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Case Study: Deqingyuan - IFC

Case Study: Deqingyuan - IFC

1Market

1Market MoversCase: DeqingyuanA 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, Deqingyuan, 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 Deqingyuan 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,Deqingyuan 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 Deqingyuanhopes 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 inDeqingyuan’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 Deqingyuan, 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.Deqingyuan 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), Deqingyuancontinued 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 Deqingyuan 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 notDeqingyuan’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 Deqingyuan’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 Deqingyuan cancharge a higher price for its eggs(Deqingyuan’s eggs sell at almosta 200% premium to the price of astandard egg).Deqingyuan’s sustainability concernsstretch well beyond animal welfare.There are significant worker healthrisks in this industry due to ammoniaand dust concentration in thefacility. Deqingyuan 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 Deqingyuan 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 Deqingyuanwill 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 Deqingyuanguarantees 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, Deqingyuan 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.”Deqingyuan 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.

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