Although the prices for sugar and palm oil are expected to fall by 10 percent, costs for raw materials in general will see a rise in 2007.

In recent years international players like Nestle and Wall's, which were targeting high-end markets, have either expanded their product lines or reduced prices in order to reach mid-range customers selling items at prices between 2 and 5 yuan and even the least affluent, who pay below 1 to 2 yuan for their ice cream.

In early 1998 Wall's cut prices on five products between 17 to 38 percent. It also increased the ratio of low-end items, which are now more than 50 percent of its business.

The company's efforts have paid off. Wall's has seen a growth rate of 200 percent in market share in Beijing and Shanghai.

For most domestic companies this is not good news, but there are ways to rise to the challenges they face.

Increasing investment in research and development in mid-range products emphasizing taste, ingredients, and packaging is one solution. It is also important for an ice cream brand to fix the proportion of new products to its overall product line at 30 to 40 percent.

This year innovation could go into health- and nutrition-oriented ice creams as well, milk-flavored ice creams will enjoy continued popularity, more so than vegetable-flavored and egg-roll ice creams, whose market share is falling.

It is also critical for major companies like Mengniu and Yili to expand networks to distribute to high-end outlets like airports, clubs and pubs. Smaller players should focus on sharpening brand impact in the standard markets.

For advertising, rather than spending more, it is a better choice for ice cream companies to diversify the media they use, expanding from television to print, outdoor and auto ads.

The author is a founder of Harbin QZLC Marketing Co Ltd and previously worked for PepsiCo and Wandashan.

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