Despite the fallout from the melamine contamination scandal that has blighted the Chinese dairy industryover the last quarter, activity in the food and drink sector continues at a staggering pace. US soft drinksfirm The Coca-Cola Company remains hopeful that its deal to acquire Hong Kong-based HuiyuanJuice Group will be cleared by Chinese authorities before the deadline of March 2009, while PepsiCoannounced plans to invest US$1bn in the Chinese market over the next four years, its largest investmentin the country to date. Yum Brands announced that it expected to hit its 2009 target of 15-20% profitgrowth in China, mainly by opening hundreds of new restaurants.
There are also indications that the market is becoming more sophisticated. At the beginning of December2008, for example, China Organics revealed plans to increase its focus on value-added products. Thecompany will begin selling ‘high-quality premium products’, including organic foods and Californianwines, in the latter half of 2009, stating that it hopes to meet the rising demand for specialty internationaland organic goods from the new and rapidly growing ‘affluent middle class in Asia’.
The above developments illustrate the belief held by foreign companies in the potential of the Chinesefood and drink market. BMI is forecasting that overall food consumption in China, in yuan terms, willgrow by 58.21% to 2013, while per-capita food consumption will reach US$243, an increase of 109% onestimated 2008 levels, albeit from a very low starting point. This growth will be driven by sustainedeconomic development, fuelled by enormous inflows of foreign direct investment (FDI), which will boostemployment levels, buoy consumer confidence and stimulate greater domestic consumption, a trendsupported by rising urbanisation as well as the more prominent presence of foreign mass grocery retail(MGR) operators, as they move into second-tier cities.
In the meantime, the repercussions from the recent melamine contamination scandal are likely to gathermomentum in the coming few months. In mid-November 2008, Fonterra confirmed that it is consideringselling its stake in Chinese dairy Sanlu, the company at the heart of the melamine scandal. There havealso been reports that US private-equity house Kohlberg Kravis Roberts (KKR) is joining forces withChina Mengniu Dairy, China's largest milk producer, and a fund established by China Mengniu Dairy'sChairman Niu Gensheng. The consortium is reportedly preparing to invest in milk producer MengniuModern Animal Husbandry, following the contamination scandal.
However, industrial output growth dropped to its lowest-ever level for a non-holiday month in November2008, further underscoring the parlous state of the world's fourth-largest economy. BMI remains scepticalthat Beijing will be able to rescue the economy from its current doldrums, and consequently expects realGDP growth to dip below 9% in 2009, forecasting economic expansion of 8.8%.
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