MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

Market Overview On Gelato, Coffee And Sweet Food In China 1 MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA 2018

MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

Market Overview On Gelato, Coffee And Sweet Food In China 2 TABLE OF CONTENT SECTION 1: SECTION 2: Executive Summary General Overview on Gelato, Coffee and Sweet Food Page 3 Page 7 Market in China SECTION 3: The Ice Cream Market in China Page 11 SECTION 4: The Pastry and Bakery Market in China Page 37 SECTION 5: The Coffee Market in China Page 53 SECTION 6: The Chocolate Market in China Page 62

MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

Market Overview On Gelato, Coffee And Sweet Food In China 3 * SECTION 1:Executive Summary As a populated country with a fast-paced economy, China’s market for sweet food and coffee market is experiencing exponential growth due to a rising middle class and changes in the young generation’s attitudes and consumption behaviors.

The Chinese, accustomed to a salty diet, are adopting the western coffee culture and learning to appreciate various sweet indulgences, leading to vast opportunities for Italian coffee and sweet food manufacturers.

The era of globalization presents immense opportunities for brands, especially Italian ones, to understand and grow with Chinese consumers as they explore a modern lifestyle enabled by years of socioeconomic improvement. More encouragingly, third-party research showed a strong trend towards premiumization and discretionary purchases, which is likely to translate into demand for premium products. Since “made-in-Italy” coffee and confectionary is often considered “premium” by most Chinese, the market potential at this time seems stronger than ever for products of Italian origin.

Among the different sweet food markets, the gelato and coffee markets seem to be having good potential in China as they are emerging and developing.

*The present market research has been compiled by N‐Dynamic Market Research & Consultancy Ltd. for Italian Trade Commission Shanghai Office.

MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

Market Overview On Gelato, Coffee And Sweet Food In China 4 There is a high level of cross-pollination between western products such as coffee and gelato. Currently, there is a trend in which professionals from other industries start their own coffee and ice cream businesses. In order to maximize sales and offset significant production and operation costs, small business owners will often stock diverse product options to cater to as many customers as possible. This has resulted in the emergence of hybrid stores that can comprise of a gelateria, a café, or even a bakery.

Ice cream has been integrated into other kinds of food forms.

Instead of being a single product, ice cream has started to extend itself into other food categories. For example, restaurants might serve ice cream as a dessert along with other sweet food; bakeries could also sell ice cream in tandem with other products, such as mooncakes, birthday cakes, etc. Ultimately, the integration of gelato into other kinds of food forms is well received by Chinese consumers as they love sophisticated products. The promotions of the new food forms have resulted in higher awareness of and preference for gelato. One example is the affogato drink, which is promoted heavily by various coffee shops in China.

While consumers care most about the taste and flavor of their ice cream, the “health” has almost an equal amount of importance. Interestingly, Chinese consumers’ preference for less sweet products makes it easier to create healthier ice cream without a significant compromise in taste. Gelato is well positioned to fulfill this unmet need with its fewer calories. In general, consumers are also seeking more flavors, and thus investment in research and development is needed. Other suggestions by consumers include a softer ice cream texture as well as more innovative shapes when it comes to serving ice cream.

These are peripheral product attributes that can be leveraged to increase differentiation from other ice cream.

MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

Market Overview On Gelato, Coffee And Sweet Food In China 5 Gelato market players need to seek the best competitive advantages to define and maintain the product’s uniqueness through product innovations and nutritional messages. From a marketing perspective, gelato producers need to emphasize the naturalness and authenticity of the product through product attributes as well as leveraging the well-established reputation of Italy as a producer of gourmet ice cream. In order to educate consumers about gelato, industry experts advise business players to organize roadshows, gelato competitions, exhibitions, etc.

These events will serve as educational opportunities where both brands and consumers can exchange information and become educated about each other. As suggested by one distributor, flagship stores are great marketing and business investments where gelato chefs can demonstrate the production process and educate consumers. Moreover, cross- promotion across other industries is a powerful way to enter the market through partnership growth. One machinery and ingredients provider stated that, in past few years, their company has setup gelato booths at event venues like the F1 car racing course and equestrian events with great success.

Partnerships with large businesses or even local governments could go a long way in covering otherwise immense costs of industry-wide events. Gelato’s success in China will be a combination of business ventures into unknown territories as well as public relations strategies to raise awareness and establish a unique reputation for gelato. Finally, understanding how to navigate the ever-changing government regulations will be key for businesses. The Chinese government pays a lot of attention to food safety, but the specific regulations around gelato remain unclear. Businesses will have to continually look out for updates and guidance on gelato production in the near future as the Chinese government becomes more familiar with the production process.

MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

Market Overview On Gelato, Coffee And Sweet Food In China 6 It is without doubt that the gelato market in China will continue growing in the near future. The most important challenges that gelato producers will need to continue tackling are education, cultural assimilation and financial feasibility. As suggested by many industry experts, education on an industry level will act as a catalyst for faster growth through greater interest in gelato and a higher willingness to pay for it. Moreover, adapting to cultural norms and localizing the taste of gelato will help gelato products bypass consumer unfamiliarity and into consumers’ comfort zones.

Lastly, scales of economies should be leveraged to reduce the overall cost of doing business in China so that more producers, distributors, and retailers are incentivized to expand access to gelato. Ultimately, the goal is to create a positive cycle of profitability that will in turn lead consumers to be more frequently exposed to gelato experiences. The inextricable link between consumer demand and gelato supply will continue to grow as long as the barriers are addressed on both sides with long-term prospects in mind.

This market research is a general overview. ITA Shanghai would be pleased to assist Italian companies and associations to get more specific and detailed information on these sectors, as well as personalized services to facilitate their entrance into Chinese market.

MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

Market Overview On Gelato, Coffee And Sweet Food In China 7 SECTION 2:General Overview on Gelato, Coffee and Sweet Food Market in China As a populated country with a fast-paced economy, China’s market for coffee and sweet food is experiencing exponential growth due to a rising middle class and changes in the young generation’s attitudes and consumption behaviors.

The Chinese, accustomed to a salty diet, are adopting the western coffee culture and learning to appreciate various sweet indulgences, leading to vast opportunities for Italian coffee and sweet food manufacturers.

While there are only 33 cities with over 1 million people in all of Europe, the number of cities in China with same population is 303. Furthermore, as shown in the figure below, there are different tiers of cities in China. Each tier of cities represents a certain group of consumers with their idiosyncratic attitudes, behaviors, and preferences. Understanding these nuances will help products with different positioning find their success in China.

MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

Market Overview On Gelato, Coffee And Sweet Food In China 8 According to the consulting firm McKinsey & Company, rapid growth of disposal income within China’s middle and upper classes has been occurring since 2012 and is projected to last until 2022.

The figure below demonstrates this growth and the increased consumer spending as a result. The affluent (annual salary greater than 229,000 CNY [€29,090 EUR]) and upper middle class (annual salary ranges from 106,000 to 229,000 CNY [€13,466 to €29,090 EUR]) groups will have a CAGR (compound annual growth rate) of 19.6% and 22.4% in the projected period, respectively. The incremental growth of their annual salaries will drive an expenditure shift from products to services and from mass to premium segments. In addition, middle-class growth has been concentrated more so in smaller cities to the north and west of China, many of which are 3rd tier cities.

China's Rising Middle Class Source: McKinsey & Company This transition of focus away from major cities presents a unique opportunity to capitalize on previously untapped markets. What is interesting is that Italian coffee and sweet food manufacturers will have the ability to shape the mind of customers,

MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

Market Overview On Gelato, Coffee And Sweet Food In China 9 many of whom have minimal historical exposure to Western products. Less preconceptions and stereotypes about what Italian products look and taste like means that Italian producers can more easily assimilate into the local culture.

Despite the recent slowdown of the country’s economic growth, China’s middle-class consumers are still confident about the prospects for their incomes, which make them more willing to spend disposable income. More encouragingly, results from a recent survey and third-party research showed a strong trend towards premiumization and discretionary purchases, which is likely to translate into demand for premium products. Since “made-in-Italy” coffee and confectionary are considered “premium” by most Chinese consumers, the market potential at this time seems stronger than ever for products of Italian origin.

Chinese consumers’ curiosity towards Western food has continued to expand in conjunction with middle class income growth. The adoption of a Western lifestyle and diet is evident through increased imports of foreign food products as consumers search for avenues of enjoyment. HKTDC’s survey results highlighted the popularity of international travel among Chinese consumers and their willingness to try new things, which aligns with the growing appreciation for foreign brands and products among China’s younger generations. The era of globalization presents immense opportunities for brands, especially Italian ones, to understand and grow with Chinese consumers as they explore a modern lifestyle enabled by years of socioeconomic improvement.

MARKET OVERVIEW ON GELATO, COFFEE AND SWEET FOOD IN CHINA

Market Overview On Gelato, Coffee And Sweet Food In China 10 References China Daily 2017 http://www.chinadaily.com.cn/china/2017-10/02/content_32752727.htm HKTDC Research 2017 http://economists-pick-research.hktdc.com/business-news/article/Research-Ar ticles/C hina-s-Middle-Class-Consumers-2017-Survey-Summary-and-Recommendations/rp/en /1/1X000000/1X0AB8SK.htm McKinsey& Company 2016 http://mckinseychina.com/the-modernization-of-the-chinese-consumer/ McKinsey& Company 2013 https://www.mckinsey.com/industries/retail/our-insights/mapping-chinas-midd le-class

Market Overview On Gelato, Coffee And Sweet Food In China 11 SECTION 3: The Ice Cream Market in China Types of ice cream in China Currently, the most popular type of ice cream in China is hard ice cream (10% to 18% milk fat content), which is as known as American ice cream or Philadelphia ice cream.

It is the most common type of industrially produced and branded ice cream that can easily be purchased in China’s supermarkets and convenient stores. Other varieties of ice cream, such as gelato (Italian-style ice cream), custard- or egg-based ice cream (French-style ice cream), sorbet, frozen yogurt, and soft serve ice cream, can be found in a multitude of distribution channels including ice cream shops, hotels, cafés, and restaurants. Among all the ice cream types, soft serve ice cream is a particularly popular in China mainly due to the convenience of making and storing the product through a soft serve machine.

While American ice cream and soft serve ice cream have gained widespread recognition and large market share in China, gelato has not grown to the same extent and accounts for only a very small portion of the market. Market size indicators and trends Chinese consumers are not known for their love for ice cream—as a matter of fact, older generations of Chinese believe that cold food is bad for one’s health, let alone iced food. The projected average consumption per capita for ice cream in China is only 0.03 kg in volume in 2018 according to Statista. Even so, as of 2014, China is the world’s largest ice cream market in terms of volume consumption thanks to the influence of Western lifestyles and rising disposable incomes.

The graph below shows the incredible growth of China’s market volume since 2008: a stark difference especially when compared against the highly saturated and stagnant US market.

Market Overview On Gelato, Coffee And Sweet Food In China 12 Market volume of Ice Cream in China and US Source: Mintel While Mintel projected the market volume to continue upwards in 2014, the ice cream category in China actually recorded a decrease in ice cream volume consumption in 2017. To be more specific, based on data from Euromonitor, both take-home dairy ice cream (-3%) and impulse ice cream (-1%) saw decreased retail volume last year. Research further indicates that the percentage of Chinese people that do not consume ice cream rose from 4% in 2012 to 11% in 2017 as Chinese consumers’ preferences shifted towards healthier eating habits.

Considering the strengthening awareness of healthy diets amongst consumers, overall ice cream sales volume is expected to keep declining in the next few years while healthier options such as frozen desserts are predicted to slowly increase in volume based on reports by Euromonitor. Despite the decrease in volume, China’s ice cream market has continued to grow in retail market value. According to Statista, revenue in the country’s ice cream segment is expected to reach $183 million USD (€149.70 million EUR) in 2018 with the market expanding annually by 3.5% in value from 2018 to 2021.

Market Overview On Gelato, Coffee And Sweet Food In China 13 Revenue Growth of Ice Cream in China Source: Statista According to the marketing manager of a machinery producer interviewed by N- Dynamic Market Research, the overall market size of ice cream is approximately 40 billion CNY (€5 billion EUR) per year. The gelato market share is believed to be less than 10% of this amount, although the interviewee demonstrated confidence in gelato’s growth potential: “In the next 5 years, the gelato market should be able to take off again quickly”. As a gelato producer interviewed by N-Dynamic puts it, “Even though there was a ‘winter season’ for China’s gelato market in 2015 and 2016, the 2017 market began to warm up again”.

Furthermore, the growth in value coupled with the decrease in volume points to the greater demand for high-quality/gourmet ice creams. This trend is likely to remain for the foreseeable future and will continue to benefit makers and distributors of gelato. In addition, Technavio published a report on the global market for gourmet ice cream, covering three segments: gelato (which accounted for 69% of the gourmet ice cream market in 2016), sorbet, and frozen custard. The report predicted that APAC (Asia Pacific) will soon become the fastest-growing market for gourmet ice cream products due to rising demand.

Indeed, the explosive growth of China’s emerging middle class has greatly driven demand for gourmet ice cream, among which gelato plays an important role due to its viability as a premium and healthier ice cream alternative.

Market Overview On Gelato, Coffee And Sweet Food In China 14 Data on ice cream imports from 2014 to 2017 indicates that imports dropped in 2015 and 2016 and recovered in 2017. More importantly, the 2017 recovery lead to an importation market value of $64.16 million USD (€52.45 million EUR) by November 2017, a value that already surpassed the market value for the entirety of 2016 ($60.68 million USD [€49.60 million EUR)]. In conjunction with decreased sales volume, this jump in market value is strong evidence that premium product demand is growing. According to the Chinese custom ‘s data, the China’s importation of ice cream for the first three months has increased of 20.54% comparing to the same period of last year.

Currently, the average price per unit for ice cream products in China amounts to $4.90 USD (€4 EUR) based on data provided by Statista. Moving forward, the prices of ice cream are likely to go up as manufacturers launch more premium product lines and raise prices to maintain profit margins.

In order to better understand the gelato market in China, N-Dynamic interviewed 6 experts in the industry, including machinery manufacturers, gelato retailers, distributors, and showcase manufacturers. Their many years of experiences in gelato production and retail have led to in-depth insights on the market. Based on the interviews, the most significant difference between the gelato markets in China and in Italy is the consumer perception of gelato itself — Chinese customers ultimately think that ice cream is too cold and therefore unhealthy for human bodies. Simultaneously, they are unaware of gelato’s health benefits.

Most importantly, however, many Chinese consumers cannot differentiate between gelato and ice cream. These cultural and knowledge gaps among Chinese consumers are significant barriers for gelato producers and sellers. Of course, the complete opposite is true for Italians—for them, gelato is native and an essential part of their lives.

“Understanding the markets’ distinctiveness is key to entering China’s gelato market”, suggested a showcase marketing manager, “so it’s better for foreign companies to hire

Market Overview On Gelato, Coffee And Sweet Food In China 15 Chinese market specialists to implement marketing strategies”. Ultimately, the hope is that local specialists will be able to tackle the cultural and social nuances of Chinese consumers. “The high price of gelato makes it a luxury dessert in China’s market, and the main customers are young people who have travelled abroad, kids who grew up well-off, young couples, and oversea returnees”, remarked a distributer.

Overall, the interviewed experts think the confectionery industry in China has been growing in the past few years. The major reason cited is the rising disposable income of Chinese consumers along with China’s economic growth in general. As a machinery manufacturer stated, “With rising income, Chinese people started to pursue higher quality of life including sweet food”. Thanks to the huge population of the nation, the entire confectionery industry is extremely promising in China. Also, according to a gelato distributor, “Decades ago, Chinese people simply wanted to have food to survive, but now people want food not only to be delicious but also to be good looking, so they can take photos and share on social media platforms”.

With increasing quality of life for the average Chinese consumer, many gravitate towards food as a means of enjoyment and social reciprocation: “Since more flavors are invented and more styles are created, food nowadays can even be selected as a present for friends”. Moreover, according to one distributor, “the offline sales channels have expanded from street stores to shopping mall centers”, especially as products have become more mainstream.

The main consumer groups of gelato are young. Born between 1980 and 2000, many grew up with ice cream and popsicles with the culture of eating ice cream deeply rooted in their lives. These are the consumers that will continue the cycle of ice cream consumption as they encourage their children to consume ice cream as well. In the long term, this self-reinforcing culture will bring a positive influence on the market. Ultimately, as the interviewed experts all believe, the future of the ice cream market is

Market Overview On Gelato, Coffee And Sweet Food In China 16 being built on a strong foundation of cultural norms established by a young generation of Chinese consumers and will likely keep growing as they strengthen their long-term appreciation of ice cream.

Geographically speaking, “both southern and northern regions have good markets. In the North, ice cream is being sold throughout the year due to the warm heating systems in the region, while the sales drop in South when it enters winter”. The experts believe tier-one cities like Shanghai, Beijing, Guangzhou, and Shenzhen have the most potential for future market development. For example, Starbucks opened its biggest store Roastery in Shanghai in late 2017, which led to another coffee craze in the region, causing people to wait in long lines to visit the shop. This is not to say that lower-tier cities are not worth expanding to: as stated by a machinery manufacturer’s marketing manager, “People in tier-three and tier-four cities are more conscious of “face” and consider eating ice cream a fashionable trend, which makes the market in those cities have growth opportunities”.

Market structure and key players According to Euromonitor, Inner Mongolia Yili(内蒙古伊利)Industrial Group continued to lead ice cream and frozen desserts in 2017 with a market share of 13%. China Mengniu Dairy(蒙牛乳业)Co., Ltd. is another top Chinese dairy company among the industry leaders. These local giants have maintained their market shares through strong cross-country distribution and consistent new-product launches. Two non-Chinese companies also made the list of the country’s top 10 ice cream brands: Unilever and Nestlé (Eurasia Consult 2015). The success of Unilever’s ice cream brands in China (Wall’s, Magnum, and Cornetto) proves that international brands can have strong brand presences that compete well against local players.

Aside from these big players, the market is highly fragmented with a vast variety of locally-produced and low-price brands all vying against each other in a competitive environment.

Market Overview On Gelato, Coffee And Sweet Food In China 17 Based on results from a recent internet poll, the ice cream brand most favored by Chinese consumers is Häagen-Dazs, followed by Dairy Queen. The high recognition of Häagen-Dazs came primarily from its successful positioning as an “experience” luxury brand as well as its countless marketing campaigns. The company reported strong growth in large cities (revenues in Shanghai and Beijing grew 16% and 13%, respectively) in June 2016, despite challenges it faced in other smaller cities. In them, rising commercial rent and lower profit forced Häagen-Dazs to close stores in second- and third-tier cities in 2015 and 2016 amid a slowdown in the ice cream market.

As the brand is widely perceived as overpriced by many Chinese people, one of the major reasons for its failure could have been consumers’ lower willingness to pay for ice cream in second/third-tier cities. Häagen-Dazs’ failure comes as a lesson that companies need to proactively manage their pricing strategy in response to consumers’ price sensitivity—this can vary widely based on the city and be a large determinant in the success of a product in highly individualistic environments.

The Chinese market also sees a high level of cross-pollination between Western products such as coffee and gelato. As remarked by a gelato machinery and ingredient distributor, there are a large number of individual market players in China that contribute to the growth of the coffee and ice cream market. Currently, there is a trend in which professionals from other industries start their own coffee and ice cream businesses: “The investors mainly have their own full-time jobs in design or architecture industry, but they see the opening a café or ice cream shop as a business investment as well as a way to pursue their own interest and dreams”, said a distributor.

In order to maximize sales and offset significant production and operation costs, small business owners will often stock diverse product options to cater to as many customers as possible. This has resulted in the emergence of hybrid stores that can comprise of a gelateria, a café, or even a bakery.

Market Overview On Gelato, Coffee And Sweet Food In China 18 While distribution and preservation have always been big challenges for frozen food companies, it is now a better time than ever for gelato market players to enter China as the country has been strengthening its storage and distribution channels. Moreover, the growing demand for ice cream has resulted in the expansion of production and distribution, according to Daxue Consulting—the frozen foods logistics industry was expected to achieve a 25% increase in market size in 2017.

Based on the in-depth interviews, one of the main challenges for gelato retailers is the high production costs.

As an example, a retailer stated that his store is able to sell 100 cups of gelato every weekday and 400 cups every day on weekends; yet he cannot solely rely on gelato to sustain his business. He continues to run his coffee and Cantonese dessert product lines to make a profit: “It is almost impossible to make money by selling only gelato, because the cost is really high”. These costs include investments in large fixed purchases such as production machines and showcases as well as the variable costs of gelato ingredients, labor, rent, and utilities. Imported production machines, such as Carpigiani, costs around 300,000 to 400,000 CNY (€38,127 to €50,836 EUR) while imported showcases cost 18,000 to 19,000 CNY (€2,287 to €2,415 EUR).

On the other hand, domestic production machines, like Kingdom and Easy Best, only costs 20,000 to 50,000 CNY (€2,542 to €6,354 EUR) and the showcases around 20,000 to 30,000 CNY (€2,542 to €3,813 EUR). Although these domestic machines would markedly reduce the cost of doing business, distributors and retailers are not satisfied with the performances of these appliances. Thus, retailers naturally gravitate towards the idea of purchasing imported machines. The truth is that many retailers believe the Italian-made machineries would help them produce better gelato, but the entry price is simply too high for many of them.

The interviewed experts believe that, if machinery and ingredients costs can be reduced,

Market Overview On Gelato, Coffee And Sweet Food In China 19 there would be more retailers to sell higher-quality gelato, starting a cycle of consumer education and more stringent expectations towards gelato quality. With high production costs, the gelato industry suffers from overpriced products—a single scoop of gelato costs between 25 ~ 40 CNY (€3.18 ~ 5.08 EUR)—which deters customers who cannot afford it or are not willing to pay for it. “In order to reduce the cost”, the retailer comments, “We need to develop our own recipes. 50% of the material cost [could be saved] if we invented new flavors on our own”.

Another distributor suggested opening a gelato factory to reduce the production and operation cost for retailers. The expert indicates that she and her partner plan to set up a gelato production factory while relying on a third-party shipping provider to efficiently deliver the fresh gelato to major cities like Shanghai or Beijing. Purchasing gelato directly from a factory itself would effectively reduce the cost for retailers because they would not need to purchase gelato production machines nor the recipe ingredients themselves. This centralized production system would utilize scales of economy to lower cost for all market players and create an affordable solution for Chinese consumers.

Another way to help retailers reduce costs would be to simplify the gelato production process through innovative recipes: in fact, an interviewed ingredient distributor remarked that they have started to sell new ingredients to gelato retailers that do not require expensive machinery to process, thus saving on the large fixed costs that a normal gelateria would incur.

Consumer needs, attitude and behavior As Chinese consumers become more sophisticated and further refine their tastes and preferences for ice cream, new formats of ice cream made from organic and natural ingredients—such as gelato, sorbet, and other reduced fat products—are becoming more popular. Based on recent research conducted by Mintel, more than half of urban Chinese consumers are willing to buy 100% natural ice cream products and are

Market Overview On Gelato, Coffee And Sweet Food In China 20 willing to pay more for them, owing likely to increased health-consciousness.

Yet, it was also pointed out in the research that consumers did not want a compromise between a product’s taste and its healthiness. As a result of its balance between healthy ingredients and rich taste, gelato is gaining more and more attention in the Chinese market and is well positioned to grow in the ice cream market. Moreover, Mintel published a recent study indicating that consumers in Shanghai demonstrate a strong interest to eat ice cream products that are made on the spot when they are hanging out or craving something sweet. The freshly-made format seems to be popular among the consumers in tier-one cities like Shanghai, which aligns perfectly with the nature and tradition of gelato.

As a matter of fact, a number of ice cream boutiques have appeared in China in recent years that are likely a result of growing demand for instant-made ice cream like gelato.

Meanwhile, more and more Chinese are buying ice cream products in winter compared to several years ago, suggesting a behavioral shift to year-round consumption that is not dependent on season. The shift can possibly be attributed to Chinese consumers perceiving ice cream more and more as a sweet indulgence rather than just a summertime treat. When it comes to sweet food (especially ice creams and desserts), an interesting observation can be made about Chinese consumers: they tend to display herd behavior and fall for all kinds of internet fads. For example, WIYF is an ice cream shop in Shanghai, which is now “the most popular ice cream” place in the city with people lining up for hours just to try their ice cream, according to China Daily.

Based on interviews conducted by East Day News, a number of its customers actually came “for a selfie rather than the ice cream” itself just because of a viral post that introduced WIYF on the internet. Another example of fad-driven success is the

Market Overview On Gelato, Coffee And Sweet Food In China 21 growing popularity of Russian ice cream in China. This was a result of the Russian President, Vladimir Putin, bringing them as gifts for his Chinese counterpart, Xi Jinping, during the 2016 G20 summit in Hangzhou. In the end, however, viral fads are simply unpredictable and unsustainable marketing tactics that require astute and timely identification of internet trends: something that companies are unlikely to achieve consistently. Even WIYF and Farine, its sister French bakery, were forced to shut down in March 2017 due to issues with their ingredient procurement, demonstrating the barriers to running an ice cream shop despite nation-wide fame.

N-Dynamic’s online survey of 300 respondents has shed light on additional Chinese consumer needs, attitudes, and behaviors. First of all, as shown below, all surveyed consumers purchase imported ice cream at least once a month while a third of respondents said they purchase once a week. These respondents are distributed evenly across three major cities—Shanghai, Guangzhou, and Beijing—and their reported behavior support earlier findings that urban citizens regularly consume ice cream. How often do you purchase imported ice cream?

22.2% 33.3% 44.4% Once / week times/month Once / month

Market Overview On Gelato, Coffee And Sweet Food In China 22 Similar to the preferences for baked products when it comes to country of origin, Italy, France and United States rank among the top three. When it comes to ice cream, however, a majority (68.3%) of the surveyed consumers preferred Italy more than the other two countries, demonstrating the strong preference for Italian ice cream products in China. Which country’s ice cream is your favorite? Italy 68.3% United States 51.7% France 46.1% New Zealand 38.9% Australia 35.0% Japan 35.0% China 22.2% South Korea Others 18.

0.6% 3% More than half (58.9%) of the respondents claimed to know the differences between gelato and industrial ice cream. The percentage is quite high considering the penetration of gelato in China and is likely a result of the demographic present in this survey: Chinese consumers in major metropolitan areas with exposure to Western culture. Nevertheless, the results demonstrate that there continues to be a knowledge gap, as only 60% of Westernized Chinese consumers understand the difference. Extrapolation to more rural populations or those in second/third-tier cities will likely mean that a majority of Chinese consumers in those areas do not know the difference between gelato and industrial ice cream.

Market Overview On Gelato, Coffee And Sweet Food In China 23 Do you know what gelato is? Do you know the differences between gelato and industrial ice cream? 2.8% 2.8% I don’t know gelato 58.9% 35.6% I know gelato, but it should be the same as other ice cream I know gelato, but not sure what’s the different between gelato and industrial ice cream I know gelato and I know the differences between gelato and industrial ice cream More specifically, however, when asked about the actual differences between gelato and industrial ice cream, almost half (49.1%) of whom claimed to know the difference think gelato contains more milk and air than industrial ones, when, in reality, gelato is actually denser with less air in it.

This finding shows the misperception of Chinese consumers and the knowledge gap that must be addressed to position gelato as a premium product. Additionally, during the in-depth interviews, almost every expert stated that Chinese consumers do not fully understand the product of gelato, nor can they perceive the differences between gelato and industrial ice cream. “The industry needs a leading company to educate the consumers”, a showcase sales manager claims, “There is no competitive gelato brand on the market, no outstanding brand at all.” The interviewees believe if Chinese consumers could understand the uniqueness of gelato, they would be willing to pay the price for it.

The healthiness factor of gelato, as mentioned, continues to be a highly relevant consideration for all market players: “The media should educate the public about the advantages of gelato, it’s fresh,

Market Overview On Gelato, Coffee And Sweet Food In China 24 healthy, with absolutely no additive”, says the gelato retailer. He thinks that, with the right message, consumers would jump at a chance to try gelato. What do you think is different between gelato and industrial ice cream? 27.4% Gelato contains less milk but more air than industrial ice cream Gelato contains less milk and air than industrial ice cream 49.1% 10.3% 13.1% Gelato contains more milk and air than industrial ice cream Gelato contains more milk but less air than industrial ice cream Fortunately, even without a proper understanding of gelato, Chinese ice cream consumers already perceive gelato as a superior product in terms of taste and healthiness when compared to industrial ice cream.

In their minds, gelato is viewed as a healthier and fresher type of ice cream. 40% of the surveyed consumers also cited it being more expensive than regular ice cream.

Comparing with industrial ice cream, what do you think about gelato? 91.7% 76.7% 76.7% 40.0% 15.0% 3.3% Gelato tastes Gelato is Gelato is fresher Gelato is more Gelato helps lose Gelato makes me better healthier expensive weight gain more weight

Market Overview On Gelato, Coffee And Sweet Food In China 25 The results of the survey show that indulgence is the biggest reason for eating ice cream—respondents cited “feeling happy” (78.3%) and “releasing some stress” (72.8%) as the top two reasons for consuming ice cream. There is also a large percentage (66.7%) of respondents whom eat ice cream primarily to spend time with family and friends, and to “reward themselves” (64.4%).

The motivations behind ice cream purchases are highly useful in informing marketing strategies used to attract target consumers. Since these motives range from personal to social, there is a large range of emotions that brands can appeal to in order to build long-term consumer loyalty. Another interesting finding is that almost half (47.2%) of the surveyed consumers eat ice cream because they think it’s “fashionable”—this aligns with the previous observation of Chinese herd mentality as well as the positioning of some of the most famous imported ice cream brands (such as Häagen-Dazs) in China.

Why do you eat ice cream?

78.3% 72.8% 66.7% 64.4% 47.2% 0.6% Eating ice cream Eating ice cream Eating ice cream Eating ice cream Eating ice cream Others makes me feel happier helps me release stress with family and friends is a joyful thing is one way to reward myself is fashionable The distribution breakdown (chart below) shows the potential of each distribution channel for the sale of gelato. Other than supermarkets, which gained the highest vote chiefly due to industrial ice cream sales, dessert shops (63.9%), cafes (39.4%) and bakeries (31.1%) are also popular locations where consumers go to purchase ice

Market Overview On Gelato, Coffee And Sweet Food In China 26 cream besides actual ice cream shops (63.9%).

The popularity of these non-dedicated shops are a useful consideration for distribution and partnership strategies—the diverse retail experience in China means that there are plentiful and innovative opportunities to promote gelato on a product and brand level. Indeed, during the in-depth interviews, a showcase manufactory sales manager mentioned that ice cream has been integrated into other kinds of food forms. Instead of being a single product, ice cream has started to extend itself into other food categories. For example, restaurants might serve ice cream as a dessert along with other sweet food; bakeries could also sell ice cream in tandem with other products, such as mooncakes, birthday cakes, etc.

The interviewee emphasized that Chinese consumers prefer sophisticated food products. Ultimately, the integration of gelato into other kinds of food forms and its promotions have resulted in higher awareness of and preference for gelato. One example is the affogato drink, which is promoted heavily by various coffee shops in China.

Where do you usually purchase ice cream? Large chain super market (Carrefour, Walmart, etc.) 73.9% Dessert shops 63.9% Ice cream shops 63.9% Cafes 39.4 Online platforms (Tmall, Taobao, etc.) 35.6% Convenience stores 35.0% Bakeries 31.1% Ice cream wholesale stores 28.3% Food delivery apps (Eleme, Meituan, etc.) 23.3% Hotels 15.0% In terms of purchase factors, flavor (83.3%) and texture (79.4%) are the two most important factors while choosing ice cream, as one would expect. On top of that, the

Market Overview On Gelato, Coffee And Sweet Food In China 27 brand and the ingredients’ origins are also highly valued by Chinese consumers possibly because of their need for reassurance when it comes to food quality and safety.

Price being the least important factor implies that Chinese consumers are ready for discretionary purchases, especially in major metropolitan cities. When you choose ice cream, which factors would you find important? 83.3% 79.4% 63.9% 60.6% 52.8% 49.4% 38.3% 35.0% 30.0% Flavor Taste (is it Brand The If it's good Color and Package of Decoration Price (vanilla, strawberry, coffee, etc.) smooth?) country of origin of ingredients for health look of the the product ice cream and hygiene of the store The survey results reveal a strong consensus that Chinese consumers tend to eat ice cream spontaneously.

Whether they are physically passing by an ice cream store or finding a place for indulgence with friends, Chinese consumers make impulsive decisions about eating ice cream. Consequently, gelato makers should invest more into the appearances of not only the products, but also the decorations of the shops to attract customers. Marketing tactics could also be tailored to appeal towards the joy and excitement that comes with being spontaneous.

Market Overview On Gelato, Coffee And Sweet Food In China 28 In which occasions would you eat ice cream? When walking by an ice cream shop on the street 72.2% When craving for a certain brand of ice cream 66.1% When relaxing at home alone 65.6% Serve as a dessert after meals when dine out 63.9% Ice cream date with friends at the shop 62.8% Serve as a dessert after meals at home 49.4% “Chinese consumers prefer classic flavors”, observed by an ingredient distributor, “flavors such as chocolate, strawberry, vanilla, and mango are very popular.” The survey results, shown below, align perfectly with the industry insider’s comments.

“On the other hand, Chinese people are also willing to try new things: durian and matcha are the new trends of popular flavors in China”. At the same time, it is important to heed customer needs and stay conscious of their preferences: As a retailer remarks, “Chinese customers complain the products being too sweet for them, although I have already controlled the sugar around 27%. They also express concern about the product being too colorful; they are afraid too much color is not good for health”.

Market Overview On Gelato, Coffee And Sweet Food In China 29 Which ice cream flavor do you like? Chocolate Vanilla Milk Strawberry Matcha Coffee Melon Cheese Hazelnut Pistachio Wine Mint Others 0.6% 27.8% 26.1% 24.4% 44.4% 42.2% 40.0% 36.7% 34.4% 57.2% 65.6% 62.8% 73.9% The middle-tier price range that target consumers would pay for one-time purchase of ice-cream is between 36 and 50 CNY (€4.58 to 6.35 EUR). There is also an outstanding 13.8% of consumers willing to pay more than 81 CNY (€10.29 EUR)—a possible signal that receptivity is growing towards high-quality gourmet ice cream. How much would you usually pay for one‐time purchase of ice cream? 4.4% 1.7% 9.4% 10.0% Under RMB 15 RMB 16‐25 20.6% 21.7% RMB 26‐36 RMB 36‐50 RMB 51‐80 32.2% RMB 81‐100 More than RMB 100

Market Overview On Gelato, Coffee And Sweet Food In China 30 While consumers care most about the taste and flavor of their ice cream, the “health” has almost an equal amount of importance based on the online survey results. Interestingly, Chinese consumers’ preference for less sweet products makes it easier to create healthier ice cream without a significant compromise in taste. Gelato is well positioned to fulfill this unmet need with its fewer calories. In general, consumers are also seeking more flavors, and thus investment in research and development is needed. Other suggestions by consumers include a softer ice cream texture as well as more innovative shapes when it comes to serving ice cream.

These are peripheral product attributes that can be leveraged to increase differentiation from other gelato brands. Improvement Suggestions on Ice Cream (part 1)

Market Overview On Gelato, Coffee And Sweet Food In China 31 Implications Improvement Suggestions on Ice Cream (part 2) International brands and products entering China have enormous and varied advantages, including a reputation for superior food quality and safety as well as authenticity through experience. Due to increasing demand for healthier and more varied ice creams, coupled with the premiumization trend, gelato has become increasingly popular among Chinese consumers. Nevertheless, competition is fierce due to rising interest in this segment, and challenges exist in gaining market share.

With the dominance of the online shopping market in China, artisan gelato manufacturers must combat digital sales of industrial ice cream makers and drive customers back into brick-and-mortar stores. Gelato market players need to seek the best competitive advantages to define and maintain the product’s uniqueness through product innovations and nutritional messages. From a marketing perspective, gelato producers need to emphasize the naturalness and authenticity of the product through

Market Overview On Gelato, Coffee And Sweet Food In China 32 product attributes as well as leveraging the well-established reputation of Italy as a producer of gourmet ice cream. Based on the industry expert interviews, two schools of thought exist in regards to flavor innovation. One school of thought believes in localization of flavors through new developments (e.g., durian and matcha) that help drive adoption among Chinese consumers. The other school of thought is to retain the tradition and authenticity of gelato by maintaining and asserting the original flavors upon new customers. Whether a gelato producer chooses to keep only traditional flavors or localize flavors with local ingredients, the product and brand must convey a unified message so that customers know what to consistently expect.

A traditional brand may tout the luxuriousness and authenticity of their gelato while a localized brand may message about their farm-to-fork process of gathering local ingredients. Either way, to further drive success, gelato manufacturers will need to understand and adapt to Chinese culture and trends.

Major international ice cream brands such as Nestlé all have different ice cream flavors in China than in Western markets—often times, the products are made not as rich or sweet, aimed at satisfying Chinese palates. Integrating local flavors has also been shown to be effective in terms of bringing excitement to potential consumers. When French chef Gerard Taurin offered his latest creation in Beijing back in June 2015, most of his ice creams were made with unusual but very Chinese ingredients, such as jasmine, goji berries, ginger and Sichuan peppers. Moreover, according to China Daily, Huangjiu Bangbing (黄酒棒冰; Huangjiu is a type of Chinese wine), a new type of ice cream, has taken the market by storm in 2016 with its infusion of traditional Chinese wine flavors; their remarkable sales (more than 40,000 sticks sold in one summer in Ningbo, a city in East China's Zhejiang province) indicates the popularity potential of innovative flavors among Chinese consumers.

To provide

Market Overview On Gelato, Coffee And Sweet Food In China 33 some guidance on new flavors, some popular local flavors in China include red bean, taro, green tea, sesame, and dates. Other Asian fruit flavors those are unlikely to be found in Italy, such as lychee or durian, can also be used to form unique gelato flavors. In order to educate consumers about gelato, industry experts advise business players to organize roadshows, gelato competitions, exhibitions, etc. These events will serve as educational opportunities where both brands and consumers can exchange information and become educated about each other.

As suggested by one distributor, flagship stores are great marketing and business investments where gelato chefs can demonstrate the production process and educate consumers. Moreover, cross- promotion across other industries is a powerful way to enter the market through partnership growth. One machinery and ingredients provider stated that, in past few years, their company has setup gelato booths at event venues like the F1 car racing course and equestrian events with great success.

Another interviewed distributor also proposes reaching a Guinness World Record for gelato—for example, having the most people eat gelato at the same time. While these are merely example, the industry experts suggest that involvement in the everyday life and culture of Chinese consumers will garner attention for the gelato industry through the public and media. Partnerships with large businesses or even local governments could go a long way in covering otherwise immense costs of industry-wide events. Gelato’s success in China will be a combination of business ventures into unknown territories as well as PR (public relations) strategies to raise awareness and establish a unique reputation for gelato.

Finally, understanding how to navigate the ever-changing government regulations will be key for businesses. This is well illustrated by the account of one gelato retailer’s

Market Overview On Gelato, Coffee And Sweet Food In China 34 experience in Shanghai. Even as the business worked with an agency to obtain a business license, they faced unexpected government regulation changes, which caused a delay of several months. In the end, while the shop was able to open, they had already missed the summer peak selling season for gelato. The Chinese government pays a lot of attention to food safety, but the specific regulations around gelato remain unclear.

Businesses will have to continually look out for updates and guidance on gelato production in the near future as the Chinese government becomes more familiar with the production process. As suggested by an interviewee, recruiting the help of a local company may be beneficial in the long run to help navigate such complex and sometimes political roadblocks. It is without a doubt that the gelato market in China will continue growing in the near future. The most important challenges that gelato producers will need to continue tackling are education, cultural assimilation, and financial feasibility.

As suggested by many industry experts, education on a brand and industry level will act as a catalyst for faster growth through greater interest in gelato and a higher willingness to pay for it. Moreover, adapting to cultural norms and localizing the taste of gelato will help gelato products bypass consumer unfamiliarity and into consumers’ comfort zones. Lastly, scales of economies should be leveraged to reduce the overall cost of doing business in China so that more producers, distributors, and retailers are incentivized to expand access to gelato. Ultimately, the goal is to create a positive cycle of profitability that will in turn lead consumers to be more frequently exposed to gelato experiences.

The inextricable link between consumer demand and gelato supply will continue to grow as long as the barriers are addressed on both sides with long-term prospects in mind.

Market Overview On Gelato, Coffee And Sweet Food In China 35 References Mintel 2017 (1) http://www.mintel.com/press-centre/food-and-drink/chinese-consumers-increas ingly-s nacking-on-ice-cream Mintel 2017 (2) http://store.mintel.com/ice-cream-china-june-2017 Euromonitor 2017 http://www.euromonitor.com/ice-cream-and-frozen-desserts-in-china/report Business Wire 2017 https://www.businesswire.com/news/home/20170815005772/en/Gourmet-Ice-Cream- Market---Top-Regions Marketing To China 2017 https://www.marketingtochina.com/the-ice-cream-market-in-china-the-love-of- brands / Daxue Consulting 2017 http://daxueconsulting.com/hot-trend-indulgence-ice-cream-industry-china/ Sohu 搜狐财经 2017 http://www.sohu.com/a/151508689_465354 Cision 2016

Market Overview On Gelato, Coffee And Sweet Food In China 36 https://www.prnewswire.com/news-releases/ice-cream-market-trends-in-china-3 0022 9662.html China Daily 2016 (1) http://www.chinadaily.com.cn/business/2016-07/06/content_25981456.htm China Daily 2016 (2) http://www.chinadaily.com.cn/food/2016-08/04/content_26345623.htm The Telegraph 2016 http://www.telegraph.co.uk/news/world/china-watch/business/russian-ice-crea ms-hot- in-china/ East Day News 东方网 2016 http://sh.eastday.com/m/20160421/u1a9312426.html Eurasia Consult 2015 https://chinafoodingredients.wordpress.com/2015/08/21/china-the-worlds-bigg est-ice- cream-market/ Fox Business 2015 http://www.foxbusiness.com/features/2015/07/30/china-scoops-up-top-spot-in- ice-cre am-market.html

Market Overview On Gelato, Coffee And Sweet Food In China 37 SECTION 4:The Pastry and Bakery Market in China Types of bakery and pastry products in China In China, the main bakery & pastry products include bread, cakes, mooncakes, pastries and desserts (according to IBIS World). Accompanying these major categories are other smaller segments such as biscuits, cookies, crackers, and baking mixes. The industry has largely been dominated by bread as it represents a common staple with which Chinese consumers are familiar and consume as a part of their regular diet. Pastries, on the other hand, are relatively novel in the Chinese market and are thus driven primarily by “indulgence and affordability”, according to Euromonitor.

Common distribution channels for bakery & pastry products comprise of bakeries, convenient stores, supermarkets and hypermarkets (combination of supermarket and department store), and online stores. Artisanal baked goods are mostly sold through bakeries with constant innovations in terms of products and flavors.

To understand the Chinese bakery and pastry market, it is important to note the long-standing history that Chinese consumers have with traditional Chinese bakery products (such as Cantonese bakeries, Suzhou bakeries, and Beijing bakeries), many of which originated in different regions with their unique styles and flavors. Moreover, China’s traditional festivals and holidays have a huge influence on market demand for bakery goods, with a notable example being mooncake. Based on a report from Bakery and Snacks, Western-style bakery and pastry goods in China are usually excessively detailed, soft and buttery in texture, and high in sugar and fat content.

They look very much like Western products but often taste different. In fact, the evolution of the bakery and pastry market in China has been a result of integration between traditional Chinese baked snacks and trendy Western products.

Market Overview On Gelato, Coffee And Sweet Food In China 38 Market size indicators and trends Based on data from Global Industry Analysts, Chinese consumed an average of 5.8 kg of bakery products per capita in 2017. This number pales in comparison to 87 kg in Germany, 47.8 kg in the UK, and 39.2 kg in the US. Even in Japan, where the traditional staple is rice (same as in China), the average person consumes 22 kg of bakery products per year. These comparisons illustrate the fact that the Chinese market is far from saturated and still carries immense potential for growth. Based on a report by IBIS World, China’s bakery industry has grown at an average pace of 10.6% per year from 2012 to 2017.

In addition, many factors are predicted to accelerate this growth rate: the urbanization process, the rapid pace of work and study, and transforming consumption habits of younger generations. The graph below illustrates the recorded and forecasted revenue for Bread and Preserved Pastry Goods & Cakes segments in China from 2010 to 2021. While it demonstrates a steady growth rate in both categories, pastry goods and cakes are predicted to have greater growth.

Revenue of Baked products in China Source: Statista 2017

Market Overview On Gelato, Coffee And Sweet Food In China 39 According to Euromonitor, pastries are the fastest growing segment with its rich product portfolio, from traditional Chinese to popular Western products. Currently, the pastry market is already worth three times that of bread and bread products in China and projected to continue outperforming. Ken Research forecasts that cookies will register the fastest value growth in the bakery and pastry industry from 2015 to 2020 in China. More specifically, within cookie products, the brownie mix segment is expected to gain maximum share growth.

A report by Mintel suggests that the growth of pastries and its sub-categories can likely be attributed to increasing disposable income and a growing appreciation for high-quality and luxury pastries among Chinese consumers.

Nevertheless, this projected growth may face major barriers. Rising health- consciousness, compounded by the unhealthy nature of bakery and pastry products, will influence Chinese consumer purchase decisions. Pastry and bakery product manufacturers and brands should prepare to face greater scrutiny of their products. In fact, Grand View Research has discovered another result of this trend: rising popularity of natural, healthy, and organic baked products among Chinese consumers. Moreover, given greater consumer concern over food safety, emphasis on products with no additives or preservative has grown in recent years throughout the country.

Market structure and key players Based on the Bread and Cake Professional Committee of China Food Industry Association, the major players in China are Asian brands: Holiland (Chinese), 85C (Taiwanese), Bakery Christine (Taiwanese), and Bread Talk (Singapore). The bakery and pastry landscape is unique in that each of these players has widespread brand recognition in their respective regions but sparse coverage and recognition outside of their geographical boundaries. This is likely due to the brands’ lack of focus on

Market Overview On Gelato, Coffee And Sweet Food In China 40 marketing outside of these regions, as well as poor access to the products outside of covered regions.

Moreover, the presence of regionally-focused businesses means that the top 10 companies in the bakery and pastry industry in China actually accounted for less than 15% of retail value share in 2017, according to Mintel. The highly fragmented landscape of bakeries in China indicates vast opportunities to occupy specific geographical niches—market players such as Paris Baguette (巴黎贝甜) and Caffé Bene ( 咖 啡 陪 你 ) have taken this opportunity to fill the gaps between geographical strongholds of the main players by focusing their efforts on Chinese customers in large second- and third-tier cities.

Nonetheless, as Mintel suggests, China’s fast-growing pastry and bakery market is likely to experience consolidation, leading to broader coverage by bigger brands.

Based on import and export data in 2016, imports as a percentage of total retail sales among bakery products was only 3.56%. Among the importing regions, Indonesia, Hong Kong, and Malaysia were the top three suppliers of bakery products. Although the current market share for international pastry & bakery brands is extremely low in China, research by Mintel shows that 24% of new bakery products (including changes of existing products on packaging, formulation, and variety/range extensions) launched between 2012 and 2016 were imported products. As shown in the graph below, the explosive growth of imported product launches indicates that Chinese consumers have been receptive to the introduction of foreign products.

Market Overview On Gelato, Coffee And Sweet Food In China 41 1800 1600 1400 1200 1000 800 600 400 200 New bakery product launches in China 2012 2013 2014 2015 2016 Imported Not imported other Source: Mintel The main challenge that bakery and pastry product manufacturers face are the volatile prices in raw materials for such goods. According to Daxue Consulting (2016), the gross profitability in the baking industry is about 20%. Due to the increasing cost of production caused by rising raw materials and labor prices, the average unit price of baked goods increased by 4% in 2016 while the average price per unit for bread and bakery products amounted to $3.83 USD (€3.13 EUR) (Statista 2017).

Luckily, rising costs have been offset by increased disposable incomes and demand for premium baked goods. In fact, based on the 300-respondent consumer survey launched by N-Dynamic, a majority of respondents (63.3%) were willing to pay more than 36 CNY (€4.56 EUR) for a one-time purchase of bakery and pastry products. This high willingness to pay is highly advantageous to the industry as manufacturers attempt to maintain profit margins.

Market Overview On Gelato, Coffee And Sweet Food In China 42 How much would you usually pay for one‐time purchase of bakery / pastry? 5.0% 0.6% 20.6% 8.3% 29.4% 13.9% 22.2% Under RMB 15 RMB 16‐25 RMB 26‐35 RMB 36‐50 RMB 51‐80 RMB 81‐100 More than RMB 100 Grand View Research notes in particular that the operational efficiency of bread manufacturers is the key challenge in creating economies of scale within countries such as China. Moreover, the perishability of bakery and pastry goods means expansion across China will likely start in major cities, where the logistics of transporting and storing raw materials can be streamlined.

Food safety is another major concern for bakeries — especially within the context of Chinese food scandals — that makes it imperative for bakeries to carefully manage their logistical expansion. The structure and growth of the market is, therefore, limited by the geographical complexities of manufacturing, storing, and transporting such perishable goods. Consumer needs, attitudes, and behaviors According to Euromonitor, Chinese consumers’ tastes have shifted towards international products due to the increased popularity of western lifestyles and diets among younger generations who prefer baked goods as a part of their daily meals.

In fact, based on the online survey conducted by N-Dynamic, most respondents purchased imported pastries and bakery products at least once a week (46.9%) or several times a month (46.9%). More interestingly, online purchasing of pastries

Market Overview On Gelato, Coffee And Sweet Food In China 43 and baked goods was almost as significant a channel as supermarkets and hypermarkets. How often do you purchase imported bakery, pastry? 5.5% 0.8% 46.9% 46.9% Once / week times/month Once / month 2‐3 times every 3 months Where do you usually shop for imported foods? Large chain super market (Carrefour, Walmart, etc.) 90.6% Imported food supermarkets 87.8% Online 86.7% Local shops (bakery, pastry, restaurants, etc.) 36.7% Daigou (Ask someone else to buy for you) 31.7% Convenience stores 31.7% Based on the survey results, Italy is unsurprisingly conceived as a place for “Delicious food” by most of the surveyed consumers.

This impression extends to bakery and pastry goods, which was cited as a popular Italian-produced food by 61.7% of surveyed consumers. However, when asked specifically about their favorite country of origin

Market Overview On Gelato, Coffee And Sweet Food In China 44 for pastries and baked goods, more respondents cited France as their country of choice.

Market Overview On Gelato, Coffee And Sweet Food In China 45 When heard of the country “Italy”, what comes to your mind? Delicious food 79.4% Luxury goods, like clothes, handbags, etc 70.6% The Renaissance (Culture & arts, museums, etc.) 67.2% Delicate wine 58.9% Football 53.3% Beautiful landscape 43.9% Racing cars 38.3% What kind of food do you think Italy produces? Pasta 82.2% Pizza 72.2% Ice cream 68.9% Bakery, pastry 61.7% Alcoholic drinks 57.8% Cheese Chocolate Coffee Olive oil Prosciutto

Market Overview On Gelato, Coffee And Sweet Food In China 46 Which country’s bakery & pastry are your favorite? France 67.2% Italy 53.3% United States 35.6% New Zealand 31.7% Australia 31.1% Japan 30.0% China 29.4% South Korea 21.1% When it comes to the reason of purchase, a majority of people (66.1%) indicated that they would purchase bakery & pastry products because of new flavors, which is consistent with what they also consider to be the most important purchase decision factor. Unsurprisingly, flavor, taste, and appearance are the top three factors when choosing a pastry or bakery product.

What’s interesting, however, is that almost 50% of respondents consider brand and even country of origin when making purchase decisions.

Market Overview On Gelato, Coffee And Sweet Food In China 47 66.1% Why would you purchase bakery & pastry? 52.8% 51.7% 48.3% 47.2% 41.7% 38.9% 38.3% Attracted to To purchase Purchase for Just want to Random Serve as Serve as Attracted to the new flavor from a certain afternoon tea have purchase for dessert after dessert after the brand/bakery shop I am fond of dessert/sweet foods breakfast meals when dine out meals at home appearance of the bakery / pastry When you purchase bakery / pastry, which factors would you find important? 78.3% 76.1% 63.9% 55.0% 48.9% 40.0% 38.9% 28.3% Flavor Taste Appearance Brand The country Package of Decoration Price of the of origin of the product and hygiene product ingredients of the bakery / pastry shop The channel mix for Chinese consumers is particularly interesting.

Based on the chart below, not only are consumers shopping for pastries and baked goods at the traditional retail stores, but almost half of respondents cited they that they use digital channels such as apps. Given the digital-savvy nature of Chinese consumers, Italian manufacturers should not overlook the vast opportunities to market to Chinese

Market Overview On Gelato, Coffee And Sweet Food In China 48 consumers through digital mediums. Moreover, the survey results show that the time

Market Overview On Gelato, Coffee And Sweet Food In China 49 of day is not a big factor on purchase and consumption decisions—those brands that choose to build a strong online presence will unlikely need to worry about lack of interest even when their product is advertised during unconventional hours. Where do you usually purchase bakery/pastry? Bakery / pastry shop 83.9% Large chain super market (Carrefour, Walmart, etc.) 65.0% Cafe Apps for just bakery / pastry Online platform 37.

Restaurant 31.1% Convenience stores 31.1% Food delivery apps 27.2% Hotel 18.3% In which occasions would you eat bakery / pastry? Eat at home for breakfast 64.4% Serve as a dessert after meals when dine out 59.4% Serve as a dessert after meals at home 58.9% Eat at workplace for afternoon tea 53.3% Eat at a hotel, restaurant or café for afternoon tea 52.8% Eat at a café for breakfast When walk by a bakery / pastry shop and just purchase randomly 50.6% 48.9%

Market Overview On Gelato, Coffee And Sweet Food In China 50 Furthermore, the results of the online survey demonstrate that there are areas of improvements across multiple product attributes that could drive success. Most important is the health factor of the product, which 33.33% cited in their suggestions. This research complements findings by Mintel that show a rise in preference for plain-flavored baked and pastry goods—the theory is that consumers are gravitating towards products that have less sugar or fat content. The quantitative survey also shows that developing new flavors is a huge attractor for Chinese consumers.

From a texture perspective, Chinese consumers also tend to prefer soft bakery and pastry products over hard ones. Appearance continues to be a large factor for decision- making as many consumers choose based on package design or even the decoration of the pastry or baked good itself.

Improvement Suggestions on Bakery (part 1)

Market Overview On Gelato, Coffee And Sweet Food In China 51 Improvement Suggestions on Bakery (part 2) Top Five Flavors of New Bakery Product Launches 300 250 200 150 100 50 2012 2013 2014 2015 2016 Unflavored/Plain Chocolate Milk Sesame Egg Source: Mintel Implications Chinese consumers’ growing demands for international bakery and pastry products present enormous opportunities for Italian companies, who are known for their excellence in ingredients, semi-finished products, and finished products. As observed by Bakery and Snacks at the Bakery China trade show in 2017, Western- style products that adapt to Chinese consumers’ taste buds, such as soft

Market Overview On Gelato, Coffee And Sweet Food In China 50 European bread, were prevalent at the show. To appeal to a wider population, it is important for Italian bakery and pastry producers to cater to Chinese’s taste, which have a less sweet palate and a preference for salty baked goods when compared to Western consumers. As consumers in China prioritize healthy products, bakeries must be able to offer fresh and health-oriented products, especially in a country where food safety is a highly important factor. Ensuring that the packaging or marketing has a clear health message such as “no additives” can go a long way with health-focused consumers.

Finally, in order to keep up with local competitor brands as well as a growing number of international brands, market players need to understand and adopt protocols for maintaining product variety and innovation. Investment on both a product and packaging level will be crucial in differentiating the brand as consumers seek out premium and novel experiences in their search for the enjoyment of bakery and pastry goods.

Market Overview On Gelato, Coffee And Sweet Food In China 51 References Global Industry Analysts 2017 http://www.strategyr.com/MarketResearch/Bakery_Products_Baked_Goods_Market_ Trends.asp IBIS World 2017 https://www.ibisworld.com/industry-trends/international/china-market-resear ch-report s/manufacturing/food/bread-bakery-product-manufacturing.html Statistica 2017 https://www.statista.com/outlook/40050000/117/bread-and-bakery-products/chi na#ma rketStudy Agriculture and Agri-Food Canada 2017 http://www5.agr.gc.ca/eng/industry-markets-and-trade/international-agri-foo d-market -intelligence/asia/market-intelligence/sector-trend-analysis-bakery-product s-in-china/ ?id=1512649817208 Bakery and Snacks 2017 https://www.bakeryandsnacks.com/Article/2017/06/12/Penchant-for-Western-pro duct s-supports-China-s-bakery-boom Ken Research 2016 https://www.kenresearch.com/food-beverage-and-tobacco/general-food/consumer -insi ghts-bakery-cereals-china/69626-11.html Grand View Research 2016

Market Overview On Gelato, Coffee And Sweet Food In China 52 https://www.grandviewresearch.com/industry-analysis/bakery-products-market Daxue Consulting 2016 (1) http://daxueconsulting.com/bread-consumption-in-china/ Daxue Consulting 2016 (2) http://daxueconsulting.com/bakery-market-china/ Bakery and Snacks 2016 https://www.bakeryandsnacks.com/Article/2016/09/14/China-s-fragmented-baker y-m arket-likely-to-consolidate-Mintel Euromonitor 2014 http://www.euromonitor.com/bread-cakes-and-pastries-a-global-market-overvie w/rep ort

Market Overview On Gelato, Coffee And Sweet Food In China 53 SECTION 5: The Coffee Market in China Types of coffee in China There are mainly two types of coffee in the Chinese market: fresh coffee and instant coffee.

While fresh coffee is often made with roasted and ground coffee beans, instant coffee is made with soluble coffee powders. Most instant coffee in China comes from Vietnam, where Robusta, a cheaper variety of coffee, is predominately grown. They are usually packaged in boxes containing individual sachets, among which a so-called “3-in-1 type”—containing coffee, sugar and creamer—is particularly favored by Chinese coffee drinkers. In the pre-made coffee category, iced/hot coffee is another popular product in China. One can easily find them in convenient stores, packaged in cans or bottles at retail stores, or online in bulk.

Other coffee products such as drip coffee bags, coffee capsules, and coffee pods are also gaining popularity in China. Different Coffee Products in China Market size indicators and trends With an average growth rate of 16% per year between 2003 and 2013 as per data published by the International Coffee Organization, China has become one of the fastest-growing coffee consumption markets in the world. Even more recent data released by the USDA shows Chinese import demand continuing strong growth at an

Market Overview On Gelato, Coffee And Sweet Food In China 54 Consumption (thousand 60‐kg bags) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 average rate of 17% between 2013 and 2017. Although annual consumption per capita is estimated to be around 21 cups according to 2017 USDA data, China’s coffee industry is still at a very early stage with large potential to grow when compared to the world consumption annual average of 240 cups per capita. The graph below shows the coffee consumption in China from 1994 to 2017, which demonstrates the explosive growth rate of coffee imports in recent years.

4500 4000 3500 3000 2500 2000 1500 1000 500 Chinese Coffee Consumption from 1994‐2017 According to Statista, the largest category in the Chinese coffee market is instant coffee. Indeed, as of 2017, instant coffee still takes up around 99% of retail sales by volume and 98% by value of the Chinese coffee market. Although the green/roasted coffee market share has been going up in recent years, most of the imported beans are actually brought to processing facilities in China for instant coffee production. Even so, fresh coffee consumption is still growing at a faster rate and is likely to sustain this trajectory due to a rapidly increasing middle-class population in China.

As a matter of fact, the growth of single-cup coffee sales is faster than any other coffee category (single-cup coffee sales grew by 156% between 2013 and 2014 whilst other categories grew by 3.3% per year at average), according to data from Euromonitor. This trend is a strong indication that consumers are seeking out premium coffee.

Market Overview On Gelato, Coffee And Sweet Food In China 55 Euromonitor expects the market size for coffee served in cafés to hit 20 billion CNY (€2.54 billion EUR) in 2016, compared with 1.1 billion CNY (approximately €140 million EUR) 10 years ago. The rising popularity of cafés suggests that consumers will also have more exposure to premium coffee options, leading to a self-reinforcing cycle of growth. With an influx of returning Chinese expatriates, the leading players in the coffee industry have begun to see more profit growth in premium products. In addition to premium coffees, espresso-based products also experienced strong demand growth in China.

Starbucks, currently with more than 3,000 stores in China, plans to open another 2,000 by 2021. This demand growth represents a large opportunity for Italian espresso-based coffee market players, including growers, exporters, roasters, retailers, and equipment suppliers.

Sales Revenue for Coffee Shops in China (in billion CNY) 25 20 20 15 10 5 1.5 1.8 2.4 3 7 4.8 16.5 13 10 2006 2008 2010 2012 2014 2016 2018 Source: Euromonitor Market structure and key players The main player in the instant coffee market is Nestlé with an absolute dominance of 66% market share in 2017, based on a report by Euromonitor. While instant coffee is mostly consumed at home or in the office, a majority of Chinese drink fresh coffee at a café. According to 2014 data from statistica.com, China is surrounded by the big coffee chains such as Starbucks, Costa Coffee (Whitbread), UBC, McDonald’s, and C

Market Overview On Gelato, Coffee And Sweet Food In China 56 Straits Cafe. It leaves one fourth of the market occupied by smaller coffee shops that have the liberty to choose which roasted/ground coffee brands to serve. Over 80% of coffee imports in China come from the five countries shown below. Vietnam produces almost half of the coffee imports in China, which is in line with the large consumption of instant coffee. Aside from these five major import origins, imports from Colombia and Central America have been increasing significantly in recent years and now make up about 5% of the total market share.

This is possibly due to greater curiosity among Chinese consumers regarding coffee varieties. The growing popularity of Colombian coffee—which is perceived as unique and of high- quality—could be indicative of rising demand for personalized premium coffee. Origins of coffee imports by China (Average: 2009/10 to 2013/14) Expanding appreciation of coffee in China has led to a rise not only in consumption but also in domestic production. 95% of China’s local coffee is produced in Yunnan, a province located in Southwestern China with geographical characteristics ideal for growing Arabica. Even so, coffee growing techniques are still nascent in a country with a long-standing culture in tea consumption, and the quality of coffee produced may not be at the same level as producers with decades, if not centuries, of experience.

The biggest Italian coffee market players in China are Illy and Lavazza. In 2016, Illy registered the highest growth in China with a year-over-year increase of up to 60%.

Market Overview On Gelato, Coffee And Sweet Food In China 57 The huge success of Illy demonstrates a promising market for more Italian coffee products/brands to enter China. Consumer analysis Coffee consumption in China is mainly driven by a young generation that grew up with the influence of western culture. Among this group are women under 30, whom contribute the most to coffee consumption and its growth. At the moment, a majority of Chinese coffee consumers still prefer to drink mostly instant coffee at home. This landscape is changing rapidly with the rising income of Chinese consumers as they demonstrate a stronger interest in spending more time and money on coffee in restaurants and cafés.

This trend continues to grow despite the relatively high cost of a single cup of coffee (average prices are between $2.50 and $5 EUR, which is equivalent to the cost of a whole meal in China). This price insensitivity is likely due to successful promotions by global coffee brands, especially Starbucks, that aim to transform coffee from just a beverage choice to one that is about lifestyle. Chinese consumers have very different consumption habits from those in countries with a much more developed coffee-drinking culture. First of all, they do not drink coffee on a daily basis. In fact, according to Mintel’s Coffee – China 2016 report, less than 30% of coffee consumers drink coffee once a day or more.

Second, Chinese tend to use coffee as an energy booster when feeling tired instead of having it in the morning to start the day. This is evidenced by coffee shop opening times, which are usually after 9 am with foot traffic increasing later in the day. Third, Chinese consumers have a sweeter palate for coffee. They generally prefer comparatively mild, milky, and sweet coffee rather than bitter coffee, which is reflected in the popularity of 3-in-1 instant coffee. Global coffee chains like Starbucks and Costa have adjusted their coffee flavors in China accordingly. Last but not least, the coffee drinking experiences at cafés are usually within a social context, such as when hanging out

Market Overview On Gelato, Coffee And Sweet Food In China 58 with friends or having a business conversation. Thus, to a majority of Chinese, the environment of a café is somewhat more important than the quality of coffee itself. As young Chinese consumers further develop an appreciation café environment and form a habit of daily coffee consumption, having the right ambiance for regular coffee enjoyment will be a valuable asset. The coffee bean’s origin has become a key selling point in the Chinese market. While most Chinese consumers don’t understand differences between coffee regions, Italy, as a coffee origin, is preferred.

This perception is likely established by the translation of Espresso in Chinese, which is literally “Italian Concentrated Coffee” (意大利浓缩 咖啡). On the biggest Chinese online shopping platform, Taobao, various coffee products can be found branded with the word “Italy”. Most of these brands, however, neither originate from Italy nor use Italian coffee beans. Milan Gold (金米兰) is one such example of a successful Chinese local coffee brand that leverages the Italian halo effect—it is the authorized brand in many high-end hotels and international events. The name of the local brand also indicates the positive association Chinese people tend to make between coffee and Italy.

The trend favoring Italian coffee could potentially benefit the Italian vendors, but differentiation must be taken seriously in order to separate authentic Italian coffee from those sold through false claims. Implications The opportunities are vast in the Chinese coffee market. Coffee consumption will most likely increase with growth potential in areas where retail and distribution are not yet readily available. Moreover, consumers in urban areas are already learning to appreciate high-end coffee, providing a large advantage to countries with an established perception of luxury.

Market Overview On Gelato, Coffee And Sweet Food In China 59 From a production aspect, local sourcing could be a potential solution for well- established brands looking to save on cost. Yunnan Province is one such place—in fact, brands such as Nestlé and Starbucks have already created coffee factories there to process most of their production. Coffee growers and roasters will need to develop coffee beans with flavors catered to the Chinese tastes—less bitter and with less caffeine. Distributors and retailers will also need to select coffee beans with less intense flavors. Forming partnerships with these local businesses—many of which are seeking higher-end coffee products—can be a huge driver of growth for Italian coffee brands.

Finally, the growing appreciation for quality coffee experiences means that there is an ever-growing demand for Italian coffee baristas and technology in China.

To compete with local and global coffee brands in China, it is important to differentiate Italian coffee from others through branding and packaging, as well as the taste and quality of coffee. Marketing will play a very important role in Chinese coffee market as a means to build loyal customers among the younger Chinese generation. To compete, Italian coffee manufacturers can utilize Chinese social media to directly build rapport with Chinese consumers and better understand their wants. Content marketing will also be key in differentiating Italian coffee brands from other country origins by promoting Italian coffee-drinking history and culture.

Education around traditional Italian brewing techniques will also drive further appreciation of high-end coffee experiences. Ultimately, unification of the brand experience through packaging, marketing, and personal communication will be as important as the product itself, especially in the saturated Chinese marketplace.

Market Overview On Gelato, Coffee And Sweet Food In China 60 References Euromonitor International 2017 http://www.euromonitor.com/coffee-in-china/report Australian Food News 2016 http://www.ausfoodnews.com.au/2016/12/14/china-insights-report-coffee-oppor tuniti es-in-china.html Mintel 2017 http://www.mintel.com/blog/drink-market-news/encouraging-chinese-consumers- to-w ake-up-and-smell-the-coffee Bloomberg Markets 2017 https://www.bloomberg.com/news/articles/2017-08-08/china-millennials-swap-t ea-for -coffee-as-starbucks-pushes-east BBC 2016 http://www.bbc.com/capital/story/20160628-yuan-more-coffee-chinas-lucrative -caffei ne-craze CCTV.com 2017 http://english.cctv.com/2017/07/10/ARTIdkwfLrmh6FZ7G8jqrVlB170710.shtml Marketing To China 2016 https://www.marketingtochina.com/coffee-market-explodes-china/ What’s on Weibo 2015

Market Overview On Gelato, Coffee And Sweet Food In China 61 https://www.whatsonweibo.com/chinas-growing-coffee-culture/ International Coffee Organization 2015 http://www.ico.org/documents/cy2014-15/icc-115-7e-study-china.pdf UKnowledge 2016 https://uknowledge.uky.edu/cgi/viewcontent.cgi?article=1039&context=agecon_ etds Italian Food Net 2016 https://www.italianfood.net/2016/06/24/illycaffe-report-strong-growth-emea- markets/ Reuters 2015 https://www.reuters.com/article/us-coffee-illycaffe/illycaffe-sees-strong-c hinese-dema nd-growth-for-espresso-blends-idUSKBN0ME03H20150318 CNBC 2017 https://www.cnbc.com/2017/12/05/starbucks-is-opening-a-store-in-china-every -15-ho urs.html Statistica, Oct 2017 https://www.statista.com/outlook/30010000/117/coffee/china# USDA, Dec 2017 https://apps.fas.usda.gov/psdonline/circulars/coffee.pdf Bean and Beyond 2015 http://www.cafedecolombia.com/bb-fnc-en/index.php/comments/why_china_repres en ts_a_great_opportunity_for_colombian_coffee/

Market Overview On Gelato, Coffee And Sweet Food In China 62 SECTION 6: The Chocolate Market in China Types of chocolate in China Chocolate in China comes in all types, including the classic milk chocolate, dark chocolate, and white chocolate. The emergence of a new kind of chocolate—ruby chocolate—in late 2017 was the result of innovative efforts by a Swiss company specializing in chocolate and cocoa products, Barry Callebaut. Nevertheless, the potential adoption of this new type of chocolate by Chinese consumers remains to be seen.

Based on Mintel’s categorization for chocolate, the most common category in China is chocolate tablets (bars or blocks).

They come in a wide range of sizes and sometimes contain nuts or raisins. Countlines, which are full-size individual chocolate bars (e.g., Snickers), is another popular category of chocolate consumed in China. In additional to the chocolate’s physical presentation, packaging plays a large role in the function of chocolate among Chinese consumers. For example, individually wrapped chocolates such as Ferrero Rocher’s chocolate truffles are popular as gift purchases. On the other hand, non-individually wrapped chocolates, such as the Chinese household brand, M&M’s, tend to be self-consumed. Other forms of cocoa products such as cocoa powder, chocolate syrup/sauce, chocolate biscuits, chocolate wafers, and chocolate beverage are also commonly seen in the market.

The biggest Chinese online shopping platforms, Taobao (淘宝) and Tmall (天猫), have generated unique keywords for people whom are looking to buy chocolate, including “office snacks”, “wedding chocolates”, and “fancy gifts”. These keywords indicate that Chinese consumers often find uses for chocolate other than self- consumption.

Market Overview On Gelato, Coffee And Sweet Food In China 63 Market size indicators and trends Although it has been long since chocolate was viewed as an exotic treat in China, China’s chocolate market is still, by and large, untapped.

According to Euromonitor International, Chinese consumed 0.2 kg of chocolate per capita in 2014; compared against 2.2 kg per capita in the United States, it is evident that Chinese consumers have yet to adopt chocolate as a mainstream food product. Retail Sales of Chocolate in China (In billion USD) 3 2.5 2 1.5 2 1.7 2.2 2.6 2.9 2.8 2.8 1 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Statistica The chart above shows the chocolate retail sales in China from 2009 to 2017 based on data from Statista. Sales increased slowly but steadily until 2015, when it encountered negative growth. According to Mintel, lackluster performance in the chocolate industry has been due to a slowdown in new product innovation.

At the same time, economic and environmental factors could have contributed to the growth decrease. As observed by Euromonitor, the Chinese chocolate market in 2017 continued downhill with a 2% decline in the volume sales of chocolate confectionery, caused purportedly by an ever-strengthening consumer awareness of healthy diets. As chocolate is generally regarded as one of the biggest triggers of weight gain, interest from more health-conscious consumers shifted away from chocolate. Instead, popularity for healthier options such as yoghurt and nuts has boomed. According to Kantar Worldpanel, although the chocolate category as a whole showed decline,

Market Overview On Gelato, Coffee And Sweet Food In China 64 market sales of imported products actually enjoyed 3% growth during the 12-month period ending September 2016. This growth among importers demonstrates the upward potential of the Chinese chocolate market despite recent slowdowns in growth. In order to succeed, however, chocolate manufacturers should keep up with innovations and find ways to adapt to a culture of health consciousness. China is projected to have the highest chocolate market growth from 2015 to 2020 (along with India), according to a study conducted in 2017. The market for chocolate in China is expected to grow in value to 40 billion CNY (approximately €5.09 billion EUR) by 2020 based on estimates from Ebrun, a Chinese data analysis platform.

Interestingly, the President of Barry Callebaut commented on the South China Morning Post, a leading newspaper in Hong Kong, that the chocolate market is changing now because of the coffee culture: “We see more and more changes in the way chocolate is used. It’s more about chocolate with something else, like bakery products, pastries and ice-creams”. Additionally, recent research results suggest that new products can be very well received in China’s market and that Chinese consumers are willing to pay a premium for innovative products. With the great expansion of internet users in China, chocolate brands have started to focus on social media and seasonal innovation with unique opportunities in China’s e-commerce channels.

A notable example is US-based Mondelez, a company that began to build a presence on Tmall in early 2016. Furthermore, to drive sales in China, innovators are also gaining traction by catering to holidays and special occasions. For the Chinese Mid-Autumn Festival, Belgium’s Godiva chocolate company released a successful seasonal product: Chinese moon cakes made in chocolate (see picture below).

Market Overview On Gelato, Coffee And Sweet Food In China 65 Chocolate "Moon Cake" by Godiva Market structure and key players The chocolate market in China is dominated by foreign brands with a high percentage of import products. While the top 20 global chocolate brands all have share in China’s market, close to 70% of chocolate brands in the country are European brands based on a report published by Research and Markets. Meanwhile, local brands are suffering primarily due to consumers’ distrust in the quality of local products as well as their poor marketing efforts. As demonstrated in the chart below, key players in China’s chocolate market include Mars Foods, Nestle S.A., Ferrero Rocher, Mondelez International Inc., and Pladis.

Market Overview On Gelato, Coffee And Sweet Food In China 66 Key Players in Chinese Chocolate Market in 2017 Mars has maintained its leading position in the market with a well-balanced brand portfolio, targeting a wider population than any other market players. Its three main brands—Dove, M&M’s, and Snickers—successfully appeal to different consumer groups: young women, teenagers, and those whom need an energy boost, respectively. Through this effective marketing strategy, the company has been able to maintain stable market share over the last five years. Even as a market leader, however, Mars experienced a slight loss of market share in 2017.

Other brands positioned within the low- to mid-price range (the average retail price for chocolate in China amounts to approximately $21.21 USD [€17.34 EUR] per kg) such as Hershey’s were also affected, indicating a shift towards more premium products. Indeed, according to Mintel’s report, mainstream chocolate brands are losing out to premium brands in China. Godiva represents just one benefactor of this premiumization trend, which registered their strongest sales growth (193%) in 2017 according to Euromonitor.

Market Overview On Gelato, Coffee And Sweet Food In China 67 Major international players are also revving up their expansion plans to gain more market shares through a multitude of strategies, including introducing new product lines and localizing production in China. For example, Belgian chocolate maker Godiva plans to triple its 100 retail outlets in China by 2020 to capture growing demand for premium chocolate. Mondelez’s also introduced a premium-priced brand, Milka, to China’s market in 2016 with the intention of tailoring to evolving tastes. In conjunction with a premium pricing strategy, the company has also marketed and intensely advertised Milka’s “aspirational positioning and tender values”.

Italian chocolatier Ferrero Rocher started building factories in Hangzhou—a city in Zhejiang province—back in 2014 while Hershey’s acquired the Chinese confectionary company Golden Monkey (金丝猴) in the same year. These examples demonstrate the effort with which international companies are vying for market share. However, not all are winners--Hershey’s market share has been going down ever since the acquisition, though the company blamed the slowing Chinese economy for its poor performance.

Data provided by OEC and Kantar Worldpanel suggests a growing trend for imported chocolate products in 2017 with those of European origins leading the growth. European brands’ close association with luxury chocolates in China and their significant growth are yet more signs of market premiumization that has been driven by greater disposable income. Based on OEC’s dataset (see chart below), Italy is the biggest importer of chocolate in China. Overall, China’s well-built supplier network and high consumer brand awareness of Italian chocolates presents great opportunities for Italian manufacturers to enter China’s market.

Market Overview On Gelato, Coffee And Sweet Food In China 68 China 2016 Chocolate Import by Country $100m $80m $60m $40m $20m $0m $92m $44m $27m $26m $26m $16m $10m $10m $9m $9m Consumer analysis Chinese consumers have strong awareness of chocolate brands and tend to make purchase decisions based on brand. As suggested by a study conducted in 2016, brand information and rapport influences the tasting experience of Chinese chocolate consumers—on average, Chinese consumers tend to prefer imported brands over domestic brands or locally-sourced foreign brands. This stems from an innate distrust of the quality of home-grown food products, concerns about food safety issues, and a deep-seated perception that high-quality chocolate tends to come from abroad.

A report generated by Mintel suggests that healthiness is, in fact, a more important purchase factor than a product’s premium status. Interestingly, mood enhancement and stress relief have been cited as primary reasons for consuming chocolate as well, which go hand-in-hand with increasing health-consciousness of consumers. Aside from health considerations, taste remains the most important factor in chocolate brand purchases while price is the least—this is a result of price-insensitive consumers that consume chocolate mainly for enjoyment.

Observations made by Research and Markets show that Chinese consumers are more conservative compared to consumers in other countries—they tend to choose more familiar brands and flavors. Thus, it is important for foreign brands cater their products to local tastes when entering the Chinese market. Cadbury’s and Oreos are

Market Overview On Gelato, Coffee And Sweet Food In China 69 examples of two western confectionary products that have adapted themselves to Chinese consumers’ tastes by subtly reducing sweetness. Just as a Berenberg analyst told Reuters regarding China’s chocolate market, “Chinese consumers are getting sophisticated, [and] they want their own tastes and own variance.” This is evidenced by the growth in consumption particularly in urban tier-1 cities.

Consumers in these areas are highly interested in luxury packaging and more curious about a wider range of flavors and inclusions, representing a unique opportunity to develop novel flavors that satisfy urban palettes.

With the continued rise of health awareness in China, particularly in regards to childhood obesity, chocolate manufacturers and brands should focus on the healthy attributes of chocolate. The ever-greater snack options for children and teenagers means that chocolate brands will have to differentiate themselves on a healthiness, taste, and emotional level. Implications The opportunities for Italian chocolate producers are manifold. First of all, the growth of imported chocolate products, especially from European countries, means that Italian brands have a large opportunity to capture additional market share in the next few years.

Secondly, with the existing network and local management talent built by earlier Italian market players, market entry barriers are lower for newcomers. However, on the same token, early market penetration by major Italian players has led to intense competition that companies must overcome. Based on the success of current leading brands in China, the best opportunities to capture market share seem to derive from having a clear in-depth understanding of consumer desires and a product that can satisfy them.

Market Overview On Gelato, Coffee And Sweet Food In China 70 In terms of market and channel strategy, e-commerce in China is one of the most promising platforms for new chocolate brands due to its fast growth and differentiation from brick-and-mortar stores. Because Chinese consumers tend to make chocolate purchase decisions based on the brand, robust advertisement strategies are crucial to success. Thus, developing a presence on e-commerce is further justified with the increasing amount of time that Chinese consumers spend on the internet. Online marketing, which includes building a social media presence and retargeting tactics, will be a valuable tool for chocolate industry players in the years to come.

Chocolate package labels can also be improved to better indicate the country of origin. Emphasis on foreign heritage and superior product quality can attract consumers on an emotional level. In addition to leveraging the halo effect of foreign brands, it is essential for international chocolate manufacturers to localize and diversify their product flavors. By incorporating local and traditional Chinese trends, such as gifting chocolates, market players can create opportunities to make a deeper impression on Chinese consumers on an experiential rather than product level. Finally, innovation on a product level can be game-changing for market players.

Capitalizing on the current health and premiumization trends will be key to success, such as the development of low-fat chocolate or bean-to-bar chocolate. Moreover, package design will continue to be a driver for differentiation as consumers continue to appreciate chocolate both taste-wise and visually. No matter the choice, developing brands that truly cater to the experiential and cultural needs of Chinese consumers’ will ultimately be rewarded with longevity in the Chinese chocolate market.

Market Overview On Gelato, Coffee And Sweet Food In China 71 References Euromonitor International 2017 http://www.euromonitor.com/chocolate-confectionery-in-china/report Business Wire 2017 https://www.businesswire.com/news/home/20170612005536/en/Study-Chinas-Choco late-Market-2017---Research Reuters 2017 https://www.reuters.com/article/us-hershey-results/hersheys-sales-miss-as-c hina-conti nues-to-struggle-idUSKBN15I1JT Mintel 2017 http://reports.mintel.com/display/838281/ Statista 2017 https://www.statista.com/statistics/315303/retail-sales-of-chocolate-in-chi na/ Kantar Worldpanel 2017 https://www.kantarworldpanel.com/cn-en/news/Chinas-chocolate-market-faces-b oth-c hallenges-and-opportunities Confectionery news.com 2017(1) https://www.confectionerynews.com/Article/2017/02/08/Fake-Ferrero-and-Mars- choc olate-seized-in-China Confectionery news.com 2017(2)

Market Overview On Gelato, Coffee And Sweet Food In China 72 https://www.confectionerynews.com/Article/2017/09/01/M-M-s-Dove-and-Snicker s- maintain-chocolate-market-lead-in-China Newsweek 2017 http://www.newsweek.com/world-first-dark-milk-white-or-ruby-chocolates-four th-di mension-unveiled-china-659792 Research and Markets 2017 https://www.researchandmarkets.com/research/8pwvfv/a_study_of OEC 2016 https://atlas.media.mit.edu/en/visualize/tree_map/hs92/import/chn/show/1806 /2016/ Mintel 2016 http://store.mintel.com/chocolate-confectionery-china-june-2016 Oxford Scholarship Online 2016 http://www.oxfordscholarship.com/view/10.1093/acprof:oso/9780198726449.001.

000 1/acprof-9780198726449-chapter-9 Financial Times 2016 https://www.ft.com/content/d7db745e-52a3-11e6-9664-e0bdc13c3bef South China Morning Post 2016 http://www.scmp.com/business/companies/article/2110537/new-generation-choco holi cs-may-turn-china-major-chocolate-market Mintel 2016

Market Overview On Gelato, Coffee And Sweet Food In China 73 http://www.mintel.com/press-centre/food-and-drink/chocolate-eaters-full-of- beans-co nsumers-around-the-world-value-the-psychological-benefits-of-the-treat William Reed 2016 https://www.confectionerynews.com/Article/2016/01/12/China-s-chocolate-bran ds-fin d-it-hard-to-enter-the-market Ebrun 2016 http://www.ebrun.com/20160923/193881.shtml Daxue Consulting 2016 http://daxueconsulting.com/chocolate-industry-in-china/ The Silk Initiative 2015 http://thesilkinitiative.com/chocolate-in-china/ 中国商务新闻网 2017 http://www.comnews.cn/focus/5a0199f4cd91893036a4c4df

Market Overview On Gelato, Coffee And Sweet Food In China 74 Italian Trade Agency – ITA Italian Trade Agency - ITA is the government organization which promotes the internationalization of Italian companies, in line with the strategies of the Ministry of Economic Development. ITA provides information, support and advice to Italian and foreign companies, helps to develop, facilitate and promote Italian economic and trade relations with foreign countries, focusing on the needs of SME, their associations and partnerships.

ITA operates worldwide from a large network of Trade Promotion Offices linked to Italian embassies and consulates and working closely with local authorities and businesses.

ITA provides information, support and consultancy to Italian companies on foreign markets, promoting and fostering export and cooperation in all areas - capital goods, consumer goods and services – with the target of increasing and making more effective their presence on international markets. ITA provides a wide range of services overseas helping Italian and foreign business to connect with each other: identification of possible business partners; bilateral trade meetings with Italian companies, trade delegation visits to Italy; official participation in local fairs and exhibitions; forums and seminars with Italian experts.

The Italian Trade Agency - ITA has been in the People’s Republic of China for 52 years with now 4 offices respectively in Beijing, Shanghai, Canton, Hong Kong organizing hundreds of promotional activities every year to enhance the relationship between China and Italy.

The Italian Trade Agency - ITA Offices in China 北京代表处 BEIJING 6th floor, Unit 1, Sanlitun Diplomatic Residence Compound, 1 Gongren Tiyuchang North Road, Chaoyang district, Beijing 100600 Tel: (010) 6597 3797 E‐mail: pechino@ice.it Website: www.italtrade.com 上海代表处 SHANGHAI Room 1902 ‐ 1903, The Center, 989 Changle Road, Shanghai 200031 Tel: (021) 6248 8600 E‐mail: shanghai@ice.it Website: www.italtrade.com 广州代表处 GUANGZHOU Unit 3203, International Finance Centre (IFC) No.5 Zhujiang West Avenue, Guangzhou 510623 Tel: (020) 8516 0140 E‐mail: canton@ice.it Website:www.italtrade.com 香港代表处 HONGKONG Suite 4001, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong Tel: (00852) 2846 6500 E‐mail: hongkong@ice.it Website: www.italtrade.com

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