Export Partners Discuss Shanghai Snack Rollout

As the first Looney Tunes snack crackers make their one-way trip Shanghai, we had some questions for Lance's Harry Salvaggio, director of business planning, and Roy Warren, president and CEO of China Premium…

By Bob Sperber

The first Looney Tunes-branded snack crackers bearing Warner Bros. cartoon characters are now en route to grocery shelves in Shanghai, China. As reported in late April (see related article) the snacks are baked and private labeled in the United States by Lance Inc. (Charlotte, N.C.; NASDAQ:LNCE), and exported and distributed by China Premium Food Corp. (North Palm Beach, FL; listed on Nasdaq's OTC BB:CHPF.OB).

Three varieties of single-serve (six-count) packages constitute the first wave of the introduction:
• Peanut Butter on Toastchee (crispy, cheesy cracker) with Daffy Duck packaging,
• Peanut Butter with Honey on Captain's Wafers (light, buttery crackers) with Bugs Bunny packaging and
• Cheddar Cheese on Captain's Wafers with Tweety Bird packaging (see picture).

These are the first foods China Premium is bringing through its new food distribution subsidiary in the Wai Gao Free Trade Zone of Shanghai, China.

Roy Warren was the chief architect of the deal for China Premium (formerly China Peregrine). Harry Salvaggio has been the lead manager for implementing and managing the Shanghai snack deal. We recently had a conversation with both; excerpts follow.

What are your priorities for bringing baked snacks into the Chinese market?
Salvaggio: We take this relationship very seriously…. One of the biggest things we have to confront at the outset is how to take product manufactured in the U.S. and be able to put a good business proposition together where we can deliver the quality and the pricing that Chinese consumers desire. That was a big, big challenge. Chinese currency is about 8.3 to 1 U.S. dollar—we had a tough challenge to structure this deal so that both companies can make a reasonable profit.

The second thing we have to overcome is…logistics. We have to deliver extremely fresh product to the Chinese consumer, and do so economically. We had to learn a lot about shipping and … keeping food fresh. [Shelf life is in the area of five or six month for the crackers.]

Who is your competition?
Salvaggio: Our competition in the Chinese marketplace [is] locally made product. Keebler has facilities over there making cookies and crackers, and Nabisco also has a facility…and then there are local companies. Quaker oats was there, but has bailed out of China.

Warren: Over the past four-or-so years, the P&Gs--large multinational brand companies--rushed into China, and tripped over themselves. The [economic] Asian Flu came, and everyone became short-sighted. Yet our research indicated that one of the fastest growing categories in one of the 10 largest cities in china was snack foods.

I happen to be a subscriber to the theory of suppy-side economics--If you take for granted that all those things are not fixed—the market influences that are variable—you get a radical surge of consumption in China…more so than in other places. As you get this radical surge in consumption, people assume you're going to drive prices up…but a surge attracts an overreaction on the supply side, where you get more supply than you had demand. The effect is an improvement in quality, because of the increased competition—and lower prices.

So even though there is some competitive product being produced in China, we think the Lance products will come off tasting fresher and selling well.

Our previous story on this deal referenced the research you did that nailed-down products consumers were most likely to want. How do you know…?
Salvaggio: "What makes us think we have a superior proposition here is that China Premium has an innovative track record…[and]…did a bang-up job on the packaging graphics, aiming at the target audience. We really believe the Chinese consumer wants to have a products for a…fun…eating occasion.

Warren: The products tested well…and there is no one—nobody!-- in any of the hyperstores in Shanghai [the primary, initial market] with a peanut butter sandwich cracker!

The Warner Bros. Cartoon characters seem an unlikely choice Chinese consumer marketing… What's up?!

Warren:

The Space Jam movie [with Basketball icon Michael Jordan] was introduced with a significant amount of fanfare. There were more viewers of that movie in China than there were in the U.S. There was a study done after the movie was released, and awareness of "Tubagur" [name for Bugs Bunny in China] was off the charts--I've not found a schoolchild yet who doesn't know who Tubagur is. But awareness stops at around 25 or so.

Since the "Single Child" rule in 1979, families focused on that one child, on education and health [and] created a kind of spoiled "little emperor" generation. These people are severs of money, and they have resources. What's happened now, is that they've had 20 million babies a year since 1979, compared to 4 million a year in the U.S., and every one gets special attention. Those kids are now about to start having children of their own, and they're recognizing… Western culture. That's really who we're looking at…we're really after these 21- and 22-year-olds and younger.

What did your market research tell you about what type of snacks and about salty, savory or other flavors to offer?
Salvaggio: Lance has a lot of products in both the salty snack and sweet goods categories. Our product line gives us a lot of new things to continue offering the Chinese marketplace. In this case, we took three of the most popular Lance items and that's what we decided to… introduce to China. Roy and China Premium did taste tests to ensure that they would be accepted. As the relationship moves on, we'll develop products specifically set for the Chinese palette, Chinese taste preferences as the need arises.

What will the snacks retail for?
Salvaggio: Pricing is not final, but it'll be about a 30% premium for what we believe is a product with superior quality, and it will have the number-one icon [Looney Tunes characters, said to be the world's most recognized marketing image] on the package.

Warren: Without either one of those…this product wouldn't sell. Lance is for us an… interesting big brother. Quality and freshness are their forte.

What are the biggest problems in terms of distribution and logistics?
Warren: When we went over in 1995 with fresh milk, there were 100 [retail] stores in our market with refrigeration--out of 10,000 total stores. Now, there are over 1,800.

The country was "dark" for 40 years! We don't for a minute confuse China's commercial evolution with infrastructure development. Their highways and cold chain [for refrigerated distribution] is improving, but there's still a long way to go.

There's still a very fragmented distribution system over there in both retail and foodservice. Once these barriers are removed, the economics will radically improve for a number of non-domestic products in China.

How does your strategy play with off-again, on-again Chinese trade negotiations?
Warren: Our strategy is to position ourselves so we have head start--to have the facilities and the barriers removed, and provide quick access. The Chinese are clearly the fastest growing, largest consumer population in the world. It's a market we ought to be having free access to. From a political standpoint, the U.S. government has often been late to recognize its friends, but Now it looks like PNTR is a done deal.

[Editor's note: On the issue of PNTR, The U.S. House passed permanent normal trade relations with China May 24, and the senate is expected to follow suit. (See related article). Similarly, China is expected to gain entry as a member of the World Trade Organization.]

Salvaggio: Currently, we have a deal for what amounts to a 42% import tariff and duty on that product. Clearly, if you can only sell the product at X price-point, the profit might be entirely tied up in the tariffs. But these will diminish—not overnight, but they will diminish over a period of time.

Thank you.