Required Report - public distribution

**Date:** 6/27/2005

**GAIN Report Number:** CH5407

CH5407

**China, Peoples Republic of**

**HRI Food Service Sector**

**Mainland China HRI Annual Report**

**2005**

**Approved by:**

![](media/image1.wmf)LaVerne E. Brabant

U.S. Embassy

**Prepared by:**

China Food & Agricultural Service, ATO Beijing

**Report Highlights:**

China\'s food service sector continues its eye-popping growth, expanding
faster than GDP as newly prosperous urban residents continue to spend
disposable income on eating out. Young white-collar workers are
developing a taste for western food, and Chinese restaurants are
developing a new top tier. Catering for weddings and other events is a
new growing sector. The high-end market is spreading beyond the three
major cities of Beijing, Shanghai and Guangzhou. Distribution has become
more efficient and professional in major cities, but remains problematic
elsewhere. Education and training in the use of new products is needed
all along the value chain. Competition from other nations and domestic
substitution is fierce.

Includes PSD Changes: No

Includes Trade Matrix: Yes

Annual Report

Beijing ATO \[CH4\]

\[CH\]

Table of Contents

[Part I. MARKET SUMMARY 3](#part-i.-market-summary)

[A. Market Overview 3](#a.-market-overview)

[B. Market Drivers 4](#b.-market-drivers)

[C. SWOT Analysis for US Food Products
6](#c.-swot-analysis-for-us-food-products)

[Part II: ROAD MAP FOR MARKET ENTRY
6](#part-ii-road-map-for-market-entry)

[A. Market Structure 6](#a.-market-structure)

[1. Target Population 6](#target-population)

[2. Distribution 7](#distribution)

[B. Entry Strategy 9](#b.-entry-strategy)

[1. Overview 9](#overview)

[2. Marketing, Sales and Education 10](#marketing-sales-and-education)

[3. Establishing the Supply Channel
11](#establishing-the-supply-channel)

[4. Protect Your Intellectual Property Rights
11](#protect-your-intellectual-property-rights)

[5. Entry Tips 11](#entry-tips)

[C. Sub-sector Profiles 12](#c.-sub-sector-profiles)

[1. Hotels and Resorts 12](#hotels-and-resorts)

[2. Restaurants 13](#restaurants)

[3. Fast Food 13](#fast-food)

[4. Institutional Food Service 13](#institutional-food-service)

[Part III: COMPETITION 15](#part-iii-competition)

[Part IV: BEST PRODUCT PROSPECTS 17](#part-iv-best-product-prospects)

[Part V: Post Contact and Additional Resources
19](#part-v-post-contact-and-additional-resources)

# Part I. MARKET SUMMARY

## A. Market Overview

China, the world's most populous nation and fastest-growing economy,
also boasts one of the world's most dynamic HRI sectors. Industry
revenues have been growing by nearly 20% annually, about twice as fast
as GDP or per capita income. The industry has doubled in size in a
little more than four years, with foreign-invested enterprises helping
to lead the way.

Distribution has improved, but remains far below international
standards, especially with respect to the cold chain. Hands-on promotion
and, especially, training in cooking and handling techniques for
imported food, remain important. Suppliers from all over the world are
scrambling to enter the market, and local companies are trying to bring
their products up to international standards.

![](media/image2.wmf){width="5.46875in" height="3.375in"}

Revenues for restaurants with more than 40 employees and annual revenues
above US \$235,000

Source: State Statistical Bureau; CFAS projection

![](media/image3.wmf){width="5.895833333333333in"
height="2.2083333333333335in"}

Revenues for restaurants with more than 40 employees and annual revenues
above US \$235,000

Source: State Statistical Bureau

![](media/image4.wmf){width="4.552083333333333in"
height="2.6145833333333335in"}

Revenues for restaurants with more than 40 employees and annual revenues

above US \$235,000

Source: State Statistical Bureau

## B. Market Drivers

## 

The historical market forces that have been driving development for the
last 30 years in China are also driving the spectacular expansion of the
HRI sector. Economic progress has raised incomes throughout urban China,
creating an elite consumer class with disposable income to spend on
sophisticated tastes. Meanwhile, globalization is giving a once-isolated
nation ever more contact with the outside world -- and a taste of its
food.

These changes are occurring in one of the most food-oriented cultures in
the world. Social, business and family occasions and events are all
celebrated with a meal, where food quality, preparation and ingredients
are likely to be topics of passionate focus and discussion. Western
cuisine and imported foods are figuring prominently into this mix.

Higher-income Chinese are concentrated in the cities of the Pearl River
Delta, around Shanghai and near Beijing, but prosperity is spreading as
the economy develops, bringing new tastes and higher-end dining to a
much larger geography. Cities like Qingdao, Dalian, Harbin, Xiamen,
Wuhan and Changsha are also reaping and tasting the fruits of
prosperity.

Official government and business meals and banquets comprise a huge and
growing market. The importance of "face" dictates that the host splash
out for a pricey meal, often featuring prestige-promoting foreign
products and too many dishes to possibly consume at one sitting. Cost is
not a big factor since the meals are expensed. Restaurants are paying
more attention to atmosphere, venue and décor to attract this kind of
high-end business.

Chinese families treat going out as an event. Holidays and personal
milestones are often celebrated at restaurants, partly because most
urban Chinese still live in small apartments with even smaller kitchens.
Western fast food restaurants run birthday promotions for children,
while hotel restaurants target family groups. A family that normally
spends Rmb 600 (US\$73) for a week's food at home will easily spend Rmb
300 (\$36) per head at a weekend meal, according to a Shanghai
restaurateur who targets such business.

Insiders also cite curiosity and a growing taste for Western food as key
drivers for the imported food market. In addition to fast food, Chinese
are being drawn to more sophisticated Western-style food. Shan Chun-Wei,
head chef at Maxim's de Paris, says most of the clientele at his Beijing
restaurant used to be foreigners, but by 2004 half were Chinese, and he
expects about 75% by the time the Olympics are held in 2008. "Eating
imported food at business and social events is related to high societal
status," says Mr. Shan.

The Chinese middle class has become more aware of health and hygiene
issues, propelled by concerns about the SARS epidemic in 2003, an
outbreak of avian influenza (AI) in 2004, and a series of scandals
involving adulterated or unsanitary food. This has helps imported food
directly because it is perceived as safer; and indirectly by boosting
larger, cleaner restaurants that serve higher-quality food.

There has also been a large increase in Taiwanese, Hong Kong and other
overseas Chinese in China, as well as expatriate Americans, Europeans,
Australians, Japanese, Koreans and others. In some cities these groups
are large enough to create a market for international food by
themselves, while introducing Chinese friends and business associates to
new tastes, methods, standards of preparation and hygiene

**Olympic Games Symbolize Global Integration**

The 2008 Olympic Games will open China's window to the world even wider.
Beijing is the focus, but the impact will spread beyond the capital and
across North China to venues in Tianjin, Qingdao, Qinhuangdao and
Shenyang. Dozens of new hotels are being built to accommodate an
expected flood of visitors. Chefs from around the world are being
invited to train Chinese chefs to cook for athletes, tourists and
visitors. Olympics-linked promotions are planned nationwide. Domestic
tourists are expected to sample international food as part of the
Olympic experience, and bring the taste back to their home towns.

## C. SWOT Analysis for US Food Products

  ----------------------------------- -----------------------------------
  **Strengths & Opportunities**       **Weaknesses and Threats**

  Rising incomes mean more people     High price of imported products
  want, and can afford, imported food limits market to high-end urban
                                      restaurants

  Popularity of US culture extends to Competition from Japan, Europe,
  food; US fast food leads in         Australia, Southeast Asia and other
  introducing Western food            nations

  US has reputation for consistent    European, Australian-trained chefs
  high quality, health, hygiene, and  outnumber US-trained chefs in
  reliable supply                     high-end establishments

  Strong US brands in a low brand     Poor protection for Intellectual
  environment                         Property; fake products may damage
                                      brand image

  WTO targeted tariff cuts            Protectionist impulses and abrupt
  specifically benefit major US       policy changes raise non-tariff
  products                            barriers

  US recognized as leader in food     Lack of knowledge about how to
  service techniques, technology and  handle and use imported products
  management                          

  Growing prepared food sector caters Substitution by Chinese-made
  to US strong point                  products as food industry develops

  Improving distribution system gives Cold chain unreliable outside major
  imported products access to more    urban areas of Guangzhou, Beijing
  Chinese markets                     and Shanghai

  Globalization, travel leads to      Long lag time between product order
  curiosity, willingness to           and delivery; high trans-Pacific
  experiment                          shipping costs

  Importance of face, gift culture    Lack of serious commitment on the
  boosts consumption of aspirational, part US suppliers in developing
  high-status food                    China market
  ----------------------------------- -----------------------------------

# 

# Part II: ROAD MAP FOR MARKET ENTRY

## A. Market Structure

###  1. Target Population

## 

The top tier of China's urban population now earns a per capita income
of Rmb 3,500 per month, Rmb 42,000 or about \$5,000 per year. This
cohort has both the desire and the means to eat regularly in good
restaurants; the opportunity to be educated and develop sophisticated
tastes; and exposure to and curiosity about the world outside China.

"Imported food appeals to adventurous, open-minded, young, affluent
urban consumers, especially high-income white collar workers," says Xuan
Qiming, a manager at Louwailou, a classic Chinese restaurant in Hangzhou
that bought imported food for the first time in 2001.

Beijing, Guangzhou and Shanghai, first to benefit from economic reform
and foreign investment, already boast substantial urban elite
populations. Growth in the imported food market follows development and
integration with the global economy, factors now coming into play in
many second-tier cities, vastly expanding the potential market. These
cities include Tianjin, Qingdao and Dalian in the north; Suzhou, Wuxi
and Hangzhou in the Yangtze Delta; and Shenzhen, Dongguan, Zhuhai and
other cities in the southern Pearl River Delta.

Suppliers need to keep in mind, however, that the cost profile for
imported food is far higher than for domestic food, and only a small
percentage of China's 1.3 billion people can yet afford to eat in the
kinds of restaurants that use imported food. Per capita income for 800
million rural residents was only \$308 in 2003. Urban income was higher,
\$1,027 per capita, but even that leaves little for high-end meals.
Nevertheless, the top 10% of city dwellers can now afford imported food,
a market of more than 50 million people at present, and one that is
growing exponentially as incomes continue to rise.

### 2. Distribution

China is a big country and four days by truck from Hong Kong to Beijing,
and six days from Shanghai to the Far West. Food products enter the
country via two major routes: through Hong Kong by the so-called "gray
channel," and through five more northerly ports, often called "direct
imports" because products don't make a stop in Hong Kong.

Distribution has made great strides in the major markets of Beijing,
Shanghai and Guangzhou, according to restaurateurs, executive chefs and
food purchasing managers. National road, port and cold chain
infrastructure has improved, speeding transportation and delivery times.
Companies have developed expertise in imported food, becoming larger and
more focused, while many small fly-by-nighters have dropped out of the
picture.

With the above said, distribution still lags far behind Western
standards, especially outside the three major metropolitan areas and
inland China. Cold chain is unreliable, and purchasing managers at major
hotels in cities like Xian or Harbin say they take most, if not all,
perishables by air, often personally going to the airport to pick them
up.

Even in the major metropolitan areas, unreliable and inconsistent supply
remains a problem. "We commit to a menu, but then can't get the
product," says one restaurateur. Distributors have increased warehouse
space but still can't keep many items in stock, partly because of the
long lead time for transoceanic orders, and partly because of
unpredictable and occasional quarantine or customs delays.

Distributors also suffer from cash flow problems, because buyers usually
don't pay for 45-60 days after delivery. Meanwhile, normal payment for
imported food takes place 30 days after invoicing, usually on shipment.
As distributors have become more professional, fewer suppliers require
full payment in advance, but even under the best of circumstance top
distributors still pay 30% deposits on meat imports, for example.

Distributors report air shipment makes up to 10% of their imports by
volume and more than twice that level by value. Air shipment of meat and
dairy products, as well as some fruits and vegetables, is routine.
Distributors report fewer customs and quarantine difficulties with
airborne imports, as opposed to imports by sea.

**Gray Channel**

The Hong Kong gray channel is the main supply route for products going
to the Pearl River Delta and southwestern China, including the provinces
of Sichuan, Yunnan, Hunan, and Chongqing. However, distributors in
northern China say they have reduced reliance on the gray channel to
less than 20% of total food imports, and some to as low as zero.

Gray channel goods are handled by Hong Kong agents who work with fellow
agents, often family connections, across the border in Guangdong
Province. Cargo is under-invoiced to reduce tariffs. In addition, some
distributors say, it is easier and less expensive to source small
quantities out of Hong Kong, rather than landing full containers in
northern ports.

However, WTO tariff reductions have reduced the advantages of
under-invoicing, and the central government has been cracking down on
customs and tax avoidance. In addition, the leading edge of growth in
the imported food market is moving north, away from Guangzhou, so
transportation eats up a lot of the perceived savings.

**Direct Imports**

Economic development is creating a high-end food market in northern
China, and imported food volumes are increasing at more northerly ports
such as Dalian, Tianjin (Beijing area), Qingdao, Shanghai and Xiamen,
all of which are modernizing docks, warehouses and container-handling
capacity. Clearing Customs has also become more transparent as standard
protocols develop for individual products port-by-port. However,
arbitrary treatment and policy changes can still block shipments
unexpectedly, and importers complain inspectors are finicky: "They will
block something for very slight variations in the bill of lading," says
one importer.

Major distribution options include:

-   Full-service distributors, discussed above.

-   Third Party Logistics. China has been liberalizing its distribution
    industry under WTO rules, and a small group of foreign-managed
    companies has developed in ports and free trade zones. They offer
    customs clearance, foreign exchange conversion, bonded warehousing
    and shipment. They don't specialize in the food business, so you
    still need a distributor or agent for sales, promotion and some
    bureaucratic hassles, like licenses and labels.

-   Direct sales to end-users. This is limited to high volume importers
    like fast food and large hotel chains. You need a full-time office
    or agent to handle the China end, or risk losing container-loads of
    product to unexpected hassles.

-   US consolidators fill orders for China-based distributors, and also
    fill direct orders for restaurants and hotels, so you still need to
    make your sale in China. The efficiency of US consolidators is
    considered an advantage for US exporters.

-   Hong Kong distributors, who frequently make use of the gray channel.
    Many have a large number of offices or affiliates inside China, but
    basically provide the equivalent of 3^rd^ party logistics services.
    The supplier remains responsible for promotion, training and
    building a market.

-   Cash 'n Carry Outlets, such as Metro or Sam's Club. Many small
    Chinese restaurants buy at these outlets, so it can be an indirect
    way of reaching the restaurant market. In these cases, the retailers
    worry about the hassles of in-country distribution.

## B. Entry Strategy

### 1. Overview

All along the value chain, experienced suppliers, distributors and
buyers say the same thing: penetrating the Chinese market is rewarding,
but hard work. Selling and distributing your product requires
face-to-face contact, a special effort to educate the entire value
chain, and attention to the details of distribution. Even good
distributors in China lack marketing experience and it can also be
difficult to get them to focus on promoting your product among hundreds
or thousands that they might carry. Some suppliers proceed on parallel
tracks, with a small independent marketing and sales force that reports
directly but also works with a distributor. Under this system, it is
easier to work with several distributors while controlling rivalry and
cannibalization. Whether you go the two-track route or not, your
strategy should cover two important elements:

-   **Marketing, Sales and Education**: Introducing your product to
    end-users, and persuading them to use it is only the beginning.
    Chinese distributors and chefs are interested in handling imported
    products, but very often don't know how to go about it or how to
    properly handle or use a product. This can extend even to very
    elementary products, like condensed canned soup with English
    labeling, etc.

-   **Maintaining a Distribution Channel:** At the same time, it is also
    important to make sure there is a physical channel for the product
    to reach your customers. The first question buyers ask about a new
    product is, "Can I order it now?" This can be bit of a
    chicken-and-egg syndrome for a new supplier in the China market.

# 

### 2. Marketing, Sales and Education

# 

If there is one mantra that emerges from extensive conversations with
industry insiders, it is that the Chinese market needs to be educated
from A-to-Z on most imported products. This means showing distributors
how to handle and sell the product; developing recipes and showing chefs
and kitchen workers how to prepare and serve it; and launching
promotional events to familiarize consumers with the resulting menu.

Distributors won't do all this on their own, but more and more are
willing work together with suppliers to make the product successful.
Several full-service distributors say they focus on building worthwhile
brands, which requires technical support with staff, joint visits to key
customers, and other joint promotions. "You have to make people
understand the product," says Kerry Lu, Managing Director of Mandarin
Fine Foods in Beijing.

Successful suppliers have developed a number of strategies to educate
the market. On sales calls, they go fully prepared to demonstrate their
product. They develop recipes for using their products in China's
specialized cuisines. Some bring in chefs who set up at a local hotel
for several weeks, giving intensive workshops for local chefs.

Catalogues, recipes and storage instructions are best provided in
Chinese. This is particularly important at Chinese-operated hotels and
restaurants, but even at five-star hotels with Western-trained executive
chefs, the bulk of the staff will be unable to read labels and
directions unless they're printed clearly and fully in Chinese.

Restaurateurs cite national or ethnic food fairs as an effective way to
reach the ultimate consumer, the Chinese diner. Many restaurants look
for opportunities to do special promotions, saying Chinese diners are
always on the lookout for new sensations. Zhou Guoping, manager of the
Prince Grill in Shenzhen, says a recent Mexican food promotion was
successful, and the restaurant continues to serve the cuisine.

The US Department of Agriculture has several export programs that can
help pay for promotion and training. Many US states and even some cities
have offices in China, and many of them cooperate with the US
Agricultural Trade Offices in Beijing, Guangzhou, and Shanghai. Some
USDA cooperators have also held effective educational and promotional
market development programs in China.

### 3. Establishing the Supply Channel

The most important requirement for entering the China market is to
partner with a good distributor. Chinese business is famously a
"relationship culture," and one major reason is that rule of law is weak
and contracts are difficult to enforce. This is a major reason why
face-to-face contact is necessary to begin and maintain a distributor
relationship.

Your distributor should be able to handle customs, quarantine and any
licensing procedures. Some distributors do their own paperwork, while
others use import agents. These procedures involve so many requirements
and red tape that few suppliers or end-users, including even Chinese
state-owned companies, try to do it on their own.

Among the licenses and permits required may be a hygiene certificate
from the US government; a Chinese import permit, and hygiene and
quarantine inspection certificates on entry. Labels in Chinese may be
required, but stick-on labels are acceptable if they are on the product
on entry. Your distributor should be able to keep up with all this. But
plan ahead -- getting clearance for a label may take 2-3 months and cost
Rmb 2,500 (\$290).

It is crucial that your importer or distributor be able to make payments
in hard currency, or you will have trouble collecting payments. The
government has considered plans to make the renminbi (Rmb) also called
the Chinese yuan (CNY), into a fully convertible currency, but that may
be years away. For the foreseeable future, companies will need special
licenses to change Rmb into US dollars.

Suppliers of perishable products need to be alert to cold chain
procedure, because these are not well-established. Even in Beijing,
Shanghai and Guangzhou, buyers use infrared guns and check in-transit
thermometers for tampering. "You have to be a policeman; if not, they
cheat you," says the local head of one institutional catering company.

### 4. Protect Your Intellectual Property Rights

Ideally, IPR protection should begin even before you begin exploring the
China market. It's important to register and protect trademarks in both
English and Chinese languages. China's State Administration for Industry
and Commerce, involved in enforcing trademarks, has announced a special
campaign to improve enforcement of agricultural related trademarks in
the autumn of 2005. Even if US goods are not being sold in China, IPR
protection can be helpful in preventing fake goods produced in China
from being exported to third country markets. Chinese Customs provides
an on-line recording service that is usually a prerequisite for customs
detention of outbound infringing goods.

Recognizing the large number of complaints from US manufacturers and
traders regarding IPR protection, and with the aim of helping China
develop an IPR system more similar to the United States, the US Embassy
in Beijing has developed a website-based "IPR Toolkit," providing
information on Chinese laws and regulations along with steps and
suggestions on how to protect American IPR. The site is at
<http://www.usembassy-china.org.cn/ipr>

### 5. Entry Tips

Experienced distributors and buyers also offer the following advice for
those entering the market:

-   Take the time to investigate the market and how it works, and
    partner with a good distributor. Having a great product is only the
    beginning.

-   Have some key target clients in mind before you enter the market. If
    a hotel, restaurant, fast food chain or air caterer is a client in
    the US, try to use that as an entrée to the China branch.

-   Be sure that you aren't selling a commodity that competes on price
    and not quality with similar Chinese-made or competitor country
    supplier products.

-   You can take a quick reading on the market by making your initial
    visit coincide with a food exhibition such as SIAL China or Food &
    Hotel China (Beijing, Guangzhou, Shanghai), or by contacting Chinese
    representatives at US food shows.

-   In calculating your final costs, make sure you've got everything
    included, such as promotion, education, freight, handling, tariffs,
    and VAT.

-   Unless you are supplying one of the fast food chains or a hotel
    group, only a few products ship large volumes. Most likely you won't
    be able to start with full container loads. Consider waiving order
    minimums for market entry.

-   China is broken up into distinct regions and tastes vary, just as
    they do in the US. Shanghai food is considered sweet, for instance,
    while Shandong is salty. If you are successful in one region, you
    may still need to test when you enter another region. You may need
    to test or modify a product to make sure it conforms to regional
    tastes.

-   Don't try to do too much at once. Take expansion one step at a time.
    Master the business at one location, among one set of clients,
    before moving on to others. One of the biggest mistakes you can make
    is to spread yourself too thin, too quickly.

-   Link your product to occasions like weddings, major business
    successes, Christmas and Valentine's Day, or international events
    like Shanghai's annual Formula I Grand Prix, NBA team visits, and
    the 2008 Olympics.

# 

## C. Sub-sector Profiles

### 1. Hotels and Resorts

Most large international hotel chains are expanding their presence, and
use group buying for some products, although executive chefs and
purchasing managers are the key decision-makers at individual hotels.
Imported food will normally make up 30-60% of the food buy at an
internationally-managed five-star hotel, and total more than US \$1
million per year.

Most Chinese hotel chains are still state-owned companies, but they are
modernizing management and trying to develop their food services.
China's largest hotel group is the Jinjiang Group, which owns eight
5-star hotels in Shanghai and operates many others all over China
reported sales over \$300 million in 2004. Jinjiang has spun off the
food buying group into a subsidiary and hired Western consultants to
modernize their restaurant management and practices. Chinese-managed
five-star hotels buy far less imported food than internationally managed
hotels, with \$350,000 annually a typical figure.

Hotels in foreign tourist destinations like Beijing, Xian, Suzhou and
Hangzhou are more likely to have high imported food budgets, as are
hotels in business destinations like Shanghai, Qingdao, Dalian and the
Pearl River Delta. The Japanese and Korean presence is strong in cities
on the north coast, including Dalian and Qingdao, which is reflected in
local tastes and food imports.

### 2. Restaurants

The high-end restaurant sector is growing exponentially, although from a
very small base. Restaurants specializing in foreign food has nearly
tripled since 2000 in Shanghai, from 130 to 380, and almost doubled in
Beijing, from 95 to 179. The market is more difficult to serve than the
5-star hotel market because import volumes are lower, generally running
from \$7,500-\$30,000 a month per restaurant.

Perhaps the most encouraging development for the imported food market is
that more Chinese-style restaurants are using imported products. The
Greenery, which specializes in modified foreign dishes, spends hundreds
of thousands a month on imported food. Louwailou, a domestic tourist
restaurant on West Lake in Hangzhou, only began buying imported products
in 2001. It's cuisine is 100% Chinese, but by the end of 2004 it was
spending more than \$20,000 a month on beef fat; goose, duck and chicken
feet; turkey; soups; wine; butter; cheese, and jam.

The appearance of "fusion" and "modern Chinese" cuisines is helping to
create a posh new tier in the Chinese restaurant sector, with higher
checks and margins to justify the use of imported food. Chef Jereme
Leung, at Whampoa Club on the Bund in Shanghai, is deliberately trying
to upgrade Shanghainese cuisine and provide a standalone restaurant
where a visiting foreign minister or CEO could comfortably be
entertained.

### 3. Fast Food

Yum Brands and McDonald's are by far the largest fast food chains in
China. Yum has more than doubled its outlets in the last three years,
from 650 to 1400 -- over 1,200 KFCs, 150 Pizza Huts, and a couple of
Taco Bells and A&Ws. McDonald's has boosted its presence to over 600
outlets. The Taiwanese Dicos chain is another large player.

These companies import 5-10% of their food, a lower percentage than
before, although perhaps not smaller volumes. Their largest suppliers
aren't Chinese domestic companies, but rather multi-nationals
manufacturing in China. These companies have also created their own
effective standalone supply chains which overlie the domestic Chinese
market.

Many Chinese ethnic food chains are also spreading across China.
Mongolian hot pot, Beijing or Shanghai dumplings, Sichuan and Chongqing
style and Cantonese dim sum chains have all expanded into other regions.
Successful operators are quickly and shamelessly imitated. Food courts
in malls have also become popular. However, these chains currently use
virtually no imported products, which are too expensive for their price
structure.

### 4. Institutional Food Service

Institutional food service has been a dynamic sector in the last three
years, with service levels rising along with client demand. Shanghai's
Fu Ji Food and Catering Service listed on the Hong Kong Stock Exchange
in December of 2004 after reporting doubled revenues in just one year.
Meanwhile international companies like Eurest, Sodexho and Gate Gourmet
have joined the market with others reportedly on the way.

The growth of international schools catering to children of resident
expatriates has given imported food a wedge in the market. There are now
more than 25 such schools in Shanghai, 15 in Beijing and seven in
Guangzhou. The budget for a meal may average RMB 25 (US \$3), and allow
imported food like salmon and other high-end products to make an
appearance as a special feature once a month.

Food service clients include cafeterias at schools, government bureaus,
hospitals, factories and other businesses. In the past, when most
institutions were state-owned, each ran its own cafeteria, but now
services are outsourced. Fu Ji counts electronics manufacturer
Panasonic, the Shanghai Public Security Bureau (police) and Suzhou
Industrial Park as clients.

The budget for an individual meal is low and imported ingredients seldom
make it into the mix. However, Chinese workers demand a warm meal for
lunch and catering clients are increasingly becoming more demanding
because a good cafeteria attracts good employees.

Airline catering has expanded with China's airline industry, and is now
estimated at RMB 2 billion annually, or more than \$240 million.
Imported food content ranges up to 50% for international flights, but is
much lower for domestic flights, and includes products like juices, nuts
and dried fruit.

+---------------+-------+----------------+-------+--------+-----------+
| **Figure 6:   |       |                |       |        |           |
| Largest       |       |                |       |        |           |
| Restaurant    |       |                |       |        |           |
| and Hotel     |       |                |       |        |           |
| Companies**   |       |                |       |        |           |
+---------------+-------+----------------+-------+--------+-----------+
| **Company     | **Sa  | **Outlet Name  | *     | *      | **Pur     |
| Name**        | les** | & Type**       | *Outl | *Locat | chasing** |
|               |       |                | ets** | ions** |           |
+---------------+-------+----------------+-------+--------+-----------+
| Yum Group     | \$    | KFC, Pizza     | 1400  | Na     | Direct    |
|               | 1,439 | Hut, Taco      |       | tional | from      |
|               |       | Bell, A&W (    |       |        | man       |
|               |       | Fast Food)     |       |        | ufacturer |
+---------------+-------+----------------+-------+--------+-----------+
| McDonald\'s   | \$7   | McDonald\'s (  | 600   | Na     | Direct    |
|               | 57.58 | Fast Food)     |       | tional | from      |
|               |       |                |       |        | man       |
|               |       |                |       |        | ufacturer |
+---------------+-------+----------------+-------+--------+-----------+
| Inner         | \$5   | Little Sheep   | 703   | Na     | n/a       |
| Mongolia      | 24.85 | Hot pot        |       | tional |           |
| Xiaoyang      |       | (Family Style) |       |        |           |
+---------------+-------+----------------+-------+--------+-----------+
| Inner         | \$3   | Little Tail    | 417   | Na     | n/a       |
| Mongolia      | 41.31 | Sheep Hot Pot  |       | tional |           |
| Xiaoweiyang   |       | (Family Style) |       |        |           |
+---------------+-------+----------------+-------+--------+-----------+
| Jinjiang      | \$3   | Jinjiang,      | 160   | Sh     | Own       |
| Hotel Group   | 25.16 | Wanli, Xinya   |       | anghai | buying    |
|               |       | (various)      |       | region | s         |
|               |       |                |       |        | ubsidiary |
+---------------+-------+----------------+-------+--------+-----------+
| Inner         | \$1   | Little Mu      | N/A   | North  | n/a       |
| Mongolia      | 78.18 | Sheep Hot Pot  |       | China  |           |
| Xiaomuyang    |       | (Family Style) |       |        |           |
+---------------+-------+----------------+-------+--------+-----------+
| Chongqing     | \$1   | Chongqing De   | 240   | North  | Central   |
| Dezhuang      | 48.80 | Zhuang (Family |       | China, | buying    |
|               |       | Style)         |       | Chon   | for own   |
|               |       |                |       | gqingS | outlets;  |
|               |       |                |       | ichuan | fr        |
|               |       |                |       |        | anchisees |
|               |       |                |       |        | buy       |
|               |       |                |       |        | locally   |
+---------------+-------+----------------+-------+--------+-----------+
| Chongqing     | \$1   | Little Swan    | 308   | Na     | Central   |
| Little Swan   | 46.10 | Shi Fu (Family |       | tional | buying    |
|               |       | Style)         |       |        | for own   |
|               |       |                |       |        | outlets   |
+---------------+-------+----------------+-------+--------+-----------+
| Taiwan        | \$1   | Dicos (Fast    | 383   | Na     | Direct    |
| Dingxin Group | 22.25 | Food)          |       | tional | importers |
+---------------+-------+----------------+-------+--------+-----------+
| Quanjude      | \$1   | Quan Ju De     | 55    | Be     | Central   |
| Group         | 20.36 | (Family Style  |       | ijing, | buying    |
|               |       | Peking Duck)   |       | Sh     | from      |
|               |       |                |       | anghai | dis       |
|               |       |                |       |        | tributors |
+---------------+-------+----------------+-------+--------+-----------+
| Zhongshang    | \$1   | Haigang,       | 54    | South  | Buy from  |
| Haigang       | 15.50 | Prince (Family |       | China  | dis       |
|               |       | Style)         |       |        | tributors |
+---------------+-------+----------------+-------+--------+-----------+
| Qinma         | \$1   | Qinma Old Hot  | 262   | Na     | Central   |
| Cultural Food | 02.23 | Pot (Family    |       | tional | buying    |
| & Beverage    |       | Style)         |       |        | for own   |
|               |       |                |       |        | outlets   |
+---------------+-------+----------------+-------+--------+-----------+
| Shanghai      | \$    | Xinghualou,    | 34    | Shan   | I         |
| Xinghualou    | 91.27 | Xinya, others  |       | ghai-Y | ndividual |
|               |       | (Family Style  |       | angtze | re        |
|               |       | & Fast Food)   |       | Delta  | staurants |
|               |       |                |       |        | do own    |
|               |       |                |       |        | buying    |
+---------------+-------+----------------+-------+--------+-----------+
| Chongqing     | \$    | Qi Hot Pot     | 150   | Na     | I         |
| Huiyuan Hot   | 87.27 |                |       | tional | ndividual |
| Pot           |       |                |       |        | re        |
|               |       |                |       |        | staurants |
|               |       |                |       |        | do own    |
|               |       |                |       |        | buying    |
+---------------+-------+----------------+-------+--------+-----------+
| Shaanxi       | \$    | Various        | 60    | S      | Pork,     |
| Xi\'an        | 85.45 | (Family Style) |       | haanxi | chicken   |
| Catering      |       |                |       |        | central   |
| Service Group |       |                |       |        | supply    |
+---------------+-------+----------------+-------+--------+-----------+
| Chongqing     | \$    | Cai Geng Xiang | 138   | Cho    | Central   |
| Oriental      | 85.14 |                |       | ngqing | Purchasi  |
| Caigengxiang  |       |                |       |        | ng-Direct |
|               |       |                |       |        | buying    |
+---------------+-------+----------------+-------+--------+-----------+
| Sales unit:   |       |                |       |        |           |
| Million USD   |       |                |       |        |           |
|               |       |                |       |        |           |
| Source: China |       |                |       |        |           |
| Cuisine       |       |                |       |        |           |
| Association;  |       |                |       |        |           |
| China Food &  |       |                |       |        |           |
| Agricultural  |       |                |       |        |           |
| Services      |       |                |       |        |           |
| (CFAS)        |       |                |       |        |           |
+---------------+-------+----------------+-------+--------+-----------+

# Part III: COMPETITION

The Chinese market for imported food is extremely competitive in almost
every sector, with suppliers from around the world battling for market
share. Australia, New Zealand, South Africa and European Union countries
are most likely to supply products that directly compete with American
goods. The European nations in particular provide heavy support for chef
training missions and other support.

US food products have an excellent reputation for consistent quality,
whereas other nations are considered less reliable. Chefs and buyers
associate the US with premium beef, France with high-end cheese,
chocolate and yogurt and Norway with high-end seafood. New Zealand and
Australia which have a clear advantage in shipping times and costs,
dominate standard dairy imports destined for the HRI Sector.

Most products face at least some cheap, locally manufactured
competition, unless it's something China doesn't produce at all, like
olive oil. In addition, multi-nationals such as McCormick and Danone
manufacture some products in China. Chinese-made products are improving,
and chefs frequently have to decide whether they really need import
quality or prestige, or can they get along with the local product?

Some buyers believe China will never be able to produce commodities that
require large-scale corporate farming. Fast food chains still need to
import frozen French fries, because Chinese growers can't produce a
consistent fry potato despite a decade of effort.

Counterfeit or fake goods are another competitor factor for US products.
When a brand gets established, counterfeit and cheap imitations usually
follow. Fast food chains and chefs at high-end restaurants vigorously
check for counterfeit products, but that's not the case everywhere.

As of June 2005, US products had a currency advantage because the
Chinese yuan was pegged to the dollar, creating predictable prices. In
addition, exchange rate changes have made European and Australian
products more expensive. That edge will get larger in the future if
China revalues the Rmb against the dollar.

+-----------------+-----------------+-----------------+-----------------+
| **Figure 7:     |                 |                 |                 |
| Imports and     |                 |                 |                 |
| Competition**   |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| **Product       | **Major         | **Strengths of  | **Advantages &  |
| Category**      | Sources**       | Key Suppliers** | Disadvantages   |
|                 |                 |                 | of Local        |
|                 |                 |                 | Suppliers**     |
+-----------------+-----------------+-----------------+-----------------+
| **Red Meat**    | 1\. US -- 28%   | US leads in     | China is        |
|                 |                 | pork, with      | world's largest |
| Imports:        | 2\. New Zealand | extremely       | pork producer,  |
| 106,956 tons    | -- 22%          | efficient       | also strong in  |
|                 |                 | Denmark no. 2;  | mutton. Beef    |
|                 | 3\. Denmark -   | NZ specializes  | industry is     |
|                 | 16%             | in lamb and     | nascent.        |
|                 |                 | mutton;         | Imports for all |
|                 |                 | Australia now   | meats appeal to |
|                 |                 | leads in beef   | high quality    |
|                 |                 | (with US out of | buyers.         |
|                 |                 | beef market)    |                 |
+-----------------+-----------------+-----------------+-----------------+
| **Poultry**     | 1.  US -- 43%   | Brazil and      | China's poultry |
|                 |                 | Argentina are   | industry has    |
| Imports:        | 2.  Brazil --   | aggressively    | modern          |
| 185,471 tons    |     33%         | seeking to      | producers who   |
|                 |                 | build on their  | are expanding   |
|                 | 3.  Argentina   | low-cost        | into export.    |
|                 |     -- 23%      | production to   | Much of the     |
|                 |                 | expand share    | industry still  |
|                 |                 | and attract     | produces live   |
|                 |                 | Chinese         | chicken for     |
|                 |                 | investment in   | retail.         |
|                 |                 | their           |                 |
|                 |                 | facilities.     |                 |
+-----------------+-----------------+-----------------+-----------------+
| **Fish**        | 1.  Russia --   | Much of         | China has a     |
|                 |     43%         | Russia's        | large           |
| Imports:        |                 | exports are     | international   |
| 1,377,744 tons  | 2.  US -- 10%   | fish-meal; US   | fishing fleet   |
|                 |                 | leads in fish   |                 |
|                 | 3.  Holland --  | fillet category |                 |
|                 |     7%          | with 8,639 MT   |                 |
+-----------------+-----------------+-----------------+-----------------+
| **Shellfish**   | 1.  North Korea | North Korea     | China has a     |
|                 |     -- 24%      | profits from    | large and       |
| Imports:        |                 | its proximity;  | aggressive      |
| 350,032 tons    | 2.  Peru -12%   | South Korea     | domestic        |
|                 |                 | ranks 4^th^.    | aquaculture     |
|                 | 3.  Canada --   |                 | industry that   |
|                 |     11%         |                 | produces shrimp |
|                 |                 |                 | and other       |
|                 | > US -- about   |                 | shellfish.      |
|                 | > 3%            |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| **Dairy**       | 1.  New Zealand | New Zealand and | China's dairy   |
|                 |     -- 56%      | Australia are   | industry is     |
| Imports: 21,098 |                 | aggressive      | growing         |
| tons            | 2.  Australia   | suppliers and   | rapidly, but    |
|                 |     -- 17%      | have an         | still in an     |
|                 |                 | advantage in    | early stage of  |
|                 | 3.  Spain - 3%  | shipping time.  | development. It |
|                 |                 | France has a    | produces milk   |
|                 | > US -          | strong          | and yogurt but  |
|                 | > negligible    | reputation      | doesn't compete |
|                 |                 | among high-end  | in cheeses or   |
|                 |                 | cheese buyers.  | butters.        |
+-----------------+-----------------+-----------------+-----------------+
| **Berries**     | 1\. Chile --    | The three       | China produces  |
|                 | 25.5%           | leaders supply  | strawberries,   |
| Imports: 13,935 |                 | mostly counter  | but production  |
| tons            | 1.  Morocco --  | seasonal        | of other        |
|                 |     17%         | strawberries.   | berries is just |
|                 |                 | Canada and US   | beginning.      |
|                 | 2.  Argentina   | lead in         |                 |
|                 |     -- 15%      | blackberries,   |                 |
|                 |                 | blueberries,    |                 |
|                 | US -- 9%        | etc.            |                 |
+-----------------+-----------------+-----------------+-----------------+
| **Nuts**        | 1.  Russia --   | Russia is the   | China is a      |
|                 |     31%         | leading         | large grower of |
| Imports: 77,872 |                 | supplier of     | walnuts and     |
| tons            | 2.  South Korea | pine nuts; US   | other temperate |
|                 |     -- 17%      | strong in       | nuts, but       |
|                 |                 | pistachios      | quality remains |
|                 | 3.  Australia   |                 | low.            |
|                 |     -- 12%      |                 |                 |
|                 |                 |                 |                 |
|                 | US 4^th^, 9%    |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| **Sauces &      | 1.  Japan --    | Leaders produce | Multinational   |
| Condiments**    |     58%         | popular Asian   | suppliers are   |
|                 |                 | styles. The US  | taking market   |
| Imports: 42,713 | 2.  South Korea | leads among     | share with      |
| tons            |     -- 8%       | non-Asian       | domestically    |
|                 |                 | suppliers.      | made products.  |
|                 | 3.  Taiwan --   |                 |                 |
|                 |     7%          |                 |                 |
|                 |                 |                 |                 |
|                 | US -- 4%        |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| **Soups,        | 1.  US -- 32%   | The US is       | Restaurants     |
| Broths,         |                 | considered a    | used labor to   |
| Preparations**  | 2.  Japan --    | technology      | make their own, |
|                 |     27%         | leader in this  | but demand for  |
| Imports: 2,146  |                 | field.          | prepared        |
| tons            | 3.  Australia   |                 | products is     |
|                 |     -- 11%      |                 | beginning.      |
+-----------------+-----------------+-----------------+-----------------+
| **Beverages**   | 1.  Brazil --   | Brazil leads in | China's fruit   |
|                 |     28%         | fruit juice,    | juice industry  |
| Imports:        |                 | Chile in wine   | is              |
| 138.692         | 2.  Chile --    | (much shipped   | well-developed; |
|                 |     22%         | in bulk),       | wine suffers    |
|                 |                 | France in       | from low and    |
|                 | 3.  Mexico --   | mineral water   | inconsistent    |
|                 |     10%         | and Mexico in   | quality. The    |
|                 |                 | beer. Chile,    | highly          |
|                 | US supplies     | France, Spain,  | competitive     |
|                 | small amounts   | Australia and   | domestic beer   |
|                 | of fruit juice  | US supply       | industry        |
|                 | and wine        | high-end wines. | includes        |
|                 |                 | Distributors    | multinational   |
|                 |                 | are bullish on  | players like    |
|                 |                 | mineral water.  | Budweiser.      |
+-----------------+-----------------+-----------------+-----------------+
| **Fresh         | 1.  Taiwan --   | Taiwan and      | Production of   |
| Vegetables**    |     43%         | South Korea     | fresh           |
|                 |                 | profit from     | vegetables in   |
| Imports: 2,783  | 2.  New Zealand | proximity.      | China has been  |
| tons            |     -- 18.6%    | Small amounts   | rising by 5-10% |
|                 |                 | also come from  | a year for the  |
|                 | 3.  South Korea | European Union. | last decade,    |
|                 |     -- 18.5%    | Most is for     | and some        |
|                 |                 | high-end        | imported        |
|                 | US - negligible | restaurant      | products have   |
|                 |                 | salad use.      | been            |
|                 |                 |                 | substituted     |
|                 |                 |                 | domestically in |
|                 |                 |                 | recent years.   |
+-----------------+-----------------+-----------------+-----------------+
| **Frozen        | 1.  US -- 65%   | The US is the   | China still has |
| Potatoes**      |                 | clear leader    | difficulty      |
|                 | 2.  New Zealand | and preferred   | producing       |
| Imports: 20,483 |     -- 24%      | supplier.       | consistent      |
| tons.           |                 |                 | product for the |
|                 | 3.  Australia   |                 | fast food       |
|                 |     -- 3%       |                 | French fry      |
|                 |                 |                 | market          |
+-----------------+-----------------+-----------------+-----------------+
| **Fresh         | 1.  US -- 51%   | US leads in     | China's fruit   |
| Temperate       |                 | citrus, apples, | production has  |
| Fruits**        | 2.  New Zealand | pears; New      | been rising and |
|                 |     -- 25%      | Zealand in      | improving in    |
| Imports:        |                 | counter         | quality         |
| 111,099 tons    | 3.  Chile --    | seasonal stone  |                 |
|                 |     12%         | fruit           |                 |
+-----------------+-----------------+-----------------+-----------------+
| Source: China   |                 |                 |                 |
| Customs         |                 |                 |                 |
| Statistics;     |                 |                 |                 |
| China Food &    |                 |                 |                 |
| Agricultural    |                 |                 |                 |
| Services (CFAS) |                 |                 |                 |
| Research        |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+

# Part IV: BEST PRODUCT PROSPECTS

## 

There will always be a market for imported products in China because
restaurants want to give their customers something uniquely special.
However, the nature and product mix is fluid due to intense competition
and domestic substitution. Baked potatoes and onion rings have almost
vanished, to be replaced by imported frozen potato wedges.

While many chefs cited products they would like to access, some
successful market entrants are surprising. For example, although China
is the world's largest pork producer, high quality US pork is enjoying
some success here in the high-end restaurant segment.

US beef was banned due to BSE in 2004, but many chefs and food
purchasing managers say they will place orders as soon as the ban is
lifted, because of the consistent quality of US beef is unparalleled.
Salmon was the second most popular imported item named by chefs and
buyers.

Ready-to-use products were considered unlikely prospects only three
years ago because labor was perceived as being so cheap that restaurants
could hire workers to make any product from scratch. However, chefs and
purchasing managers say there is now a market for ready-made and
pre-cooked sauces, soups, pizzas, pre-cut vegetables, portion-cut fish
fillet, meat products, and frozen dough.

A.  In the Market With Potential

Seafood (lobster, tuna, salmon, mussels, seaweed)

> Beef
>
> Lamb
>
> Pork
>
> Veal
>
> Chicken paws
>
> Cream

Premium yogurt

Nuts and dried fruit

Condiments (mustard, meat tenderizer, hot sauces)

Frozen potatoes (French fries, wedges)

Potato preparations

Wheat flour

Pasta

Olive oil

Coffee

Chocolate

Breakfast cereals, including muesli

Premium fruit juices

Fruit (grapes, grapefruit, oranges, Kiwi fruit)

Frozen berries

Wine

Beer

Bottled water

B.  Not Present in Significant Quantities, but Good Potential

> Pre-cooked sauces, like bolognaise
>
> Ready-to-use fish portions
>
> Portion-cut meats
>
> Cheese
>
> Butter
>
> Mexican, South American food
>
> Other ethnic items (Indian, Italian, etc)
>
> Bulk cheese for catering use
>
> Colorant
>
> Canned cherries, maraschino cherries
>
> Turkey (temporary ban due to avian influenza lifted in late 2004)

C.  Products Not Present or With Diminished Presence

Some Fresh Fruits (domestic substitution of apples, pears)

Mayonnaise (JV manufacturing in China)

Catsup (JV manufacturing in China

French jam (JV manufacturing in China)

Simple cereals (corn flakes, manufactured in China)

Baked potatoes

Onion rings

Red cabbage (domestic substitution)

Orange juice (domestic substitution)

Macadamia nuts (some Chinese say they are too oily)

# 

# Part V: Post Contact and Additional Resources

For further information about the China market, as well as upcoming
events and activities, please contact one of the offices below. USDA has
five offices in China:

**Agricultural Trade Office, Beijing**

U.S. Agricultural Trade office, Beijing

Kerry Center, South Tower

24^th^ Floor Suite #2425

No. 1 Guanghua Lu, Beijing 100020

Phone: (8610) 8529-6418

Fax: (8610) 8529-6692

E-mail: <atobeijing@usda.gov>

**Agricultural Trade Office, Guangzhou**

China Hotel Office Tower, 14/F

Guangzhou 510015, China

Phone: (8620) 8667-7553

Fax: (8620) 8666-0703

Email: [atoguangzhou@usda.gov]{.underline}

# 

**Agricultural Trade Office, Shanghai**

Shanghai Center, Suite 331

1376 Nanjing West Road

Shanghai 20040, China

Phone: (8621) 6279-8622

Fax: (8621) 6279-8336

E-mail: <atoshanghai@usda.gov>

**Agricultural Affairs Office, Beijing**

5-2 Qijiayuan Diplomatic Compound

Jianguomenwai, Beijing, China, 100600

Phone: (8610) 6532-1953

Fax: (8610) 6532-2962

E-mail: <agbeijing@usda.gov>

**Animal and Plant Health Inspection Service (APHIS), Beijing**

Room 618, Beijing International Club Office Building

No. 21 Jianguomenwai Avenue

Beijing, China 100020

Phone: (8610) 6532-3212

Fax: (8610) 6532-5813

E-mail: <gary.greene@aphis.usda.gov>

#