Industry Insights | China's prefabricated food industry is expected to continue expanding its revenue volume

The prefabricated food industry originated in the United States in the 1940s and later in Japan in the 1950s. The first companies that emerged were mostly contract manufacturers, with no clear brands in the market. After decades of development, influential large-scale prefabricated food enterprises have grown in the United States and Japan, such as Tyson Foods, Nissui Foods, Kobe Foods, etc. Their development trends and growth trajectories have added certainty and reference models to the development prospects of China's prefabricated food industry.

After the 1990s, with the influx of Western fast-food brands into the Chinese market, such as KFC and McDonald's, domestic companies began to adopt the net-food delivery processing model. After 2000, semi-finished vegetable processing enterprises began to emerge, but due to the immaturity of related supporting conditions, the industry developed relatively slowly as a whole. Starting from 2014, with economic development and the explosive growth of takeout services, the industry entered a period of rapid development. By 2020, the outbreak of home consumption due to the pandemic directly accelerated the consumption of the prefabricated food industry.

In China, the large-scale, industrialized, and standardized production methods of dishes are showing a high degree of substitution for the full-process cooking methods used in households and various catering businesses. In the first half of 2021,Wizhi FragranceCompanies that have secured the reputation of being 'pioneers in prefabricated food' and gone public, such as Qianwei Yang Cook, Anjing Food, JiuMaoJiu, Hema Fresh, Dingdong Shopping, and Kuaquan, have also flocked into the prefabricated food market. According to Frost & Sullivan's analysis, the market size of prefabricated food in China was approximately 420 billion yuan in 2022, and it is expected that the market size may exceed one trillion yuan by 2026.

Upstream of the industrial chain:The upstream sector mainly consists of raw material suppliers, focusing on agriculture, animal husbandry, fisheries, and primary processing industries. The overall distribution is relatively scattered, with capable midstream manufacturers entering the upstream link. In addition, agricultural enterprises, relying on their advantages in raw materials and rich channel networks, often also deploy prefabricated food businesses, such as Shengnong, Zhengda, and New Hope.

Midstream of the industrial chain:The midstream consists of prefabricated food producers, mainly including specialized prefabricated food manufacturers (including frozen food merchants), central kitchens built by catering enterprises themselves, upstream agricultural enterprises, and some retail-oriented enterprises, such as Waimai, An'gong, Shengnong, Hema, etc.

Downstream of the industrial chain:The downstream market is mainly focused on the B-side, supplemented by the C-side. The proportion of the B-side market to the C-side market is 8:2, with an expectation that the C-side market will rise in the future. The downstream terminal channels are primarily catering and retail markets. From the B-side perspective, hotel channels and social catering are the main consumption tracks in the downstream market; from the C-side perspective, large supermarkets, convenience stores, takeaways, etc., are important channels through which ready-to-eat foods reach consumers directly. Secondly, with the progress and development of social science and technology, new retail (fresh food e-commerce, community group buying, new hot pot supermarkets) and live streaming platforms are becoming new sales channels for ready-to-eat foods, stimulating a continuous surge in demand from both the B and C sides.

The prefabricated food industry mainly involves five types of players, each with a different corporate DNA.

Upstream agricultural enterprises:Primarily focusing on primary agricultural product processing enterprises, these companies leverage their advantages in raw material accumulation and brand recognition to enter the prefabricated food industry through further deep processing. Examples include Guolian Aquatic Products, Fucheng Co., Ltd., and New Hope Group. These enterprises possess production and processing capabilities, with most products using traceable QR codes to ensure product safety and quality. They have strong control over raw material costs and a cost advantage. However, their brand-building capabilities are insufficient, their control over end consumers is weak, and their distribution methods are relatively single.

Professional Manufacturer:Primarily serving professional food manufacturing enterprises, these companies leverage their brand advantages and food marketing experience to directly enter the market with ready-to-eat pre-packaged products. Representative brands include Weizhi Xiang, Qianwei Yangchu, and Zhenwei Zhi. These enterprises possess strong product R&D capabilities, a rich variety of products, and the ability to develop large single-item products as well as mature sales channels, capable of meeting the personalized needs of B2B clients. However, most are small-scale enterprises with issues in quality monitoring, shallow supply chains, low factory automation levels, and are greatly affected by upstream raw material costs.

Frozen Food Enterprises:Primarily serving as a producer of frozen and chilled fresh foods, it quickly entered the prefabricated food industry with its superb chilled fresh technology, high-quality brand influence, and complete supply chain. Examples include Anju Food, Sanyou Food,Sanquan FoodWait. These enterprise products are highly standardized and scaled, with advantages in cold chain processing and transportation. Therefore, they have strong channel distribution capabilities and are also adept at creating hit products. Additionally, the product categories are single and vulnerable to upstream costs. For the C-end and small B-end markets, the main channel is merchants.

Catering Enterprises:Refers to large chain catering service enterprises that enter the market through brands and signature dishes, such as Xibei, Haidilao, Guangzhou Restaurant, and New Yaya. Secondly, the application of prefabricated food in hotel catering is becoming increasingly widespread. Currently, there are two common models of prefabricated food in hotels: one is processed on behalf of others, and the other is self-prepared by the hotel catering department, which is transported and sold through cold chain distribution. Catering prefabricated food enterprises have been deeply involved in the catering industry for many years, possessing rich experience in dish research and development and superb cooking skills. They offer high-quality flavors with a high degree of authenticity, making them more trusted by consumers, who are a strong group.

Retail-oriented enterprises:Primarily targeting online and offline shopping malls, these enterprises mainly cater to the consumer market. They enter the prefabricated food industry through their own channel advantages, brand, and supply chain systems. Representative companies include Dingo.com, Hema, Kuaquan, Walmart, etc. These enterprises have mature retail channels that allow them to directly reach consumers. Secondly, by leveraging their advantage in big data, they deeply understand consumer preferences, promptly improve product attributes, and meet consumer needs. However, they lack experience in food research and development and processing, rely on third-party factories, have weak supervision capabilities for food safety, and their supply chain systems are relatively lacking.

The simple cooking mode of prefabricated food can meet the chain catering industry's needs for cost reduction, meal service efficiency, and standardized dishes. Therefore, the chain operation of the catering industry will drive the development of the prefabricated food industry. According to data from the Hotel Association, analyses by Frost & Sullivan and LeadLeo Research Institute, the market scale of China's catering industry will exceed 5 trillion in the future. At the same time, the chain rate of Chinese restaurants is increasing year by year.

Cold chain logistics helps improve logistics data, effectively reduce enterprise logistics costs, and enhance the efficiency of commodity logistics. Currently, the downstream market is mainly B2B, with the focus on cost reduction and efficiency improvement, while the C2C market values health, convenience, and cost-effectiveness more. The improvement in cold chain transportation technology can effectively reach C2C consumers and meet their convenience needs. Therefore, the acceleration of cold chain technology is driving an increase in the transportation efficiency and business coverage of prefabricated food products. According to Frost & Sullivan and LeadLeo's analysis, the scale of cold chain transportation in China is expected to reach around 700 billion yuan by 2026.

According to the analysis of Frost & Sullivan and LeadLeo, nearly 90% of the cost of prefabricated food products comes from meat and aquatic products. Among them, the price stability of meat is relatively low, which has a significant impact on mid-tier enterprises. In addition, crop prices are characterized by seasonal cycles and are also affected by international market shocks. However, the retail prices of prefabricated food products mainly directed to end consumers and catering are not prone to fluctuation. Therefore, changes in raw material costs in the short term will affect the profit level of enterprises. The following figure shows the fluctuations in the price index of major upstream raw materials throughout 2021:

Firstly, most prefabricated food products are quick-frozen cold fresh foods that rely on cold chain transportation. Logistics costs and the requirement for product freshness limit the radius of distribution for processing enterprises. Secondly, downstream customers in the prefabricated food industry are relatively scattered, with diverse orders in quantity and variety. Product distribution is characterized by small customer scale, high frequency of delivery, dispersed customers within an area, and high timeliness requirements. For preservation needs, the transportation and distribution process of semi-finished dishes must be carried out in a low-temperature environment, requiring advanced warehousing logistics systems and advanced cold chain transportation technology support. Currently, most enterprises within the Chinese industry have single production bases, with most shipping goods through third-party logistics, and a few having their own logistics systems, but there is a widespread phenomenon of outdated equipment.

Most prefabricated food enterprises are small-scale operations with insufficient industrialization, labor-intensive processes, and uneven sanitary conditions in factories. To ensure product quality and flavor, different products require careful processing with different ratios. Therefore, strict control over each processing link needs to be achieved through establishing enterprise systems. The hygiene and safety of leading enterprises tend to improve, while those in the middle and lower tiers struggle to meet standards. The large B2C and C2C markets will tend to favor leading enterprises. In addition, consumers' choice and acceptance of different prefabricated foods depend on personal preferences and habits. According to research by Frost & Sullivan and LeadLeo, in 2022, the main constraints on the development of ready-to-eat and ready-to-heat foods at the C-end were unhealthy choices or a preference for takeout.

Although the impact of the pandemic on the catering industry is self-evident, the catering supply chain, including prefabricated food, has maintained good development resilience and an objective industry outlook. In the long run, with continuous breakthroughs in China's cold chain technology, positive news has stimulated the prefabricated food market. Most mid-sized enterprises have begun to develop towards leading companies, which require financing. The prefabricated food industry has received a new boost, with substantial capital inflows. At the same time, terminal consumption has improved, B and C market strategies have been gradually advanced, and the prefabricated food market is expected to continue expanding its revenue volume.