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, crosspromotion 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), custardor 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 NDynamic 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 secondand 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, crosspromotion 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

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