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Case Study: Deqingyuan - IFC

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<strong>Case</strong> <strong>Study</strong>:<strong>Deqingyuan</strong>An excerpt from Market Movers:Lessons from a Frontierof InnovationFull Market Movers report, and its companion piece,Developing Value, are available at www.ifc.org/enviroand www.sustainability.com/marketmovers


1Market Movers<strong>Case</strong>: <strong>Deqingyuan</strong>A lot more than chicken feedA small start-up near Beijing ishelping transform Chinese eggproduction – anticipating a markettrend towards better food qualityand safety.If you set out to find the mostchallenging environment in whichto start a business, you would behard pushed to beat the chickenindustry in China. A series of foodsafety and health issues – SARS,bird flu, the Sudan 1 carcinogen– have undermined confidence inthe ability of the world’s biggestegg consumer (accounting for anextraordinary 40% of total worldconsumption) to monitor thequality of its poultry stock. Thiswas not helped by the fragmentednature of the industry in China.Prices are continually under pressurefrom myriad small producers preparedto cut corners on productionstandards and food safety. Only acouple of farms in the whole countrycan boast more than a million birds.In Europe and America such farmsare commonplace.Nevertheless, in 2000 one mantook on the daunting challengeof producing a quality egg for theChinese market. He was not a serialentrepreneur with a family backgroundin business. Rather, ZhongKaimin was an engineer who hadworked in the Ministry of Defencefor 16 years. But he and his familyknew that it was hard to find adecent egg in Beijing. So, with thehelp and advice of a few friends andfamily, he set out to fill the gap.His company, <strong>Deqingyuan</strong>, basedsome 90 kilometres outside theChinese capital, is now producingabout 480,000 high-grade eggs aday and accounts for over 70% ofthe (growing) branded egg marketin Beijing. Profits doubled in 2005(to over RMB 10 million), and onlyfell back in 2006 because of heavyinvestment in expansion – thecompany increased its infrastructuresixfold in a single year.In March 2007 <strong>Deqingyuan</strong> beganto sell its eggs at a premium pricein Hong Kong, a city that has nottraditionally sourced eggs fromWhen an outbreak of bird flu caused egg sales to plummet,<strong>Deqingyuan</strong> continued to sell everything it could produce at itsfull premium price.mainland China. It now intends toopen two new farms – one in thesouth of the country near HongKong, the other near Shanghai.Within three years <strong>Deqingyuan</strong>hopes to be producing 6 millioneggs a day. Further plans includethe production of liquid and powderedegg. These products have alonger shelf life than eggs in theirshells and provide an efficient wayof dealing with periods of highand low demand.Meanwhile the egg-distributionsystem in China is shifting in<strong>Deqingyuan</strong>’s favour, away fromthe traditional wet markets (whichthe health authorities are graduallyclosing down) and into supermarkets,some of them owned byforeign giants such as Wal-Mart,Carrefour and Tesco. World-famousbrands such as these do not wantto risk their reputations by sellingfood products of dubious quality.Enter <strong>Deqingyuan</strong>, whose eggs arealready available in over 500 Chinesesupermarkets.Mr. Zhong did not plunge into hisventure totally unprepared. Hegained an MBA from the People’sUniversity in Beijing and persuadedsome friends with business experienceto join him. They did doorto-doormarket research and, onceproduction had begun, they gaveaway half a million eggs in order toshow people how much better theytasted than the traditional fare.<strong>Deqingyuan</strong> brands its eggs withdistinctive packaging, and it stampsthem with the date they were laid,the first time this has been donein China. The company also differentiatesits product by selling eggsby number, as well as the moretraditional approach of selling byweight. When an outbreak of birdflu caused egg sales to plummet(and a large number of producersto go bankrupt), <strong>Deqingyuan</strong>continued to sell everything it couldproduce at its full premium price.Local consumers were hungry for aproduct they could trust, a brandthat they could rely on. “Sustainabilityhas made <strong>Deqingyuan</strong> amarket leader,” says Mr. Zhong,“and a market leader will not onlysurvive a crisis, it will thrive outof crisis.”


Market Movers 2Sustainability performanceWaste not, want not<strong>Deqingyuan</strong>’s business propositionis based on Chinese consumers’growing willingness to pay for foodsafety. Expenditure on householdconsumption in the country is risingby almost 7% a year, much of itgoing towards better quality food.So the highest environmental andanimal-husbandry standards arefundamental to <strong>Deqingyuan</strong>’ssuccess. This means protecting theenvironment that birds live in,ensuring adequate cage size andsiting and providing good qualityfeed, thereby reducing the incidenceof disease and the need for antibioticuse in egg production.The company is unusual in aimingto be green in one of the mostpolluting industries of all: in Chinaagricultural waste is reckoned to begreater in volume than industrial andmunicipal waste put together. Butthe result is a higher quality product,which means that <strong>Deqingyuan</strong> cancharge a higher price for its eggs(<strong>Deqingyuan</strong>’s eggs sell at almosta 200% premium to the price of astandard egg).<strong>Deqingyuan</strong>’s sustainability concernsstretch well beyond animal welfare.There are significant worker healthrisks in this industry due to ammoniaand dust concentration in thefacility. <strong>Deqingyuan</strong> has purchasedadvanced equipment to address thisproblem, and provides a health caresystem for its employees. Otherenvironmental measures includewaste management, energy conservationand rainwater collection forlandscape use.Chickens make a lot of mess, andgetting rid of it can be a problem.So <strong>Deqingyuan</strong> turns much of it intofertiliser which it sells to nearbyfarmers. But the company nowproduces far more waste than itcan absorb, so the company hasconstructed a biogas plant, whichCourtesy of <strong>Deqingyuan</strong>will come on stream in late 2007.This will convert the waste intomethane gas, which can be used toproduce electricity. The electricityproduced will more than meet thecompany’s own needs, so it will exploreopportunities to sell the rest.The company will also benefit froma new revenue stream through thesale of Certified Emission Reductions(CERs).The company’s business goals havealso led it to provide support tothe local community. Above all, itneeds to guarantee good foodstufffor its birds, and it needs to be surethey are not going to be infectedby disease from other local stocks.So it provides high-grade organicfertiliser (made from its own waste)to local farmers to enable themto grow corn, which <strong>Deqingyuan</strong>guarantees to buy as feedstuff at ahigher-than-market price. In addition,it gives cheap eggs to villagersnearby in return for them notbreeding their own chickens – adeal struck after the avian flu outbreakin 2004.On governance, <strong>Deqingyuan</strong> hasalso set out to follow good practice,aware that without it foreign investmentis unlikely. An internationalaccounting firm is working onan audit with a future initial publicoffering (IPO) in mind. “They’re notperfect on governance,” says JoanLarrea of the Global EnvironmentFund, an investment fund focusedon clean technologies and emergingeconomies. “The main attractionis that they do take it seriously.”<strong>Deqingyuan</strong> holds regularshareholder and board meetings,and produces the required financialdocuments. They have an opendiscussion between the board andmanagement, and have just addedan independent board member.


3Market MoversConclusion“Head and shoulders abovethe rest”Setting up an operation like<strong>Deqingyuan</strong>’s is expensive. Thebirds’ cages have come from Italy,the fertiliser-making equipmentfrom Germany, and the biogas plantfrom America’s General Electric. Notsurprisingly, for some time moneywas Chairman Zhong’s main challenge.He says he devoted up to 80% of histime to fund-raising.<strong>IFC</strong> was impressed by the company’s vision of transforming China’segg production at the same time as it pioneered new standards ofsustainability.But he managed to attract someheavyweight foreign investors –including the <strong>IFC</strong> (which took astake in the company in 2006) andthe Washington-based Global EnvironmentFund. Mr. Zhong believesthat <strong>Deqingyuan</strong>’s high standardof animal welfare was partly responsiblefor <strong>IFC</strong>’s interest. Theproject is smaller than wouldusually draw <strong>IFC</strong>’s attention, butthe institution was impressed bythe company’s vision of transformingChina’s egg production at the sametime as it pioneered new standardsof sustainability. Receiving <strong>IFC</strong> supportwas crucial for <strong>Deqingyuan</strong>,bringing not only money but alsoexpertise – in, for example, thebiogas project.The company is now thinking ofa stock-market listing in 2008 or2009 to give it access to the furthercapital it will need if it is to scaleup its operation to a national level.Its good governance and environmentalperformance will stand itin good stead as it approaches themarket. Mr. Zhong says the thingthat keeps him awake at night nowis the challenge of finding enoughsuitably qualified people to managethe company’s rapid expansion. Theindustry has traditionally been runby small family firms; trained poultrymanagers in China are even rarerthan good eggs.The high price of entry may deter competitorsfrom capturing <strong>Deqingyuan</strong>’smarket share for the foreseeablefuture. Those who do enter will inany case be hard pushed to findthe management skills required tomaintain such high environmentalstandards. The few rivals that existin the branded egg market currentlyoutsource at least some of theirproduction to others, handing overbirds to their suppliers and collectingtheir eggs thereafter. <strong>Deqingyuan</strong>does everything itself and is incontrol of its birds all the time. It is,says Joan Larrea, “head and shouldersabove the rest.”Box 5: Leadership<strong>Deqingyuan</strong>’s profitability dependson the company’s abilityto charge a price premium tocover the higher costs of producinghigh-quality eggs. Thisis no mean feat in a countrywhere food quality standardsare inconsistent and many eggproducers have been bankrupteddue to the price competition.However, Mr. Zhong’s visionand leadership allowed him totake the risk. He bet (correctly)that his high-quality eggs wouldmesh with the growing healthconsciousnessof Chinese consumersif he could build a brandthat became associated withquality. He achieved this in severalways, including organisingmarketing activities in residentialcommunities, giving awaymore than 500,000 eggs for freefor people to taste, and developinga unique brand and packaging,with production datesclearly printed. Mr. Zhong’sleadership in pioneering higherquality and ethical standards inthe Chinese market also helpedsecure <strong>IFC</strong> investment – anothercritical factor that contributedto success.Courtesy of <strong>Deqingyuan</strong>


Market Movers 4Courtesy of <strong>Deqingyuan</strong>


5Market MoversCompany profile<strong>Deqingyuan</strong>, based in Beijing, China, produces high-quality eggs for the Beijing and HongKong markets. <strong>Deqingyuan</strong> was established in 2000 with the recognition that local eggquality was poor, and it became the first company in China to sell fresh eggs bearing aproduction date and trademark.key dataFoundedBeijing <strong>Deqingyuan</strong> AgricultureTechnology Co. Ltd wasfounded in 2000 by the currentchairman, Zhong Kaimin.Ownership structureOwned by: Individualshareholders includingZhong Kaimin (14.9%),DQY Agriculture TechnologyCompany (27.7%), GlobalEnvironment Fund (15.9%),Capital Today (15.9%),Innobiz Hong Kong (8.8%),Shanghai Yi Bei (8.6%) and<strong>IFC</strong> (8.2%)SectorAgribusinessHeadquartersBeijingOperationsBeijingMarketsBeijing, Hong KongMain competitorsFollowing <strong>Deqingyuan</strong>(71% share of brandedegg market in Beijing),competitors are Gegeda (25%),Liuminying (1%), Gazige (1%)and Xiaonong (1%)Employees335Market share71% of branded egg marketin Beijing3.6% of total egg market inBeijing 14Awards and recognition– National High-Tech ModernAgriculture Demonstration site– National Food SafetyDemonstration EnterpriseRevenue (USD MN)6.18643.376.74Net income (USD MN)1.201.24.900.65.601.1220.371.22.30 0.030.08FY02 FY03 FY04 FY05 FY06FY02 FY03 FY04 FY05 FY06CAGR from 2002 to 2006: 107.3% CAGR from 2002 to 2006: 150.4%US dollar figures for revenue and net income calculated by authors based on renminbi figures supplied by company and average annualRMB:US$ exchange rate from the Economist Intelligence Unit.14Calculation of total market share, based on branded eggs accounting for 5% of all eggs in Beijing. However, this figure is growing fast.


Market Movers 6The <strong>Deqingyuan</strong> business case – the three most important factorsHere we highlight the three most important ways in which sustainability performance at <strong>Deqingyuan</strong> is influencing businessdrivers and supporting business strategy.1. Higher sales and market accessfrom better environmental andsafety standards– Based on <strong>Deqingyuan</strong>’s reputationfor quality and safety, sales grewfrom $0.4 million in 2002 to $6.7million in 2006.– <strong>Deqingyuan</strong> has 71% share of thebranded egg market in Beijing.– <strong>Deqingyuan</strong> entered HongKong market, which does nottraditionally source eggs frommainland China.2. Brand value and reputationbuilt on good environmentaland safety standards– High food safety based on soundenvironmental approach allows<strong>Deqingyuan</strong> to create a trustedbrand.– During SARS crisis, which deflatedegg sales throughout China,<strong>Deqingyuan</strong>’s sales increased -evidence of high level of trust<strong>Deqingyuan</strong> enjoys with consumers.3. Access to capital from goodcorporate governance– Although industry has difficultygaining access to capital,<strong>Deqingyuan</strong> tapped intointernational investment fromGEF and <strong>IFC</strong>.– Investors are attracted by thecompany’s pioneering vision,quality and environmentalperformance, and seriousapproach to governance.– <strong>Deqingyuan</strong> commands higherprices per egg in Beijing (0.9 RMBper egg vs average of 0.3 to 0.4RMB per egg) and Hong Kong.<strong>Deqingyuan</strong> business case matrixEnvironmentalPerformanceSocialPerformanceGovernancePerformanceSales &Market AccessOperationalEfficiencyAccessto CapitalRisk Mgmt &Licence toOperateTalent &Human CapitalBrand Value &Reputation


© 2007 International FinanceCorporation and SustainAbilityISBN 978-1-903168-21-9Market Movers: Lessons from aFrontier of InnovationFirst Edition 2007All rights reservedThe material in this publication iscopyrighted. <strong>IFC</strong> and SustainAbilityencourage the dissemination of thecontent for educational purposes.Content from this publicationmay be used freely without priorpermission, provided that clearattribution is given to <strong>IFC</strong> andSustainAbility and that content isnot used for commercial purposes.Cover photos courtesy of Amanco,<strong>Deqingyuan</strong>, Jubilant Organosysand MASWriter: Timothy HindleDesigner: Gimga GroupPrinter: Balmar, Inc.This publication is printed withvegetable, soy-based inks on FinchFine paper. This paper is FSC certifiedby SmartWood.The Forest Stewardship Council(www.fsc.org) is an internationalnetwork to promote responsiblemanagement of the world’s forests.International Finance Corporation2121 Pennsylvania Avenue, NWWashington, DC 20433USAT +1 202 473 3800F +1 202 974 4384www.ifc.org/enviroSustainAbility Ltd.20-22 Bedford RowLondon WC1R 4EBT +44 (0) 20 7269 6900F +44 (0) 20 7269 6901london@sustainability.comSustainAbility Inc.1638 R Street, NWSuite 301Washington, DC 20009USAT +1 202 315 4150F +1 202 315 4178washington@sustainability.comwww.sustainability.com/marketmovers

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