Report stresses winners and losers in China

- Last updated on GMT

Related tags: China, Inflation

China's food and beverage industry continues to be a focus of long
term investment hopes for the multinationals, but as demands on
both ingredients and commodities put pressures on food prices a
report by Deloitte Touche stresses that there will be winners and
losers.

The impact of China's economic revolution is being felt far beyond its boundaries. Since the government began embracing free markets about 25 years ago, the Chinese economy has been doubling in size roughly every six years. Currently its GDP is only one-tenth the size of the U. economy, but it is moving up the ranks quickly. By some estimates, China could become the world's largest economic powerhouse by as early as 2015.

For food companies, China's huge population base of 1.3 billion consumers is the major attraction, the report says. Rising per capita disposable income is creating strong growth in retail sales of food products. Total retail sales of consumer goods rose 9.1 per cent in 2003 according to government figures. China's growing middle class is boosting demand for higher priced and imported goods, including food products.

To capitalise on China's strong growth, various companies are establishing offices or manufacturing plants there, including Procter & Gamble (P&G), Unilever, Kraft and Budweiser. China, says the report, is currently P&G's sixth largest market and since it entered the market in 1988, it reportedly has invested well over $1 billion and is now by far the country's largest advertiser.

Strong demand is creating problems for the country, particularly in food inflation. Decreasing grain output over the last four years has added to inflationary pressures in the economy. China's grain stocks are close to being depleted. In 2003, China purchased 3 million tons of wheat which led to price increases in the U.S. and elsewhere. As a result, worldwide grain stocks are reportedly at their lowest levels in 30 years.

Rising food prices partly explain the recent increase in China's consumer price index, following years of deflation. Agricultural prices in the country climbed 15 per cent in January 2004 from a year earlier.

Both US and South American agribusinesses, however, have benefited from China's increased purchases. China currently is a net importer of soybeans and cotton, and it is expected to be a net importer of corn by mid-decade. Recently Merrill Lynch reported that this trend bodes well for companies like Archer Daniels Midland and Bunge. However, the report also stresses that steadily increasing demand from China can have negative consequences on US-based food processors who are paying higher prices for these commodities.

Deloitte Touche​ believes that China has the potential to impact profits at numerous food companies. In particular, food processors selling in China might benefit from having a long-term perspective. Businesses that establish an early presence in China will often find it easier to build consumer brand loyalty. Domestic brands currently have a dominant position among Chinese consumers, but US joint ventures and imports are beginning to take the lead in some categories, according to government data.

Related topics: Business

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