Mexican Multinationals Target China's Most Adventurous ConsumersPublished February 19, 2013 in Arabic Knowledge@Wharton
In recent years, Latin American multinationals have attracted attention for expanding across borders, especially within Latin America and Europe. With less fanfare, some leading Mexican multinationals have been jumping into markets in China, ranging from baked goods to cement to tile bathroom fixtures. Although their presence in China's huge economy remains modest, Mexican companies invested a cumulative total of US$921 million in China between 1996 and 2010, according to a report published by the Inter-American Development Bank last December.
No sector has seen more activity than baked goods. On the heels of the huge expansions enjoyed in China by such U.S. fast-food brands as KFC, Pizza Hut and McDonald's, two Mexican multinationals have been expanding their presence in the country: Mexico City-based Grupo Bimbo, the world's largest baked goods company, and Monterrey, Mexico-based Grupo Maseca ("Gruma"), the world's largest manufacturer of corn flour and tortillas.
With 2010 sales of US$9.3 billion, Bimbo is one of the largest food companies in Latin America, accounting for more than 5,000 products and 150 brands worldwide. Bimbo specializes in the production, distribution and commercialization of bakery goods (89% of the company's packaged food sales), but it is increasingly involved in sweet and savory snacks, confections, snack bars and breads. Its brands include Bimbo, Oroweat, Arnold, Marinela, Barcel, Sara Lee, Entenmann's, Ricolino, Tía Rosa, Pullman, Rainbo, Thomas' and Nutrela. Apart from China, where Bimbo now operates two plants, the firm has plants in 18 other countries -- including the United States, Brazil, Colombia, Spain and Portugal.
Betting on Baked Goods
According to Enrique Dussel Peters, professor of economics at UNAM, the Mexican national university, China was of particular interest to Bimbo as a potential market for its core products because of three factors: First, the country's rising income levels and urbanization process were stimulating overall domestic consumer demand there, including for Western bakery goods. Second, although food products made from wheat had not been commonly available in China, "there was a potential for rapid takeoff in demand." Third, China's population and its domestic market were so large, there was a huge potential for sales growth, even if Bimbo managed to capture only a small share of the market. Fourth, the Chinese government provided incentives for Foreign Direct Investment.
So in 2006, after engaging in extensive market research about China, Bimbo decided to buy Panrico Beijing Food Processing Center, a subsidiary of Spain's Panrico, for US$13.4 million, while also assuming a net debt of US$1.9 million. In so doing, Bimbo acquired a firm that already employed 800 workers and had more than 10 years of experience operating in China. Since then, Bimbo has continued to grow. Nowadays Bimbo -- or Bin Bao, as it is known in China -- employs more than 1,400 workers near Beijing and Tianjin, distributing products to more than 26 cities, compared with just four cities back in 2006. Its production plants in Beijing, in the district of Tongzhou, manufacture around 110 products, mainly under the Bimbo brand. By 2010, its retail sales had quadrupled to US$35 million, making Bimbo the tenth-most important firm in China's highly fragmented baked goods market.
Z. John Zhang, marketing professor at Wharton, says that it is "admirable" that Bimbo saw the relative absence of Western baked goods in China as an "opportunity" rather than a decisive barrier to entering the Chinese market. A lot of foreign food companies have jumped into the Chinese market in recent years, notes Zhang, either to supply new products to grocery chains or to provide them directly to consumers at fast-food outlets. "With enough money and enough time, you can sell anything in China," says Zhang. "China is big enough that no matter what you do, you can find enough people to sell to in order to be profitable."
Tuning into Taste
Bimbo's executives recognized early on, however, that their product line had to be adapted to local tastes if it was to reach its market potential in China, notes Dussel Peters. So the company hired members of Mexico's community of Chinese-born immigrants to sample hundreds of its own products and recommend new products that would please Chinese consumers. Their market research persuaded Bimbo to concentrate on five main products for China, including bread, croissants, candies and chocolates. Mexican-style tortillas, a staple of the Mexican diet, were not included in this first group of products. A popular product, "Bimbo's sweet bread ('pan dulce') was too sweet for the Chinese," notes Dussel Peters.
Other products were gradually eliminated from Bimbo's line-up because of weak demand. Dussel Peters notes that when Bimbo introduced a very sweet snack-cake known as "gansito"- one of its most successful traditional products in Mexico - "it had a very short life before exiting" China. Tests have showed that Chinese consumers have a different palate: Products had to be less sweet. Zhang notes that Chinese bread "is very different from European bread," in that it is "mostly very soft and sweet, but not too sweet."
According to Wharton marketing professor Qiaowei Shen, while KFC sells many of the same products as in the U.S. - such as spicy wings -- they often have a slightly different taste. "One big challenge is to find a way to localize the product, yet still maintain its main characteristics as a food." Most foreign food products in China have inevitably undergone some process of adaptation to Chinese tastes.
In additional, although food products of U.S. origin benefit from the cachet of an American birthplace, products with an obviously Mexican - or other Latin American - pedigree may not benefit as readily from their cultural origins when they enter the Chinese consumer marketplace, notes Zhang. "There is more of a horizontal shift" between one emerging nation (Mexico) and another (China) than a perceived upgrade in such a process. According to Shen, "Mexico has a more neutral image than the United States," which projects a clear, positive brand in China through all sorts of cultural products, including fast food brands like McDonald's, KFC and Starbuck's.
Moreover, adds Zhang, "[companies] have to target the right customer," which means identifying those buyers who are younger and more inclined to be adventurous, and take a plunge into foreign foods.
In some cases, packaging may also need to be adapted to suit the way that Chinese consume a particular food product. Dussel Peters said that Bimbo discovered that rather than make sandwiches from bread, many Chinese were dipping chunks of the bread into their tea. Since Chinese were eating smaller portions of the bread, Bimbo decided to package the bread in smaller boxes.
Introducing a New Product
For its part, Gruma's initial US$100 million investment in 2006, using the Mission Food Shanghai brand, created annual production capacity of 15,000 tons of wheat tortillas, 7,000 tons of corn tortillas and 6,000 tons of chips, the equivalent of 4% of Gruma's global sales. Gruma's Shanghai plant also supplies corn chips and pizza ingredients to restaurants (including McDonald's, Pizza Hut and KFC), hotels, supermarkets and convenience stores.
Nevertheless, there is little awareness of tortillas in China, except among a handful of adventurous, younger Chinese who live in the country's more affluent big cities. Wharton's Shen says that "bread is not a staple in the Chinese family; the Chinese are not used to eating bread for breakfast." When it comes to unfamiliarity, the case of the tortilla is "even more extreme." In an attempt to bridge that gap, Gruma's Mission Foods brand has been introducing its exotic products directly to Chinese consumers via new online menus and cookbooks that emphasize the value of healthy and nutritious meals based on corn and wheat tortillas and wraps. The company has announced plans to increase its annual production from 15,000 to 30,000 tons in China.
Further into the future, Gruma's strategy is to establish plants in other major Chinese cities and to adapt the product line to meet growing demand for different kinds of corn and wheat tortillas, chips, wraps, breads and flat breads responsive to local tastes. Gruma's total investments in China -- around US$200 million so far --account for only 11% of the firm's total foreign assets, but existing trends indicate that this share will increase, especially since the market for packaged foods in China is still developing, according to a report by UNAM economistJorge Basave Kunhardt.
Many of the other Mexican firms active in China do not face the challenge of marketing culturally unfamiliar products -- such as Mexican bread and tortillas -- to Chinese consumers. However, Interceramic, the largest tile manufacturer in North America, could benefit significantly from its Mexican cultural origins if it successfully communicates the message that tile making has long been a Mexican tradition.
In 2010, Interceramic signed a memorandum of understanding to a joint venture to distribute ceramic tile in China with Guangdong Kito. The new brand, known as ICC (Interceramic China) will produce high-end design ceramic tiles that will be marketed through exclusive local distributors in China. The amount of the investment and the details of the joint venture have yet to be disclosed.
To achieve their sales targets for such high-end products, the Mexican and Chinese partners "will probably have to do a lot of education to let people in China know that Mexico is good at producing high-quality tiles," notes Shen. On the positive side, Shen adds, "the housing market in China has been booming, and high-income Chinese people are willing to pay high prices for high-quality products. But they will have to educate the public about their quality" in order to gain a strong foothold.