LONDON/SHANGHAI (Reuters) - Chen Chen, a 27-year-old financial analyst in Shanghai, has cut back on bottled milky tea in favor of fresh-squeezed juices. Like more and more of her compatriots, she wants to consume more natural ingredients and less fat and salt.
“Health is a key factor,” she said.
Chinese consumers like Chen are making new demands of international food brands, posing challenges for Western firms already grappling with slower sales and intense competition in the world’s most populous nation.
Packaged food makers such as Nestle, Danone, PepsiCo and General Mills enjoyed fast growth in China as middle class consumers opted for convenience foods.
Now conditions have become more difficult. Aside from the economy cooling, a government crackdown on gift-giving, local competition and increased labor costs, there is growing demand for healthier foods with fewer artificial ingredients that can be more expensive to make.
Some Western companies have been caught flat-footed.
Never before have consumers changed so fast and so fundamentally as in China, Nestle Chief Executive Paul Bulcke said last week. “We lost touch ... we are working on plans to reconnect.”
Nestle reformulated its Chinese Nescafe coffee in 2012, saying at the time that coffee had gone from being “a pick-me-up” to “a social drink,” and people now expected “a richer more aromatic coffee”.
The firm is now looking at updating its Yinlu peanut milk brand to satisfy consumers who prefer fewer additives and alternative ingredients, and to modernize its Hsu Fu Chi confectionery brand.
Nestle does not break out country performance but analysts at Swiss bank Vontobel estimate it eked out 0.7 percent growth in China last year, with gains in brands like Nespresso offsetting declines for Yinlu and Hsu Fu Chi.
Rival Unilever reported China sales down 20 percent during the second two quarters of last year as wholesalers and retailers reduced inventory because of the slowdown.
The consumer market has been thrown into disarray over the last 12 months, said Jon Cox, an analyst at financial services group Kepler Cheuvreux. “Chinese consumers are being very discerning when it comes to consumer products.”
Chinese consumers are sensitive about ingredients following a series of food safety scandals, especially after tainted baby formula killed at least six infants in 2008. In 2013, a false alarm from dairy supplier Fonterra sparked a sharp decline in formula sales.
Danone said last week that Chinese infant formula demand was improving, but it was benefiting premium brands sold online like its Nutrilon, rather than its mainstream Dumex brand.
“E-commerce is a flight to safety for Chinese mothers,” said Danone Chief Executive Emmanuel Faber.
James Roy, associate principal at China Market Research Group, says consumers have always been concerned about safety, but are now increasingly concerned about nutrition.
Some local brands have been using that as a selling point to challenge their international rivals. Food maker Cayman Islands Holding Corp has played up the image of natural ingredients and home cooking. Drinks maker Jiaduobao (JDB), which is challenging Coca-Cola Co and PepsiCo, claims its canned herbal tea drink can put out internal “fires”, in a nod to traditional Chinese medicine.
Local egg producer Zhan Wang, Chinese-owned cereal brand Weetabix, and PepsiCo’s Quaker brand have emphasized qualities such as healthy omega-3 content, “all natural” ingredients and zero additives.
“That is something we are advising clients to do a lot more, and it’s something you’re going to see more of going forward,” Roy said.
Sales of health foods were up 15 percent in China by the third quarter of last year, according to Nielsen data, versus just 5 percent for the wider market.
Health has become the number one concern of Chinese urban consumers, according to the Nielsen Chinese Consumer Confidence Index.
“We believe more and more Chinese consumers would be willing to pay more for food with healthy attributes in order to keep fit,” said Kiki Fan, senior vice president of Nielsen China.
Additional reporting by Anjali Athavaley in Boca Raton, Florida, and Dominique Vidalon in Paris; Editing by Giles Elgood