The meat cases of Beijing supermarkets have had a more colorful look about them this summer as the Shuanghui Group, the country’s largest meat-processing firm, has been launching a new range of pork products targeting young affluent customers. The company hopes the products, with Western-style concepts and packaging inspired by the company’s newest US subsidiary, Smithfield Foods, will improve profit margins and keep the firm ahead of local competitors.
This year, Shuanghui has initiated what it internally calls a “strategic adjustment” period during which it has developed and launched an unprecedented number of new products. “The hope is that the new products will improve the company’s profitability,” according to an executive in the distribution division at Shuanghui’s Beijing-based regional office. Marketing advice and product from Smithfield are key to the future, the executive explained.
With packaging featuring a stylized version of the American flag, one of the most patently American of the new product offerings launched this spring is “Virginia-style” imported US pork which retails at RMB19.50 (US$3.23) per 250-g (8.8-oz.) pack in supermarkets across Beijing. This compares to RMB4 (US$0.64) per 500 g (17.6 oz.) charged for older, heat-treated products. A new range of high-temperature treated Shuanghui fish-flavored pork snacks targeting infants are sold at RMB10.75 (US$1.72) per 500-g (1 lb., 1.63-oz.) serving.
In February of this year, the firm launched 25 new product lines targeting younger consumers. There was another round of launches in May, and there will be another before the Chinese New Year festival in 2016. Evidence of marketing and product development assistance from Smithfield could help justify the US$7.1 billion ($4.1 billion and assumed debt) price that Shuanghui paid for the US-based firm.
A crisp new logo and marketing campaigns have stressed the Smithfield connection. Shuanghui, says a company sales executive, also commissioned marketing executives to come up with stories and imagery around each new product. A marketing campaign for supermarkets stresses the ham’s classification as “Smithfield ham, produced in green and clean nature,” with photos of Smithfield, Va.
Industry analysts in China seem to have bought into the company’s new products as a means of improving company earnings. New product launches will account for six to eight percent of sales in 2015 and 10 percent of profits, according to Zhu Huizhen, who monitors Shuanghui at Xi Nan Securities, one of China’s top brokerage houses. He claims average sales prices on Shuanghui’s new products are 60 percent higher than current lines with profit margins at 50 percent to 60 percent higher than current products.
Widening the Gap
The purchase of Smithfield has helped Shuanghui widen the gap in distribution and marketing over key local rivals, according to analysts who cover the Henan Shuanghui Investment and Development Co. (listed on the domestic Shenzhen stock exchange). Clearly under some pressure to perform, Shuanghui Development saw profits for the first quarter of 2015 drop 15.3 percent to RMB950 million (US$144 million) with turnover down 3 percent year on year to RMB9.95 billion (US$1.59 billion). Investors meanwhile have been disappointed by the WH Group share price that is down from the IPO price, HK$5.53 (US$0.71) in mid-June compared to the IPO rate of HK$6.20 (US$0.80).
Other chilled, Western-style products new to the Shuanghui range include honey-roasted sausage and both smoked and unsmoked bacon slices. One of the company’s few Asian-themed new products is a convenience offering of Hong Kong-style barbecued pork, sold in 210-g (7.4-oz.) frozen packs at outlets of Walmart and Carrefour as well as Yonghui convenience store outlets in Beijing.
Shuanghui has long gotten around the lack of refrigeration in parts of China by offering low-cost sticks of meat paste, with its ubiquitous 125-g (4.4-oz.) stick of pork and chicken-flavored meat retailing for as little as RMB2 (US$0.32). But the company has decided low-temperature products are crucial to future profitability.
Several members of the company’s marketing team interviewed this past month explained how Shuanghui staff have carefully studied Smithfield brands like Cook’s, Curly’s and Farmland as they get ready to process US-style meat products at four new Shuanghui factories, the first of which will come online in Zhengzhou this year. Shuanghui claims to sell 1,000 individual products, a possibility given it has 13 factories dispersed across China as well as its headquarters in the central Chinese city of Luohe, where the firm was founded in 1958. But Shuanghui still needs help given its first branded product was launched only in 1992, whereas Smithfield has decades of experience in marketing meat products.
Company records show Shuanghui gets just more than half of its sales from packaged heat-treated and refrigerated products and has promised Chinese investors new products, new technology and a larger distribution network as part of its strategy to expand sales.
The firm’s best margins, at 27 percent, come from heat-treated meat. This compares to 23 percent margins on chilled and frozen meat products.
Intense investment in its cold-chain logistics network has allowed Shuanghui to stay ahead of competitors like China Yurun Food Group Limited, which has focused on low-temperature packaged meat products as well as chilled and frozen bulk sales. Shuanghui has faced competition from state-run conglomerate China National Cereals, Oils and Foodstuffs Corp. (COFCO), which sells US-style bacon products under its Joycome brand. Jinluo Meat Products Co. and Shandong Delisi Food Co. have also been investing in new products.
Pork Pricing
A recovery in Chinese pig and pork prices will, however, put new pressure on Shuanghui to improve profitability after weaker pig prices in 2013 helped boost Shuanghui’s figures by allowing the firm to improve average gross margins. Wholesale pork prices went from a high of RMB23 per kg (US$3.68 per 2 lb., 3.27 ozs.) in November 2013 to RMB16 per kg (US$2.58 per 2 1b., 3.27 oz.) in April 2014 and rebounded to RMB19 per kg (US$3.04 per 2 lb., 3.27 oz.) in late May this year.
While much has been made of Shuanghui’s intentions to import US pork, a weaker Euro means it is European rather than US pork that’s taking market share in China’s imports (admittedly a small percentage of its overall pork consumption). While the US accounted for the largest share, 21 percent, of China’s 564,337 tons of chilled pork imports in 2014, it has been overhauled by EU exporters in the first quarter of 2015. Germany and Spain took the top two spots in China’s imports this year, with 31 percent and 20 percent market share respectively of the 52,910 tons imported in March.
The investment community remains bullish on Shuanghui’s chances to improve its profitability at home thanks to product development help – and some imported pork – from Smithfield. Profits at the firm will go to RMB445 million (US$71.2 million) in 2015 and rise to RMB496 million (US$79.36 million) in 2016 and RMB58.3 million (US$93.28 million) in 2017, according to an analyst at Guo Yuan Securities, which also monitors Shuanghui from his office in Shanghai.
The other analyst, Zhu, is likewise cautiously optimistic that the firm can use its Smithfield connection to improve profitability. “The outlook looks positive but of course, the big risks are that the new launches don’t live up to expectations and that there’ll be another food safety crisis that hurts consumption of Shuanghui products or of pork in general.”
