if they aren’t involved in the process. Many products begin to generate a buzz online well before their official arrival in China. On occasion, my Chinese friends will ask me about random U.S. brands they saw on Taobao. They are interested to know if these brands are famous in the U.S. and have good reputations.
Conclusion
As China’s economy and middle class continue to grow, there’s no doubt these sales channels will develop and expand outside the top tier cities of Beijing, Guangzhou and Shanghai. However, as Drew Campbell pointed out, current regulations are stifling the growth potential of the industry. This is one of the main reasons why the Natural Products Association has an office in China—to work on regulatory advocacy issues. Moving China’s regulatory environment to a more open and transparent system—like that found in the U.S.—will certainly do wonders, not only for the industry, but also for the millions of people who will benefit from an expanded variety of health-promoting products. The association’s China office is continuing to work with both U.S. and Chinese officials on regulatory advocacy and envisions a bright future for China’s dietary supplement industry.
