Global Policy Forum

By Rebecca Buckman

China is not a nation of cheese lovers. At least one company wants to change that, and Western supermarkets and fast-food chains are helping

For all the products streaming out of China these days, from furniture to TVs to United States quota-hit bras, Samir Kumar is cashing in on one that's not: cheese. Kumar, who heads the Hong Kong office of a small Australian food-distribution company, Frontier Foods, has nurtured a thriving imported-cheese business in a country better known as an export powerhouse -- and where few people can tell Cheddar from Camembert.

When privately-held Frontier Foods first moved into China several years ago, critics said he was crazy. Chinese can't digest cheese and don't like the taste, they said. Moreover, China's food-distribution system wasn't set up for a product with a short shelf life that had to be stored chilled in warehouses and delivered by refrigerated trucks.

"Pretty much everyone told us, don't do it," recalls Kumar, who is sometimes called "The Cheeseman" by associates because of his relentless devotion to the dairy cause. A U.S.-educated native of India who moved to Hong Kong in 1994, Kumar's office fridge is crammed with cheese--slices, blocks, even canned varieties.

Now the gamble is paying off. The rapid spread of Western-style supermarkets and fast-food chains such as McDonald's and Pizza Hut are giving increasingly wealthy Chinese consumers an unprecedented taste for cheese, and Frontier is generating 70% of its sales from China, up from nothing seven years ago. Kumar says Frontier's revenue roughly doubled last year, mostly due to the success of its China business strategy, which targets the country's burgeoning middle class. In the process, Frontier has become one of China's biggest cheese suppliers, even as giants like Kraft Foods International, part of the Altria Group, have pulled out of dairy joint ventures here.

To be sure, China's cheese market is still tiny, with annual sales of around $30 million, according to market researcher Access Asia, in Shanghai. But there's plenty of room to grow; sales have jumped more than 130% since 1996, Access Asia says. "Obviously, Chinese are eating cheese," says Kumar.

Kumar's big cheese-selling break came in 1996, when he cold-called a manager at the brand-new Wal-Mart Inc. branch in the southern city of Shenzhen and persuaded him to stock Frontier's cheeses. Frontier now also supplies other big chains operating in China, including France's Carrefour, Japan's Jusco and Chinese grocery Lianhua. Frontier has also set up a network of local distributors that store cheese in refrigerated conditions, instead of freezing it or allowing it to go mushy at room temperature.

Earlier this year, Frontier also won the contract to provide cheese slices for new breakfast sandwiches at Yum Brands Inc.'s KFC outlets in China. The Louisville, Kentucky-based chicken chain has more than 900 Chinese outlets. Yum also runs more than 120 Pizza Hut restaurants in China, though they buy their cheese from New Zealand's Fonterra Cooperative Group.

Frontier is "doing quite well," says Stephen Wu, who works in purchasing for Capital Lide Foods (Beijing) Co., which places Frontier's cheeses in Chinese supermarkets. Frontier's biggest imported brand is Bega cheese from Australia; it also ships processed Bega slices to a big Chinese dairy, called Shanghai Bright, which then sells the product under its own name.

Indeed, at Beijing's cavernous Carrefour supermarket recently, the refrigerator was filled with bright orange-and-yellow packs of Shanghai Bright cheese slices. They were on offer for 13.90 renminbi ($1.68). Young mother Zhang Ling tossed a pack into her shopping cart, explaining that it's often easier to give her 15-month old son a slice of cheese than a drink of powdered milk.

Dairy Drawbacks

Moments earlier, Li Huan, a 25-year old secretary, looked at a package of Bega shredded cheese and wondered if she could use it to make pizza for her boyfriend. Her friend, Qu Liqiu, piped up, "Is Pizza Hut using this brand?"

Frontier's deal with Shanghai Bright shows how foreign companies can find a lucrative niche in the Chinese cheese market, despite competition from big local dairies, Kumar says. Other companies also trying new approaches include Fonterra's New Zealand Milk Products unit, which sells Chinese dairies raw ingredients to help them make cheese, and France's Bongrain, which has set up a plant in Tianjin, outside Beijing, to process cheese.

But Kumar claims it's easier to just import it, particularly with tariffs on cheese coming down as part of China's membership in the World Trade Organization. It's a point he says U.S. politicians should remember next time they criticize China for its export prowess, or accuse Beijing of unfair trade practices. "China cannot produce everything," Kumar says. "China has no competitive advantage in producing cheese."

Analysts and other dairy-industry executives concur that China has little local expertise in cheese-making. There is "almost zero" real cheese production in China, though an industry could develop if demand for cheese really catches on, says Sandy Chen, an analyst with Rabobank International in Shanghai. To make cheese, it takes a lot of milk. China doesn't have that: According to a recent report from Access Asia, "China's cattle-breeding industry is synonymous with small-business scale and low productivity." Chinese cows, on average, produce less than half the output of U.S. cows. An Australian cattle-industry group said last week that it could ship 50,000 head of dairy cattle to China next year to help the country meet its dairy needs.

Kraft discovered some of those drawbacks. Two years ago, Kraft got out of a joint venture with a Chinese dairy that was supplying cheese to hundreds of McDonald's restaurants in northern China, as well as making yogurt and other products. Strategically, it was not a fit for us," says Arjun Gupta, a Beijing-based Kraft vice-president and area director for Greater China. Now, all the cheese Kraft sells in Chinese retail stores, including Philadelphia cream cheese, is imported.

According to the National Dairy Council, Chinese consume only about 150 grams of cheese per person a year, compared with 14 kilograms in the U.S. and 24 kilograms in France. Gupta is not convinced that a bigger China cheese boom is in the offing, noting that many big-city supermarkets there still don't stock the product. What's more, most of the cheese that is selling is relatively bland, processed cheese -- "what you'd call lowest-common-denominator cheese," says Paul French, the publishing director for market-researcher Access Asia. In other words, Gouda and Roquefort are not exactly flying off shelves -- yet.

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