China's leading frozen food manufacturer First Natural has announced strong 2007 financial results. The Hong Kong-headquartered firm saw sales climb by an enormous 36% year-on-year (y-o-y) to reach CNY739.5mn ($105US.5mn), while operating profit increased by an impressive 11% y-o-y to CNY236.8mn ($33US.8mn). First Natural has attributed its success to disciplined cost control and a commitment to food safety, both of which will remain important throughout 2008; however, BMI notes that the competitive landscape will only get more challenging for the company.

Frozen Food A Hot Prospect

China Frozen Food Sales (US$bn) - Historical Data & Forecasts

e/f = BMI estimate/forecast. Source: Access Asia, Company figures, BMI

First Natural has long prioritised investment in hygienic food manufacturing and distribution and thus has a hard-earned reputation as a safe food processor. In the current climate of intense food safety fears, this reputation has given First Natural an important competitive edge. The company has, not only been able to build local confidence in its food safety credentials, but it has also managed to drive export growth, with the profitable markets of the US, Russia and Japan all becoming leading importers of its produce.

Cost control has been the second key element of the company's strategy and here it has performed remarkably well, securing double-digit profit growth amid soaring input costs. First Natural claims that for the most part it has enjoyed fairly stable raw ingredient prices. Rising production and distribution costs on the back of spiralling energy prices have, however, proved unavoidable and the company has sought to offset this by increasing retail sales prices where appropriate. Primarily this has involved packaging upgrades and the premiumisation of existing brands for which consumers are willing to pay more and which typically carry higher margins.

Premium product development and the establishment of new distribution channels will remain key elements of First Natural's strategy in 2008, alongside cost-management and investments in food safety, be it production or marketing. However, BMI expects the competition faced by the company to accelerate dramatically during the year, potentially forcing the firm to up its expenditure and upsetting its approach to controlling costs. BMI's Chinese frozen food sales forecast of 67% to $19US.1bn in 2012 will attract newcomers, while considerable improvements in general food safety standards will erode First Natural's long-held competitive advantage.