Analysis of Pet Food Market in China - by Polish Investment and Trade Agency China Trade Office in Shanghai

Analysis of Pet Food Market in China

                                by
Polish Investment and Trade Agency China Trade Office in Shanghai

                            August 2017

5 facts about China’s growing pet food market

Pet owners in Chinese mega-cities are increasing and buying pet food online.
With China’s growing middle class and the resulting increased disposable income, both domestic and
international pet food companies are beginning to watch and move into China’s rapidly growing pet food
market. Petfood Industry reported these key facts about China’s pet food market.

1. China leads Asia-Pacific
China’s pet ownership outpaces Asia-Pacific numbers, as 25% of the population owns dogs and 12% of
the population owns cats. For the Asia-Pacific region, 20.9% of the total population owns dogs and 11.1%
owns cats.

2. Mega-cities top pet ownership
Shanghai and Beijing, China’s two largest cities, account for much of that pet ownership, with 24% of
Shanghai’s residents owning dogs and 11% owning cats. Twenty-five percent of Beijing residents own
dogs, while eight percent own cats.

3. China approaching global average
Considering that 29.9% of the total global population owns dogs and 21.8% owns cats, China’s pet food
market growth has put it on track to become a pet food superpower in the global pet market, as ownership
rates approach the global average.

4. Economic boom fuels pet food industry
Disposable income in urban China households has gone up each year since 2010, and continues to
increase. This means more people are looking to pets as companions, and those people are willing and
able to spend more on their dogs and cats than ever before.

5. Strong online pet food market
China’s pet food market consumers’online presence is stronger than in more developed markets. Thirty-
eight percent of the country’s pet food is purchased online, according to Fung Global Retail and
Technology data, compared to 7% in the US for total pet care sales, including pet food.

Natural Pet Products
Natural products, in general, are gaining wide-spread popularity. This is because people have become
more conscious about improving and sustaining the health of the planet.Consumers are also increasingly
leery of the potential toxicity of synthetic chemicals and other harmful materials.In addition to a desire to
decrease their pets’ carbon paw prints, pet parents are opting to purchase natural products in an effort to
maintain and/or improve the health and well-being of their beloved companion animals. The top-selling
natural pet products are: Holistic cat and dog food, Cat litter, Natural flea and tick repellents, Holistic

grooming products such as the blueberry facial for dogs, Products for older pets, particularly for dogs,
Toys made with natural fibers.

Pet Industry Trends of the Future

                                                 Chinese
                                                 Market

Pet food annual forecast 2014-2019
Premium Dog Food: +13%
Premium Cat Food: +10%
Whole sector average: +9%
38,000,000 cats and dogs
80,000,000 fish

Navigating Cross Border e-Commerce Regulations in China’s Pet Food Industry

On April 8, 2016, Chinese authorities released an updated “positive list” for goods imported through cross
border e-commerce (CBEC). Pet food, specifically dog food and cat food, are included on the list for the
first time. This new regulatory update presents a substantial e-commerce opportunity for foreign pet food
companies, as pet food can now be imported more easily via one of China’s 13 free trade zones or sold
directly on business-to-consumer (B2C) or consumer-to-consumer (C2C) e-commerce platforms such as
Tmall and JD.com. However, uncertainties and risks accompany these new opportunities, as new
integrated tax policies for CBEC and the pre-existing “negative list” exert impacts on foreign investment.

Opportunities for foreign brands

Since global food and drink conglomerates Mars, Inc. and Nestle S.A. attained sweeping success in China
in the early 2000s, numerous market research analyses have projected enormous growth momentum in
China’s pet food industry. Their confidence in China’s pet food sector is fundamentally based on the
reality that around 75 percent of pet owners in China still do not feed their animals with commercial pet
food, as estimated by Euromonitor. However, the use of commercial pet food is expected to become more
widespread going forward, with GfK projecting online pet food sales growth in China to reach 43 percent
for 2016.

In addition to the promising growth potential in the pet food industry, the growing food safety concerns
among Chinese citizens encourages more and more middle and upper class pet owners to choose reliable

foreign-branded pet food over domestic options. In recent years, a sequence of food safety incidents
associated with Chinese food manufacturers have weakened the nation’s trust in national brands, such as
when tainted Chinese-made pet treats killed over 1,000 dogs in 2007, causing the US Food and Drug
Administration to recall a massive amount of pet food. The most prominent food safety scandal occurred
in 2008, when the sale of tainted milk powder led to more than 300,000 infants being harmed, leaving
China’s central government embarrassed amid severe domestic and international reprimands over its
regulatory deficiencies.

Tax treatment of pet food imported through CBEC

Due to uncertainties brought by the new integrated tax policies for CBEC, however, and counteractions
hidden in the “negative list”, foreign investors are not necessarily guaranteed immediate success. As new
integrated tax policies for CBEC means that the overall tax burden on consumers will exceed 10 percent,
the price of imported pet food products will be significantly higher.

For example, if an online buyer paid RMB 202.26 (US$30) for a popular US branded natural dry adult
dog food before the new adjustment, the tax would be waived by Customs because it amounted to less
than RMB 50 (202.26 x 10% = 20.226). After the new adjustment, the same item is subject to a tax rate of
9.1 percent (0% [tariff for pet food] + 13% [VAT for pet food] x 70% = 9.1%). A further RMB 18 (RMB
202.26 x 9.1% = RMB 18.40566) would therefore be added to the original retail price after the
adjustment.

In the short term, e-commerce platforms have been absorbing the price of the integrated tax for online
buyers as a sales promotion to win greater market share. However, in the long run, integrated tax will
eventually be passed onto online buyers. Consumers who prefer to enjoy low tax benefits might turn away
from pricier overseas products, and instead choose from the existing foreign brands in China’s sales
market. Though new investors may lose connections with that customer segment, licensed foreign pet
food manufacturers will continue to benefit from sales growth due to well-established brand awareness,
competitive price advantages, and low cost and speedy delivery.

Regulatory uncertainty

While the new “positive list” includes pet food, the “negative list” excludes certain animal feeds, such as
meat meal, bone meal, fish meal, whey powder, blood meal, animal-derived medicines, and other
unspecified feeds. Under such a contradictory situation, customs clearing will prioritize the “negative
list,” according to China’s Inspection and Quarantine Bureau. Inclusion of pet food on the “positive list”
seems to be good news for foreign investment at first glance, but when it comes to the implementation
level, further legal due diligence is essential for any new market entrant.

In general, both licensed foreign pet food manufacturers and new foreign pet food companies will
encounter different types of barriers in the process of achieving sales growth. Nonetheless, new

regulatory changes open an e-commerce channel for more foreign investment to enter China’s pet food
market. With the increasingly diversified demands of China’s pet owners, foreign brands specializing in
different pet food products have the chance to establish their respective market niches when navigating
the choppy waters of China’s cross border e-commerce.

Industry data

As released data from National Bureau of Statistics, Total Retail Sales of Consumer Goods is in 2015 was
 more than USD 4.5 trillion, ranked as the second largest retail
consumer country in the world, right after USA. Pet consumption, with the biggest gain, reached to RMB
5.68 billion, with 260.2% year-on-year growth.

Chinese pet market includes retail and pet service. In 2014, the market value was USD 16.1 billion,

includes online and offline consumption. CARG is 59.5% within 10 years. Online sales takes a huge
amount of market share.

Market scale of pet food reached to USD 4.5 billion in 2015 and maintain the speed of 25%.

The annual pet supplies consumption in China:

11% family - over USD1500

29% family - USD750 - USD1500

China is one of the most fastest growing and vibrant area of pet industry.

The pet industry has become big business in China with forecasters predicting the pet care sector could
grow to $2.6 billion by 2019. Nowadays, pets have become a symbol of financial success and status.
Dogs are the most popular pet, according to a report by Euromonitor, with some 30 million households
owning a dog last year. Loneliness and stressful city living seem to be driving the pet ownership boom.

"In big cities like Shanghai, many people feel lonely and treat pets like family," said pet groomer Zhao
Huanhuan. "People are now willing to spend on their pets as much as they are willing to spend on their
parents."

Multinational companies such as Mars Inc, Nestle S.A., Procter & Gamble Co and Colgate-Palmolive Co
are all setting their sights on China in the coming months and years.

Other pet care industries on the rise in China including luxury pet product companies like Chrome Bones,
a company that produces pet collars with Swarovski crystals. Pet pampering services are huge business,
so are veterinarians, groomers, and high-tech animal hospitals.

Sources: baidu.com, China Briefing, petfairasia.com

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Contact:

Dr Andrzej Juchniewicz
Chief Representative
Polish Investment and Trade Agency
China Representative Office in Shanghai
Suite 1708, Cross Tower, No. 318 Fuzhou Road
200001 Shanghai
tel. (+86) 21 63309206
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