China's health food market: hard to open the door

With the largest consumer base in the world and an expanding economy, many international health supplement companies have focused on China.

However, recent policy changes by the Chinese government have made it more difficult for foreign companies to thrive or even survive in the market.

Last year, the China Food and Drug Administration cut the number of permits it issues to foreign companies to sell health food products without proper registration. The registration of health food, required by the legal system, is seen as costly and a time-consuming course for most of the foreign companies in the industry.

And more government regulation is said to be on the way though no details have been publicly released.

The reduction cost a huge loss of those who register their products as food instead of the dietary supplements. The potential export loss for a US company to China's market could be $19 million, according to the 2014 report of the US-China Health Product Association.

Some have hence been scared away, with their selling channels shut down.

The estimated 400 billion yuan ($65 billion) market is expected to grow 11 percent annually by the year 2020, according to the recent survey of "Capturing a Share of China's Consumer Health Market: From Insight to Action" by the Boston Consulting Group released in February. Through last year, the value of the market created reached 110 billion yuan. Consumer estimates are in the range of 250 million to 300 million.

The only legal registration for the nutritional supplementary products in China is a license issued by China Food and Drug Administration, whose logo evokes a blue hat, so nicknamed "the blue hat".

Since the Administrative Measures on Registration of Health Foods was legislated and enforced in 1996, about 700 types of imported dietary supplement products have been successfully granted the "blue hats", while 13,000 Chinese food products won the same reward.

"The Measures has no bias pro or against the domestic or the imported brands of products. It is quite fair," said Gao Peng, general manager of Ankang consulting, at China International Nutrition and Health Summit 2014, Beijing, on November 3. "But we found fewer foreign companies come to register their products for a blue hat."

Only the domestic products can apply for the license through the provincial level administration.

The long procedure for registration involves more steps and proves costly.

"You can't imagine a big company owning 40 to 1,000 sorts of products go through the procedure of 2 to 3 years and pay the registration cost of 40,000 yuan as a package for one single product," said Deng Hua, president of DavidiaHealthtech based in San Diego, US.

A bigger cake?

Before the China Food and Drug Administration put the brakes on permits last year, foreign companies sold their health products in the category of food, not the supplementary category.

With bigger demand from the increasingly aging group of 60 years old or older that has already reached 14.9 percent of the entire Chinese population, according to the statistics given by the central authority in February 2014, no one will doubt China's market for anything related to the health concept. Not to mention the growing need of the newly born babies along with those in the group of the special needs.

The country of thousands of years of history in traditional herbal medicine and food craves for everything either promoting longevity or raising the quality of life. However, when the concept of health food is familiar with the common people in the country, the dietary supplement which is common to residents in western countries such as the US and Canada, is out of the touch of understanding here.

"Basically Chinese people still tend to take the dietary supplement products as something functioning as medicine," said Dr. Wei Wendell, CEO of ChinaGate consulting company. "There is no category of the products in China. The new raw food material will be defined very soon."

Many dietary supplementary products have been put on the shelf in a pharmacy where over-the-counter has been sold for years.

"At least right now they still hold that the nutritional supplement equals medicine in China," said Jeff Growther, executive director of US-China Health Products Association.

The dietary habit of the country has been reflected in the food materials used in their traditional menu, for example, silky fowl boiled with yum—both of them in the eyes of a Chinese are not only food materials for good taste or flavor, but the medicinal ingredients have positive effects on the body. Meanwhile, Ginseng, a type of medical resource, has enjoyed its good reputation for thousands of years in China as food material you can cook in a dish in the belief that it may help improve the health.

At the same time, some common ingredients in a nutrition supplementary product are unfamiliar to Chinese people. As they don't recognize them, they don't buy the products.

"The consumers in the market lack the education of the essential concepts in the industry," said Zhou Jingshi, CEO of TSI Group.

The regulation is the key

The move by China's FDA at the end of last year has put an end to US imports of dietary supplements as food. Many American companies used to sell their products through the online retailing channel, also a channel for the grey market. Without specialty health food store chains, many imported supplements go to direct sales, high-end supermarkets, shopping mall kiosks, health and beauty stores, pharmacies and internet.

Six of the top 10 supplement companies entering into the market earlier are taking the strategies of direct selling, occupying an estimated 58 percent of the market share.

"It's always been hard for us, a big company with hundreds or thousands of products" said Jeff Yin, the Chinese representative of GNC in Shanghai, China. "The channels here should be better and it must involve the efforts of all members in the industry."

"The regulation is the key to the market, not only because it works as the safety entrance to the market but also it's opening-up and building channels and brand images," said Growther.

Talk is that there will be a new regulation or at least a draft implemented in the near future. The confirmation from the CFDA and other specialists is that it will be the right way to release the draft according to which procedure of registering the health products will be greatly simplified. But details have not been given.

"In the past, we have about 300 registrations related to the health food registration, more confusing, and more steps for checking, examining and testing; hopefully the new draft will skip the checking or examining, and that will deduce half of the time in the whole course," said Gao.

Experts suggest the companies humble themselves at the door. With eager expectations to have the draft come out quickly they also see the market once regulated by hundreds of related sub-regulations in a practical way.

"You should know China first and better before you come into the market," said Zhou. "Even the successful experience of doing business in the US, Canada or Europe cannot simply be employed directly into the China's market. Just check your ego at the door."