By Kellie Holloway
China, China, China. It’s hard to get through a business journal without reference to the country’s influence in the international trade scene. U.S. firms, whether selling to China, sourcing from China, or working to protect their intellectual property because of China, have to factor the country into their competitive position. What is a leading request to my friends traveling back to the US from China? Bring home supplements, ginseng, and cosmetics. The nutritional supplements market is one of strong potential for US exporters with an estimated market size of $10-$16 billion. Euromonitor data suggests China’s vitamin and dietary supplement sector will continue to grow at 6% per year.
Market development forces are driving urbanization, supporting a growing middle class, a strong consumer culture of consumption and a government eager to encourage that spending. These market drivers are the foundation of the demand. Overlay this with worsening health problems due to environmental degradation, improved health awareness, an aging population, growing disposable incomes, local product quality concerns and positive reputation of American brands and you have a formula pointing to great opportunity for U.S. made health products.
A recent story by China Daily indicated that Chinese consumers spent 10% of their total expenditures on healthcare products in 2011, which compares to an average of 3% for developed economies. Further, studies show that Chinese consumers of western health and beauty products are willing to pay a 20-30% premium, leaving many western businesses anxious to plot their market entry strategy.
The China Health Care Association, which is affiliated with the Chinese government, reported that over the past 15 years, some 644 types of nutritional supplements have been exported to China, with 63% of those coming from the U.S. While some US firms such as General Nutrition Centers Inc. and Amway have aggressively established a strong foothold in the market, there is room for more players, and many Chinese firms are working to step up to the plate.
While the potential is great, so too is the risk and market entry challenge when it comes to selling U.S. products in China. Take regulations. The Chinese government authority that oversees product registration for nutritional supplements and health products is the State Food and Drug Administration (SFDA). Whether a US firm is making products health claims will influence the path of registration. Registration must be handled by a legally registered agent in China. A U.S. firm cannot do it themselves, directly from the States. Many U.S. firms will separate their registration needs from product import/distribution as a means to create some firewalls to protect formula and proprietary information. The formal registration process is complex and costly with evolving requirements. Companies must comply with animal testing requirements. This leaves many producing natural products unable to satisfy SFDA requirements due to an ethical stance against this practice. Nutritional supplement SKU registration fees can be in excess of $50,000, with a 24 months waiting period. Greater cost and a lengthier registration timeframe exist for ingredients new to the market.
It is also useful to understand the Chinese distribution and retail network, a highly fragmented system. The vast majority of health products are sold via the three channels: Supermarkets/hypermarkets such as Wal-Mart; convenience stores; or pharmacies. For supplements, in particular, estimates are that about 80% are sold through pharmacies which represent some 400,000 outlets throughout the country. There are few national chains however, with most (65%) being independently owned. Watsons, as an exception, operates about 1000 stories.
In such an environment, having a trusted partner is the cornerstone to success. An importer able to reach into multiple channels, familiar with the regulatory obligations of SFDA, as well as customs clearance procedures is paramount. Companies should also take measures to protect their brand and domain name in China where copycat products are rampant. Trademark protection stops at the border. A US firm wanting to protect their name, their brand, their logo must file in China to be protected in China. We have heard estimates of $2500 to do so. Helpful guidance on intellectual property protection is available at www.stopfakes.gov.
Fortunately, there is support for American companies via the U.S. Commercial Service which is an agency of the U.S. Department of Commerce working to help American businesses enter the market. The Commercial Service helps American exporters identify and qualify distributors, provides business matchmaking services, and organizes market promotion opportunities such as US Pavilions at Natural Products Expo East and Cosmoprof , two leading Asia trade shows. Another resource is the U.S. – China Health Products Association in Beijing which publishes a free industry newsletter and has information on the regulatory environment for supplements, cosmetics and other health products, plus greater advocacy and market entry support services for members. American companies supplying health foods can find considerable China market intelligence in the Foreign Agriculture Service’s research library.
For more information, contact Kellie Holloway, Program Manager with the Commerce Department’s China Business Information Center at kellie.holloway -at- trade.gov.