Soft Drinks in China – Volume and Value
With the largest global population and rising purchasing power of a vast section of the middle-class in the last three decades, China has become the largest soft drink market on both a volume and value basis. Domestic and international soft drink producers have enjoyed steady growth rates in recent years. In this feature, Brewing and Beverage Industry International presents an overview of the Chinese soft drink market and major players.
Overview of the Chinese soft drink market
2020 was a tough year for the global and Chinese soft drink industry due to the COVID-19 pandemic. Although compared to a number of other countries, COVID-19 only had a short-term negative impact on the Chinese soft drink market, as the industry is trending upward, especially in terms of emerging channels and consumption scenarios. From January to April 2020, local governments in the People’s Republic of China implemented strict measures of varying degrees, which were aimed at controlling the outbreak in the country. The closure especially of schools and places of consumption, transport bans and workplace shutdowns had an adverse impact on soft drink consumption.
Market share of different beverages
According to a Frost & Sullivan report, the size of China’s soft drink retail market in 2019 was RMB 991.4bn (US$142bn), with a compound annual growth rate of 5.9% from 2014 to 2019. While the market is expected to reach RMB1,323bn (US$190bn) in 2024, the CAGR is expected to remain at 5.9%.
In recent years there has been a steady uptick in the consumption of sparkling water, soda water and tea, as well as zero sugar and zero calorie beverages, as consumers become more health conscious. The ongoing demand for premium quality and healthy, functional soft drinks is also a key driver behind the industry’s growth. Other factors, such as added nutrients, freshness as a result of upgraded processing techniques and beauty enhancements, will play a critical role for brands and companies seeking to stay competitive in the coming years, as Chinese consumers are shifting toward premium products. Currently, this trend has been observed in first and second tier cities, but it is expected to spread to smaller towns as income rises throughout these areas.
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Bottled water has witnessed the highest growth rates in terms of consumption in China in recent years. China has seen average annual consumption of bottled water increase from 41 liters in 2014 to 59 liters in 2019. Rising incomes also boost the thirst for bottled water.
In addition to water, carbonated beverages and ready-to-drink beverages, functional and energy drinks have registered huge growth rates in China in recent years. This category includes drinks enriched with vitamins and minerals, sports and energy drinks, in addition to wellness drinks and nutraceuticals. The Chinese market is full of more than hundreds of different brands offering these products. Many of these have been developed to provide specific medical or health benefits, such as acting as energy boosters, improving digestion, enhancing immunity, or promoting heart health.
COVID-19 impact on Chinese soft drink industry
COVID-19 has had a deep impact on consumer behavior. However, it is still too early to reach a conclusion regarding the impact on consumer behavior, but a number of recent surveys have indicated that Chinese consumers have become more cautious as a result of the pandemic. Moreover, this is reflected in consumers who are tending to spend less, but buying better quality products. According to a recent survey by one of the leading Chinese companies in the beverage sector, nearly 40% of the Chinese respondents intend to live more frugally and seek value-for-money when selecting beverage products.
According to a survey conducted by the research firm Global Data during the height of the COVID-19 crisis in April, almost 89% of the Chinese consumers are influenced by how the product will impact their health and well-being. Nearly 39% of the consumers are buying ‘juices and squash’ products more than before COVID-19, whereas about 22% of them are purchasing other soft drinks. The research implies that Chinese consumers are turning to more naturally formulated, low-sugar ‘good-for-you’ beverages, in an effort to improve their overall well-being.
Major soft drink producers in China
China’s soft drink manufacturers consist of regional leaders as well as international and national manufacturers such as Coca-Cola, PepsiCo, Wahaha, Master Kong and Tongyi. Due to unbalanced economic development, the landscapes of soft drink markets in high-income first and second tier cities and low-income third and fourth tier cities and rural areas are different.
Market shares of national leaders in certain regions are smaller than that of regional enterprises and largely depend on product varieties and retail prices. For example, in third and fourth tier cities and rural areas, soft drinks that sell well are tea beverages priced at CNY 1-1.5 (250 ml) and peanut milk priced at CNY 2-3 (500 ml). By contrast, in the first and second tier cities, popular products are functional drinks priced at CNY 5-8 (360 ml) and juice priced at CNY 3-5 (500 ml).
International soft drink giants like Coca-Cola and PepsiCo entered the Chinese market in the 1980s. Throughout the next two decades, these two beverage giants exacerbated the situation for domestic Chinese soft drink producers. For example, the Chinese cola brand Tianfu, previously the country’s top-selling soft drink in the 1980s, saw its market share plunge to only one percent in 2005.
According to Karen So, managing director of Swire Coca-Cola, “China’s beverage market is diversified with a wide range of products. Tea is a relatively large market in China, while carbonated beverages account for 14 percent of the total market. We will strive to achieve a dominant position or top ranking in soda water, tea, coffee, energy drinks and other categories in the future.” However, over the last 15 years, a number of Chinese soft drink producers have emerged as sizable producers with significant market shares in different categories.
Hangzhou Wahaha Group Co Ltd (Wahaha) is one of the largest soft drink producers in China. Founded in 1987 by entrepreneur Zong Qinghou, Wahaha has grown into a food and beverage giant with products ranging from bottled water, yogurt drinks and juice to instant noodles. The company has 80 production sites and employs around 30,000 workers. Wahaha means a “laughing child” in Chinese. Its products are available in more than 30 countries including Canada, Singapore and the United States.
Qinghou Zong, the Chairman and Chief Executive Officer, has been responsible for the company’s transition from a small entity selling ice-cream to children, to one of the industry’s leading players. Furthermore, he was China’s richest man in 2010, 2012 and 2013, according to Forbes magazine.
A couple of years ago, Wahaha launched its pH 9.0 alkaline water product, following the two-year-long research and development process. The product contains a pH of 9.0, making it mildly alkaline. It is manufactured using the electrolytic water treatment, which consists of water being ionized through electrolysis, thus providing a higher pH level. In addition, this product does not contain any sugar or carbon dioxide. In first half of 2020, company’s pH 9.0 alkaline water registered an increase of 235% in sales. Alkaline water has become highly popular in recent years, with some studies reporting its better hydration properties, ability to reverse the acidic effects of a poor diet, helping in acid reflux and containing higher amount of minerals such as magnesium and calcium.
In 2020, Wahaha was ranked the top soda brand in China, according to Chnbrand’s customer satisfaction index, thus replacing 2019’s top ranked Watsons. Chnbrand is a Chinese brand evaluation institute.
The company was established on September 26, 1996, and launched its first packaged drinking water product in 1997 with water sourced from Thousand Island Lake in Zhejiang Province. It became a joint stock company Nongfu Spring Co., Ltd in 2001. Nongfu Spring developed and launched a range of beverage products, including Farmer’s Orchard, Scream and Oriental Leaf, while using popular marketing slogans, most notably ‘a little bit sweet’. Through growth and acquisition, Nongfu Spring has become China’s largest bottled water producer and is one of the top three producers in the bottled tea and juice market.
Last year, Nongfu Spring filed an initial public offering with the Hong Kong Stock Exchange and raised approximately US$1bn through this IPO. The company recorded revenue of 24 billion yuan (US$3.4 billion) in revenue in 2019, up from 20.47 billion yuan a year earlier. The company registered a profit of nearly 5 billion yuan in 2019, representing a 20% increase from the previous year. Much of its success has been generated because of the company’s ability to understand local markets’ needs and respond to them rapidly.
In addition, the company has an extensive nationwide network of water production sites. The advantage of sufficient supply and quality production enables the company to produce natural water, natural mineral water and pure water.
In addition to bottled water, the company boasts different types of products in its portfolio, including functional drinks, juice, tea and plant protein such as coconut yogurt. Moreover, one of the most recent launches was its carbonated coffee drink, a coffee and carbonated soft drink hybrid beverage, which appeals to those who rely on coffee for an energy boost, but who are still longing for a refreshing feeling for the mouth.
Coca-Cola China is one the largest soft drink producers in the country. Moreover, Coca-Cola China and its bottling partners have continued to invest in local supply chains, which is aimed at improving efficiency, ensuring supply and serving domestic consumer demand.
In the second half of 2020, Swire Coca-Cola, a bottler of Coca-Cola, put six new production lines into operation, with a total investment of 250 million yuan (about 36 million U.S. dollars) and an additional annual output value of more than 1.7 billion yuan.
Swire Coca-Cola currently has 18 factories in 11 provinces and the Shanghai municipality on the Chinese mainland, all of which play an important role in the company’s business growth. Swire Coca-Cola also plans to add a plastic bottle production line to its plant in central China’s Hubei Province, which is expected to be operational by May 2021.
COFCO Coca-Cola Beverages Ltd. (CBL), another bottling partner of Coca-Cola, has started building its first factory in China’s southwestern province of Guizhou. With an estimated investment of 270 million yuan, the new facility, scheduled for operation by the end of 2021, will start with two advanced PET soda production lines with an annual capacity of 170,000 tonnes. CBL was established in 2000. It is a joint venture between COFCO Corporation and The Coca-Cola Company. COFCO Corporation controls 65% of shares and TCCC has 35%.
Under the franchise of The Coca-Cola Company, CBL manufactures, distributes, promotes and sells Coca-Cola series products in the franchised territories, and provides consumers with 20 brands of products in ten major types of beverages which include sparkling drinks, juice, water, milk drinks, energy drinks, tea, coffee, functional nutrition drinks, sports drinks and plant-based protein drinks.
CBL operates 19 bottlers, covering 19 provinces and municipalities (i.e., Beijing, Tianjin, Hebei, Shandong, Heilongjiang, Jilin, Liaoning, Shanxi, Shaanxi, Szechuan, Chongqing, Inner Mongolia, Gansu, Ningxia, Qinghai, Tibet, Hunan and Guizhou). The territory represents 81% of the geographical area and 51% of China’s population.
Pepsi was one of the earliest multinational companies to become established in China under the Open Door Policy (although it arrived after Coca-Cola). In 1982, Pepsi set up its first 13,000-square-meter bottling plant in Shenzhen, then a rural town located next to Hong Kong. Throughout the 1980s, Pepsi proceeded cautiously, taking small stakes in joint ventures. As part of Pepsi’s business strategy, the company opted to sell the drink’s concentrate, rather than relying on income generated by joint ventures. Pepsi expanded more aggressively after establishing the Pepsi (China) Investment Company in Shanghai in 1994, an umbrella responsible for monitoring all mainland operations.
PepsiCo does not separately disclose revenue generated in China. Instead, the country is included in its APAC (Asia Pacific, Australia, New Zealand and China) segment, which reported a revenue increase of 4% annually to $2.92 billion, or four percent of its total sales, in fiscal 2019.
Would you like to know more about China’s soft drink market or the beverage industry in other countries? Then join us at the next drinktec which will take place in Munich from September 12 to 16, 2022.
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