The End of Cheap China: Economic and Cultural Trends That Will Disrupt the World (10 page)

Chapter 5

WHY CHINESE CONSIDER KENTUCKY FRIED CHICKEN HEALTHFUL

CHINA’S IFFY FOOD SUPPLY CHAIN IS PUTTING A PREMIUM ON SAFE FOOD

I was interviewing Emily, a twentysomething Shanghainese girl, about her eating habits. Emily had flowing black hair and shapely shoulders, and carried herself with the self-assurance of someone who has been told she could be a model and knows it. She wore a stylish dark-blue dress that matched her looks, mottled brown pumps, and a bright pink Hello Kitty wristwatch. She drank a Frappuccino while she constantly messaged her friends on her iPhone 4, when she suddenly said to me, “I love Kentucky Fried Chicken. I go there all the time because it’s healthy.” I did a slight double take. Since when is KFC considered healthy?

I pressed Emily to explain. She said, “I know fried food isn’t really healthy, but I trust KFC to be safe.” I asked her what she meant. “First, I trust that KFC uses real cooking oil,” she said. “Lots of street vendors use recycled oil from sewers. I don’t think KFC would do that. And they wouldn’t put cardboard in their batter—I heard some dumpling restaurants do that to save money. And I don’t think they would use expired or tainted ingredients. Many restaurants dye their food or add all kinds of additives that are toxic.”

The more Emily and I talked, it became clear she did not consider Kentucky Fried Chicken and other fast food chains like McDonald’s and Dunkin’ Donuts “healthy” in the conventional sense. She knew fatty, oily foods could cause heart disease as well as a host of other problems, like diabetes. But she saw Western fast food options as offering safer food than many local restaurants. She worried that unscrupulous businessmen, farmers, and restaurant owners would cut corners on safety to make a few extra bucks, so she preferred to dine in foreign-owned restaurants or big domestic chains like Babela’s Kitchen, because she trusted they would not use poor-quality ingredients. Emboldened and enriched by better educational and work opportunities, as outlined in Chapter 4, young women like Emily have the money and sophistication to demand better-quality food, and they are willing to pay higher prices for safer and more healthful food options. The trend toward spending more on food is a trend that companies cannot ignore. They must build trust with consumers and offer premium healthful options.

In 2011, my firm interviewed 2,000 Chinese consumers in eight cities about their dining habits. We found that Emily’s response actually was not unusual. After years of food scandals hitting the nation’s food supply chain—such as the dairy scandal in 2008, in which tens of thousands of babies were sickened from infant formula tainted with melamine—my firm’s research suggests many Chinese trust Western fast-food brands like KFC because they believe they would not cut corners in the supply-chain process. Like Emily, they all know that a healthy diet should not include too much oil, meat, or fat, but they often view Western fast-food companies as safer alternatives to local restaurants. Because many consumers lead busier work lives and have more money to spend on leisure, eating at home and cooking their own meals has become less commonplace. We also found they will pay a premium when buying food from trusted sources, especially food destined for children.

It is not hard to see why Chinese consumers are so fearful about eating toxic or contaminated food. Stories abound in newspapers and online forums of local farmers, restaurants, and supermarkets selling expired meat, injecting additives to make pork look like beef, mislabeling products, and even pumping watermelon and other fruits with dirty water to make them heavier. One woman told me that her mother bought ready-to-eat shrimp that she thought looked nice and pink, but she washed them in a pot to be safe, just in case the shrimp were a little dirty. To her horror, dye began leaking from the shrimp into the water and turned it pink. She threw the shrimp out, scared of what their quality might be and what other chemicals might have been added.

One of the surer signs that there are serious problems with the food supply chain is that most people with direct industry experience are even more cautious than laypeople. I once told my local fruit vendor that I like to eat apples without peeling them, and she looked at me like I was crazy, even when I told her I scrubbed the skin with fruit soap. She told me if I saw how farmers grew produce, and what kind of chemicals they spray on them, I would never think about eating the skin again. She said farmers used the cheapest chemicals possible, which are frequently deadly to humans as well as to bugs and bacteria, and often colored the fruit to make it more appealing.

A senior, China-based executive at one of the world’s largest hypermarket chains told me to be very careful about what I eat. He said his company spends millions of dollars ensuring safety and teaching farmers proper ways to handle food. “Some of the hygiene practices farmers use is sickening,” he told me. “They just don’t know how to keep produce clean. They use chemicals to kill bugs. They either do not know or do not care if the chemicals can also kill humans. They often do not clean processing areas enough, so they are basically breeding grounds for bacteria.” Instead of taking tea in restaurants, the hypermarket executive told me he carries his own bags of tea imported from abroad everywhere he goes, because he is not sure how clean the tea leaves used in restaurants are.

China’s food supply chain is clearly a mess that is literally poisoning the Chinese population. It is causing global fears and a backlash because China plays such a critical role in the global food supply chain. Many processed foods lining the aisles of U.S. supermarkets contain some ingredients that began their journey in China.

Concerned about the scope of the problem, and the anger welling up in the domestic population and throughout the world, the government has even given fairly free rein to the state-owned media to uncover issues and help press for change. Newspapers chronicle problems in restaurants or in dairies nearly every day.

Smarter companies are taking advantage of these fears by investing millions to ensure better oversight of the supply chain. They seek to build trust with consumers by offering safe food and to guarantee they never do anything to damage that trust. McDonald’s, for instance, has invested millions to be sure they have an adequate supply of the tasty but healthy potatoes they use for their French fries.

In a survey of 5,000 consumers in 15 cities, my firm found that food and product safety were far and away Chinese consumers’ biggest concerns in life. The vast majority of respondents were more worried about these factors than being able to pay for medical bills or their children’s education. Moreover, if they had the money, they would be willing to pay 20 percent more for trustworthy brands of any type of product that they or their families might ingest (or could inhale, like paint or varnish on furniture). Many even told us they preferred to buy furniture products from Scandinavian furniture retailer IKEA, because they believed it would use good-quality glue and varnish that would not hurt throats and lungs if the smell were inhaled.

China’s government understands the dangers of the crisis of trust in the country’s food supply chain, and has made fixing it a priority. The government has urged consolidation in the supply chain, and premier Wen Jiabao has pushed for more farmer’s markets to cut its length, because the longer it is, the more likely that problems will occur.

Many of the food-supply problems are so entrenched that progress is slow despite public demand. Major changes are being driven by restaurant chains like McDonald’s and Kentucky Fried Chicken, and supermarket chains like Carrefour, which see the need for reliable food sources, and are rushing to improve direct oversight to cater to consumer demands. They know that by offering trustworthy products they can gain loyal customers and charge more.

Chinese consumers increasingly have the income, the sophistication, and the demand for healthy and safe products. Brands should be forewarned that consumers are very unforgiving of those that become associated with tainted products.

One good example is Ajisen Ramen, a Chinese-owned, Japanese-style noodle chain that is one of the most popular restaurant brands in the country, with nearly 600 outlets. In 2011 Ajisen came under heavy criticism after it was alleged that staff used flavor packets to prepare the broth for its soup noodles rather than boiling pork bones, as Ajisen claimed in advertisements it always had. Until the scandal, consumers told my firm one of the main reasons they ate at Ajisen was that they thought quality standards were higher than at most mom-and-pop noodle shops, and that it used safer ingredients.

After the scandal, Ajisen’s stock price took a beating, dropping more than 40 percent at one point, as investors feared consumers would shun the outlets. The company’s chief executive officer, Poon Wai, was rumored to have lost over $100 million when the share price fell. It would have been much cheaper, both for him and the company, to live up to the standards it had claimed in its ads in the first place. Now Ajisen will have to spend millions to rebuild trust with consumers, and it will take a while for the share price to rebound—if it ever does.

Dozens of Walmart executives in Chongqing were detained in October 2011 when it was found they were mislabeling organic meat. The local government shut 13 stores for two weeks. Yet one Beijing woman told me, “If Walmart as a trusted foreign brand breaches trust like that, I am scared to think about what local retailers do.”

The demand for better-quality food from Chinese consumers will also strain global commodity markets and add to worldwide inflationary pressures. If you look at a globe, you will see China is a big country. Really big. It has a slightly larger land area than the United States, including Alaska and other territories, but the scary part is that only 7 percent, or around one million square kilometers of it, is arable. Much of the country is desert and mountains that make farming impossible. Mind-numbing pollution and urbanization are depleting China’s aquifers even further, and are forcing the nation to source more and more of its food from other countries. A nation known the world over for rice has even became a major importer of the white grain, as its farmers convert rice-producing fields to cropland for higher-priced produce and nuts that can be exported to the United States and Europe.

The son of one major military figure told me that he was investing heavily in pistachio and almond farms in Xinjiang. He had the goal of replacing California as a major nut-producing sector.

For some countries and companies, the shift of Chinese diets toward higher protein and calorie consumption represents an opportunity, if they can switch their croplands to raise the produce and meats Chinese want. According to U.S. Department of Agriculture data, China imported over $15 billion in food products from America in 2011, up from $6.7 billion in 2006, and is now the second-largest importer after Canada. Within two decades, as waistlines get bigger, China will likely replace Canada. Already America has become China’s largest supplier of agricultural products, according to the state-owned newspaper
China Daily
, as it buys U.S.-grown corn and soybeans. Some analysts expect China’s demand for corn from the United States to reach 15 million metric tons within three years.

Chinese demand for U.S.-raised meat products will continue to grow as incomes rise and Chinese get more accustomed to meat-laden diets. Exports of pork to China increased fivefold between 2010 and 2011 to 200 million tons. Right now, Chinese consumption of meat per capita is half of America’s—over 125 kilograms per year.

While some companies will benefit from evolving Chinese appetites that demand better-quality food products, problems could emerge as global food supply chains get strained. Speculators from around the world are sitting in cafés to see how many cups of coffee Chinese buy so they can make bets on the coffee bean market. Coffee bean prices hit all-time highs in 2011 largely due to increased demand for coffee from Chinese consumers. Unless technology can keep up with China’s growing food demands, it is likely that global food prices will move higher.

For nearly eight years, I regularly ate at what I thought was a Subway sandwich shop located a minute from my office. The shop is in the lobby of a towering skyscraper in the heart of Lujiazui, Shanghai’s financial district, and its tenants include the Chinese headquarters for many Fortune 500 firms. Rolls-Royces and Mercedes line its parking lot. The Shanghai Stock Exchange is a 30-second walk away, and two minutes away is the Shanghai World Financial Center, the tallest building in China.

Every day the Subway shop was packed by Western and Chinese executives craving tasty, healthy food and maybe a cookie or pack of potato chips. Sometimes the wait to order was 30 minutes long. The outlet had the exact same menu, signs, and uniforms as every other Subway restaurant in America and China. This shop wasn’t a
shanzai
—the term used for obviously fake imitations of famous products or brands you see around China, often with bizarre or comical names like Starbooks, McDnoald’s, or Pizza Huh.

No, this was a real Subway restaurant in every perceptible way, with the exception of two minor discrepancies that a reasonable person might assume were the fault of poorly trained staff or maybe a sloppy franchise owner. The first was that instead of wrapping sandwiches in wax paper with the Subway logo, the staff used generic wrappers that simply said, “Good Food.” The second was that the cookies always looked slightly flat, as if the bakers had not added enough baking soda to the batter.

I never gave these discrepancies a second thought until, one day, we interviewed a former Subway executive who told us that the sandwich shop was a complete fake. It was opened by unscrupulous entrepreneurs who had set up multiple fake Subways throughout the country. The executive told me that was why the cookies looked different and the daily promotions in that outlet varied from those in others.

Subway corporate headquarters had even sued the owners of the fake Subway several years earlier in a Chinese court, and had won. The court ordered the shop to close and pay a fine. The problem was that there was little enforcement of court decisions, so for years the restaurant kept running without any change. Hundreds of people a day, including me, ate lunch at a fake Subway located at one of the most prestigious addresses in China. Subway kept up the legal pressure, to little effect.