What’s Driving China’s Noodle Revival?

For 30 years, perhaps the most revealing prognosticator of the Chinese economy has been the humble $0.25 instant-noodle bowl. Between 2001 and 2011, the peak of China’s boom, instant-noodle sales increased 140%, to 43 billion bowls and packets, as hundreds of millions of farmers moved to the cities and sought out cheap eats between factory shifts. As it happens, 2011 was also the year that China's labor force peaked. From that point, both workers and noodle sales went into decline. By 2016, China was consuming 7 billion fewer bowls and the biggest instant noodle-maker was removed from the Hang Seng Index. A noodle boom had become a bust.

But that’s not the end of the story. According to a widely circulated report in Securities Journal last week, instant noodles have made a comeback even as the economy has slowed in recent years: Sales rose 7.5% during the first half of 2019, and Chinese are once again consuming more than 40 billion bowls and packets a year. Behind that unexpected renaissance are some important and lasting changes to China's economy.

The most crucial factor in the noodle comeback is affluence. Historically, instant noodles were marketed to low-wage workers and students. But as incomes rose, the industry responded by offering better noodles at higher prices to upwardly mobile consumers. This strategy, known as "premiumization," is being adopted by manufacturers of fast-moving consumer goods across China. And it's getting results: One of the country’s largest noodle-makers reports that as much as 40% of 2018 revenue was generated by premium offerings.

A second factor is that China's food-delivery apps have matured. In the mid-2010s, companies such as Meituan Dianping took advantage of seemingly unlimited investor funding to offer subsidized deliveries of cheap, fresh food that could compete with instant noodles. In my old Shanghai neighborhood, it was possible to get a bowl of fresh soup dumplings delivered for roughly $1.25. For low-wage workers, the appeal was obvious. According to one analysis, every 1% increase in the food-delivery market meant a .05% decline in instant-noodle consumption. And there were a lot of 1% increases: In 2018, China made nearly 11 billion food deliveries.

But like unicorns everywhere, the delivery startups soon felt the pressure to profit and started raising prices. According to TechCrunch, many restaurants are now paying at least 20% of each order to the delivery giants. Those prices are often being passed along to customers, thus making noodles attractive once again.

Finally, there’s the matter of a slowing economy and rising cost-of-living. That combination has led many Chinese to downgrade their expectations and scale back their expenses, a shift that's reflected in slowing retail and auto sales. China's avid consumers continue to consume, but more selectively and at lower prices, a phenomenon that's come to be known as the "consumer downgrade." As prices rise for other once-accessible luxuries, premium instant noodles will likely become more attractive to those who can't afford un-subsidized delivery but won't stoop to buying the $0.25 variety.

Superficially, at least, that seems like a bleak outlook. But the reality is that China is mostly reverting to global norms. In more developed economies, delivery isn't competitive with a pack of home-cooked ramen. And while convenience foods aren't exactly nutritious, they're far better than the cheapest paper bowl of instant noodles. In fact, in developed Asian countries, premium instant noodles have been a part of the dining scene for years: South Korea consumes double the volume of instant noodles as China per capita, and Japan eats roughly 50% more.

For China's noodle-makers, at least, that's a bullish future. And for everyone else, it's a sign that the economy is evolving to provide more choice and opportunities, even during the down times.