Vitamin boost

To grow in China’s health supplement market Citic buys into foreign brand


Tapping a Rmb400 billion market

Whether ejiao, or donkey-hide gelatin, has real health benefits became a hotly discussed topic recently. The debate was sparked by a weibo post penned by the National Health and Family Planning Commission’s hotline service, which advised the public against gifting the gelatin during the Spring Festival period.

“It’s merely stewed donkey’s skin,” said the governmental body. “The main component of donkey-hide is collagen. [Yet] this collagen lacks the kind of amino acid needed by human bodies. It is not a good source of protein.”

A week later the China Association of Traditional Chinese Medicine responded to this attack, telling a trade publication: “The efficacy of ejiao is indubitable – dismissing [it] readily without testing violates the pursuit of science.” Its feisty defence prompted the public health department to issue an apology. The weibo in question was deleted.

The BBC reported last October that African donkeys are facing their “biggest ever crisis” because of China’s surging demand for ejiao. Its retail price has surged over 40 times between 2001 and 2016 to Rmb5,400 ($853.6) per kilogram – which has enabled its major supplier Dong’e Ejiao to net earnings in 2016 of Rmb1.84 billion with a gross profit margin of 74% on donkey-hide products.

The dramatic price rise is a function of supply (fewer donkeys) but also demand: a growing middle class willing to spend more on their health. It is estimated that China’s vitamin, mineral and supplement market will reach Rmb400 billion in sales by 2021, up 54% versus 2016, according to the Hong Kong Trade Development Council.

It was with this market opportunity in mind that Harbin Pharmaceutical Group (or Hayao) last month invested in US dietary supplement maker and retailer GNC Holdings (slogan: Live Well).

The Heilongjiang-headquartered company, 61%-controlled by Citic Capital, bought a 40% stake in the Pittsburgh-based wellness chain for $300 million and became its largest shareholder in mid-February. The pair have also agreed to form a joint venture to manufacture, market and distribute GNC-branded products in China.

The deal signals a change of focus for Hayao which has traditionally sold medical drugs such as antibiotics, as well animal vaccines. The pharmaceutical unit of Shanghai-based Fosun made a similar move in 2014 when it partnered with Utah-based supplement maker Nature’s Sunshine Products.

According to Reuters, Hayao has invested in a business that both Fosun and Jack Ma-backed Yunfeng Capital had passed on. Struggling to compete with online rivals including Amazon, New York-listed GNC has been lossmaking since 2016. Its market capitalisation has shrunk by over 90% from its peak in 2013.

What Hayao saw in GNC is apparently its brand value – with its ‘Made in America’ background viewed as a major plus.

The Chinese have been taking dietary supplements for millennia – especially those derived from traditional Chinese medicine (think ejiao, bird’s nest or caterpillar fungus). But over the past couple of decades consumers have grown wary that shady local manufacturers have churned out either adulterated supplements or outright fakes.

Even among the more legitimate and well-known Chinese supplement brands there are concerns about their health-boosting qualities. “Currently in China, all health supplement products are scams, no exception,” read one People’s Daily headline. The widely-circulated article pointed out that advertising typically made up 30-60% of the costs of a locally made supplement, while the actual manufacturing of the products bore just 10%.

Imported supplements enjoy a better reputation: in general consumers have more confidence in the integrity of the manufacturing processes and sourcing policies.

The imports remain heavily in the minority, mind you. Of the 16,631 supplement products approved by the China Food and Drug Administration as of July 2017, domestic ones took the lion’s share at 95%.

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