Texas Pecan Growers Conference

1. Texas Pecan Growers Conference Presentation on Chinese Market July 14, 2009 Prepared by: SMH International

2. Contents This presentation is to introduce the Chinese market and tree nuts market, pecan specifically to pecan growers in Texas. About SMH Part I China Market Overview Part II China Tree Nuts Market Overview Part III China Pecan Market Part IV Import Procedures & Requirement Part V Marketing Suggestions Part VI

3. Part I About SMH

4. About SMH - Introduction • SMH International (SMH) is a marketing, consulting, PR and events agency • Established in 1993 with over 15 years of professional experience • Provide in-market assistance to foreign organizations and companies in China • Help numerous foreign companies & organizations establish themselves and expand their markets throughout Mainland China and HK

5. About SMH – Our Client • SMH is currently contracted by several major foreign associations and companies • Under the guidance of SMH, these companies have experienced significant growth in the Chinese market and their products are now available in many retail outlets and restaurants.

6. About SMH – Activities I Marketing & Promotions SMH has cultivated close connections with many Chinese companies and organizations in order to assist clients in promoting their products. Media Reception In-store Promotions Events Planning We are very detailed in our work, and therefore help our clients in creating successful events that raise brand and product awareness in their related markets in China. Chef Training

7. About SMH – Activities II Trade Mission Trade Show Trade Show & Mission We have strong experience in trade shows, allowing clients to make an impact when utilizing either tradeshow or mission options. PR Work We provide various media campaign options, all of which have been successful for clients due to our relationships with local media in China. Media Campaign

8. Part II China Market Overview

9. China Market Overview - Economy Overall: China is experiencing stable growth in recent years, and suffers less from the global economic recession. Macroeconomic Consumption Retail & HRI • GDP grew by 6.1% to RMB 6.57 trillion (USD 0.97 trillion) in the first quarter of 2009, slowed down a bit compared to 9% in 2008, but still a stable growth • CPI went down by 0.6% • Disposable income: RMB 4,834 (USD 711), a growth of 11.2% in the first quarter of 2009 • Sales of consumer commodities: rose 15.9% to RMB 2.94 trillion (USD 0.43 trillion) • Retail sales: USD 1,334 billion in 2008 • HRI sales: USD 225 billion in 2008 • Expo 2010 is to foster HRI development, 400 new hotels to be built,300 star-rated

10. China Market Overview – Market Trend Health Benefit With improvement of living standards, Chinese consumers are more aware of the health benefit from daily diet. Positive Trend for Imported Foods • 15% annual growth in China for the past 5 years. • China is one of the largest food importers in the world. • By 2018, total sales are projected to reach RMB 480 (USD70 billion). Food Safety After the melamine scandal, the safety and quality of food products become public concerns. Western Lifestyle There is an increasing percentage of younger middle class population who enjoy western lifestyle including cuisines etc. E.g. there are more than 20,000 western style restaurants in 30 provinces in China.

11. China Market Overview – Trading Strong Demand for High- Value Products U.S. Exports of Consumer-Oriented Products to China 2001 - 2008 ($Million)

12. Part III ChinaTreeNuts Market

13. China Tree Nuts Market – Popular Products • The most popular tree nut product in China • Regarded as most nutritional • The origin of all types of almonds in the world • Long history leads to high consumption Walnut Almond Popular Tree Nut Products in China • One of the top four nuts products • Liked both as snacks and ingredients • Shorter history but great development • Welcomed as snack foods Pistachio Hazelnut

14. China Tree Nuts Market – Domestic Consumption Consumption Volume of Tree Nuts in China (2003 – 2007, MT)

15. China Tree Nuts Market – Importation The increasing consumption demand has led to the growth in tree nuts importation. Import of Tree Nuts in Mainland China 2008

16. China Tree Nuts Market – Importation The importation trend of tree nuts from US is similar to that from the world, with pistachios ranking first in volume. US Export of Tree Nuts to Mainland China 2008

17. China Tree Nuts Market – Market Analysis • Increasing demand for tree nuts products • Taken as snacks or ingredients • Largest consumption: Walnut, regarded as nutritional and beneficial to brains Consumption Analysis of Tree Nuts Market in China • Traditional products mainly rely on domestic production • A net importer of pistachio • Overall: a considerable growth due to falling price and great demand • Expanding market • Favorite for novel products to be exported to China • Favorite for products with nutritional benefits Importation Development

18. China Tree Nuts Market – Consumer Behavior Flavor Shell Price Natural flavor is preferred by middle to high class consumers who are more aware of quality. For taste, south and east China enjoy sweet ones while salty is welcomed in the north. Chinese consumers have a preference for in-shell tree nuts as snacks. Therefore, those in-shell but easy-to-break products will see great potential in China. Regardless of the increasing income, Chinese consumers are still price sensitive. To select from similar products, they will choose a cheaper one.

19. Part IV ChinaPecan Market

20. ChinaPecan Market – Chinese Name Pecan By meaning: 山核桃 By pronunciation: 碧根果 Bi Geng Guo

21. China Pecan Market - Overview • Pecan was introduced to China in 2002, before that there were no products available on the market. • Currently 7 varieties have been exported from US to China and the most popular one is Western Schley. • Varieties with bigger size and larger amount of meat are highly recognized by Chinese importers and manufacturers. • In-shell pecans are more popular than shelled ones due to its lower price and consumer preference. But demand for shelled pecans is largely unleashed for high-end market like being used in Haagen Daz ice-cream etc. • Feedbacks from traders show that there is increasing demand for value-added pecans like roasted or seasoned ones from US which could be sold to retailers directly.

22. China Pecan Market – US Export From 2004, there is gradually growth in the export of US pecans to China. Due to various promotional activities like trade shows and trade missions, 2008 saw a tremendous increase in export volume. US Export of Pecans to Mainland China in 2008

23. China Pecan Market – US Export US Export of Pecans to Hong Kong in 2008 • With almost zero tariff, Hong Kong is a major base for tree nuts import in Asia • Therefore, the volume of US pecans exported to Hong Kong is much larger than that to Mainland China • After being exported to Hong Kong, pecans will then be distributed to southern or even northern China through grey channel • Therefore Hong Kong is usually selected as the gateway to China for US suppliers.

24. US Pecans Mexico Pecans Australia Pecans China Pecans China Pecan Market – US & Competitors • US produces over • 80% of total pecans in • the world. • With the status as • dominant supplier, US • has occupied 77% of • the market share in • China. 77% 8% 15% The domestic production of pecans in China is still at infancy, it would take four or five years for large quantity of harvest for commercial sales. • With good product quality, Mexico • and Australia are able to compete • with US and take 15% and 8% • market share respectively.

25. China Pecan Market – Application in Bakery • From 2003 to 2007, CAGR (Compound Annual Growth Rate) of bakery industry reached 25.7%, far above the figure of GDP at 10.9%. And in 2008, the strong performance continued with total product sales accomplishing a remarkable year-on-year growth of 43%. • Unpackaged/artisan bread in China: - Sold mostly in supermarkets and bakery stores - Chinese consider it fresh, healthy and good quality • Many bakeries are trying to create healthier products to cater to the consumers, by adding more additives such as walnuts, pecan, raisins, oats, etc. • Further research shows the number of Western-style bakery shops is growing. Western pastries are even beginning to compete with traditional Chinese varieties and taking a larger share of the middle-class urban consumer segment. • While high-fiber products have seen relatively gradual growth globally, 2006 value growth rates for Asia-Pacific was around 9% and an astonishing recorded rate of 20% for China

26. China Pecan Market – Retail Market • Since access into Chinese market, US pecans have gradually become a popular snack foods on the retail market. • Supermarket & Convenience Store: a. Import (Raw) – Manufacture – Package – Retail Channel b. Import (Value-added) (– Package ) – Retail Channel Packaging: Plastic or paper bags Domestic famous brands: Orchard Farmer, A Ming, Baiweilin, Tenwo etc. • Department Store & Snack Chain Store • Snack chain store is a new popular format in China, e.g. “Laiyifeng” opens over 1,000 outlets within 10 years • Sold in bulk size

27. China Pecan Market – Opportunity & Challenge Challenge • Price sensitivity • Competitions from other tree nuts products • Limited knowledge about specific nutrition and benefits of pecans • Limited knowledge about the versatile application of pecans Opportunity • Improvement of living standards • Increasing awareness of product quality, value and nutritional benefit • Growing demand for tree nuts • Almost no domestic production, rely on import • Development of bakery industry

28. Part V Import Procedure & Requirement

29. Import Procedure & Requirement - Procedure Step One Step Two Step Three Completion of foreign exchange formalities Entrust a domestic import company to import the products Sign a contract with Chinese buyers Step Six Step Five Step Four Customs formalities (declaration, tariff payment, inspection etc.) Application for inspection of imported commodities Prepare documents according to laws and regulations Step Seven Retail HRI Distribution in China Bakery

30. Import Procedure & Requirement - Document Necessary documents for pecan import according to the requirement from Chinese laws and regulations Phytosanitary Certificate (issued by APHIS) Commercial Invoice Certificate of Origin Document for pecan import Packing List Bill of Lading Label (for pre-packaged products)

31. Import Procedure & Requirement - Labeling • Name/Brand • Quantitative listing of ingredients • Net contents and drained weight • Name and address of manufacturer and distributor • Production date/Minimum durability date and/or Best before date • Special storage conditions (if applicable) • Warnings in relation to consumption or storage (if applicable) China has issued a new regulation on the labeling requirement of food products. Therefore for imported pre-packaged foods, labels must be prepared both in Chinese and English. The information to be stated clearly in the labels includes: There is no specific requirement on the labels of bulk products

32. Import Procedure & Requirement - Taxation • Value-added Tax: 13% • Tariff: In-shell Pecan: 25% Shelled Pecan: 20% Transaction Price (Contract) Access Price Dutiable Value: CIF Cost of Packaging, Freight, Insurance etc. • It is the most-favored-nation (M.F.N) bound rate enjoyed by US, therefore certificate of origin is necessary to enjoy this rate.

33. Part VI Marketing Suggestions

34. A B Title D C Marketing Suggestion • Middle to lower price for introduction of the products. • In 2008, price of almonds decreased which contributed to the growth of US export to China. (327%) • Pecans are most welcomed as snack foods, retail channel is the main target market. • Bakery sector is another key market for pecans as ingredients. Price Channel • Currently the most important thing for promoting pecans is to differentiate it from walnuts and hickory • Education on the nutrition knowledge of pecan is to be strengthened. • Ensure the quality of pecans exported to China as there is a stricter control on food Education Quality

35. Marketing Suggestion – Trade Shows • SIAL China • (May 2010) • China's largest and leading international exhibition for the food and beverage trade. FHC China (November 2010) One of the biggest food and drink shows, focusing on Retail and HRI sector Bakery China (May 2010) International Trade Fair for the Bakery and Confectionery Trades in China FIC (March 2010) FIC is the largest food ingredients exhibition in China and one of the largest in Asia to hear advice from exports on: market trends, price and supply issues, quality assurance standards, and environment regulations.

36. Marketing Suggestion – Trade Missions Pecan Trade Mission to China Lead Texas pecan growers to visit China: • Retail Check: visit local retail • stores and bakery stores to • collect first hand information • One-on-one meetings with key • importers, manufacturers, • bakery operators etc to seek • business opportunities • Product showcase • Target cities: Shanghai, Beijing, • Guangzhou (Chengdu) Reverse Trade Mission to Texas Organize Chinese buyers to visit Texas: • One-on-one meetings with growers or • exporters to enhance mutual • understanding for business cooperation • Plant tour: visit local growers’ plant to • see the growing, processing of Texas • pecans for the buyers to better • understand the quality and value of • Texas pecans • Seminar: lecture given by professionals • in pecan industry to educate Chinese • buyers on the features of US pecans to • raise their awareness

37. Marketing Suggestion – Media Campaign • As mentioned, one challenge facing US pecans in China is consumers’ limited knowledge about nutritional benefits of pecans and misunderstanding about pecans and hickory. • One effect way to address the constraint is through media campaign, currently there are some professional magazines in China focusing on food industry. Advertisings and advertorials could be conducted. • In addition, Interactive Program like guess competition on pecan knowledge through media is also a good way to convey necessary information to target consumers.

38. Marketing Suggestion – Bakery Training • Bakery Training Programs • To promote pecan application in bakery sector, bakery training programs could reach more pastry chefs and educate them on the versatile application of pecans in bakery products • The objective of the activity is through these pastry chefs to introduce pecans in bakery stores, hotels and restaurants which will lead to the increase of pecan sales in china. • Recipe development: use US • pecans as ingredients • Invite guest chefs from • Texas • Lecture on US pecans • On-site demonstration of • cuisine preparation with US • pecans • Practice by pastry chefs • from local bakery stores and • HRI

39. Thank You !