January 2017
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An Appetite for Growth
CENTRE STAGE
As the demand for better quality food products grows in China, Derrick Chan of Swire Pacific's Trading & Industrial Division explains how Swire is responding with the acquisition of a bakery chain in Southwest China and the opening of a sugar refinery in Guangdong – a return to one of Swire's first businesses.
As it emerges from its 200th anniversary year and in the tradition of its Chinese name, Taikoo – meaning great and ancient – it is no coincidence that Swire is about to return to one of its earliest and most successful ventures: the manufacture of high-quality sugar.

The Taikoo Sugar Refinery in 1895. The company was incorporated in 1881, when Swire diversified its business to capture the local and regional demand for refined sugar.
The Taikoo Sugar Refinery in 1895. The company was incorporated in 1881, when Swire diversified its business to capture the local and regional demand for refined sugar.

As most people know, sugar is not new to Swire. The company has been in the trade for over 130 years, establishing the renowned and much-loved Taikoo Sugar brand in 1881. The Taikoo Sugar Refinery in Hong Kong went into production in 1884, in what is now Taikoo Place in Quarry Bay, and soon became the largest and most sophisticated plant East of Suez. Due to the loss of two major export markets in Singapore and Malaysia, when local sugar industries were developed there, Swire ceased sugar refining in Hong Kong in 1973, moving away from production and focussing instead on packaging and distributing sugar under the Taikoo brand.

Derrick Chan Director Trading & Industrial, Swire Pacific
Derrick Chan
Director Trading & Industrial, Swire Pacific

That is, until now, when – according to Derrick Chan, Director Trading & Industrial – the time is ripe to resume refinery operations in the region. As part of its long-term plan to diversify and expand its food business in Mainland China, Swire Foods – which was launched in 2010 and now encompasses the Taikoo brand – is about to open a new sugar refinery in Guangdong Province. "As sugar was one of the earliest ventures within the group, there is a real significance to Taikoo Sugar getting back into the refinery business," Chan reflects.
But, you might wonder, when health food fads are on the rise and sugar seems to be public enemy number one the world over, why is Swire investing in sugar production? "It's a very simple supply and demand equation," explains Chan. "Whereas there has been a shift from sugar to alternative sweeteners in other markets, there hasn't been in China. The demand for good quality sugar is growing year-on-year, particularly in the food and beverage and pharmaceutical industries. And we believe this growth trend will continue for some years." So rather than being a step back in time, this is very much a strategic move forward for Swire.
 
The per capita intake of sugar in China is still very low at around 10 kg per person per year. To put that into perspective, in Hong Kong it is 24 kg, Europe 26 kg and in Australia, a whopping 42 kg. But according to Chan, as living standards continue to rise in China, the desire for high-quality sugar will increase in tandem. Currently, the domestic supply from local sugar cane and beet is fairly low-grade. The job of the new refinery will be to transform the low-grade raw sugar into a stable supply of purified, high-quality refined product for distribution and use throughout China to meet the projected demand.

The refinery will be operated in collaboration with two partners: the Sumitomo Corporation of Japan and South Korean company, TS Corporation – both of whom are experienced in running refineries and have good distribution networks in China. It will initially have an annual capacity of around 100,000 metric tons, which can be expanded up to 300,000 metric tons if needs arise. Its main product will be high-quality refined white sugar, but it will also produce small quantities of brown sugar and molasses, with the potential to produce liquid sugar in its later stage. Alongside the sugar refinery, Swire will continue with its packaging and distribution business under the Taikoo brand, operating three sugar packaging plants in Guangzhou, Shanghai and Chengdu that will be mostly supplied by the new refinery, with a distribution network spanning 123 cities and over 20,000 retail outlets and 10,000 HORECA (hotel, restaurant and café) outlets on the Mainland.
Learn more about the business of Qinyuan.

Learn more about the business of Qinyuan.
As well as being a successful standalone business, with a long and revered history in China, Taikoo Sugar has been a solid base from which Swire has been able to launch into other food sectors in the region. "The brand is very widely recognised and people have a close attachment to it, so we have a good foundation to expand into other food categories," says Chan. Leveraging the distribution network and experience of sugar and tapping into the growth of the more affluent and younger consumer market in China, Swire Foods has diversified into cereal, dried fruits, rice-based dairy desserts, tea, coffee, ice-cream, soup, biscuit and bakery products, as the appetite for the Western diet and higher quality food increases.

It is in the baked goods sector that Swire has made its most recent acquisition, and March 2016 saw Swire Foods take full ownership of Qinyuan, a leading bakery chain selling Chinese and Western-style pastries, with over 500 retail outlets in Southwest China. Qinyuan has since launched a new 65,000 square-metre factory producing bakery goods in Chongqing. An odd choice for Swire? Not at all, explains Chan.

"People may say: 'Why would Swire go into the bakery business?' – which seems to be entirely new to Swire. But actually, I don't think that way. The food category is not something new to Swire; managing retail outlets is not something new to the group. Most importantly, if you have to operate a very successful bakery business, producing your own goods and distributing to over 500 stores, it will very much rely on an efficient supply chain. Over the last two decades, we have learnt how to manage a very professional and world-class supply chain process with our Coca-Cola bottling system in China. These are all critical factors to managing a bakery business locally, so we're not starting from scratch," Chan says.

Qinyuan opened its newest bakery plant in the Jiulongpo district of Chongqing in May 2016, complementing two existing plants located in Chengdu and Guiyang.

Qinyuan opened its newest bakery plant in the Jiulongpo district of Chongqing in May 2016, complementing two existing plants located in Chengdu and Guiyang.

Qinyuan opened its newest bakery plant in the Jiulongpo district of Chongqing in May 2016, complementing two existing plants located in Chengdu and Guiyang.
Qinyuan is the number one bakery chain in Chongqing, number two in Guiyang and number five in Chengdu. It has a strong reputation, with brand awareness of 95% in Chongqing and 85% in Guiyang. The story of demand for bakery goods in China is similar to that of sugar. Bakery is one of the food growth leaders and Chan believes that the demand will rise in coming years, mainly due to the fact that per capita consumption is currently very low. The average spend on bakery goods in China is only around RMB 140 (HK$160) per person per year. In Singapore, it is double that, Hong Kong three times and Japan is close to seven times as much. Taiwan, which has a population of 23 million people, has over 10,000 bakery outlets. But in Chongqing, with a population of over 30 million, there are only 1,000. "The bakery fits in very well with the modern lifestyle, with the new generations and young customers in China. So you can see that there is actually a big opportunity there," adds Chan.

Since taking over the bakery, the priority for Chan has been building up and improving the existing business in terms of people, systems and quality of product. And moving forward, the plan for expansion is "aggressive", he says. It took the previous owners of Qinyuan 26 years to establish a retail network of 500 stores; Swire's current strategy is to double that number in the next few years, as well as to remodel and upgrade existing stores. "This is a journey. It's too early to say how soon we can get there. But if you look at all those parameters – the very low per capita consumption, the new generation enjoying bakery products – the outlook is good. The retail business is not easy in China these days, because of the rise of e-commerce, but food retail cannot be replaced by e-commerce just yet."

Other Swire initiatives to drive food business growth in China include introducing premium items like Mövenpick Coffee and London Tea into the bakery stores. Qinyuan is also maximising the experience from the Swire Foods/Taikoo Sugar side to explore opportunities to supply their bakery products into supermarkets and some HORECA channels. Swire Foods is opening two new bakery chains under new brand names, Bakerland and Moment – the former selling premium European bakery products and the latter selling traditional Chinese wedding pastries. "As you can see, we have a lot of plans in the pipeline," Chan says. "Food still serves a basic need for everyone and despite the economic slowdown in China, we still foresee very decent growth in the food industry. We just need to be very careful about our systems: that we don't cut any corners; that we make sure that everything is done in the best way. People will become more cautious about picking the right brand, the right items, and that means opportunity for us. Quality will become our competitive advantage. China is the largest consumer market globally for food and beverages. We will continue to rationalise the Swire Foods product portfolio to ensure we continue to find the right product to cater to consumer leads."

Qinyuan’s retail outlets feature modern, attractive shop interiors, stocked with a wide selection of bakery products.
Qinyuan's retail outlets feature modern, attractive shop interiors, stocked with a wide selection of bakery products.

Officially opened in December 2016, the new Bakerland store in Chongqing sells premium European-style bakery products, as well as Mövenpick coffee and icecream.
Officially opened in December 2016, the new Bakerland store in Chongqing sells premium European-style bakery products, as well as Mövenpick coffee and ice-cream.

Swire News January 2017
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