October 17, 2013
Paying the price for a bad reputation: Analysing China's paradoxically low chicken consumption
Neither economics nor cultural preferences explains why China's per capita chicken consumption is not growing as quickly as it should be.
by Eric J. BROOKS
An eFeedLink Hot Topic
Everyone knows that it has been a difficult 12 months for China's poultry industry. December 2012's exposure of KFC suppliers' overuse of AGPs and banned supplements devastated poultry industry returns just before Chinese New Year, when a large part of every year's profits are usually made. That was followed by a disastrous second quarter H7N9 outbreak. The industry had only recovered from the first crisis when the latter not only destroyed consumer confidence for a second time, but also crashed broiler inventories by 25% in less than two months.But while broiler numbers have finally equaled or exceeded their second quarter, pre bird flu crisis levels, there are deeper, more profound issues dogging this once most promising of Chinese protein lines. Superficially, the industry's has grown at a cumulative annual rate of approximately 3.5% since 2008, which makes it very promising relative to the flat or sub 1% growth seen in mature western countries.
But while this is a respectable growth rate, it is substantially below the 5% annual increase that had been widely anticipated. Moreover, as the above graph shows, China's chicken meat's consumption is not even keeping up with that of pork -when it should be overtaking it.
Disappointing per capita consumption
Moreover, at 10.3kg, China's 2013 per capita poultry consumption remains 40% or more below the levels seen in Thailand, Philippines and other nations with similar incomes and living standards. Oddly, this is true even though China, with a similar per capita income, eats two to three times more pork than either of these nations -and this is true even though pork costs significantly more than chicken, which is a major consideration in developing countries.
China's low poultry consumption even sets it oddly apart from other pork loving Chinese culture dominated countries like Singapore and Taiwan. In those countries, even though consumers have high per capita incomes capable of eating much more red meat, they actually eat one-half the pork of their poorer, mainland Chinese cousins, but two to three times more chicken meat, which is less expensive.
There are several key points to be drawn from all this. The first being that as a developing country with limited consumer incomes, Chinese consumers should be opting to buy poultry more than they are. The second point is that with both wealthy, ethnic Chinese-dominated Asian nations like Singapore and Taiwan and poorer ones like Thailand and Philippines both eating much more chicken meat per capita than the citizens of China, the latter's relatively low poultry consumption cannot be explained away by its level of economic development.
Paradoxically, while poultry consumption has inched up from 9kg to 2008 to a little over 10kg today, chicken meat's relative underperformance is not shared by that of chicken-selling fast food restaurants: Not withstanding late 2012's KFC broiler supplement scandal, their sales had been expanding by more than 20% by volume year-on-year for well over a decade.
Eaten to save money, or when someone else is paying
And this contradiction between China's relatively disappointing broiler consumption growth fast food marketing's successful marketing of chicken meat is at the very heart of the Chinese poultry's underperformance. According to an October 2013 Rabobank report (Industry Note #406), China's poultry consumption increase, "has mainly been driven by the expansion of quick service [fast food] restaurants and rising consumption in schools, factories and government institutions."
Fast food is frequented by middle to lower income, budget conscious consumers. Similarly, many penny-pinching factories, public schools and government agencies give free or subsidized meals based on chicken meat, for the simple reason that it is the cheapest alternative. Most of their students or employees are reluctant to turn down a free meal and consume it as out of necessity, rather than as an actual consumer choice. This can be seen in the fact that, "estimates for at home consumption are relatively flat, despite rising income levels."
-Bluntly put, China's citizens mostly chicken either when they must eat cheaply outside the house, or if their government, school or employer paid for the meal -and they have no choice in the matter. Moreover, despite the country's rapid economic growth and huge gains in incomes, a large part of the last decade's (disappointing) increase in per capita chicken consumption came institutional coercion, rather consumer choice.
Eating more than 3.5 times more pork than chicken, neither pork's skyrocketing cost nor chicken's promotion by schools, governments and corporations has succeeded in changing this bias towards red meat consumption. It implies that broiler meat has a low value in the eyes of Chinese consumers and if anything, market trends appear to concur: USDA statistics show that in the two years since 2011, the quantity of chicken meat consumed by China has risen by 6.9%.
Over these same two years, Rabobank estimates that the market value of broiler meat consumed fell by 22% -with nearly 10% of this decline having occurred even before the KFC broiler scandal and H7N9 epidemics had upended the market. With China's feed costs and meat processing wages rising at an exceptionally rapid rate, this divergence between production and revenues could, if sustained, threaten the broiler sector's profitability.
Dairy sector history repeats? Giving themselves a bad reputation
Evidently, although recent scandals made marketing chicken more challenging, these events are not responsible for the obvious consumer indifference towards poultry meat.
In fact, not even the cultural preference for pork can account for China's stubborn resistance to poultry meat: For example, as a nation symbolized by the cowboy, America's traditional cultural preference for beef was at least as strong as China's bias in favour of pork. Moreover, with their much higher personal incomes, Americans should be able to afford red meat much more easily than the average Chinese citizen. Nevertheless, the last thirty years has seen US per capita poultry consumption more than double while per capita beef consumption fell 40%.
According to Rabobank, the answer to this paradox can be found in one simple fact: More slowly and over a longer period of time, China's broiler sector damaged its reputation as much as its dairy industry did after the 2008 melamine in milk scandal. It has, since the turn of the century, been beset by major food safety scandals every two to three years on average.
Prior events include Hong Kong's 1997 bird flu crisis, a 2004 bird flu outbreak, post 2008 export bans to Japan and the EU due to high antibiotic levels, 2009's feeding of carcinogenic yolk dyes to layers, and 2011's feeding of barium sulphate powder (which is used in oil drilling) to increase carcass body weight and revenues, alongside countless rumours of bird flu epidemic cover-ups over the years.
In retrospect, the more recent problems with KFC's antibiotic laced poultry and this year's H7N9 outbreak were merely capstones on a long succession of public relations disasters. Rabobank noted that much like what happened in the dairy sector, "the average Chinese consumer has been gradually losing confidence in the industry," and that "this sense of crisis is showing no signs of abating."
Because of these scandals, "Consumers have formed a negative perception of poultry as a non-nutritious and unsafe source of animal protein, especially after the introduction of industrialised production, which in consumers' minds equates with to rapid maturing, heavy antibiotic use in feed, and excessive medicine residue in birds."
Make it run on preference, not coercion
With the industry's reputational damage hitting its bottom line, Bloomberg figures indicate that the stock market returns on swine industry shares has exceeded that of broiler producers by 7% to 13% for most of the past year -and this performance gap would have been even larger, except for the fact that live hog prices are kept artificially low by periodic government dumping of reserve pork into the market.
Relative to the dairy industry, China's broiler sector is in a 'good news, bad news' position. On one hand, unlike the more battered dairy sector, it is not losing large market shares to imports. On the other hand, this is partly because, while Chinese consumers import foreign cheese and milk formulas to satisfy booming demand for dairy products, chicken consumption is barely rising faster than that of pork.
This also implies that if the government were to successfully persuade Chinese consumers to choose chicken (rather than be coerced into eating it at school or work), unless the food safety standards of poultry farms are raised, they could start losing market share to imports in the same way the dairy sector did.
The last few years have seen China's imports of infant milk formula rise by up to 24% annually. If the poultry industry wants to avoid a similar fate, it has to acknowledge that it is encountering the same food safety and marketing problems as their broiler sector counterparts -and then take steps to cease repeating that sorry history.
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