Smucker’s Uncrustables Product Expansion: China

Smucker’s Uncrustables Product Expansion: China Presented by: Linsey Bailys, Kelly Cocanougher, Jon Oleksyk, Matt Overholser, Tim Rittenhouse, Will Veit

China Profile • Population: 1.3 billion • GDP: approximately $6 trillion • GDP Per capita: $4700 • Unemployment: 10.1% • Became a member of the World Trade Organization in 2001 • Member of Asia Pacific Economic Cooperation • Chinese Communist Party is in power • Currency: Yuan (CNY) or Rembini (RMB); Exchange Rate: $1/8.2765 • Language: No official language - Putonghua (Mandarin) considered the standard spoken language. There are many dialects spoken as well • Age distribution: • 0-19: 31.66% • 20-39: 34.7% • 40-59: 23.02% • 60+: 10.62%

General Information • Market analysis: • Chinese ready meals market is experiencing enormous growth. • Acceptance of chilled and frozen “convenience” foods • Lots of growth in the last five years • Retail food market: $126 billion • Ready-made meals market: $2.2 billion • Major food categories: baby foods, breakfast cereals, frozen foods, fast food, noodles and snacks. • Snack market grew 14.1% to reach a value of $4,390 million in 2003.

Distribution • Currently there are no Smucker’s products in China. • There are no known operations or manufacturing in Asia or China specifically. • Local companies enjoy cost advantages in distribution over their foreign competitors.

Distribution • Smucker’s Production Facilities: • Canada • Brazil • Livingston, Scotland (U.K.) • Member of EU • UK and China working together on bilateral, multilateral and global issues • Plans for developing co-operation on areas including trade, education and the environment. • In China companies such as Exel, Fed Ex, & Sinotrans are leaders in providing supply chain and freight carrying services.

Logistics • There are heavy costs of importing due to the value added tax of 17% on the value of products at importation, at wholesale and at retail sales. • Foreign companies tend to have higher logistics and supply chain costs. • Long haul trucking • Expensive option • Underdeveloped roads • High intra-provincial customs fees • Ocean and river • Cheaper • Yangtze river flows through several, large inland cities • Ports • Commonly used to import goods into the country • Several large ports in China

Infrastructure • China’s 14,500 km coastline hosts 200 seaports. • Hong Kong is home to the world’s largest container port. • Most ports—including some of the largest, such as Shanghai—are relatively shallow, and this prevents modern container ships from using many of them. • Developing a new offshore deepwater port • The full project will take 20 years to complete • China has made concerted efforts in recent years to construct highways in its western regions. • Investment in highway construction has increased rapidly. • 3.0 billion yuan (US$360 million) in 2001 • 12.1 billion yuan (US$1.5 billion) in 2004. • In October 2004, a 4,395 km-long major national highway was completed. • Links the New Silk Road to the Asian highway network • Reduced the travel time from Urumqi, the capital of Xinjiang, to Lianyungang, a port city in eastern Jiangsu Province, from more than two weeks to just 50 hours.

Infrastructure • Over the next two decades, Xinjiang will be investing a total of 200 billion yuan (US$24.1 billion) to build up its major highway networks. • The total length of highways nationwide is now 1.9 million kilometers, and superhighways extend for some 34,200 kilometers. • 200,000 km of roads will be built, connecting 93% of villages across the country. • Despite these improvements, the road network is likely to remain inadequate in relation to the demands for transportation in China. • First-ever railway to be built with privately invested shares is expected to break ground in East China this year. • A key move in the finance and investment system in the previously government-monopolized sector • 1,724.7 billion tons/km of freight traffic in 2003

Targeting • Smucker’s is a product for school-aged children • Generally, in China, there is one child per household • Population aged 39 and under = 66.36% • Target • Families (especially mothers) with young children • Busy and always on the go

Population Controls • Many Chinese are moving to nuclear families and away from their extended families. • Most families are simply parents with one or two children or empty nest parents. • Most families only have one child because of the population control measures enforced by the government. • Rural families with difficulties who have had a girl may apply to have a second child. • Urban couples who are both only children may have two children. • The one child policy is not as strict for ethnic minorities in order to prevent extinction. • Population control policies vary from province to province and from city to city.

Urban vs. Rural Markets • The gap between urban and rural China has also been growing in recent years. • Income per head in 2003 • 8,472 RMB in urban areas • 2,622 RMB in rural areas • Income per head in 1995 • 4,283 RMB in urban areas • 1,578 RMB in rural areas • Urban income per head is now 3.2 times that in the rural areas • Up from 2.7 times rural income in 1995. • Disposable income • Urban: $830 per person • Rural: $286 per person • The opening up of China to foreign investment and trade has naturally favored provinces with good transportation links to the outside world, like Guangdong, Shanghai, and Jiangsu. • It has done this at the expense of the huge Chinese hinterland.

Positioning • Convenience, delicious, time-saving, neat snack • Frozen meals – convenience, freshness, neatness • 96% of urban Chinese households have refrigerators • Fast food is growing in popularity in China • Food vendors at schools • Boxed lunches (He Fan)

Competition • Frozen-made meals: • Leading companies include: Nestle, Ajinomoto Co., Inc, and Unilever • Ready-made meals: • Leading companies include: Nestle, Unilever, Kraft • The popularity of fast food is also growing rapidly. • Dominos, McDonalds, KFC have gained acceptance in China

Product and Local Standards • Smucker’s Uncrustables • Come in packages of 4, 10 and 18. • The color of the box varies, depending upon the flavor inside (red, purple, orange). • Four is considered an unlucky number in China due to the word resembling the sound of the word for “death.” • Eight is considered the luckiest number in Chinese culture. • Black and white are considered unlucky colors, while red and gold are considered lucky colors. • Red symbolizes happiness and gold symbolizes wealth.

Product and Local Standards • Pricing: $2.39 - $2.59 (US)four pack • Uncrustables would be taxed three times at 17% for importation, wholesale and retail sales. • All goods must be inspected prior to importation which increases the cost of imported products. • These standards are viewed as overly strict by many.

Brand Name • “Uncrustables” must be translated into Mandarin as required by law. • This name does not translate directly into Mandarin. • There is no brand equity with the “Smucker’s” brand name or “Uncrustables.” • They have no current products in market. • Peanut Butter & Jelly is not big in China, therefore they would not have an idea of a sandwich with crusts.

Packaging - Regulations • All packages must have Chinese language labels. • The label must include: • Country of origin • Name & Address of Chinese distributor • National Health and Quarantine Administration • Imported food items need to be affixed with a laser sticker evidencing the product’s safety. • 5-7 cents per sticker

Taxes Personal income tax rates: • A proportional tax rate of 20 percent shall apply to the income from franchise royalties, interest, dividends, bonuses, any other types of income. • At the beginning of 2001 the average tariff on imports was reduced to 15.3%. • Progressive tax rates in excess of specific amounts shall apply to wages and salaries, the rates being 5 percent to 45 percent (see graph).

The monthly taxable income means the balance of the monthly income after deduction of 800 RMB in expenses

Promotion • All forms of media are directly controlled by the Chinese government. • China has more cable television subscribers (around 100 million) and mobile phones customers (270 million) than the US • Types of media available • Television • Time watching television averages 215 minutes/day • 94.6% of households have television in urban areas • 750 cable television stations • Radio • Time listening to the radio averages 83 minutes/day • 1100 radio stations • Print ads • Internet • Average time spent on internet is 115 minutes/day

United States Event Sponsorship Figure Skating “Stars on Ice” China Sponsorships Sports teams and some other events are also permitted Possible promotion opportunity during the 2008 Summer Olympics in Beijing Promotion

Advertisements • Can not Contain: • The national flag, national emblem, or the Nation Anthem of people’s Republic of China • Names of state organizations or staff of state organizations • The words “state level,” “highest level” or “best” • Matters hindering the public order or violating good social customs • Matters hindering social stability or endangering the safety of life or property or harming the public interest • Pornographic, superstitions, offensive, violent or unpleasant matters • Discrimination on the grounds of ethnicity, race, religion or sex • Matters hindering environmental and natural resources protection • Matters that are prohibited by laws and administrative regulations

Advertising Restrictions • Direct marketing is banned in China. • Samples may be sent after receiving the approval of a consumer in advance • Tobacco ads: banned • Alcohol ads: restrictions on the number of advertisements per time slot • Children’s ads: • Must be suitable for developing “moral character” • Advertisements should be written in Mandarin. • They should uphold national dignity and respect Chinese culture. • The comparison between competing products is prohibited.

Advertising Restrictions • The State Administration of Radio, Film and Television (SARFT) is set to publish new rules by April 2005. • Guidelines will focus on the design, image, taste and possible psychological impact of advertisements. • SARFT recently tightened controls on the use of English words on TV, and programs that promoted "Western ideology and politics."

Advertising Costs • The state controls the price of advertisements in the various media forms, and foreign advertisers pay a premium. • Television: • Channel 1: 198,000 RMB/30 sec. peak rate ad • Most Expensive ($22,758.62 US) • Channel 11: 9,000 RMB/30 sec. peak rate ad • Least Expensive ($1,034.48 US) • Print ad: • People Daily: 280,000 RMB ($32,183.91 US) • full page black and white • daily circulation of around 3 million

Trade Groups • China & European Union • Hold annual Summits • Allow political leaders to update each other on progress made and to plan for the future • Working to further co-operation in all areas on the basis of equality and mutual benefit and to promote the development of a partnership between the EU and China.

Trade Groups • China & World Trade Organization (WTO) • Accepted into WTO December 11, 2001 • Given “Most Favored Nation” status • offers low tariffs and treats countries as normal trading partners. • With this status, imports from China have a maximum tariff of 2% while China maintains a 30% to 40% tariff on US goods. • China & Asian Pacific Economic Cooperation (APEC) • Consists of 18 Nations • Committed to creating a free-trade zone around the Pacific

Conclusion • In 2008, the Chinese frozen food market is forecasted to have a value of $12.51 billion, an increase of 30.3% since 2003. • The population of 1.3 billion will make China an industrial powerhouse within the next few decades. • Companies not located in China will miss out on their great consumer & labor markets. • "Chinais a big prize," says PepsiCo's Asia president, Ron McEachern. "As the Chinese have opened up in the past ten years, there's been an inherent demand for foreign products. An aspiration aspect of that is a willingness to try new things.“

Smucker’s Uncrustables Product Expansion: China