Even as regulators seek a more streamlined process for supplements in China, investors, retailers, and customers continue to focus on cross-border e-commerce.
Dietary supplement prospectors in the U.S. have long heard about the rich opportunities coming out of China’s emerging market. Here in 2018, what do those business opportunities really look like?
With China’s Food and Drug Administration (CFDA) still struggling to smooth the regulatory process for dietary supplements, China’s domestic supplement players are focusing heavily on cross-border investment and e-commerce, creating attractive opportunities for international brands.
Nutritional Outlook learned about some of the biggest market opportunities and regulatory challenges facing the China supplement market today from Jeff Crowther, executive director of the U.S.-China Health Products Association (USCHPA), an organization committed to promoting the commerce of health products in China. Here’s what we found out.
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China’s Growing Dietary Supplement Audience
China’s rapidly growing middle class, with an increasing focus on health and nutrition, lays the groundwork for a potentially enormous dietary supplement consumer base. During a Nutrition Business Journal conference in March at the Natural Products Expo West trade show in Anaheim, CA, William Hood, founder of investment banking firm William Hood & Co., noted that by 2020, China’s middle class will triple to 400 million people, and that by 2020, 273 additional cities will grow their per-capita disposable income to equal the per-capita disposable income of residents in Shanghai.
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Chinese investors are heavily interested in international brands. During his Natural Products Expo West presentation, Hood noted that the Chinese customer is aspirational, seeking out the same types of products popular in countries like the United States. Moreover, he said, “There are still some local concerns about local manufacturing and safety, so strong Western brands are very attractive to Chinese investors.”
Unfortunately for Chinese supplement brands, China’s own internal regulatory roadblocks (more on this later) continue driving investors overseas instead, slowing domestic growth, USCHPA’s Crowther points out. “Because of the restrictive nature of the regulatory system, growth and expansion continue at a slower pace than what they should be,” he says. “Difficult and/or restrictive regulatory systems tend to dissuade many from investing.”
“The association looks forward to the continued development and streamlining of the regulations to encourage faster growth,” he added.
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How Are Dietary Supplements Regulated in China?
Dietary supplements in China fall under the China Food and Drug Administration’s umbrella of “health food products,” a category that also includes food and drinks. In a 2017 interview with organizers of the Healthplex & Nutraceutical China trade show (owned by Nutritional Outlook’s parent company, UBM), Crowther estimated the size of the Chinese dietary supplements market at around US$25 billion. He noted, however, the difficulty in determining the exact market value for supplements because the supplement regulatory category includes food, drinks, and other products besides supplements.
Four years ago, CFDA began revamping the country’s regulatory process for health food products. These products are generally regulated under CFDA’s “blue hat” pre-registration process-a process that can take up to three years to complete, can require companies to invest in clinical trials, and is extremely expensive for companies to undergo.
This restrictive system has kept many players out of the Chinese supplements market and has instead restricted the market to a small handful of companies that can afford to undergo the blue hat process.
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Streamlining the China Supplements Process
Regulators know that China’s restrictive regulatory framework has slowed growth of the Chinese dietary supplement market. Regulators, however, are hoping to change that. In July 2014, as reported by Nutritional Outlook, China’s National People’s Congress passed draft reform of China’s Food Safety Law that effectively turns parts of China’s dietary supplement registration process into a notification system, at least for some types of dietary supplements. (Some call this a “recording” system instead of a notification system.) Certain, limited classes of supplements are only required to provide notice to CFDA before entering the market, instead of submitting to full, blue hat premarket screening.
“The blue hat registration process continues to be a big challenge for companies, as it takes up to three years to get approval and costs in excess of US$150,000 [per product registration],” Crowther says. “The recording process, on the other hand, can take up to one year and costs about US$15,000 to $20,000.”
The notification process is currently restricted to vitamin and mineral type supplements only. “So far, there are only a handful of companies that have gone through the process, so it is still early days,” Crowther says.
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Opening Up Notification to Other Types of Supplements?
So far, only vitamin and mineral supplements are eligible for China FDA’s more lenient notification process, but Crowther says this could change.
“The recording process for vitamins and minerals should be watched closely, because there are potential plans to add more ingredients other than vitamins and minerals to this process,” he says. “For example, it’s been discussed that fish oil, lutein, CoQ10, lycopene, ginseng, and some other ingredients might be added to the approval list for recording. This, of course, would help speed the entry process for products as well as lower the amount of time and capital it takes to get a registration approval.”
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Focus on Cross-Border e-Commerce
Even as regulators seek a more streamlined process for supplements, investors, retailers, and customers continue to focus on cross-border e-commerce. As Crowther told organizers of the Healthplex & Nutraceutical China show, Chinese customers are most interested in well-established international brands and do their own Internet research to discover what’s popular internationally. A strong online and social media presence, through growing Chinese social media platforms like WeChat, is important for international brands hoping to reach Chinese consumers, he said.
Natural Products Expo West presenter William Hood noted the significant increase in investment activity in recent years, with Chinese companies taking over U.S. brands. He pointed to one of the most significant deals yet: in 2018, when Harbin Pharmaceutical Group forged a $300 million strategic partnership with struggling U.S. retailer GNC. Harbin now owns a 40% stake in GNC. “Why was a Chinese buyer interested in GNC? GNC is a phenomenal brand in China, a small business with great potential overseas,” Hood said, noting that GNC had five retail stores in China at the time of the deal.
Other notable deals include Shanghai Pharmaceuticals’ 2016 acquisition of Australian supplements firm Vitaco Holdings, Xiwang Foods’ 2016 acquisition of Canada’s Iovate Health Sciences, and Biostime’s 2015 acquisition of Australian brand Swisse, he said.
USCHPA’s Crowther sees this as a continuing trend, at least until the regulatory environment in China improves. “As mentioned, the regulatory system has really stifled the speed at which the market develops. The domestic market has not seen many new players added because of the costs involved; however, there has been much in the way of investment from China in international brands, the latest being the investment in GNC,” he says.
“Investment is the fastest way for the Chinese domestic industry to grow,” he continues. “Having an investment or controlling power in these international brands gives these players an advantage as the industry continues to develop.”
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China Market Is Ripe for Supplements
All signs point to growing interest in dietary supplement and nutrition products in China, as China’s growing middle class grows increasingly health conscious. This is manifesting in a growing sports nutrition market, for example.
“Because the Chinese government is encouraging its citizens to exercise and lead healthier lives,” health and fitness are increasingly top of mind for Chinese customers, Crowther says. “There are now literally hundreds of marathons and cycling events as well as triathlons held in China each year. These activities are driving up gym memberships and interest in sports nutrition-specifically, protein, amino acids like BCAA formulas, pre-workout formulas, and creatine.” He notes that USCHPA will host its upcoming sports nutrition industry summit in Shanghai on August 15. “This is an ideal time for international companies involved in sports nutrition to visit China, as they will get one full day of up-to-date sports nutrition information at the association’s summit, followed by three days at the FIBO China Expo on August 16-18,” he says.
Aside from sports nutrition, Crowther notes that Chinese consumers continue to grow increasingly interested in probiotics and omega-3s. “Omega-3s have a bit of an advantage as they have been around longer in the market than probiotics,” he adds. “Probiotics are, for the most part, contained in the dairy/yogurt industry. They have yet to make a big impact in the supplement channel. This is mostly due to the regulatory hurdles of the blue hat.”
Finally, he says, “Like the world, I think many companies in China are interested in utilizing big data, customized supplements, gathering information from wearables, and/or through blood tests in order to give greater insights to one’s health. For example, [USCHPA] is working with OmegaQuant in South Dakota to bring its omega-3 index and blood test to China.” He says USCHPA is also building a new website aimed at ingredient companies, called HPA-Supply.
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