Chinese consumers’ taste for premium imported products provides lucrative prospects for exporters, but up against global competition, Australian companies such as Nutrition Care and Brownes Dairy say they needed the right local partner to succeed.
One of Australia’s oldest vitamins manufacturers is experiencing surging demand for its products in China, nearly three decades after its entrance to the world’s fastest-growing and most lucrative retail market.
In the first quarter of 2018, Melbourne-based Nutrition Care recorded a five-fold increase in sales compared with the full 12 months of 2017, as Chinese demand for its Australian-manufactured health supplements began to skyrocket.
However, entering the Chinese market was not strictly a simple proposition for Nutrition Care, which was established in the 1970s as the Brighthope Clinic and Biocentre.
Led by nutritional pioneer Ian Brighthope, who began his career in agricultural science and food research before transitioning into medical practice, Nutrition Care made its first foray into China in the 1990s, shortly after establishing its manufacturing facility in Melbourne.
Professor Brighthope had developed a range of gastro-intestinal, lactose intolerance, metabolism and liver health supplements for use at the Brighthope clinics, which were proving popular among other doctors after producing positive results from many patients.
Entering the China market at that time was a logical step but Professor Brighthope said the company’s efforts of expansion were derailed because of issues with its export partner in Hong Kong.
“We were the first Australian vitamins company who went into China, far, far earlier than Blackmores or Swisse or any of the others,” Professor Brighthope told Australia China Business Review.
“That early sojourn was not successful, because the company in Hong Kong stopped funding their company in China, so it damaged our business there.
“But I kept an interest in doing something in China because it’s the largest local market for us, and also I wanted to globalise the product and also the educational services and training we provide, so we found the right partner.”
That partner was Hong Kong-listed Ausnutria Dairy Corporation, which took a 75 per cent stake in Nutrition Care for $30 million in 2016.
Since then, demand for Nutrition Care’s supplements has rocketed, tapping into Chinese consumers’ growing propensity to spend big on health and wellness products.
According to the Hong Kong Trade Development Council, China’s health supplement market is expected to increase by between 10 per cent and 15 per cent annually, from around ¥260 billion ($53.8 billion) in 2016 to ¥400 billion ($$82.8 billion) in 2021.
Professor Brighthope said he was confident that this time, Nutrition Care had selected the right partner to cash in on that growing demand for internationally manufactured products.
“Chinese consumers hold Australian-manufactured products in high regard, but they can’t be guaranteed that all products are Australian manufactured just because it is coming from an Australian marketing company,” he said.
“Some of the biggest brands here don’t manufacture their own products. We manufacture all of our products here in Australia, and that was one of the attractions for Ausnutria to buy 75 per cent of the business.
“Their chairman, Yan Weibin, has a very similar philosophy about business and healthcare as I do, so we have a good match.
“They are quite large in China, they are the largest infant formula company providing goats milk infant formula to the Chinese population, which is a very good formula for children with allergies.
“They are also expanding into camels milk, but their focus is largely on infant formula from Australia, Europe and New Zealand.”
Professor Brighthope said the process of selection for partnership with Ausnutria was an extensive one, which took place over several years of travel between Australia and China.
“I spoke a lot to people, to people in business, I went to trade shows, and eventually I found Ausnutria of interest,” he said.
“Our partnership with Ausnutria has also given us some opportunities with some of the other companies that have invested in Ausnutria – most of these companies are public companies.
“They are involved in health and medicine, and one of our specialities is in the area of probiotics.
“One example, Bioengine, has ownership of a probiotic research facility in Taiwan, so the synergies have been absolutely fantastic.”
In Western Australia, the state’s oldest dairy, Brownes, recently found its own partner to enter the Chinese milk market – in the country’s biggest cheesemaker.
Shanghai Ground Food Tech Co acquired Brownes in November last year, the culmination of a year-long sales process conducted by the dairy’s former owner, private equity group Archer Capital.
The company has four cheese and milk processing plants in Shanghai, Changchun, Tianjin and Jilin, with a processing capacity of about 400,000 tonnes.
Speaking at a recent Committee for Economic Development of Australia event, Brownes chief executive Tony Girgis said Shanghai Ground Food’s supply chain touched around 90 cities in China, making the company the perfect partner to roll out Brownes’ range of fresh milk, yogurt and cheese products.
“Right from the beginning when we had people from Ground Food come and look at the business, I and the management team felt the most comfortable,” Mr Girgis said.
“First of all because they were in the game, they have been at it for a while and are very successful.
“They are a family business, and we were essentially founded as a family business so there was an immediate fit and we felt we could work with these people.
“The most important thing is they said ‘you can continue to do what you do, we won’t interfere’ and that is truly the case today.”
Mr Girgis said Brownes had decided to enter the Chinese market in 2015, two years before the Shanghai Ground Food deal was finalised.
“A critical point is finding the right partner, I remember at one stage around 2015, I would have met 15 potential partners that wanted us to work with them and take the brand to China,” Mr Girgis told attendees at the CEDA forum.
“When you meet the first, the second and the third, the numbers are intoxicating. They tell you what they can do with your product in the market and you say ‘wow, I want that’.
“Then the reality hits very quickly.”
That reality, according to Mr Girgis, includes the sophisticated nature of China’s retail market.
China’s dairy market is one of rapid growth, particularly when compared with Australia’s.
While Australian dairy consumption is growing at an annual rate of less than 1 per cent, China’s is growing at 6 per cent, Mr Girgis said.
Cheese consumption is growing even more rapidly in China, at a rate of between 17 and 20 per cent each year.
Those numbers provided a compelling proposition for Brownes, but Mr Girgis said Australian and New Zealand-based dairy product manufacturers were not the only ones to take notice, with European dairies firmly focused on supplying Chinese demand.
“Today when you’re getting into the milk or dairy markets in China, you have to have a compelling proposition,” Mr Girgis said.
“(Chinese consumers) are spoiled for choice. They are very fussy, and they are very sophisticated.”
Brownes’ biggest challenge in China, alongside cutting through competition on supermarket shelves, is dealing with supply chain challenges.
Mr Girgis said while Brownes’ products attracted a healthy premium on Chinese shelves as compared with Australian supermarkets, ensuring the range arrived in a fresh and consumable condition eroded much of that margin.
Adding to that cost pressure is the fact that manufacturing in Australia is often done at a higher cost for Brownes than its competitors.
“Manufacturing is difficult, not just in WA,” Mr Girgis said.
“I started my career in manufacturing and it’s been on a downhill trajectory for a long, long time.
“It doesn’t matter what industry you are in, you really have to be on the ball with your costs and supply chains and efficiencies and so on, and Australia now competes in a very big, global market.
“The premiums we used to command in WA are not that premium any more, there are lots of other choices that are just as good