China Consumer

A billion chocaholics?

Why family-owned Mars won the chocolate ‘war’ in China

A billion chocaholics?

Businessmen have been travelling the Silk Road for centuries. But Italians have been prominent international visitors since at least 1266, when Niccolo and Maffeo Polo reached the court of Kublai Khan. Since then, they have prided themselves on being first-movers in the China market.

Little surprise then, that when it came to introducing the Chinese to chocolate, a family with Italian origins was prominent. In 1982 the Ferreros created a new gift box containing gold-foil-covered chocolates. In Hong Kong the new product – Ferrero Rocher – became a runaway success, given by locals to one another during major festivals.

Across the border Deng Xiaoping was reforming China’s planned economy. In those early days, Hong Kong was the model from which the Chinese learned. Luckily for Ferrero, the mimickry stretched to confectionaries. With its promise of a taste of luxury, Ferrero Rocher soon found its way into China’s own gift-giving culture.

“It was Ferrero Rocher that had the greatest early impact in establishing a first impression of chocolate on the nation’s virgin chocolate consumers,” writes Lawrence Allen, author of Chocolate Fortunes: The Battle for the Hearts, Minds and Wallets of China’s Consumers. “It was the first to establish its brand.”

Allen’s new book is well-timed. Amid all the talk of China’s switch from an export-led economy to domestic consumption, the chocolate industry offers some very salient lessons. Thirty years ago practically no chocolate was consumed in China. It was left to the big five international chocolate makers – Ferrero, Cadbury, Hershey, Nestle and Mars – to create the market from scratch.

The prize was self-evident: Cadbury, for example, had ambitious hopes of selling a billion bars of Dairy Milk. The question was, which chocolatier would figure out how to do so first?

In some ways the Chinese chocolate market was like a grand game of chess played by multinational executives. None started with any local advantages. Yes, Ferrero had got off to an early start, but each firm had to build consumer awareness from zero. Success would be determined by long term vision and the smartest marketing strategies.

One thing that wouldn’t help: knowledge of how chocolate bars were sold in the US and Europe. Indeed, among the first things executives had to learn were the peculiarities of the China market. Chief among these was the nature of chocolate itself, which the Chinese deemed a ‘yang’ food within their ancient yin-yang classification system. This meant that – like pepper and lamb – it made the body warm.

“Whether these beliefs are scientifically sound was irrelevant insofar as the chocolate companies were concerned,” points out Allen. “The vast majority of Chinese believe it and the question, therefore, was how it would affect the way they consumed chocolate. The principal impact was that people dramatically reduced their consumption during the summer months, believing that ‘heaty’ foods like chocolate should not be consumed when the weather was hot. Consequently chocolate companies planned for significantly lower sales in the summer.”

And that wasn’t all. In the early days almost half of chocolate sold in China was given as a gift around the Lunar New Year. And further determining the size of the market: the number of shops with air-conditioning. Without it, chocolate bars literally melted away.

Allen found all this out first hand. He describes himself as a “foot soldier” in the “chocolate war”, having worked as an executive for first Hershey and then Nestlé between 1998 and 2007. Like others mesmerised by the prospect of one billion sweet-toothed consumers, he soon got to grips with reality on business trips to second and third-tier cities. “Figuratively speaking,” he writes, “in China today there are fewer than 50 million people living in the twenty-first century, about 300 million living in various stages of the twentieth century, and nearly a billion people living in the latter part of the nineteenth century.”

For all the chocolate makers, he says, this posed a difficulty – how to manage a nationwide business within what he snappily terms a “one country, three centuries” economy.

By his own estimate: the likely market for chocolate was probably only 10 to 20 million consumers through the 1980s, 20 to 60 million throughout the 1990s and is only about 100 million today, “roughly 8% of China’s population”.

Allen’s book devotes a chapter to describing how each of the five firms adapted to a one country, three centuries economy. In his judgement, there are two clear winners. Mars won the biggest share of the mass market (with its Dove bar gaining a 39% market share by 2005); while Ferrero has capitalised on its early brand-building to secure a very profitable niche. Interestingly, he observes that both are family-owned businesses. He considers this an advantage in China since “it is inherently more difficult for public corporations to provide the continuity of leadership needed to sustain a long-term challenge such as building China’s chocolate market.”

He notes that Mars only became profitable in China in 2005, a full 12 years after it opened its first Beijing factory. Public companies, on the other hand, are under pressure to turn a profit fast, and are watched by analysts on a quarterly basis. He believes that this was one reason why Nestlé’s chocolate business was outpaced by Mars. The Swiss firm held back on advertising spend to keep down costs and as a result products like its Crunch bar didn’t take off.

Allen says Mars benefited from its steady leadership – this allowed the China business and the US headquarters to agree and execute a very long term strategy. The opposite was true for publicly-listed Hershey – which pulled out of China in 2004 and then returned via a JV with Lotte in 2007 – and Cadbury. The UK-based firm’s China business went through six general managers in six years. “With the social chaos of the Cultural Revolution within living memory of many employees, there was universal disdain for this kind of disorder and the factional infighting that resulted… the most effective and productive people left for greener pastures.”

Mars, on the other hand, got it right. The chocolate used in its Dove bar (made from imported milk powder) appealed to local tastes, while its packaging and “silky smooth” advertising associated its chocolate with foreign luxury. Its price point was correct (Rmb6), as was the size of the bar (47 grams). And its distribution was good, with teams of smartly-uniformed salesmen – “the Mars militia” – spreading the reach of the Dove bar on their bicycles. It also did better at retaining local staff – creating career paths using its Mars Academy. By 2006 there were just 10 expats among its 2,000 staff. As Allen states: “Nowhere else in the world did Mars have higher growth and market share.”

Allen reckons Mars will also benefit from its acquisition of Wrigley chewing gum, which enjoys even deeper distribution in China than the confectioner.

There are other tailwinds behind future sales: with new air-conditioned supermarkets spreading rapidly across the nation, China could add as many as 20 million new chocolate eaters every year. Currently, the Chinese eat nearly $1 billion worth of chocolate annually – less than 2% of the world’s total. Still, Allen cautions that the chocolate war remains far from over. “We’ve done the first kilometre in a 10km race,” he observes.

In the next 9km, Chinese brands may try to challenge Mars’ dominance. According to China Business, foreign brands have an 85% market share. The biggest local player is Le Conte, made by COFCO. Its strategy is simple: to offer the same quality as foreign brands but at 25% cheaper price. With its strong distribution capabilities in China’s less sophisticated cities, and Le Conte’s foreign-sounding name, COFCO could have picked a winning formula. Of course, if that means introducing more Chinese to their first taste of chocolate, foreign firms might welcome its efforts.

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