The food chain

Reforms in China's production and distribution sectors that were introduced in 1986 have relaxed the regulatory environment. However, many restrictions still hamper products reaching their intended consumers.

Distribution has often been cited as the one great barrier to successful penetration of the Chinese food market. Plagued by a highly under-developed infrastructure and the thousands of state-owned, inefficient and under-financed distributors, the distribution sector has for many years been in need of a severe face lift.

With the reforms initiated in 1978, the traditional distribution networks in China began to crumble; the introduction of market forces necessitated the disintegration of the centrally run, state-owned monopoly. These developments aimed to shift the system towards many distribution channels and routes, rather than many distribution stages, as was the case before. In actual fact, what has replaced the highly organised and hierarchical structure is chaos.

Companies from both the emerging private sector and the different levels of the former -three-tier state-controlled system now compete against each other. Long established distributors are seeing their traditional territories encroached upon, while numerous distributors now distribute the same products to the same retailer.

Competition at all levels of the chain is therefore intensifying. Products may now pass through many more hands before reaching the market. This chaotic system has also resulted in products retailing at vastly differing prices. Furthermore, developments in distribution reform are taking place at differing rates in China, with fastest growth in the more developed eastern provinces

The new distribution situation
Despite the emergence of private groups, such as Shanghai-based Shan Long, which distributes for the likes of Kraft and Hershey's chocolates, most food distributors are still state owned. Reforms have had a major impact on these state-owned enterprises (SOEs). For many, as competition increases, state support has gradually decreased, even to the point where the state is allowing these companies to run autonomously or face bankruptcy. This is especially true in the more developed areas of the country such as Guangdong and Shanghai, where the quality and efficiency of new, private companies is much higher than anything most SOEs could hope to achieve in their current form. However, some SOEs, such as Beijing Chaoyang Non-Staple Food General Wholesale Company, are managing to flourish.

As with many other forms of SOE, companies involved in distribution are riddled with problems, as indeed are many of the private players, mainly as a result of a lack of investment in the sector and decades of operating under a system of state dictate and protection. Old attitudes and business practices are proving hard to change, including:

-a lack of sales culture, as sales and merchandising skills were previously not required
-poor quality and inadequate storage facilities – old and dangerous facilities are the norm, with little or no use of modem inventory techniques and high spoilage rates
-under-developed chill chain low penetration of cold storage and transportation low investment in technology – under-developed computerisation and, finally,
-a lack of business acumen.

In a recent PROMAR International analysis among distributors in China, only 4 percent of respondents indicated a good understanding of market conditions or have developed a business plan of any sort. Typical responses included: ?being in the enterprise reform process, there is no clear direction for development,? and ?we aim to explore more business channels and increase the sales value.?

Most distributors in China today are small in terms of turnover and geographical scope, limited to local districts. Though many of them now deal directly with manufacturers, this reflects the fragmented, local nature of the food processing sector. In most cases, national distribution can only be achieved in a long, fragmented supply chain.

The only groups that can claim to distribute to more than five provinces are the large foreign players as well as the branches of the old first-tier distributors.