The Queen of the Chinese Food Market: Danish Crown
In 2018, the Danish meat producer Danish Crown Foods managed to do what many international competitors could not even begin to imitate: they expanded to the Chinese food and beverage market. But how did they manage to do that? How could a company with just 23.000 employees from a country with just 5.840.000 inhabitants enter China's giant and diversified meat market?
Tulip Food Company A/S, a subsidiary to Danish Crown Foods, which is an international food business established in Denmark, did in 2018 finalize the agreement with the Danish authorities, the Ministry of Food, and the Danish Embassy in Beijing, and was now allowed to export some categories of their products to China. As a start, they have made an agreement on exporting three categories: sausages, salami, and conserves to the Chinese retail market as well as on the online market, and to the food-service sector in China. This agreement is a great strategic action in Danish Crown's export strategy, as they, besides Northern Europe, have growth plans in Asia. Moreover, the agreement also allows Danish Crown to gain knowledge and build a business relationship with both retails and wholesales in China.
Winchain, owned by Alibaba, made an agreement with Danish Crown to purchase the amount agreed upon, which in this case meant to purchase everything produced by Danish Crown's production in Pinghu near Shanghai. However, due to financial challenges, Winchain has not purchased the amount agreed upon, and therefore, both parties have agreed to end the collaboration.
These tangled circumstances have forced Danish Crown to a change of strategies, and they have now discovered a clear potential in the sale to hotels, restaurants, and fast food-chains. These sectors are demanding products and raw materials as we know them in Europe, and therefore, Danish Crown visualizes a great opportunity to create an advantageous position for themselves in that sector. Even though Danish Crown has faced some challenges in entering the Chinese food market, they are now relying on creating a strategic marketing campaign, on providing high standards of delivery, and providing high quality products in order to keep their position on the Chinese market.
Rivalry among Existing Competitors
When competing for a position on the market, there are different but specific external factors that can either create a challenge or an opportunity for a new company on a foreign market. One of these points is that the Chinese food and beverage industry is getting more and more competitive, and companies are experimenting with new ways to drive sales. The competitive market challenges the existing brands, which are getting more innovative and are now implementing offline retail stores, meaning e-commerce. The online branding can improve the consumer experience, as the customers can save time when pre-ordering their order online . In the following, we will discover some of the most recent and dynamic challenges and circumstances the Chinese meat market saw itself confronted to.
Due to the outbreak of African swine fever in China in March 2019 more companies were forced to reduce their production of pigs by 30 %, which resulted in a big need for importing pork to the Chinese market. This gave Danish Crown an opportunity, as the demand for European imported pork benefited the European suppliers.
The food market in China has been subject to change since the outbreak of Covid19, and the many Chinese consumers are now chasing a healthier and more nutritious lifestyle and diet. 69 % of the Chinese consumers have already altered their diet due to the pandemic, and 84 % of the Chinese consumers are searching for more protein in their diets. These surveys open up a new market segment for the existing competitors, and the rivalry among them will grow. Healthier eating habits and more protein in the diets allow for an even bigger competition in producing healthier and more nutritious choices for the consumers.
This presents Danish Crown with a great competitive advantage on the Chinese food market, as their products allow the Chinese consumers to obtain a more nutritious diet with lots of protein. Moreover, because the Chinese pork import has been heavily affected by the African swine fever, and China being the world's largest importer of pork, the demand for pork will increase the competition between foreign investors. As a result of Covid19, food safety and hygiene have increasingly been a more and more important factor for the Chinese consumers, and with Danish Crown's high food standards and highly acknowledged brand in China, Danish Crown will have a great advantage in the rivalry among existing competitors.
The Threat of New Entrants
The threat of new entrants can define the possible profit in the market. However, it is important to mention that the threat of new entrants is only the intimidation and not when competitors enter the market, meaning that it is the companies who threaten to enter a certain market who can define the possible profits. As recognized, already existing companies in a market are always threatened by potential market entrants of other companies. This threat alone is usually enough to keep the profitability of the market low, so that more firms do not actually sponge into the market. To actually enter the Chinese meat market, there are significant obstacles to overcome, including government prescriptions and regulation that producers, as well as suppliers and distributors, must comply with. There are also significant capital requirements to enter the Chinese market.
Government regulations in the Chinese market are particularly stringent in the food sector and require a great deal of research in advance of market entry. Due to the fluctuating markets, especially in the food sector, but also because of the possible perishability of food, quick actions and changes in decisions and regulation must always be considered and factored in. For this reason, it is of crucial importance to always know the current rules and regulations. Nevertheless, it can often take years for a company to obtain import or export permission to enter the Chinese market: Tulip, a subsidiary that is also part of Danish Crown, for example, had to wait a whole ten years for approval for the Chinese market and the accompanying issue of export certificates. There are reports of arbitrariness here in some quarters, especially in the U.S., but it must be noted that the U.S. has been engaged in a trade dispute with China in recent years and may have fired verbally against China for other motives.
Despite the high level of capital and relationships required, as well as the long endurance, entry into the Chinese market is very attractive: the threat from other market entries for Danish Crown were rated medium-high in 2019, and the growing mistrust that Chinese consumers had in domestic companies catalysed Danish Crown's success. And even despite the existing barriers to entry and the strong integration of the companies that entered, there is great potential in the large market.
The Bargaining Power of Suppliers
Danish Crown, as a purely processing but non-producing company, follows the second model. In this structure, the company and farmer focus on the respective tasks they can best accomplish. For example, farmers on the one hand take care of the breeding and fattening of the animals, while companies on the other hand take care of the slaughtering and processing. With this form of enterprise, the power of the suppliers is greater. At the same time, the power of the processing companies is also lower. Danish Crown, as a processing company, is therefore subject to the power of the Chinese supplier companies when entering the Chinese market. This is because the farmer can choose not to sell his pigs to the company, and in certain cases it may be more profitable for the farmer to sell his pigs to another buyer, so the processor is more dependent on the farmer in this model than in a fully integrated supply chain.
The Bargaining Power of Customers
Companies that can rely on powerful suppliers themselves usually have to deal with very powerful customers at the same time. These are able to put companies under strong pressure, to persuade them to lower their prices, or to change the quality of the products. Looking at the meat market, Danish Crown faces two different types of buyers: processors and supermarkets. Danish Crown itself, as a processor, deals mainly with wholesalers and less with end consumers themselves. Therefore, its customers include supermarkets as processors. Nevertheless, it can be said that the power of the pork company depends on the type of company.
If it is a fully integrated company, there is hardly any buyer power. The company then controls every participant in the supply chain. However, this is not the case for Danish Crown. In the case of the company and farmer approach, which Danish Crown follows, the buyer has relatively high power. It is estimated that the actual producers of the meat receive about 60% of the sales, but only make about 7% profit. The situation is different for the associated processing company: Danish Crown basically receives a lower share of the turnover, but this accounts for a higher share of the profit.
With regard to the power of customers, two further factors can be identified, which on the one hand make it more difficult to enter the market and on the other hand increase the market power of customers: Since the brand loyalty of the Chinese market can be described as mediocre at best, the power of customers decreases here. The push for higher product quality and lower prices at the same time, on the other hand, puts suppliers under pressure.
Danish Crown is aware of these challenges and has made a conscious decision to disintegrate its business. However, if the trend towards fully integrated fleece companies increases, it must be expected in the future that buyers will have less and less power and the danger of forward integration will increase further. At the same time, this would mean an advantage for companies like Danish Crown, which benefit from the decreasing power of buyers.
The Threat of Substitute Products or Services
The Chinese food market represents a niche market for vegetarian products. Especially among the young and urban population of China, the consumption of vegetarian products is popular. In 2018, the plant-based industry in China reached approximately 6.1 billion yuan, which was an increase of 14.2 percent from the previous year. This indicates that the vegetarian industry in China is in a growing development, and that the threat of substitute products and services is an increasing threat.
However, more than 90 percent of the Chinese population do not identify themselves as being vegetarian, hence that even though the threat of substitute products is a growing threat it still remains low. More and more of the Chinese population, especially the young population of China, has implemented a very positive attitude towards substitute products to meat, hence this can create a challenge for Danish Crown in the future.
We will still only assess the threat of substitute products and services as being fairly low, as the development within the vegetarian market in China is still a small percentage of the total Chinese population. More so than this, China still has the largest production of pork in the world, and they account for more than half of the total pork production in the world. Besides this, the average yearly consumption of pork in China is more than 30 kilos per person, which indicates that the diet of a Chinese household still consists of a great amount of pork.
Due to the above statistics, we do not assess the threat of substitute products to have a very high impact on the Chinese meat industry, and Danish Crown should not fear the vegetarian industry when entering the Chinese meat market. On the contrary, the Chinese population still consumes a relatively large amount of pork on a yearly basis, which is a positive force for Danish Crown when trying to conquer the market.
The investigation of our initial question of How did Danish Crown manage to enter the Chinese food and beverage market, and how can Danish Crown maintain a sustainable position in the market? has produced a large number of findings. By applying Porter's Five Forces theory, we were able to approach the question in a structured way and found a reliable answer to our question in theory.
Firstly, we were able to explain that Danish Crown was able to benefit from the rapid increase in demand in 2019. In addition, the company was able to distinguish itself in a changing market through its positive image. Otherwise, Danish Grown was able to draw on a large number of experts, who analysed and evaluated the barriers to entry and made them strategically tangible. Through a knowledge advantage Danish Crown had over European competitors, it was able to prevail and establish itself in the Chinese market. Furthermore, we have found that market entry as well as successful retention in the market also depends on the power of the suppliers.
As Danish Crown has decided on the 'Company & Farmer' concept in its strategy, the company is subject to a great deal of supplier power. Nevertheless, through the division of tasks, Danish Crown can focus on certain products and differentiate itself from its competitors. In addition, we could discover that customers also play a big role in market entry. However, since Danish Crown, as just mentioned, has opted for a strategy that does not involve integrating the company, the power of customers is relatively high. This puts Danish Crown at the centre of two powers: that of the customers and that of the suppliers. With regard to other products and substitutes, the market is not yet particularly developed. Substitutes to meat are increasingly in demand on the Chinese market, but still relatively little. However, the demand for meat is correspondingly high, so Danish Crown can rely on a large customer base.
For the future, we recommend that Danish Crown pays more attention to the changing meat market, and also keep an eye on the demand of the younger generation. Tofu, for example, has been an integral part of the Chinese diet for centuries, but it tends to be consumed as a complement to meat and does not replace it. The younger generation of the Chinese population, however, is increasingly confronted with the problems of meat consumption, alleged health consequences and also ethical questions due to an increasing westernisation. Against this background, more and more young Chinese are opting for a vegetarian or even vegan diet. Danish Crown should follow these changes and, if the occasion arises, consider expanding its product range to meet the demand of those who choose not to eat meat, in order to remain competitive in a market that is already undergoing constant and dynamic change.
Mette Sørensen Thyrsted & Laura M. Detels