Bringing foreign foods to China and Hong Kong

Samir Kumar has a flourishing Hong Kong business based on offbeat ideas, mostly centred around dairy products.

Selling Australian cheese in China and Indian butter in Hong Kong are not obvious business decisions. But Samir Kumar prides himself on being a pioneer rather than a follower.

Kumar's first taste of entrepreneurship was a distribution company he co-founded with Australian firm Frontier Foods in 1996 to sell cheese in China. The idea had more sceptics than supporters. A myth prevails that Chinese are lactose intolerant and, further, that cheese is an acquired taste for many Asians. Kumar also had to grapple with the problems of creating a cold chain for distributing and storing the cheese. 

But Kumar persisted and the business grew to become the largest exporter of cheese into China, with a market share larger than both Kraft and the New Zealand Dairy Board.

Kumar is candid that he has had his share of lucky breaks as well, something every entrepreneur hopes for. Kumar was early to call on Wal-Mart when the chain came to China and in 1996 Frontier's cheese was being stocked in Wal-Mart's Shenzhen store.

He had similar luck with Carrefour. And as the two retail chains grew across China, Kumar's distribution followed suit. "We got in on the ground floor of the retail revolution in China," recalled Kumar.

Kumar also started contract manufacturing and packaging of Bega sliced cheese for Shanghai Bright Dairy at Bega's Australian factory, which contributed to profitability. Contracts from Kentucky Fried Chicken followed suit.

Then in 2004 Kumar sold his stake in the distribution company back to Frontier to pursue a new business idea. "I had been bitten by the Chindia bug," he explained. Kumar wanted to import ethnic food products and make them mainstream. He began with MTR Foods, a Bangalore-based manufacturer of ready-to-eat curries and other Indian foods.

"Instant curries had become big in the West and I hoped to replicate that success here," said Kumar. But he overestimated the market size for the product and underestimated the entry barrier posed by how cheap catering is in Hong Kong.

Despite managing to get his products on the shelves of Park'n'Shop, Wellcome and the Japanese supermarkets, MTR has not achieved large volumes in Hong Kong. Kumar recently launched MTR in Beijing and Shanghai and is awaiting the results of this foray.

Meanwhile, the Gujarat Cooperative Milk Marketing Federation, which owns India's largest butter and cheese brand, Amul, approached Kumar. GCMMF is a giant in India's dairy industry with a turnover of Rs67 billion ($1.4 billion) in the financial year ended March 31, 2009, and it was keen to expand overseas. 

Kumar knew Amul cheese would have a hard time competing with Australian and New Zealand exporters but he thought the pricing of Amul butter made it very competitive. Further, Kumar felt the taste of Amul butter, which is salted, would appeal to the local Hong Kong consumer.

"Our edge with Amul butter is food service," explained Kumar. The retail market in Hong Kong and China is almost saturated but Kumar focused his energies on the portion butter market, which he estimates is worth around $50 million. He was rewarded with contracts to supply to Hong Kong's second-largest fast-food chain, Fairwood, and steak house chain, Steak Expert.

"The segment we supply to is recession proof so we were not hit by the 2008 meltdown," said Kumar. "As a matter of fact, demand is inversely correlated, so Fairwood for example, started to do more turnover when the financial crisis hit." On the back of the success with Fairwood GCMMF and Kumar have been emboldened to bid for supply contracts with the likes of Cathay Pacific -- so on your next Cathay flight, the butter you get with your bread roll could well be Amul.

Despite exiting Frontier Foods distribution, Kumar continued to be optimistic about the dairy industry in the region. And with good reason. In a recent report KPMG estimated that total dairy consumption in China reached 19 million tonnes in 2006 and forecast it will have surpassed 25 million tonnes in 2008. These numbers make China's total market size larger than that in European countries such as France and Germany where dairy consumption is well-established. On a per head basis, Chinese consume only 42 grammes of dairy per day, well behind both the world average of 270 grammes and the Asia average of 140 grammes, further corroborating the potential for growth.

"Around two-thirds of our revenues are derived from dairy products and this is the segment in which I intend to continue to launch new products," explained Kumar. "The balance is what I call opportunistic." Currently, the latter includes the MTR range of instant curries, Australian wines Kumar imports under his own label 3 Roos and the McPhersons range, as well as consultancy services Sino Hero Foods provides to Australasian food companies wanting to break into China.

Kumar recently struck a deal to bring the Australian Star brand of UHT or long-life milk to Hong Kong. The milk is distributed through Park'n'Shop and China Resources Vanguard supermarkets. UHT milk has always been popular in Hong Kong but demand for Australian milk has increased tremendously following the scare with melamine in milk sourced from China.

Kumar estimates that the total import bill in Hong Kong for the products Sino Hero Foods is targeting (milk, processed cheese and butter) amounted to HK$1.5 billion ($193 million) in 2008.

"And this is in Hong Kong alone, not including the market size on the mainland," he said. "After the melamine scare most multinationals in China are using only imported dairy ingredients to better control the integrity of the supply chain."

In closing I ask Kumar about his experience of operating in the small and mid-sized enterprise segment in Hong Kong. Kumar finds Hong Kong an easy place for SMEs as trade finance is available at competitive rates and banks are generally supportive. Sino Hero Foods banks with HSBC. "But I always tell start-up entrepreneurs, as an SME, as long as you don't expect funding from your banks, you'll be fine," he said.

The story was first published in the December/January issue of FinanceAsia magazine.

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