By DOUGLAS C. McGILL
You might well wonder if Roy Warren, the CEO of China Premium Foods, got the idea for his company from watching the based-on-a-true story movie called "Cool Runnings." It's about an Olympic bobsled team from Jamaica.
Warren has big plans, you see, to sell premium caviar in the People's Republic of China. He also intends to import into China container ships filled with sun-dried tomatoes, Bluepoint oysters, smoked salmon, and French pastries.
Do the folks at China Premium know that pieces of cooked chicken in one's daily rice is still a luxury for most people in China? The average monthly income for well-to-do families in China's urban areas is about $250.
Here's the real surprise: yes, they do know. What's more, a dramatic restructuring of the company over the past six months shows China Premium is crafting one of the most ingenious -- if counterintuitive -- strategies yet for a foreign company breaking into China's potentially vast consumer market.
Do-or-Die
That new strategy (we'll describe it in a minute) was born of painfully acquired knowledge. Under its original name of China Peregrine Foods, the company has been manufacturing and selling pasteurized milk in Shanghai for five years. That business comprehensively failed, a textbook tale of a foreign company in China saddled with unexpected start-up costs, partners suddenly becoming competitors, and vicious pressure on profit margins.
Even with a strong financial start and the full support of the Ministry of Agriculture, a year ago the company was deep in the red and in a do-or-die situation. That's when Warren took a long trip to China and had a revelation.
"The more I got involved, the more I saw our strategy was wrong," he continued. "You are not going to outproduce the Chinese. It won't be long before they figure out how to do it cheaper and better."
On his trip, Warren noticed that China was undergoing a classic paradox of emerging economies: both the demand and the supply of consumer goods were rising at the same time. In mature economies, demand and supply usually go in opposite directions. Worse, prices were falling sharply - a nightmare scenario for any manufacturer, much less one new in a country.
Bugs and Tweety
"The question was, what were we going to do about that?" Warren said.
He came up with two interrelated answers. The first was to become a distributor rather than a manufacturer of Western branded goods in China. The second was to use the Internet in that distribution process.
Warren, who as the company's President had handled its finances but not set its strategy, pitched his idea to the Board of Directors. In June last year, he was made CEO and given the mandate to turn the company around.
His first move was to secure a licensing agreement with Warner Brothers, under which China Premium could market foods in China with Bugs Bunny, Tweety Bird, and other characters from Warner's menagerie. The first shipment of goods thus labeled -- snack crackers made by Lance Inc. of Charlotte, North Carolina -- are being distributed in Shanghai this week.
Real Sales
"We shifted from dairy producer to branded distribution because the opportunity was where you add value," Warren explains. "If you make Tootsie Rolls in Nebraska and want to go to China, you've got to go over there and find distributors, and after that you certainly can't track the progress of their operation. Or you can call me, a fully-reporting company, and we'll procure your goods and sell them and you are off the hook."
Which brings us to the caviar. Cognizant of the Internet's rising importance as a business-to-business or "B2B" distributor of goods, Warren began to wonder how the new-and-improved China Premium could hitch its wagon to that trend. Rather than start an online B2B exchange from scratch, he started to look instead for an existing company - a real business with real and repeating sales - that he could bring online.
He found that company in Mandarin Foods. With a mere $10 million in annual sales it could hardly have been smaller, but the niche it occupied had incredibly high visibility in a rapidly emerging market. Namely, it was the sole importer for most of China's luxury hotels of fine imported foods.
Perrier Please
This means that virtually every foreign business person, eating at his or her five-star hotel's lavish buffet in the morning, noon, and night, is noshing on Mandarin-imported cold cuts, smoked fish, deserts during their trip.
"We aren't going to buy rice in Hong Kong and sell it in China," Warren explains. "We can't do that better than anyone else. But we can bring Perrier into China and sell it to the Ritz-Carlton." China Premium has signed a "definitive agreement" purchase Mandarin Foods and on July 3 will launch the beta version of its B2B food portal. "We realized they had so many operational limitations in inventory management, order processing, and sales," Warren said. "They had to streamline their systems, and that's easily done with technology, which is the basis for the B2B notion."
A demo of the portal can be viewed now at www.mandarinfoods.com.
Streamlining the fancy-foods-at-fancy-hotels market could in itself expand Mandarin's market by orders of magnitude, Warren figures. "There are sixteen Shangri-La's in China, and those 16 Shangri-La's have told Mandarin they buy $300 million worth of consumables for their customers a year, $100 million of which they'd buy from Mandarin if they could."
One Dancing Angel
In the long run, though, it's not this niche, as large as it is, that Warren's got his eyes on. He has his eyes on the big pork dumpling.
"China started to modernize in 1979," Warren says. "You now have 21 years of Little Emperors" - the single children of doting parents - "in an open market with increasingly expendable incomes. The story is those kids and their kids as well. At 20 million babies a year times 20 years, that's 400 million people with different habits and expectations and abilities than at any time in the history of China.
"And food and education are the two most important things to the Chinese."
There are some tough realities facing China Premium, all on vivid display in the company's SEC filings. The company's tough times in the 1990's have left it with $13 million in accumulated deficits. On March 31, it had barely $9,000 in the bank and $151,800 in listed assets. If the company were any smaller there wouldn't be room for even one dancing angel on top.
Still, it's a microcap with a great idea, and in the past six months it's made a lot of imaginative and gutsy moves that place it squarely in the fast moving currents of the Internet and international trade.
China Premium is picking up speed. Maybe Roy Warren is studying how those Jamaican bobsledders made it all the way the Calgary Winter Olympics of 1988.
To reach Douglas C. McGill email: dmcgill@virtualchina.com
