Selling Australian Made Organic Baby Porridge to China - Case Study Example

International Marketing Report: Selling Australian Made Organic Baby Porridge to China Table of contents Executive summary………………………………………………………………………………..3 Introduction……………………………………………………………………………………….4 Background………………………………………………………………………………..4 Aim………………………………………………………………………………………..4 Scope……………………………………………………………………………………...4 Assumptions………………………………………………………………………………5 Market Research, Analysis, and Target market…………………………………………………..5 Promotional concept……………………………………………………………………………....8 Distribution strategy……………………………………………………………………………....9 Conclusion……………………………………………………………………………………….11 Recommendations……………………………………………………………………………….12 References……………………………………………………………………………………….1 Executive Summary 3 Market Research, Analysis and Target Market 5 References 13 Executive Summary Growing competition in Australias baby food industry has forced manufacturers to look elsewhere for growth. China has proven to be a favourite destination for various factors. First, China is the worlds most highly populated nation. Its vast population provides a ready market that any serious international business cannot take for granted. Secondly, in recent years, China has been able to generate and sustain high levels of economic growth. This steady growth has created a robust middle class with a taste for quality imported goods. Lucrative as it is, Australian organic food businesses have found difficulty in trying to access the Chinese market in recent years. The 2008 scandal in which contaminated milk found its way into the country only served to make access to the market difficult. At the height of the stand-off, China banned Australian organic food on grounds that the latter’s certification program was not thorough. This report explains how an Australian manufacturer of organic baby porridge may enter the Chinese market. The report is divided into two major parts. The first part illustrates a possible market segment the company may pursue. The second part explains how the company may move its product such that it reaches the target customer. Finally, the report recommends some actions the company may need to take to operationalise the report. International Marketing Report: Selling Australian Made Organic Baby Porridge to China Introduction Background The retail value of organic baby food in Australia increased from AU$ 22.7 million in 2004 to AU$38.1 in 2009 (Biological Farmers of Australia (BFA), 2012). Most of this food is sold through supermarkets and hypermarkets. As of 2009, 67.5 percent of organic baby foods were sold via these outlets. Growing competition in recent years has forced manufacturers of organic baby foods, including porridge, to seek markets outside Australia. For many manufacturers, China has proven to be a suitable destination, possibly due to its large population that provides a ready market for the product. However, many exporters of organic foods indicate that they need more government support to access the Chinese market. Recent changes in China no longer recognize Australian standards for organic foods and the Australian government’s criteria for accrediting organic foods. Aim The aim of this paper is prepared a marketing report which an Australian manufacturer or exporter of organic baby porridge can use to penetrate the Chinese market. The report is particular important given recent changes China that rendered Australian organic foods unrecognizable there. Scope Whereas Australia produces a wide variety of organic foods that can be sold to China, the focus of this report is organic baby porridge. Indeed, if one were to prepare a marketing report for the export of all organic foods produced in Australia, they would require more pages than this paper permits. Also, is it instructive to note that the report is limited to China although there are several other countries to which Australian organic baby porridge could be exported. Assumptions This report assumes that the ban on Australian organic foods reported in the report already cited above has either been or will soon be lifted. Otherwise, this report will be rendered ineffective. Market Research, Analysis and Target Market Baby foods are the fastest expanding category of products in China’s large-scale retail stores (Li, 2012). The growing demand for baby foods is driven by China’s expanding economy coupled with increased purchasing power and improved standards of living. The nation’s growing urban middle-class is prepared to pay for the more expensive yet quality imported baby foods. They are sceptical of local brands because of inconsistent quality (Peng, 2010). The 2008 scandal in which milk contaminated with melamine is still fresh in the minds of many middle-class households in China. Nonetheless, international manufacturers of baby foods are repositioning themselves to grab a share of the growing market or to carve a niche for themselves (International Trade Centre, 2011). Organic baby food is another fast growing business in China. A growing segment of affluent parents feels the need to buy organic foods for their babies even though these could cost twice the price of conventional baby foods. These parents are more conscious of the health of their babies (Lagos, Scott, & Rasmussen, 2010). The decision is partly driven by the numerous reports on the Internet that talk about the development of allergies that may arise from the use of chemicals that conventional baby food may contain. Organic baby formula and food supplements are increasing in popularity in Chinas Tier 1 cities. These products come in packaging bearing such labels as "Organic" and "Pure and Safe". However, the use of these terms is highly subjective, and there are no regulations nor standards to guarantee what they claim. China requires organic baby foods to receive the China Organic Seal of Approval before they can enter the country’s retail outlets. Thus, all baby foods on supermarket shelves bear the seal of approval on the packaging. Most makers of organic baby foods underscore the ideas of food safety, improved nutrients and eco-friendliness. Despite the fact that the label “Organic” has no guarantee rich Chinese parents are willing to pay a premium for it. A study conducted by Innovative Research and Products (iRAP) Inc. indicated that the world market for organic baby foods would grow to $2.26 billion by 2012 against $760 million in 2007 (Li, 2012). Today, countries in Southeast Asia are the main producers and exporters of snack foods to China. This report predicted that in the long run, these countries were likely to emerge as producers and exporters of organic baby foods. However, they would need to import their raw materials from countries such as the United Sates, New Zealand and Australia. From the above analysis, several points emerge. First, organic baby foods are at the growth stage of the products’ life cycle in the Chinese market. Secondly, it is clear that the Australian company that intends to export organic baby foods to China will do well to target the country’s upper middle class. An upper middle class individual or household is defined as one that earns an annual income of $16,001 to $34,000 (Farrel, Gersch, & Stephenson, 2006). As already noted, this segment lives in China’s leading cities. The decision to pursue this segment is informed the factors discussed in the following paragraphs. Today, China’s middle class represents 14% of all urban households in China. By 2025, this segment is projected to comprise 520 million people. This number will comprise more than half of the projected urban population of the country. Collectively, the upper middle class is expected to have a disposable income of 13.3 trillion renminbi (Farrel, Gersch, & Stephenson, 2006). This growth potential will ensure sustained demand for the Australian company’s products for a long time to come. Even though directly imported baby food commands a higher price, middle-class Chinese parents are prepared to pay for them (International Markets Bureau, Canada, 2011). They believe these exported brands are of superior quality compared to local brands. As already noted, upper middle-class parents are going a notch higher and feeding their children on imported organic baby foods despite the fact that these foods could easily command twice the price. These parents are more concerned about the health of their babies and will no spare a penny to give their infants the best that today’s life can offer. This taste and preference should create sustained demand for the Australian firm’s product. In terms of access, the target market segment lives in China’s tier one cities. These include Shanghai, Beijing and Guangzhou. Tier 1 cities attract the most attention of foreign companies owing to the heavy of the middle class and income levels that are well beyond the national average. Even though the secondary sources accessed do not state where China’s upper middle shops, it is believed that as the case in many developing and developed countries, they shop at leading supermarkets and hypermarkets situated in shopping malls. Thus, the company will work to delivers its products through these channels. Promotional Concept Nutritional Value Organic food is believed to be of superior nutritional value even though there is no empirical scientific evidence to support that claim (Batra, Sharma, & Gupta, 2014). Most of the research on organic food, thus far, is observational, without checked trials for health benefits. Organic foods are believed to be richer in nitrates, antioxidants, potassium, phenolics and vitamins A, C and E. whereas some of these nutrients have been proven most of them are yet to be demonstrated scientifically. Another significant nutritional benefit of organic foods is their antioxidant effect. Organic foods are supposed to generate more antioxidants than regular foods in order to compensate for their lack of fertilizers and pesticides. Health Benefits Scientists have undertaken several studies to compare macro- and micro-nutrient make up of organic and conventional foods. However, very few studies have demonstrated the direct benefits of organic foods to human beings (Indian Council of Medical Research, 2010). A study conducted in the Netherlands involving 2764 infants reached that conclusion that consuming organic dairy products lowered the risk of eczema in children under two years of age. The main shortcoming of this study, however, is that it dwelt only on organic dairy products. Thus, very little is known about the direct health benefits of other types of organic foods including cereals. In addition, the authors of the research were uncertain where their findings could be generalized to the whole infant population in the Netherlands. Consequently, they recommended further investigations to confirm or refute their findings. Production of Organic Foods in Australia The use of pesticide is a major concern with conventional foods. Currently, there are two main standards that regulate the production, processing and labelling of organically produced food in Australia (Neeson, 2010) . The domestic and import standard regulates organic food that is produced and consumed locally in Australia. The export standard, on the other hand, governs organic food produced for external markets. These standards define organic farming as the practice of raising foods without applying man-made fertilizers, pesticides, fumigants, genetically modified methods, human excreta or growth hormones. The land must be clear of all these substances before an organic crop is raised on it. Certain practices are recognised to increase organic production. These include crop rotation, the application of green manure and seed bed preparation among others. Organic animal products are obtained from animals that have been fed on 100% organic fodder for at least one year prior to their slaughter. Certification Amongst other things, the Australian export standard require manufacturers of all organic food, including baby porridge, to have all their products meant for export labelled “Organic” on their packaging (Neeson, 2010). There is a similar requirement in China (Li, 2012). Together, these standards assure the Chinese consumer of the safety of the company’s product. Distribution Strategy The company will adopt a business-to-consumer distribution strategy in which it will the product to leading retail stores in the aforementioned Tier 1 cities of China. These stores will in turn sell the product to the upper middle class customers who, it is believed, frequent these stores for their shopping. This channel of distribution offers many benefits to all the parties engaged in the channel of distribution – the company, the retail stores and the customers. Given the relatively small number of high-end retail stores in China’s Tier 1 cities, the company will have an easier task of managing them (Sreenivas & Srinivas, 2008). Otherwise, a long chain channel of distribution would be costly and cumbersome to manage. In addition, the short chain of distribution involving the producer (the company), the retailer and the consumer will help the company to maintain the quality of the product. A longer chain of distribution, on the other hand, would increase the risk of adulteration of the product as it moves from one agent to another in the chain (Sreenivas & Srinivas, 2008). This point is important when one considers the fact that the 2008 scandal in which milk powder contaminated with melamine found its way onto China’s supermarket shelves is still fresh in the memory of the Chinese consumer. Moreover, the Chinese upper middle class parent is much more concerned about the health of their infant than the average parent. The short chain of distribution will also enable the company to control the amount of the product available in the Chinese market (Sreenivas & Srinivas, 2008). This point is crucial if the company is to maintain the prestige of its brand. On the contrary, if every other store, big and small, were allowed to stock the product, it would flood the market and lose its value and prestige. For retail store, it will enjoy greater trade discounts by virtue of purchasing the product from the company in large quantities. In turn, the store will be able to sell the organic baby porridge to the consumer at a reduced price and still make a good profit margin (Sreenivas & Srinivas, 2008). If on the other hand, the company took to distributing the product via a lengthy chain, the chain would push up the final price of the product while encroaching onto the profit margins of the agents in the chain. The stores that the company may approach to stock their product include departmental stores, supermarkets and speciality stores. Examples of leading department stores are Dashang Group, Friendship and Yinzuo (Li & Fung Research Centre, 2012). These types of stores are strategic for many reasons. Some of these reasons have already been explained in the preceding chapters under this heading. In addition, these are the places the upper middle class frequent for their shopping. They offer them the exclusivity they seek. Thus, it makes a lot of business sense to stock the product where its target market will find it. Conclusion China’s growing economy has created a growing middle class that demands quality products from manufacturers around the world. One of the major winners in the wake of Chinas expanding economy is the baby food business. The country’s middle class wants the best for their infants. For this reason, they are willing to pay higher prices for imported baby foods because they believe these are of superior quality compared to local brands. Within this wider sector of baby food is the sub-sector of organic baby food. This category is increasingly becoming popular among the country’s upper middle class. This class is more conscious of the health of their infants. As a result of these developments, manufacturers of baby food, both organic and conventional, from around the world are positioning themselves to get a share of the pie. This paper has outlined how an Australian manufacturer or exporter of organic baby porridge may position themselves to tap into the vast market that China presents. The report has presented a promotional concept that the Australian company may use to break into the Chinese market. The concept outlines the strong points of the product, including the certification demanded of the product by Chinese authorities. Finally, the report has outlined a distribution strategy the company may employ to avail its product to the consumer in China. Recommendations In order to enhance the effectiveness of this report, the company should do the following. First, it should get hold of the latest information available as some of the sources used in this report are not up to date. The Australian standards for the production and certification of organic food are reviewed from time to time in order to take into account the demands of countries that import Australias organic food such as China. The issue of those standards accessed and used for this report was released in 2010. It is likely that by now, it has been reviewed. Secondly, the company will need to undertake a ground truthing exercise in China to confirm the information contained in this report. For example, the company may need to ascertain the existing situation as far as the certification of organic food is concerned. As reported here, some time back Chinese authorities had declined to recognize Australia’s process of certification. As a result, Australian manufacturers could not sell to China. The company will have to find out whether or not this has changed. Finally, it has been reported that several international manufacturers of baby food are competing for a share of the Chinese market. However, there is no information on who these players are, their niches and market shares. This kind of information could determine the success or failure of the Australian firm. The firm will have to do due diligence to obtain this information. References Batra, P., Sharma, N., & Gupta, P. (2014). Organic Foods for Children: Health or Hype? Indian Paediatrics, 51, 349-353. Biological Farmers of Australia (BFA). (2012). Australian organic Market Report 2012. Brisbane: Biological Farmers of Australia (BFA). Farrel, D., Gersch, U., & Stephenson, E. (2006). The Value of Chinas Emerging Middle Class. London: McKinsey Global Institute (MGI). Indian Council of Medical Research. (2010). Nutritional composition and health benefits of organic foods - using systematic review to question the available evidence. Indian Council of Medical Research, 131, 478-480. International Markets Bureau, Canada. (2011). Consumer Trends: Baby Food in China. Ottawa: International Markets Bureau, Canada. International Trade Centre. (2011). Organic Food Products in China: Market Overview. Geneva: International Trade Centre. Lagos, J., Scott, R., & Rasmussen, K. (2010). Organics Report. Beijing: USDA Foreign Agricultural Services. Li & Fung Research Centre. (2012). Department Stores in China, 2012. Guangzhou: Li & Fung Research Centre. Li, J. (2012). Whos feeding Chinas offspring? Baby food market indicates strong. Guangzhou: USDA Foreign Agricultural Services. Neeson, R. (2010). Organic standards and certification in Australia. Sydney: Vovernment of Australia. Peng, F. (2010). Organic Food Market Segmentation in China. Jamk University of Applied Sciences. Sreenivas, M., & Srinivas, T. (2008). Effectivenes of Distribution Network. International Journal of Information Systemsand Supply Chain Management, 1 (1), 80-86. Read More