麦肯锡-GNC中国市场进入战略-中国保健品市场研究报告-20090115

CONFIDENTIALChinesemarketfactpackJanuary20th,2009Thisreportissolelyfortheuseofclientpersonnel.Nopartofitmaybecirculated,quoted,orreproducedfordistributionoutsidetheclientorganizationwithoutpriorwrittenapprovalfromMcKinsey&Company.ThismaterialwasusedbyMcKinsey&Companyduringanoralpresentation;itisnotacompleterecordofthediscussion.ChinaNutritionMarketFactPackHKO-AAA123-20081119-ContentChinesenutritionmarketoverviewRegulatoryenvironmentCasestudiesoftopplayersMarketsizeandkeycharacteristicsConsumerbehaviorChanneldynamicsCompetitorlandscapeAppendix1HKO-AAA123-20081119-China’sVDSandnutritionalfoodsindustrywillgrowatabout13%annuallytoUSD20-22billionby2012ApproximatefiguresinUSDbillions Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC);GNCannualreport,2007;GNCcompanywebsiteShare%CAGR2002-07%2012sales2007salesTotalAveragegrowth18%20-2211Vitamins10141.8-2.01.2Generalwell-beingDS27154.7-4.93.0Specializedsupplements16132.8-3.01.8Weightlossandsports30176.6-7.03.5Chinesespecific17394.0-5.01.8Share%CAGR2007-12%91123914113215221913%2HKO-AAA123-20081119-Multi-vitaminsaccountsforover80%oftheVitaminmarket+11%1311320071591,4591538891048661,1621,9152012VitaminAVitaminBVitaminEVitaminCMultivitaminsGrowthrate%2007-2012Producers,productsandpricerangeinChinaRMBpertabletLeadingbrandsTier2brandsBristol-MyersSquibb

CompoundVitaminB(0.3)Amway'sNutrilite

NutriliteDoubleX(2.3)K-LEXMultiVitamin(2.3)WyethCentrumfromAtoZine(1.2/t)Minsheng

PharmaGroup21Super-Vita(0.4)Amway'sNutriliteNutriliteVitaminC(1.5)NewEraHealthGrapeSeedSoftE(3.3)KangNiulaiFruityVitaminC(1.33)Amway'sNutriliteNutriliteVitaminB(0.76)KangweixinVitaminA(0.6)Amway'sNutriliteNutriliteVitaminAcarotene(2)Amway'sNutriliteNutriliteVitaminE(1.62)SegmentsizeMillionUSD9810911 Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC);GNCannualreport,2007;GNCcompanywebsite1533HKO-AAA123-20081119-Calcium,ginsengandproteinpowderarethetop3generalwell-beingdietarysupplements1541773,0561211694333915031,2582007322986086299901,7641282012RoyaljellyGarlicextractGinkgobilobaMineral4,781GinsengProteinpowderChild

VDSCalcium+9%FishoilGrowthrate%2007-2012Producers,productsandpricerangeinChinaRMBpertabletLeadingbrandsTier2brandsKangjialiFishoil(0.68/c)HarbinPharmaceuticalNewGai

Zhong

Gai(0.7)Amway'sNutriliteNutriliteCal-Mg.(0.8)PerfectNutritionpowder(16.0/s)AmericanGinsengLozeng(1.04/c)NanfangLeeKum

KeeNutritionpowder(10.3)Amway'sNutrilitebrandNutriliteProteinPowder(6.0)Amway’sNutriliteDeep-seaSalmonfishoil(3.30/c)RolmexGarlic

extract

tablet(1.0/t)PerfectGarlicextractcapsule(2.26/c)EagleGinseng(1.06/c)SegmentsizeMillionUSD111481277 Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC)K&AChildfishoil(1.98/c)ByhealthChindFishliveroil(1.18/c)1410GoldPartnerGoldPartner(1.0/t)WyethCentrumfromAtoZine(1.2/t)BenefitGinkgobiloba(0.5/c)K&A

Ginkgobiloba(1.68/c)Amway’sNutriliteGinkgobiloba&DHA(3.04/t)QingchunbaoRoyaljellycapsule(0.7/c)K&ARoyaljellycapsule(0.88/c)4324HKO-AAA123-20081119-Functionalsupplementmarketisaslargeasthegeneralwell-beingsupplementmarketandisgrowingfast+11%Braindevelopment484189140342470155Femalebeauty1,7592007265974187397945OthersSleepenhancementHeart/Diabetes2,9232012134IntestineGrowthrate%2007-2012Producers,productsandpricerangeinChinaRMBpertabletLeadingbrandsTier2brandsHongFuLoiBrain

StrongerCapsule(1.6)NanfangLeeKum

KeeMulberryleaftonic(4.7/t)CombaliMelatoninpill(1.3)HongFuLoi

CherylOralLiquid(1.5)PerfectPumpkinSeedOil(1.0)GoldPartnerBiotechNaobaijin(7/s)GoldPartnerBiotechNaobaijin(7/s)SegmentsizeMillionUSD673 Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC)NewEraHealth'sGuozhenSong-HuaLiangYan(1.7)Chiatai

QingchunbaoBeautyCapsule(1.3)15153K-MaxLecithin(0.6)NewEraHealth'sGuozhenLophatherumEssence(2)PerfectJian

YiTea(6.3)NanfangLeeKumKeeNutritionpowder(10.0/s)2655HKO-AAA123-20081119-Weightlossandsportsnutritionislargeandrapidlygrowingsub-categoryoftheChinanutritionalmarket1,632466117+15%244EnergybarsWeightlosstea2009523,44720073,4281,022267Weightlosspills4381,3996,7992012Energy/sportsdrinkLow-carbfoodMealreplacementGrowthrate%2007-2012Producers,productsandpricerangeinChinaRMBpertabletLeadingbrandsTier2brandsJinggongYam

Nutrition

Meal(4.3)LibaojianEnergydrink(5.3/100ml)HarbinPharmaceuticalSlenderladiesdrink(4)RedbullEnergydrink(2.2/100ml)PerfectNutritionMeal(4.3)PerfectJian

YiTea(6.3)SegmentsizeMillionUSD171717 Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC)YilishouFlowerWeightlosstablets(5.6)HerbalifeCellulosefilm(1.45)YaKouNutritionCo.,LtdDietarycellulosefilm(1.45)16825NotavailableMarsSnickers(3.5/bar)SweetangelSugar-freebiscuits(0.18)GlicoLowcardbiscuits(0.6)ORBISPhilipefarmfibercake(0.4)1,0226HKO-AAA123-20081119-Chinese-specificnutritionalfoodsincludeshealthwines,TCM-basedsupplementsandherbalextractmarkets5001,0891,889TCM-based*Herbalextracts20076581,065Healthwine+19%2,8254,5472012300Growthrate%2007-2012Producers,productsandpricerangeinChinaRMBpertabletLeadingbrandsTier2brandsTianshi

BiologicaTiens

Cordyceps(herbalextract)capsule(1.68/c)Chiatai

QingchunbaoPharmaceuticalCoLtdQingchunbaoBeauty(1.3)NanfangLeeKumKee'sInfinitusGanodermalucidum(herbalextract)capsule(3.442/c)TianjinTianshiBiologicalDevelopmentCoLtdTiens

cordycepspills(1.68)SegmentsizeMillionUSD17 Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC)NewEraHealthSong-Huawine(29.6/100ml)

YedaoYedao

Luguihealthwine(5.2/100ml)2116Yantai

zhongyaSanbianhealthwine(3.9/100ml)2,8257HKO-AAA123-20081119-TheChinesenutritionmarkethasthreekeycharacteristics7Increasingconcentrationofwealthinurbanareasmeansthanmostdemandfornutritionalfoodsisinthetop40Chinesecities3 Source: Teamanalysis Themarkethasrecoveredfromadownturnandwillcontinuetogrowrapidly,drivenbyrisingincome,increasingpenetration,anagingpopulationandconsumereducation1Chinamarketcanbesegmentedbasedonsalesformat,productcategories,andlevelofcommoditization28HKO-AAA123-20081119-Recoveredfromcyclicalrecenthistory,themarketwillgrowquickly1+13%+9%CyclicaleraSolidgrowthManymarketfluctuationscausedbyqualityproblemsIn1995,mediaexposedfalseanddeceptiveadvertisementsfromVDSmakers(e.g.,“SanZhu”tonicsuedforkillingconsumer,“Brainplatinum”madeexaggeratedclaims,“JunengCalcium”containedtoomuchhydrogenperoxideIn2000,MinistryofHealthreportsthatseveralwell-knownVDSbrandsfailedtomeetqualitystandardsStricterregulationwillallowforsmoothergrowthStricter

regulation

allowforsmoothergrowthConsolidationofhealthylivingregulatorybodiesStrongerapprovalprocessandstrictercontrolsonproductclaimsdiscourageexaggerationConsumptionfromtheaffluentclassgrowingatadisproportionalrapidpaceIncreasingpenetration

asConsumersbecomemorehealthconsciousaspopulationageandadoptnewlifestylesLeadingindustryplayerspushmoreconsumereducationcontinuously Source: Marketsizingmodel;interviews;literatureresearch;teamanalysis9HKO-AAA123-20081119-Fast-growinghigh-incomesegmentswill

accountfor80%ofconsumptionby2015Uppermiddleclassisgrowingmuchfasterthanexpectations1990952000200510E201520E2025Totalurbanhouseholdsbyhouseholdincome(RMB/yr*)millionsofhouseholdsAllUrban2008:Uppermiddle class(40-100K)2008:Lowermiddleclass(25-40K)2006:Uppermiddleclass(40-100K)2006:Lowermiddleclass(25-40K)Affluentconsumersaredrivinggrowth1 Source: MGI“MadeinChinatoSoldinChina”Report;2008McKinseyGlobalInstituteChinaCityModel;MGIConsumerDemandModel;McKinseyanalysis * Inreal2000terms

UrbanconsumptionbyincomeclassRMBbillions,percent100%544,734200711,3152010Global

(RMB200+K*/yr)Affluent

(RMB100-200K*/yr)UpperMiddleClass

(RMB40-100K*/yr)LowerMiddleClass

(RMB25-40K*/yr)Poor(<RMB25K*/yr)1522179-5-3ForecastActual10HKO-AAA123-20081119-Increasingpenetrationduetocontinuousconsumereducation1 Source: Nielsen,CTRAdvertisingMonitoringRisingpenetrationtoeventuallyreachthelevelofeastAsiandevelopedeconomiesHeavingadvertisingbyindustryplayers28Professionalservices12223VDS01818Haircare01414Oralcare11322Skincare211TCM(OTC)29Realestate39Telecom08Cough/coldmedicine7AutomobilesPrintTV142005ChineseadvertisingspendRMBbillionsPercapitaVDSspendingvs.GDPUSD,2007JapanGermanyHongKongSKoreaFranceUKUSChina(2007)TaiwanSingaporeChinaTier1PercapitaGDPUSDPercapitaVDSspendingUSD11HKO-AAA123-20081119-Consumersbecomemorehealthconsciousasthey

ageandadoptnewlifestyles1 Source: GlobalInsight;McKinseyGlobalInstitute;ChinaNationalNutritionSamplingSurveyin1982,92and2002;AsianDemographics * Definedasproportionofdietaryenergysupplyderivedfromfat504ChanginglifestyleRapidlyagingpopulationsAddingtheequivalentofHolland,France,andGermany2006201020152020+84+35+68Populationover50yearsoldmillionsUrbanpopulation’sfatenergysupplyratio*in2002(35%)exceededWHO’smaximumrecommendedlevel(30%)About62%ofwhitecollarworkersconsiderthemselvessub-healthy（亚健康）

Morethan30millionChinesehavediabetestoday;another20

millionpre-diabeticssufferfromimpairedglucosetolerance12HKO-AAA123-20081119-02004001,700Ginkgobiloba3005009001,100VitaminCVitaminEVitaminBVitaminAMulti-vitamins100CalciumMineralProteinpowderGinsengFishoilGarlinextractRoyaljellyChildvitaminsChildDSFemalebeautyBraindevelopmentIntestineSleepenhancementHeart/DiabetesWeightlosspillsSizeUSDmillions10WeightlossteaLow-carbfood1,200Energy/sportsdrinksMealreplacementEnergybarsHealthwine2515Other*Herbalextracts5Growth(CAGR2007-2012)Percent Source: Marketsizingmodel;teamanalysisWeight-lossandsports(self-enhancement)Chinesespecificproducts(incl.TCM-based)Growthvariesamongthesub-segments;6sub-segmentswillbethemajorgrowthdriversintheneartermLarge&fastgrowingLargematureEmergingstars213HKO-AAA123-20081119-WesegmentedtheChinamarketbasedon3keydimensionsSalesformatProductcategoriesLevelofcommoditization Source: TeamanalysisRetailformat(includinge-commerce)DirectsellingmodelsCore:GNCproprietaryproductavailableExtendable:GNCcurrentandpotential3rdpartyproductsOthers:categorieswhereGNChaslimitedpresenceDifferentiable(competitiveproductsbeingabletochargehigherprices,usuallyover2Xmarketaverageprice)Middle-ground(~1.2–2Xmarketaverage)Commodity(difficulttodifferentiatethroughproductperformance,i.e.<1.2Xmarketaverage)Wesegmentedthemarketintosubcategoriesbasedon3keydimensionsObjectivesDefinerelevantmarketforGNC/SFVClarifythedegreeofadaptationrequiredDrawimplicationsontimingandresources214HKO-AAA123-20081119-RelevantmarketinGNC’scorecategoriesamountstoaroundUS$3.8billionin2007,representing~35%ofthetotalmarket1.91.40.53.8Core0.61.30.92.8Extendable0.20.40.71.3OthersDifferentiableMiddle-groundCommodity1.43.4Allproducts0.81.2Retailformat(Total=USD7.9billionin2007)Directselling(Total=USD3.4billionin2007)Levelofcommodi-tization*LowHighProductcategoriesVitaminsGeneralwell-beingdietarysupplementsFunctionalDSWeightloss(GNC)Weightloss(current&potential3rdparty,e.g.,weightlosstea)FemalebeautyTCM-basedHealthwineLow-carbfoodMealreplacementEnergybarEnergydrinks * Basedonstorecheckresults Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC);GNCannualreport,2007;GNCcompanywebsite;ACNielsen;storechecks;teamanalysis215HKO-AAA123-20081119-Estimatesfor2012:sizeofdirectsellingmorethandoubles;extendableovertakescoreproductcategories3.11.90.65.6Core1.13.01.75.8Extendable0.50.61.12.2OthersDifferentiableMiddle-groundCommodity3.67.3Allproducts2.01.7Retailformat(Total=USD13.6billionin2012)Directselling(Total=USD7.4billionin2012)Levelofcommodi-tization*LowHighProductcategoriesVitaminsGeneralwell-beingdietarysupplementsFunctionalDSWeightloss(GNC)Weightloss(current&potential3rdparty,e.g.,weightlosstea)FemalebeautyTCM-basedHealthwineLow-carbfoodMealreplacementEnergybarEnergydrinks * Basedonstorecheckresults Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC);GNCannualreport,2007;GNCcompanywebsite;ACNielsen;storechecks;teamanalysis216HKO-AAA123-20081119-Differentstagesofcommoditizationandmanufacturers’abilitytochargeapremiumCommodityMiddle-groundDifferentiableCompetitorshaveproventheabilitytochargea

premiumindifferentiablecategories * Fulllistofproductcategoriesandtheirlevelofcommoditizationestimatescanbefoundinthe“GNCmarketentrymodel”Excelfile Source: Marketsizingmodel;storecheck;teamanalysisDriversof

commoditizationSlowerdemandgrowthinover-saturatedproductsegmentsGrowingconsumersophisticationleadingtomorepricetransparencyDomesticmanufacturingcapabilitiesimprovingtomatchwesterncounterpartsStagesofcommoditizationCalcium/mineralsGinsengFemalebeautySegments*VitaminBsGarlic&GinkgobilobaWeightlosspillsHealthwineMulti-vitaminsProteinpowdersFishoilSleepenhancementAbilitytochargepremiumRMB/serving,examples1.0LeeKum

KeeHarbinPharma0.80.4AmwayNutriliteBMS0.82.3AmwayNutrilite0.4Minsheng0.7217HKO-AAA123-20081119-Fivetypesofcom-petitorsobservedSuccessfullycompetingindifferentsub-categories

requiresdifferentcapabilitiesDifferentiable(morepremiumlypricedproducts)Middle-ground&CommodityCoreVDScategoriesProductextensions(e.g.,Chineseherbs)Businessmodelextensions(e.g.,directselling)(A)CorecompleteTianshi;NanfangLeeKum

Kee(B)CorenicheWyeth;Jiante;BMS;Harbinpharmaceutical(C)ExtendableNewEraHealth;QingChunBao;Sanjing;Yedao(E)CompletelineupPerfect,Avone;Nuskin(D)Puredirect-sellerAmway Source: EuromonitorInternational;ISI;literactureresearch;teamanalysisRetailformat100%=US$14.7billion(2012)DirectsellingUS$6.3billion(2012)…eachhasdistinctsetofcapabilitiesA&B:SuperiorproductperformanceA:StrongoverallcorporatebrandB:Promotionofthetop-sellingSKUsC:Localproductdevelopmentcapabili-tiesandstrongoverallcorporatebrand(duetogiftingandhigherlevelofcommoditization)D&E:StrongdirectsalesmanagementE:Abilitytodealwithchannelconflicts218HKO-AAA123-20081119-GNC-retailformats’coreaddressablemarketwillgrowat~10%p.a.tobecomeaUSD5.3-5.9billionmarketby2012 Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC);GNCannualreport,2007;GNCcompanywebsite;teamanalysisKeyobservationsMarketsizein

China(2007-2012)USDbillionsMultivitamin~76%ofthissegmentandisprofitableAmwayissegmentleaderCalcium~37%ofthissegment,followedbyprotein,ginsengandfishoilDiabetes/heart~50%ofthissegment,followedbybraindevelopmentandsleepenhancementCAGR2007-12Percent~14%Coremarketgrowingslower

thanmarketoverall…~18%~13%2007~*~*1.1-1.31.1-1.3~*~*3.1-3.35.3-5.92012VitaminsGeneralwell-

beingDSFunctional

supplementsCAGR2002-07Percent~15%~13%~9%~7%~9%~14%~8%1.2219HKO-AAA123-20081119-Demandforcoreproductsthroughretailformathighlyconcentratedinthetop40citiesinChina…USDpercapita/year(2007)JapanSingaporeTaiwanUSSKorea~*ChinaTier1HongKong~*Chinatier2GermanyUKChinaoverallFrance Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC);

McKinseytier-citymodel,2006;MGIurbanizationforecast;EIU;Chinaconsumersurvey(spendingonhealthsupplements);teamanalysisTier-1(4cities)Tier-2(36cities)Tier-3(98cities)RestofChina100%=USD5.3-5.9billionOver75%ofdemandcomesfromthetop40citiesin2012PercapitaVDSconsumptionbyregions450-50070-805-6Marketsizepercity(average)USDmillionsTier-1Tier-2Tier-316220HKO-AAA123-20081119-Andthetop3clustersaccountfor~US$3,100millionsalesamongstGNC’scoreproductcategories * Stand-aloneformataccountsfor10-12%ofthecoremarketintier-1cities,and6-8%intier-2cities Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC);

McKinseytier-citymodel,2006;MGIurbanizationforecast;EIU;Chinaconsumersurvey(spendingonhealthsupplements);teamanalysisSizablemarketforGNC’scoreproductcategoriesUSDmillion(2012)Wenzhou,Shantou,Haerbin,Changchun,Kunming,Tai-yuan,Guiyang,Huai’an396Dong-guan*Guangzhou*Yantai*Jinan*Shenzhen*1,141Tianjin*Nanjing*230ShandongpenisulaSuzhou-WuXi-Changzhou*Zhu-hai*Zhong-Shan*Fo-Shan*Shi-Jia-Zhuang*Shanghai*ChangSha*Zhengzhou*1,134YangtzedeltaXi’an*Xiamen&Fuzhou*Tangshan*Beijing*830Shenyang&Dalian*Wuhan*BohairimChengdu*Chongqing*Pearlriverdelta238ChengYuHangZhou&Ningbo*Othertier-2citiesZibo*561OthercityclustersQingdao*Tier-1cities,‘Big4’Tier-2citiesExpansionintier-2citiesneedstoconsiderboththeirmarketsizesandproximity(clustering)tothehometier-1citiesforeasiermanagement123456-11321456101197849221HKO-AAA123-20081119-GNCretailformat’sextendableaddressablemarketwillgrowataround16%annuallytoUSD5.5-6.1billionby2012 Source: Euromonitor;NutritionBusinessJournal;PublicNutritionDevelopmentCenter(PNDC);ChinaHealthcareAssociation(CHAC);GNCannualreport,2007;GNCcompanywebsite;teamanalysisKeyobservationsMarketin

China(2007-2012)USDbillions~22%isweightlossteaProportionallylargershareoftotalmarketcomparedtoUSLeadingplayersincludeNewEraHealth'sGuozhenandChiataiQingchunbaoYedaoLuguihealthwineisthemarketleaderwith~10%shareCAGR2007-12Percent~21%Coremarketgrowingfaster

thanmarketoverall…~18%~13%~*~*~*~*~*20072.8-3.00.5-0.70.4-0.51.8-1.95.5-6.12012Weightloss(current&potential

thirdparty)FemalebeautyTCM-basedHealthwineCAGR2002-07Percent~18%~48%~14%~13%~19%~26%~16%~30%~15%LeadingplayersincludeLeeKumKee,TianjinTianshi,andTianjinTesley1.8222HKO-AAA123-20081119-“TCMsprovedtheirefficacyalongtimeago…therecouldnotbeanymistakeaboutit.”Chinese-specificproductsarelargeandgrowingfast Source: Consumerinterviews;literatureresearch;teamanalysisChinese-specificproductsaccountforover1/3ofthenutritionalfoodsmarketHealthwines,TCMs,weight-losstea

andpills,ginseng,Ginkgobiloba,etc.Internationalnutritionalfoodsandsupplements2001200220032004200520062007+49%Asanexample,ChinesehealthwinemarkethasseenrapidandsustainablegrowthHeavyinvestmentsbyJinpaiandHainanCoconutIslandearnednationalattentionMostmajordomesticricewinemakersdevelopeddistinctivebrands“IbelieveinTCMs.Theyaregoodforthehumanbody--notlikewesternmedicinewithitssideeffects.”ShareofChinese-specificproductsPercentHealthwinesalesUSDmillion65223HKO-AAA123-20081119-Demandforextendableproductsthroughretailformatis

spreadmoreevenlyacrossthecountry Source: McKinseytier-citymodel,2006;MGIurbanizationforecast;EIU;Chinaconsumersurvey(spendingonhealthsupplements)2012–retailformat,extendable2250.4-0.51.0-1.1300-3204100.4-0.51.8-1.950-552050.35-0.400.7-0.87-8Total

income2100~0.296.1-6.3AverageMarkettotalPercentspendonextendablePercentProjectedcityincomeUS$billionMarketsize(2012)US$billionsMarketsizepercity(average)US$millions1,2600.15-0.202.0-2.5N/ATier-1Tier-2(36cities)Tier-3(98cities)Restof

ChinaTier-1Tier-2Tier-3RoC100%=US$6.1-6.3billionDemandspreadmoreevenlyacrossthecountry38224HKO-AAA123-20081119-ContentMarketsizeandkeycharacteristicsConsumerbehaviorChanneldynamicsCompetitorlandscapeChinesenutritionmarketoverviewRegulatoryenvironmentCasestudiesoftopplayersAppendix25HKO-AAA123-20081119-KeycharacteristicswithChineseconsumerNutritionfoodisnotyetadestinationproduct;purchasingisdrivenlargelybytraditionalretailchannelpush3Wordofmouthhasthemostinfluence;consumersincreasinglyvaluequality,professionalknowledgeandservice4Womenandolderconsumersarethemajorconsumers;womenmakethemostpurchases1ConsumersinTier1/2citiesspendmoreonnutritionfoodpercapita;inT1cities,moreconsumersbuynutritionproductsforthemselvesthanasgifts;Moreconsumersbuyextendableproductsasgifts;brandloyaltyishigherinTier1cities226HKO-AAA123-20081119-Womenandolderconsumersrepresentthe

majorsegments;womenmakemostpurchasesESTIMATE“Idecideformyhusbandandmykidwhathealthylivingproductstobuy.”“Ourparentscan’taffordhealthylivingproducts–myhusbandandIpayforallofit…”Consumption

*PurchaseKids/teensMaleadultsFemale

adultsOlderWomenare“gatekeepers”offamilyspendingPeopleineachsegmentconsumedifferentproductsBraindevelopmentBonehealthProteinpowderImmunedefenseKidneyfunctionFatiguerecoveryProteinpowderWeightlossAnemia/QisupplementationFemalebeautyProteinpowderImmunedefenseBonehealthSleepenhancement

Source: Consumerresearch;IMIresearch;teamanalysis1Consumptionandpurchaseofnutritionproductsbydifferentsegmentsofpeople,2007%27HKO-AAA123-20081119-Mostspendingonnutritionalandhealthsupplements

isintier1and2citiesTier1Tier2RestofChina~*“Ithinkthepriceofnutritionfoodisstillhigherthannormalconsumergoods,soIbuyitonlyoccasionally,mostlyasagift.”－ConsumerinSichuanProvince“Itakenutritionfood–vitamins--everyday.People’slivingstandardsarerising,andwecanaffordtotakemorecareofourhealth.”－ConsumerinShanghaiAveragemonthlyspendingonnutritionalandhealthsupplementsamongthepurchasers,2007RMB

Source: Teamanalysis;McKinseyChinaConsumerCenter2007&2008Surveys(Dec2006&Jan2008);interviews228HKO-AAA123-20081119-MostconsumersinT1citiesbuynutritionproductsfor

theirownuse,muchhigherthannational

averageTier1ChinaAverageTier2/3(2007)100Tier2/3(2002)GiftSelfusePurchasingmotivation%InChina’sgift-givingculture,nutritionfoodhasbecomepopular.DuringSpringFestival,giftscanaccountforupto70%ofsalesThegiftingrateisevenhigherintier2/3citieswherepeoplearecloseremotionallyandhavefewerchoicesforgiftingMorepeopleintier2/3willpurchasefortheirownuseinthefuture Source: Teamanalysis;litresearch;Chinanutritionmarketandconsumerbehavioranalysis2

29HKO-AAA123-20081119-Brandloyaltyishigherintier-1citiesChongqingYes,*Yes,*NoneWuhanShanghaiBeijing

Whenasked“Doyouhavebrandpreferencewhenbuyingnutritionproducts”?%ofrespondents Source: 2007-2008ChinaNutritionmarketsurveyandinvestmentreport230HKO-AAA123-20081119-Nutritionfoodisnotyetadestinationshoppingitem;mostsalesaredrivenbychannelpushPercentofrespondentsrankingchannelamongtop2 Source: QuantitativeconsumerresearchinShanghai(n=400)andShenyang(n=422),Mar2006;teamanalysisIndependent

storeNever

purchased85Hospital

pharmacy62DrugstoreHypermarketSupermarketDepartment

storeC-storeSpecialty

storeWatsons20841033303415526322637511617718Nutritional

foodVs.Beverageand

packagedfoodHousecarePersonal

careOTCdrugsRxdrugs3 * 331HKO-AAA123-20081119-Mostconsumersshopintraditionalretailchannels,especiallydrugstoresandsupermarkets62302007Others(e-commerce, catalogue,etc.)retailDirectsalesChinaVDSmarketbychannel

(2007) Source: Euromonitor;Chinanutritionmarketcustomerbehaviorsurvey2008;teamanalysis446432007OthersDrugstoresSupermarket

countersStandalonestores/storeinstoresWhenaskedinasurvey“Wheredoyouusuallybuynutritionfood”(2008)%ofrespondentsSpecialtystoresaleswillgrowbecauseasconsumersbecomemoresophisticated,theywanttounderstandtheproductsbetterandseekprofessionalguidance－ChinaNutritionAssociation3

32HKO-AAA123-20081119-WordofmouthandTVhasthestrongestinfluence Source: McKinseyChinaConsumerCenter2007&2008Surveys(Dec2006&Jan2008)Top5sourcesofinformationonnutritionfoods%ofrespondentsRecommendedbyfriends/relativesTVadStor