""""

Required Report - public distribution

**Date:** 11/12/2003

**GAIN Report Number:** CH3825

CH3825

**China, Peoples Republic of**

**Retail Food Sector**

**Report**

**2003**

**Approved by:**

![](media/image1.wmf)Ross Kreamer

#### ATO Shanghai

**Prepared by:**

Ralph Bean

**Report Highlights:**

China\'s food retail sector continues to grow and develop as
hypermarkets and convenience stores open across the country.
Hypermarkets are now present in all major and most second-tier cities.
The pace of development, however, varies widely from city to city.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Shanghai ATO \[CH2\]

\[CH\]

Table of Contents

[I. Market Summary 3](#i.-market-summary)

[I.A Overview of the Retail Food Market in China
3](#i.a-overview-of-the-retail-food-market-in-china)

[I.B Major Food Retail Chains in China
6](#i.b-major-food-retail-chains-in-china)

[I.C Advantages and Challenges for U.S. Exporters in China
7](#i.c-advantages-and-challenges-for-u.s.-exporters-in-china)

[I.D Regional Market Profiles 8](#i.d-regional-market-profiles)

[II. Road Map for Market Entry 12](#ii.-road-map-for-market-entry)

[II.A Hypermarkets, Supermarkets and Warehouse Outlets
16](#ii.a-hypermarkets-supermarkets-and-warehouse-outlets)

[II.B Convenience Stores 16](#ii.b-convenience-stores)

[II.C Traditional Markets, Wet Markets and "Mom and Pop" Stores
17](#ii.c-traditional-markets-wet-markets-and-mom-and-pop-xiaomaibu-stores)

[III. Competition 17](#iii.-competition)

[IV. Best Product Prospects 18](#iv.-best-product-prospects)

[IV.A Products Present in the Market Which Have Good Sales Potential
18](#iv.a-products-present-in-the-market-which-have-good-sales-potential)

[IV.B Products Not Present in Significant Quantities, Which Have Good
Sales Potential
19](#iv.b-products-not-present-in-significant-quantities-which-have-good-sales-potential)

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

# I. Market Summary

## I.A Overview of the Retail Food Market in China

![](media/image2.wmf)

Beijing, leaving more room for future expansion, particularly for
convenience store chains. The SARS crisis proved to be a boon to both
hypermarket and convenience store chains, which have a strong reputation
for cleanliness and quality control. Although sales of seafood slumped,
fruit and vegetable sales skyrocketed during the crisis.

Faced with intense competition, retailers are taking measures to control
costs and increase revenues. Most now offer products such as
ready-to-eat and heat-and-eat meals, while some are seeking to sell
products with higher unit values---a positive development for high
quality imported products. Another revenue-boosting measure has been for
retailers to charge numerous different fees to suppliers in exchange for
carrying their products, a tactic that has produced considerable
friction with suppliers. This is also discouraging distributors from
bringing in new products, as the cost of these fees places them under
pressure to support only products that are guaranteed to succeed. Last
Spring a group of dried nut packers launched a boycott of one major
foreign-invested retailer in an effort to negotiate lower slotting fees
for their products. The Chinese government has encouraged mergers among
domestic chains, including one that joined together the nation's two
largest food retail chains, Hualian and Lianhua. Other measures have
included the development of private label products and increased
vertical integration.

**[Supermarket chains]{.underline}** remain the largest chain retail
format, but are suffering from competition with hypermarkets and
convenience stores. This sector is dominated almost exclusively by
domestic chains, with Lianhua and Hualian by far the largest players,
followed by Nonggongshang and Suguo. Only Lianhua and Hualian are true
nationwide players, although Nonggongshang has expanded well beyond its
base in East China. Both Lianhua and Hualian have continued to expand,
both through opening new stores and through acquisitions. Although the
two dominant chains were recently merged, both appear to be operating
independently and continue to report revenues as separate entities.
Competition is fierce and margins extremely thin. Most foreign retailers
competing in this sector have been forced to either retrench and change
to a different format or withdraw entirely. Management, purchasing,
distribution systems, and layouts for supermarkets tend to be
considerably less sophisticated than either hypermarket or convenience
store chains. Penetration of imported products is extremely low, limited
primarily to frozen vegetables and dried fruit and nuts. Most stores
feature extensive frozen and refrigerated sections with a wide variety
of products ranging from frozen dumplings to fresh dairy products. The
quality of fresh vegetables and meat is variable, however, and many
shoppers still prefer to buy these products at wet markets or from
streetside vendors. Some supermarkets are attempting to boost traffic by
offering more ready-to-cook products such as meat prepackaged with
spices and cut vegetables.

![](media/image3.wmf) are growing rapidly, particularly in second-tier
cities. Foreign invested companies such as Carrefour and Metro pioneered
the format in China, and these companies, along with Wal-Mart, Lotus and
several others, remain among the strongest competitors in the market.
These chains have established stores in cities as diverse as Kunming,
Wuhan and Harbin. Foreign-invested hypermarkets are comparable to their
overseas counterparts in terms of management and layout, with some
adjustments for the Chinese market. A number of Chinese chains, most
notably Lianhua and Nonggongshang, have responded to the competition by
establishing hypermarkets of their own.

In a number of smaller cities, local companies have also established
hypermarkets, although these often operate as hybrid
hypermarket/department stores. Imports are more common in hypermarkets
than in any other retail format, particularly in the foreign invested
chains. These chains are also more aggressive in pursuing promotions,
though many levy exorbitant fees from suppliers in exchange for carrying
new products or supporting promotions.

Faced with tougher competition, hypermarket chains are seeking various
ways to reduce costs and increase revenues. Most now offer a variety of
ready-to-eat or heat-and-eat products, as well as pre-packaged
ready-to-cook meal sets. Many have also opened kiosks inside the store
for independent contractors that offer various freshly made snacks. The
most recent trend is for stores to stock house-brand items. This runs
against the traditional preference of Chinese consumers for name-brand
products as a guarantee of quality, instead relying on the reputation of
the hypermarket chain to provide that guarantee, while it works with
traditional consumer price sensitivity.

**[Convenience store chains]{.underline}** continue to be dominated by
Chinese companies, although U.S.-based 7- Eleven has announced plans to
expand beyond its base in South China into the Beijing market. Nearly
all of the Chinese-owned chains are affiliated with a larger food retail
company: Quik is owned by Lianhua, Alldays is owned by Nonggongshang,
Kedi is owned by Bright Dairy (which is owned by Nonggongshang), and
Lawson's is a joint venture with Hualian. The pace of development for
convenience stores is extremely uneven with Shanghai leading the way.
Beijing, on the other hand, has only recently opened to convenience
store chains, and the combination of local regulations and local
consumer culture may prevent explosive, uncontrolled growth as seen in
Shanghai. Stores connected to gas stations are gaining popularity, with
the trend being most advanced in the Guangzhou area.

Convenience stores are the newest retail format: management, purchasing
and distribution systems are very modern and heavily automated. Although
the specific distribution systems vary, most chains use automated
on-line systems to report sales and order products. Nearly all
convenience stores include frozen and refrigerated food sections, along
with microwave ovens and a variety of hot snacks. Apart from nuts and
dried fruit, imported products are fairly rare. However, some chains are
seeking to boost revenues by stocking more expensive items, and have
expressed an interest in stocking more imports.

Nearly all convenience stores include refrigerator and freezer sections,
as well as a variety of hot snacks, such as tea eggs and boiled
dumplings. The emphasis in these stores is on impulse purchases of
packaged foods and ready-to-eat items such as ice cream, dairy drinks
and cigarettes. Where convenience stores are common, competition is
extremely tough, driving down per-store profits. These chains are
extremely sensitive to the demographics of the customer base,
identifying them primarily as school kids and working parents. One
director described his customers as 'travellers,' explaining that the
ideal locations are at schools, bus stations, subways and other public
facilities. Another strategy has been to collocate convenience stores
with supermarkets owned by the same company. Rather than competing, the
convenience store benefits from the foot traffic generated by the
supermarket, then during off hours acts as a 24-hour window for the
supermarket.

**[Traditional markets]{.underline}** continue to be a presence
throughout China, although many of the wet markets in big cities are
being closed or consolidated. Local authorities in most cities view the
wet markets as unsanitary, not to mention that tax revenues from these
markets are small, relative to more well regulated markets. SARS
accelerated the process by focusing more attention on sanitation and
depressing demand for meat and seafood. In some areas, the authorities
are attempting to move the markets indoors into a cleaner and
better-regulated environment. Although some supermarkets are offering
expanded produce sections, the quality, variety, freshness and pricing
are often not up to consumers' standards. It is not unusual to see
street vendors selling vegetables outside of supermarkets, and in some
cases the supermarkets actually seem to encourage them, as both benefit
from the increased foot traffic.

Other traditional formats include the small variety store (called
xiaomaibu) and fruit stands. Although challenged by convenience stores,
xiaomaibus continue to dot every city in China, filling in the gaps left
by supermarkets and convenience stores. Sourcing and supply are
improvised, and these stores are highly unlikely to stock any imported
products at all. Over the long term, this format is likely to decline as
the extreme small scale makes them unprofitable, while expanding the
size of the stores will put them into direct competition with
convenience stores. Fruit stands are also common throughout China,
appearing in a wide range of venues, including small open markets,
kiosks and small storefront operations. Like the xiaomaibus, these are
family-owned operations and extremely small in scale. These shops
occasionally stock imported fruit, from Israeli tangerines to Washington
State apples to Thai rambutans, but also include quite a large number of
fakes and counterfeits.

## I.B Major Food Retail Chains in China

###### **Revenue, Lies and Statistics**

Reliable statistics on the size of China's food retail sector are not
publicly available. Although there are several sources for such numbers,
all have serious shortcomings. None report income for foreign-invested
joint ventures (JVs), instead listing them under the name of the Chinese
JV partner, many of whom own food retail operations of their own. This
can create considerable confusion in the case of JVs like Carrefour,
which has different Chinese partners in different regions, including
Lianhua. Thus it is difficult to determine how much of Lianhua's
reported revenue derives from its JV with Carrefour. Metro, on the other
hand, has a single, separately incorporated JV partner, making it easier
to identify and track revenues.

The complex web of ownership in the domestic industry also adds to the
confusion. For example, the Kedi convenience store chain is owned
indirectly by Nonggongshang through it's Bright Dairy subsidiary, but is
listed separately in most statistics. However, Nonggongshang's Alldays
convenience store chain is not listed and it is unclear whether it is
included in the total numbers for Nonggongshang. Likewise, Lianhua's
Quik convenience store chain, the largest in China, is not listed
separately, but is clearly not included in the number of stores reported
for Lianhua (there are over 1,200 Quik outlets, and a total of only
1,883 stores reported for Lianhua, one of China's two largest
supermarket chains). Whether the Quik revenues are also excluded from
Lianhua's total revenues is unclear.

Keeping these shortcomings in mind, the following table provides some
sense of the size of the retail food sector and the players involved.
Data from several different sources is included.

+-------------------+---------+------+---------+------+---------+-----+
| **Table 1. CHINA: |         |      |         |      |         |     |
| Top Retail Chains |         |      |         |      |         |     |
| in 2002**         |         |      |         |      |         |     |
+-------------------+---------+------+---------+------+---------+-----+
|                   | Data    |      |         |      |         |     |
|                   | Source  |      |         |      |         |     |
+-------------------+---------+------+---------+------+---------+-----+
|                   | CCFA^1^ |      | B       |      | Pur     |     |
|                   |         |      | usiness |      | chasing |     |
|                   |         |      | Info    |      | Maga    |     |
|                   |         |      | rmation |      | zine^3^ |     |
|                   |         |      | of      |      |         |     |
|                   |         |      | Shan    |      |         |     |
|                   |         |      | ghai^2^ |      |         |     |
+-------------------+---------+------+---------+------+---------+-----+
| Retail Chain      | Revenue | St   | Revenue | St   | Revenue | Sto |
|                   |         | ores |         | ores |         | res |
|                   | (       |      | (       |      | (       |     |
|                   | billion |      | billion |      | billion |     |
|                   | rmb)    |      | rmb)    |      | rmb)    |     |
+-------------------+---------+------+---------+------+---------+-----+
| Lianhua           | 18.33   | 1921 | 18.3    | 1921 | 18.0    | 1   |
|                   |         |      |         |      |         | 883 |
+-------------------+---------+------+---------+------+---------+-----+
| Hualian           | 15.07   | 1200 | 15.1    | 1200 | 12.5    | 1   |
|                   |         |      |         |      |         | 080 |
+-------------------+---------+------+---------+------+---------+-----+
| Dalian Dept.      |         |      | 12.8    | 51   | 10.0    | 51  |
| Store Grp.        |         |      |         |      |         |     |
+-------------------+---------+------+---------+------+---------+-----+
| Beijing Hualian   | 10.30   | 54   | 10.3    | 54   | NA      | NA  |
+-------------------+---------+------+---------+------+---------+-----+
| Nonggongshang     | 8.73    | 702  | 8.7     | 702  | 8.5     | 670 |
+-------------------+---------+------+---------+------+---------+-----+
| Huarun Wanjia     | 8.59    | 397  | 8.6     | 397  | 8.59    | 450 |
+-------------------+---------+------+---------+------+---------+-----+
| Suguo             | 7.02    | 940  | 7.0     | 940  | 7.02    | 940 |
+-------------------+---------+------+---------+------+---------+-----+
| Wuhan Wushang     | NA      | NA   | 5.9     | 20   | NA      | NA  |
| Group             |         |      |         |      |         |     |
+-------------------+---------+------+---------+------+---------+-----+
| Chongqing         | 5.36    | 72   | 5.4     | 76   | NA      | NA  |
| Shangshe          |         |      |         |      |         |     |
+-------------------+---------+------+---------+------+---------+-----+
| Jinjiang (Metro)  | 5.31    | 16   | 5.3     | 16   | NA      | NA  |
+-------------------+---------+------+---------+------+---------+-----+
| Beijing Wumei     | 5.07    | 355  | NA      | NA   | NA      | NA  |
+-------------------+---------+------+---------+------+---------+-----+
| Beijing           | 4.26    | 102  | NA      | NA   | NA      | NA  |
| Jingkelong        |         |      |         |      |         |     |
+-------------------+---------+------+---------+------+---------+-----+
| Shanghai Kedi^4^  | 1.1     | 706  | NA      | NA   | NA      | NA  |
+-------------------+---------+------+---------+------+---------+-----+
| 1\) CCFA          |         |      |         |      |         |     |
| statistics        |         |      |         |      |         |     |
| provide greater   |         |      |         |      |         |     |
| detail than other |         |      |         |      |         |     |
| sources, but      |         |      |         |      |         |     |
| appear to be      |         |      |         |      |         |     |
| missing key       |         |      |         |      |         |     |
| players. CCFA may |         |      |         |      |         |     |
| have separated    |         |      |         |      |         |     |
| the subsidiary    |         |      |         |      |         |     |
| companies, which  |         |      |         |      |         |     |
| would then have   |         |      |         |      |         |     |
| fallen further    |         |      |         |      |         |     |
| down in the list. |         |      |         |      |         |     |
| 2) Business       |         |      |         |      |         |     |
| Information of    |         |      |         |      |         |     |
| Shanghai          |         |      |         |      |         |     |
| statistics are    |         |      |         |      |         |     |
| consistent with   |         |      |         |      |         |     |
| other sources,    |         |      |         |      |         |     |
| but conflict with |         |      |         |      |         |     |
| other statistics  |         |      |         |      |         |     |
| in the same       |         |      |         |      |         |     |
| publication. 3)   |         |      |         |      |         |     |
| The Purchasing    |         |      |         |      |         |     |
| Magazine          |         |      |         |      |         |     |
| statistics are    |         |      |         |      |         |     |
| missing at least  |         |      |         |      |         |     |
| one major player  |         |      |         |      |         |     |
| and report        |         |      |         |      |         |     |
| consistently      |         |      |         |      |         |     |
| lower revenue and |         |      |         |      |         |     |
| store numbers     |         |      |         |      |         |     |
| than other        |         |      |         |      |         |     |
| sources. They     |         |      |         |      |         |     |
| also suffer       |         |      |         |      |         |     |
| internal          |         |      |         |      |         |     |
| inconsistencies.  |         |      |         |      |         |     |
| 4) Kedi is        |         |      |         |      |         |     |
| included to show  |         |      |         |      |         |     |
| the impact of     |         |      |         |      |         |     |
| separating        |         |      |         |      |         |     |
| subsidiary        |         |      |         |      |         |     |
| companies.        |         |      |         |      |         |     |
| Nonggongshang     |         |      |         |      |         |     |
| indirectly owns   |         |      |         |      |         |     |
| it.               |         |      |         |      |         |     |
+-------------------+---------+------+---------+------+---------+-----+

Because it excludes foreign JVs, the table above does not show the
growing influence of foreign-invested retailers. These are listed in the
following table, along with the number of stores and revenue estimates,
where available. The difference between the 2002 number and the current
(October, 2003) number gives an idea of the pace of growth. Note also
that Metro has announced plans to add up to 10 stores per year over the
next 10 years.

+----------------+-----------------------+----------------+-----------+
| # Tabl         |                       |                |           |
| e 2. CHINA: Ma |                       |                |           |
| jor Foreign-In |                       |                |           |
| vested Hyperma |                       |                |           |
| rket Companies |                       |                |           |
+----------------+-----------------------+----------------+-----------+
| Retailer       | Ownership             | Number of      | Annual    |
|                |                       | Outlets        | Sales     |
|                |                       |                |           |
|                |                       | 2002/current   | (billion  |
|                |                       |                | rmb)      |
+----------------+-----------------------+----------------+-----------+
| Carrefour      | Sino-French           | 32/41          | 12.9^1^   |
+----------------+-----------------------+----------------+-----------+
| Wal-Mart       | Sino-U.S.             | 25/31          | NA^2^     |
+----------------+-----------------------+----------------+-----------+
| Metro          | Sino-German           | 16/18          | 5.3^3^    |
+----------------+-----------------------+----------------+-----------+
| PriceMart      | Sino-U.S.             | 26/NA          | NA        |
+----------------+-----------------------+----------------+-----------+
| Lotus          | Sino-Thai             | 5/NA           | NA        |
+----------------+-----------------------+----------------+-----------+
| Trustmart      | Sino-Taiwan           | 40/76          | NA        |
+----------------+-----------------------+----------------+-----------+
| RT Mart        | Sino-Taiwan           | 14/NA          | NA        |
+----------------+-----------------------+----------------+-----------+
| 1\)            |                       |                |           |
| ATO/Shanghai   |                       |                |           |
| estimate; 3)   |                       |                |           |
| CCFA           |                       |                |           |
| statistics     |                       |                |           |
+----------------+-----------------------+----------------+-----------+

## I.C Advantages and Challenges for U.S. Exporters in China

+-----------------------------------+-----------------------------------+
| # Table 3. CHINA                  |                                   |
| : Strengths and Challenges for U. |                                   |
| S. products in Retail Food Market |                                   |
+-----------------------------------+-----------------------------------+
| Advantages                        | Challenges                        |
+-----------------------------------+-----------------------------------+
| Chinese consumers generally       | U.S. products are routinely       |
| regard U.S. products as being of  | counterfeited.                    |
| high quality.                     |                                   |
+-----------------------------------+-----------------------------------+
| Chinese consumers spend over 1/3  | Consumers are extremely price     |
| of their income on food.          | sensitive, and are often          |
|                                   | unwilling to risk spending on     |
|                                   | products they are unfamiliar      |
|                                   | with.                             |
+-----------------------------------+-----------------------------------+
| U.S. brands are widely known and  | Many U.S. companies have          |
| respected in China's urban        | established plants in China,      |
| markets.                          | manufacturing their products      |
|                                   | using Chinese ingredients.        |
+-----------------------------------+-----------------------------------+
| Incomes are growing rapidly in    | Distribution and logistics remain |
| second-tier cities, creating a    | underdeveloped, making            |
| whole new range of opportunities. | distribution of imported products |
|                                   | to interior cities extremely      |
|                                   | difficult.                        |
+-----------------------------------+-----------------------------------+
| Food is a central part of Chinese | Lack of knowledge about U.S.      |
| culture, and consumers enjoy      | products and how to prepare them  |
| trying new tastes.                | makes consumers more hesitant to  |
|                                   | buy.                              |
+-----------------------------------+-----------------------------------+
| China's entry into the WTO has    | Labeling and sanitary             |
| reduced tariffs on many imported  | restrictions act as non-tariff    |
| products.                         | barriers. Enforcement of these    |
|                                   | rules is haphazard, creating      |
|                                   | additional uncertainty.           |
+-----------------------------------+-----------------------------------+
| The Agricultural Cooperation      | U.S. exporters that have relied   |
| Agreement opened the Chinese      | on gray market channels in the    |
| market to many U.S. products that | past lack direct contact with     |
| were previously banned.           | Chinese buyers.                   |
+-----------------------------------+-----------------------------------+
| Rapid growth in retail food       | Purchasing by most retail chains  |
| chains has created more           | remains decentralized. Few        |
| opportunities for bulk            | purchase imports directly, so     |
| purchasing.                       | exporters must establish a        |
|                                   | relationship with a distributor.  |
+-----------------------------------+-----------------------------------+

## I.D Regional Market Profiles

###### **Guangzhou Region** -- Guangdong province, of which Guangzhou is the capital, is one of the wealthiest and most developed markets in China. It is also regarded as one of the centers of China's food culture, with an emphasis on the exotic. The influence of Hong Kong is also very strong in this region, with distributors more likely to rely on Hong Kong-based companies to transship products than in other parts of China. 

###### 

###### Guangzhou has seen the establishment of a large number of **hypermarkets** in recent years, and competition has become fierce. Chinese retailers in this area appear to be slowing down their pace of expansion, and are now focusing on increased profitability for their existing stores. CRC Vanguard (Huarun Wanjian), one of the largest retailers in the region, recently announced that it will temporarily stop purchasing and merger activities to focus on profitability. Minrun, which recently purchased Daoneijia, has also announced that it will slow down its pace of expansion. Among the foreign-invested hypermarket chains, Hong Kong's Park n' Shop, Taiwan's Trust-Mart and the U.S.' Wal-Mart are currently the largest.

###### 

###### Despite tough competition, foreign-invested retailers have plans to expand in this area. Metro recently announced plans to open a new store in Dongguan, and 7-8 more stores in the Guangzhou area over the next 5 years. Nearby cities such as Dongguan offer fertile fields for future expansion, as do key emerging cities in neighboring Fujian province, such as Xiamen. Changsha in neighboring Hunan province is already home to Metro and Carrefour stores, as well as a major domestic hypermarket company, Hunan Apollo.

+--------+------------+----------------+----------+------------------+
| ##     |            |                |          |                  |
| #####  |            |                |          |                  |
| Table  |            |                |          |                  |
| 4. CHI |            |                |          |                  |
| NA: Hy |            |                |          |                  |
| permar |            |                |          |                  |
| kets i |            |                |          |                  |
| n Guan |            |                |          |                  |
| gzhou  |            |                |          |                  |
+--------+------------+----------------+----------+------------------+
| Re     | Ownership  | Total Sales    | Number   | Relative sales   |
| tailer |            | (RMB)          | of       | efficiency per   |
|        | (Base)     |                | stores   | outlet (RMB)     |
|        |            |                |          |                  |
|        |            |                | (Dec     |                  |
|        |            |                | 2002)    |                  |
+--------+------------+----------------+----------+------------------+
| CRC    | China      | 42.1 billion   | 450      | 9.35 million     |
| Va     | (Shenzhen) |                |          |                  |
| nguard |            |                |          |                  |
+--------+------------+----------------+----------+------------------+
| Xin Yi | China      | 15.6 billion   | 26       | 60 million       |
| Jia    |            |                |          |                  |
|        | (Shenzhen) |                |          |                  |
+--------+------------+----------------+----------+------------------+
| Park'n | Hong Kong  | 897 million    | 8        | 112.1 million    |
| Shop   |            |                |          |                  |
+--------+------------+----------------+----------+------------------+
| Trus   | Taiwan     | 827 million    | 11       | 75.2 million     |
| t-Mart | (          |                |          |                  |
|        | Guangzhou) |                |          |                  |
+--------+------------+----------------+----------+------------------+
| Wa     | U.S.       | 655 million    | 25       | 26.2 million     |
| l-Mart | (Shenzhen) |                |          |                  |
|        |            |                | (nat     |                  |
|        |            |                | ionwide) |                  |
+--------+------------+----------------+----------+------------------+
| Makro  | N          | 362 million    | 3        | 120.7 million    |
|        | etherlands |                |          |                  |
|        |            |                |          |                  |
|        | (          |                |          |                  |
|        | Guangzhou) |                |          |                  |
+--------+------------+----------------+----------+------------------+
| Jusco  | Japan      | 179 million    | 5        | 35.8 million     |
|        | (          |                |          |                  |
|        | Guangzhou) |                |          |                  |
+--------+------------+----------------+----------+------------------+
| Ho     | China      | 109 million    | 25       | 4.54 million     |
| mecity | (          |                |          |                  |
|        | Guangzhou) |                |          |                  |
+--------+------------+----------------+----------+------------------+
| Car    | France     | N/A            | 33       | N/A              |
| refour |            |                | (nat     |                  |
|        | (Shanghai) |                | ionwide) |                  |
+--------+------------+----------------+----------+------------------+
| M      | China      | 10.1 billion   | 21       | 48.1 million     |
| inrun/ |            |                |          |                  |
| Dao    | (Shenzhen) |                |          |                  |
| neijia |            |                |          |                  |
+--------+------------+----------------+----------+------------------+
| S      |            |                |          |                  |
| ource: |            |                |          |                  |
| A      |            |                |          |                  |
| TO/Gua |            |                |          |                  |
| ngzhou |            |                |          |                  |
| and    |            |                |          |                  |
| Purc   |            |                |          |                  |
| hasing |            |                |          |                  |
| Ma     |            |                |          |                  |
| gazine |            |                |          |                  |
| No. 6, |            |                |          |                  |
| 2003   |            |                |          |                  |
|        |            |                |          |                  |
| All    |            |                |          |                  |
| listed |            |                |          |                  |
| superm |            |                |          |                  |
| arkets |            |                |          |                  |
| and    |            |                |          |                  |
| hyperm |            |                |          |                  |
| arkets |            |                |          |                  |
| rely   |            |                |          |                  |
| on     |            |                |          |                  |
| agents |            |                |          |                  |
| and    |            |                |          |                  |
| d      |            |                |          |                  |
| istrib |            |                |          |                  |
| utors. |            |                |          |                  |
+--------+------------+----------------+----------+------------------+

###### The **convenience store** format is also well developed in the Guangzhou area, though not at the level of Shanghai, leaving room for future growth. Foreign-invested chains are common here, and actually hold a dominant market share. The key foreign-invested chains are 7-Eleven (operated through a Taiwanese joint venture) and BP Service Station Convenience Stores. As the last indicates, the service-station format for convenience stores is much better developed than in Shanghai, where it is just now getting started. Domestic convenience giants Quik and Kedi are only now establishing a foothold in the area, but are likely to expand quickly. Kedi has established a regional logistics center, and Quik has included a number of mini-marts in Guangzhou as part of its deal with Sinopec to open stores at Sinopec gas stations.

The convenience store industry in this region appears to be expanding
quickly into niche-oriented stores. Apart from the gas-station stores,
7-Eleven has signed deals to open stores in the subway systems in
Guangzhou and Shenzhen. The expansion into these niche markets involves
some differentiation, as the customer base is quite different. Gas
station stores cater primarily to truck drivers, who typically purchase
soft drinks and packaged products, while more typical convenience store
customers tend to purchase ready-to-eat foods, snacks and newspapers.
Subway stores are expected to offer a narrow range of products including
ready-to-eat breakfast foods, batteries and newspapers.

+--------------------+----------------------+--------------------------+
| #                  |                      |                          |
| ###### Table 5. CH |                      |                          |
| INA: Company Profi |                      |                          |
| les: Convenience S |                      |                          |
| tores in Guangzhou |                      |                          |
+--------------------+----------------------+--------------------------+
| Retailer           | Ownership            | No. of Outlets           |
+--------------------+----------------------+--------------------------+
| 7-Eleven           | President/Tianwan    | 126, another 25 stores   |
|                    | (franchise holder)   | in subway stations       |
+--------------------+----------------------+--------------------------+
| Kedi               | Dairy Farm/Hong Kong | 13                       |
+--------------------+----------------------+--------------------------+
| Quik               | Lianhua/Chinese      | 65                       |
+--------------------+----------------------+--------------------------+
| BP Service Station | BP/PetrolChina       | 140+ (30+ in and near    |
| Convenience Stores |                      | Guangzhou, others are on |
|                    |                      | major expressways)       |
+--------------------+----------------------+--------------------------+
| OK                 | Ya Li Group/Hong     | 4                        |
|                    | Kong                 |                          |
+--------------------+----------------------+--------------------------+
| Sources: ATO       |                      |                          |
| Guangzhou Field    |                      |                          |
| Research           |                      |                          |
+--------------------+----------------------+--------------------------+

**[Shanghai Region]{.underline}** -- Shanghai and nearby parts of
Zhejiang and Jiangsu provinces form one of the most vibrant centers of
commerce in China. Shanghai has made massive investments in import and
distribution infrastructure, with the expressed goal of becoming China's
biggest port and the gateway to the entire Yangtze River basin. The area
is also home to a number of relatively unknown but massive cities.
Imports generally enter directly through the port of Shanghai.
Transshipment through Hong Kong, once commonplace, is fast becoming a
rarity.

The **hypermarket** and supermarket sector is similarly well developed
compared to Guangzhou, although the players are different. In general,
foreign-invested hypermarkets are receptive to promotions and have
well-established procedures, while domestically owned hypermarkets are
traditionally less interested in them. Although many chains have
centralized purchasing for some products, a large number of items
continue to be sourced by individual stores or small groups of stores.
The scale of stores in the city of Shanghai tends to be small. Hence
what are commonly called supermarkets are often little larger than
grocery stores, while many hypermarkets are actually somewhere between a
supermarket and a hypermarket in size. Competition is fierce, and
retailers are seeking innovative ways to attract customers, including
promotions and by offering more and more ready-to-eat, heat-and-eat and
similar 'meal solutions,' as well as snacks.

Unsurprisingly, the Shanghai-based supermarket and hypermarket giants
Lianhua, Hualian and Nonggongshang dominate the supermarket scene, and
are significant players among the hypermarkets. However, foreign-owned
hypermarkets have a substantial share of the business (keep in mind that
Lianhua's revenues include those earned from its joint venture with
Carrefour). Among foreign-invested retailers, Carrefour is the most
successful in this area, although Metro, Trust-Mart, Lotus, Auchon and
other are present. Wal-Mart is still absent from Shanghai proper, but is
rumored to have plans to open as many as five stores in 2005, after
China opens the retail business to wholly foreign-owned enterprises.
Wal-Mart has also recently made forays into other cities in the region,
most recently including Nanchang, the capital of the interior province
of Jiangxi. Carrefour has recently opened Dia discount stores in
Shanghai. These small stores offer a limited range of house-brand
products at deep discounts. In 2003, food and agriculture powerhouse New
Hope Group, China's largest private company, announced plans to open a
series of NextMart hypermarkets in malls owned by its Nextmall Group.

Despite these plans, future development in the Shanghai area is likely
to focus the numerous large cities nearby. Suzhou, Hangzhou and Wuxi are
cities of well over 1 million people with incomes well above the
national average, within 2 hours drive of Shanghai. Further afield, a
number of other cities have attracted substantial investment from
foreign retailers. Kunming in particular (in Yunnan province) has become
a hotbed of activity and is now home to three Wal-Mart, two Carrefour,
two PriceSmart, two Trust-Mart and one Parkson hypermarket. Other inland
cities in the region have attracted foreign-invested hypermarkets,
including Nanjing, Wuhan, Ningbo, Mianyang, Chengdu, Chongqing, and
Nantong. Even the city of Nanchang in Jiangxi province is home to both
Wal-Mart and Nonggongshang hypermarkets.

+---------------+----------+----------------------+--------+-----------+
| # Table 6. C  |          |                      |        |           |
| HINA: Major S |          |                      |        |           |
| upermarket an |          |                      |        |           |
| d Hypermarket |          |                      |        |           |
| s in Shanghai |          |                      |        |           |
+---------------+----------+----------------------+--------+-----------+
| Company Name  | O        | Business             | Stores | Revenue   |
|               | wnership |                      | in     |           |
|               |          | Line                 | Sh     | (billion  |
|               |          |                      | anghai | rmb)      |
|               |          |                      |        |           |
|               |          |                      |        | (na       |
|               |          |                      |        | tionwide) |
+---------------+----------+----------------------+--------+-----------+
| Lianhua       | China    | supermarket,         | NA     | 18.3      |
|               |          | hypermarket          |        |           |
+---------------+----------+----------------------+--------+-----------+
| Hualian       | China    | supermarket,         | NA     | 15.1      |
|               |          | hypermarket          |        |           |
+---------------+----------+----------------------+--------+-----------+
| Nonggongshang | China    | supermarket,         | NA     | 8.7       |
|               |          | hypermarket          |        |           |
+---------------+----------+----------------------+--------+-----------+
| Carrefour\*   | France   | Hypermarket          | 5      | NA        |
|               | JV       |                      |        |           |
+---------------+----------+----------------------+--------+-----------+
| Metro         | German   | Hypermarket          | 2      | 5.3       |
|               | JV       |                      |        |           |
+---------------+----------+----------------------+--------+-----------+
| Lotus         | Thai JV  | Supermarket,         | 2      | 2.4       |
|               |          | hypermarket          |        |           |
+---------------+----------+----------------------+--------+-----------+
| Hualian       | China    | Hypermarket          | NA     | 2.2       |
| (Jiemaisheng) |          |                      |        |           |
+---------------+----------+----------------------+--------+-----------+
| Jiadeli       | China    | Supermarket          | NA     | 1.2       |
+---------------+----------+----------------------+--------+-----------+
| Jieqiang      | China    | Supermarket          | NA     | .88       |
+---------------+----------+----------------------+--------+-----------+
| Auchon        | France   | Hypermarket          | 4      | .82       |
|               | JV       |                      |        |           |
+---------------+----------+----------------------+--------+-----------+
| Hymall        | China    | Hypermarket          | NA     | .50       |
| (Qibao)       |          |                      |        |           |
+---------------+----------+----------------------+--------+-----------+
| Hymall        | China    | Hypermarket          | NA     | .40       |
| (Kangren)     |          |                      |        |           |
+---------------+----------+----------------------+--------+-----------+
| Source:       |          |                      |        |           |
| Business      |          |                      |        |           |
| Information   |          |                      |        |           |
| of Shanghai;  |          |                      |        |           |
| ATO/Shanghai  |          |                      |        |           |
| research      |          |                      |        |           |
|               |          |                      |        |           |
| Note: Store   |          |                      |        |           |
| numbers for   |          |                      |        |           |
| supermarkets  |          |                      |        |           |
| chains were   |          |                      |        |           |
| unavailable,  |          |                      |        |           |
| and numbers   |          |                      |        |           |
| for most      |          |                      |        |           |
| supermarke    |          |                      |        |           |
| t/hypermarket |          |                      |        |           |
| chains        |          |                      |        |           |
| combine both  |          |                      |        |           |
| types of      |          |                      |        |           |
| stores,       |          |                      |        |           |
| making them   |          |                      |        |           |
| less useful.  |          |                      |        |           |
+---------------+----------+----------------------+--------+-----------+

With roughly half of all the **convenience stores** in China, Shanghai
is oversaturated. Key locations (near schools, subways and bus or train
stations) often see three or four stores from competing chains on the
same block. This competition has driven per-store profits down, and the
chains are aggressively seeking ways to bring profits back up. In
Shanghai, this sector is overwhelmingly dominated by domestically owned
companies, with the relatively small chains Lawson's and C-Store being
the only foreign-invested chains. Most chains have deep-pockets owners.
Supermarket chains, particularly Lianhua, have realized that convenience
store operations complement rather than compete with supermarkets, and
often pair the two together, with the convenience store acting as a
24-hour window for the supermarket at night.

In Shanghai, convenience stores act as service centers, providing
services to pay utility bills, purchase phone cards, etc. The stores
claim to make little or no money from these services, nor from sales of
cigarettes and dairy products, but are compelled to offer them as a
means of generating foot traffic. The top profit-making items in this
market are beverages and household items. To increase profits, stores
are offering a wider range of ready-to-eat products. As elsewhere,
penetration of imported products is minimal, limited primarily to nuts
and dried fruit, although some chains have recently featured U.S. fruit
nectars and potato products. Several chains have expressed a growing
interest in carrying more imported products as a means of increasing
sales values.

Tough competition and falling profit margins have led many observers to
expect a wave of mergers and acquisitions, but this has yet to
materialize. If anything, some chains are expanding by moving into niche
venues. Hualian's joint venture, Lawson's, has announced plans to open
stores in shopping malls, while Lianhua's chain of Quik stores announced
a deal with a subsidiary of the Sinopec petroleum group to open stores
in gas stations. Two large chains, 21 Convenience and Liangyou, saw
changes in management, but will both continue to operate independently.
Quik, Kedi and C-Store have sought greener pastures in nearby cities
such as Suzhou and Wuxi. Despite the ferocious competition, rumors
continue to swirl that 7-11 will enter the market. Some industry
observers attribute the continued expansion of smaller local chains to
this rumor, as the owners are hopeful that a foreign chain will buy them
out as a means of establishing an instant presence in Shanghai.

+------------+----------+------------------+------------+------------+
| **Table 7. |          |                  |            |            |
| CHINA:     |          |                  |            |            |
| Major      |          |                  |            |            |
| C          |          |                  |            |            |
| onvenience |          |                  |            |            |
| Stores in  |          |                  |            |            |
| Shanghai   |          |                  |            |            |
| Area**     |          |                  |            |            |
+------------+----------+------------------+------------+------------+
| Retailer   | O        | Annual sales     | Number of  | Principal  |
|            | wnership |                  | outl       | locations  |
|            |          | million rmb      | ets/cities |            |
|            |          |                  |            |            |
|            |          | (latest or       |            |            |
|            |          | estimated)       |            |            |
+------------+----------+------------------+------------+------------+
| Lian       | China    | 18,300           | 1,200/50+  | Coastal    |
| hua/Quik\* |          |                  |            | China      |
+------------+----------+------------------+------------+------------+
| Kedi       | China    | 1,094            | 700+/9+    | East,      |
|            |          |                  |            | South      |
|            |          |                  |            | China      |
+------------+----------+------------------+------------+------------+
| NGS        | China    | 8,700            | 800+/1     | Shanghai   |
| /Alldays\* |          |                  |            |            |
+------------+----------+------------------+------------+------------+
| Liangyou   | China    | 890              | 470/1      | Shanghai   |
+------------+----------+------------------+------------+------------+
| 21 Century | China    | 160              | 516/NA     | Shanghai   |
+------------+----------+------------------+------------+------------+
| Laws       | Japan JV | 185              | 78/1       | Shanghai   |
| on/Hualian |          |                  |            |            |
+------------+----------+------------------+------------+------------+
| Mei        | China    | 234              | 270/1      | Shanghai   |
+------------+----------+------------------+------------+------------+
| C-Store    | Taiwan   | NA               | NA/2       | Shanghai,  |
|            | JV       |                  |            | Jiangsu    |
+------------+----------+------------------+------------+------------+
| Source:    |          |                  |            |            |
| AT         |          |                  |            |            |
| O/Shanghai |          |                  |            |            |
| research   |          |                  |            |            |
+------------+----------+------------------+------------+------------+

###### **Beijing Region** -- Although Beijing is an extremely wealthy and well-developed city, retail development lags slightly behind Shanghai and Guangzhou. There are various explanations for this, but many sources cite Beijing's generally conservative regulatory climate. While this has slowed the pace of development for retail, it has also left Beijing with more room for future development than the other two leading cities. Imports do reasonably well in Beijing, but distributors complain of difficulties shipping through the nearest port, Tianjin. Officials at this port have a reputation for aggressive pursuit of taxes and fees, and stringent interpretation of China's loosely worded import, quarantine and labeling regulations. As a result, some distributors prefer to bypass Tianjin and bring products in through Dalian, Qinghuangdao, Shanghai, and even Guangzhou.

Unlike Guangzhou and Shanghai, Beijing does not have a brace of large
satellite cities nearby. Whereas Guangdong province (where Guangzhou is
located) and Zhejiang and Jiangsu provinces (near Shanghai) are both
hotbeds of commercial development with dozens of wealthy and growing
satellite cities, neighboring Hubei province remains primarily an
agricultural region. The exception is the port of Tianjin, which is a
major city in its own right and has household incomes well above the
urban average. Further afield, this region offers a number of massive
and dynamic cities that are already attracting the interest of
foreign-invested hypermarket chains. Harbin (Heilongjiang), Dalian
(Liaoning) and Qingdao (Shandong) are all thriving cities that have
attracted the attention of retailers like Carrefour, Wal-Mart and Metro.
Shandong province deserves special mention: in addition to the coastal
resort city of Qingdao, the provincial capital of Jinan shows great
potential. The southern part of the province is also dotted with often
overlooked and thriving commercial centers.

###### 

**Hypermarkets** are a major presence in Beijing. Foreign-invested
hypermarkets include Carrefour, Metro and Wal-Mart, while a number of
Chinese companies including Hualian, Nonggongshang and Wu-Mart also have
operations in the city. The supermarket sector is also well developed,
and the city is home to several major chains such as Jingkelong (ranked
12^th^ among national chains by CCFA). The Beijing government has been
aggressive in relocating, merging and shutting down wet markets, which
has helped to drive customers toward the fast-growing supermarket and
hypermarket sector.

Development has been slowest for **convenience stores**. Industry
observers attribute this to the conservative regulatory climate, which
has likely been fueled by a desire to avoid the uncontrolled growth seen
in Shanghai (not to mention protecting Beijing's hordes of family-owned
variety stores). This suspicion is borne out by the slow pace in
approving permits for convenience store chains to operate in Beijing.
Several permits have been granted over the past year or so, most notably
to Lianhua's Quik chain, and a number of Quik stores have appeared in
the city.

# II. Road Map for Market Entry

## 

###### **Ground Rules**

China is not a single amorphous market, but a myriad of small markets
separated by geography, culture, cuisine, demographics and local
dialects. As such, there is no single formula for entry into this
market: the best approach to marketing a product will vary depending on
the product and the specific market being targeted. Nonetheless, there
are some basic guidelines that apply in all cases.

**Get to know the market**

China is very different from other places. Tastes, customs, culture,
business rules and government regulation are all different. Visiting
China gives exporters the opportunity to assess the market and establish
relationships. Experience in other markets will not necessarily help you
in China. Chinese buyers are often unfamiliar with U.S. product sources,
quality standards and contract practices, while many U.S. exporters are
not familiar with China's sales practices, distribution channels and
customer preferences. Visiting China gives exporters the opportunity to
assess the market and establish relationships.

**Invest (wisely) in market research**

From the perspective of an outsider, Chinese tastes can seem fickle.
Tastes poorly received in the U.S. may be successful in China, while
products targeted to one market niche may find their best sales in an
entirely different one. To avoid unpleasant surprises (and take
advantage of the pleasant ones), exporters with a long-term interest in
China are advised to research the market and ultimately to test their
products directly. Due to the absence of reliable government data and
restrictions on public polling, the quality of research by most
international market research firms is only marginally better than that
of much lower-priced local counterparts.

**Find a local partner and/or distributor**

An exporter's success in China often hinges on his local partner,
distributor or representative. Business in China is based on
relationships and regular contact with buyers, distributors, consumers
and government officials is crucial to success. For larger companies and
companies with a long-term commitment to China, establishing a
representative office or a joint venture partnership may be worthwhile.
Others, however, are likely to rely on a local importer/distributor to
handle marketing and regulatory issues, making the choice of a good
partner absolutely critical. Hastily made partnerships are perhaps the
most common cause of business failure in China.

**Find your market segment or niche and focus on it**

China is an impossibly big place. A common mistake is for exporters to
spread themselves too thin by trying to cater to the entire market
spectrum. Exporters with limited resources are well advised to identify
the best market niche for their product (e.g., wealthy gourmands, new
mothers, middle-class teens, etc.), and serve it faithfully and
consistently until they are sure of their success.

**Adapt your product to the Chinese market**

Exporters should be prepared to adapt their products to the demands of
their Chinese customers. This includes flavors, packaging, prices and
labeling. Small changes to flavors or packaging, based on market
research, may make the product more viable in China. For example,
Chinese consumers are often unwilling to buy products they can't see, so
including a transparent window in the box can help sales. Labeling is
another major issue, as China has detailed regulations on food labeling.

**Pursue gradual but sustainable growth**

Another common pitfall is the temptation to pursue explosive growth
(especially in geographic distribution and store penetration) in the
first year or two, either to amass market share or impress investors.
This may produce good results if long-term demand for the product
exists, but more often than not exporters end up surfing the edge of a
fad only to find themselves overextended and unable to focus on the
requirements of local markets. In such cases, a sudden weakening in
demand or the appearance of competition can prove fatal. The go-slow
approach gives exporters time to accumulate customer feedback and
fine-tune their products, marketing campaigns and distribution.

**Invest in market promotion**

Once in the market, an exporter's product will be competing with tens,
if not hundreds, of similar products. Domestically made products will
have advantages on price, familiarity and brand recognition, while
imports can be aided by aggressive promotion campaigns. Lacking the
massive marketing budgets of multinationals like Nestle or Kraft, most
exporters must design and implement their marketing campaigns carefully.
Attending only quality trade shows and trade shows focused on your
particular market segment is a good way to start. In-store promotions
are also a cost-effective way to support your product while building
your relationship with distributors and retailers. Above-the-line media
advertising should be carefully planned, as TV and radio time is
expensive and has limited reach. Exporters are advised to explore joint
marketing opportunities with local Agricultural Trade Offices or with a
State and Regional Trade Group (such as NASDA, WUSATA, MIATCO, SUSTA or
EUSAFEC).

**[Market Structure]{.underline}**

Distribution and logistics channels vary significantly within China and
across all sectors, but have certain features in common.

\- China is still subject to import licensing requirements and currency
exchange restrictions. All imported products must, at least nominally,
pass through the hands of a licensed importer. Few distributors or
traders hold import licenses and very few licensed importers act as
distributors, so the licensed importer is little more than a legal
convention, adding paperwork (and fees) to the process. Import licensing
requirements are being loosened, and are scheduled to end in 2005.
Licensed importers typically also handle the formalities of currency
exchange, which also requires special rights. Even if payment is made on
delivery, the entire process can take several weeks from the time the
goods arrive to the time that the foreign exchange transaction is
completed.

\- The most important task for an exporter is to identify a distributor
they can work with. This company must be able to handle all the import
formalities (including finding a licensed importer, customs clearance,
logistics, quarantine and inspection), and have a network of retail
customers. Finding a good distributor is critical to success.

\- Indirect sales through Hong Kong still take place, but are declining
in importance. In this case, exporters sell to an agent in Hong Kong,
who then resells the product into China, in many ways taking on the same
role that the distributor plays in direct transactions. Exporters
lacking the time or resources to become directly involved in China often
take this route, as business practices in Hong Kong are more familiar
and language barriers less of a problem. In doing so, however, exporters
lose contact with their ultimate customers and lose control over their
products.

\- Gray market channels, an extralegal version of indirect sales, also
persist, though their importance has declined in recent years. Once
necessary to move banned products into the mainland, these channels are
notoriously opaque and increasingly subject to crackdowns. Declining
tariffs and increased openness in the mainland market are likely to
result in further decline of this channel.

\- Once a product clears customs, it is usually stored in a warehouse
rented by the distributor, with the storage costs borne by the exporter.
As a result, most shipments arrive as consolidated containerloads
ordered by one or more retailers. Most major ports in China include free
trade zones with bonded warehousing.

\- To enter the retail market, food products must meet a number of
licensing requirements. All foods must receive a hygiene certificate
from the local government where the store they are listing in is
located. Food products also must be labeled in accordance with the
latest labeling regulations. Functional or health foods must obtain a
health-food certificate, and foods containing GMO ingredients may be
subject to additional labeling requirements. Many of these regulations
are vaguely worded, and enforcement tends to be arbitrary and opaque.

\- In recent years a number of service-oriented logistics companies with
foreign participation and/or management, have been established in port
areas and near free-trade zones. These companies offer a one-stop
solution for companies interested in exporting to or importing from
China, including customs clearance; shipment, handling and storage;
bonded warehousing and foreign exchange clearance for imports. They are
also able to dispatch products on demand and maintain transparent,
international-standard accounting for their customers. The following
chart provides a simplified overview of the flow of goods from a U.S.
supplier to a Chinese retail outlet.

# Chart 1. CHINA: Imported Goods Marketing Chain

Import licensing and currency exchange restrictions complicate
transactions more than are apparent from the above chart. The following
chart follows the sequence of transactions involved in exporting celery
from the U.S. to China.

Exporters working with a good distributor can avoid getting involved in
these details. Nonetheless, knowing how the transaction works is
important. Note that this is not a model for all transactions: details
differ for different products and buyers. For example, payment of 50% on
shipment is not typical of sales to retailers: most retail buyers do not
pay until after they receive the shipment, and many will insist on
90-180 days credit. Also, first shipments of new products will require
additional paperwork for approving the labels, etc. Nonetheless, it
provides an idea of how the process works.

## II.A Hypermarkets, Supermarkets and Warehouse Outlets

Hypermarkets and warehouse outlets provide the best opportunity for U.S.
exporters. Dominated by chain stores, this sector has more centralized
purchasing and higher volumes than most others, and foreign companies
that are more familiar with and receptive to imported products often
manage hypermarkets. Leading hypermarket chains such as Carrefour and
Wal-Mart owe part of their success to the fact that they have managed to
bypass China's inefficient wholesale system and are ordering some
products directly from suppliers and manufacturers. Although these
buyers still often rely on domestic distributors for logistics and
import formalities, the distributor is much less involved in marketing
the products. Supermarket chains are more difficult to work with, as
management is often poor and purchasing and distribution systems are not
usually centralized. Nonetheless, their sheer size and nationwide reach
makes them tempting targets.

Exporters interested in this market segment are advised to familiarize
themselves with their prospective buyers, as purchasing practices vary
between different chains. Since most of these chains rely on
distributors to some extent, it is also useful to become familiar with
them. In some cases, the more aggressive distributors will act to market
a new product to retailers. Support from the distributor can make a
tremendous difference, as hypermarket chains frequently charge
exorbitant slotting fees for new products. Since the supplier (i.e., the
distributor) usually pays these fees, many distributors are hesitant to
carry new products unless test marketing has shown good potential. On
the positive side, both hypermarkets and distributors are generally very
open to the sort of promotions that can prove the potential for new
products. Be warned, however, that hypermarket chains may add strings to
such promotions, such as a guarantee that the supplier will take back
any product that has not sold by the end of the promotion.

## II.B Convenience Stores

The convenience store industry is still relatively new to China. Unlike
hypermarkets and supermarkets, which appear across the country,
convenience chains are still geographically concentrated, with most
located in East China, a significant number in South China and
relatively few in North and Northeast China. Penetration by imports is
limited primarily to dried fruit and nuts: chains tend to be
conservative in product choice, and like to stick to well-known brand
names. Purchasing is centralized, providing a single point of contact
for companies wishing to introduce their products. Most chains rely on
distributors for food products other than dairy, so suppliers hoping to
crack this market must also establish a relationship with the
distributor. Promotions are common in these chains, but are typically
restricted to lucky-draw or two-for-one type deals and POP displays.

Brutal competition in some areas is causing chains to re-evaluate their
strategies. Many have expressed a growing interest in increasing
per-sales values by stocking more expensive products, including imports.
At least one chain has already conducted a limited promotion of
ready-to-eat U.S. potato products in Shanghai. Other strategies to raise
profits include stocking more box lunches and focusing on niche markets,
such as gas stations, subways and shopping malls.

There are several additional facts that exporters should keep in mind in
targeting these chains. They are very sensitive to customer
demographics: they will be more receptive to promotions and products
that target school kids and working parents. Products will have to be
adapted to suit impulse buyers: single-serving portions will do best.
Customers at these stores are brand conscious, but also price sensitive.
Key price points are 1 and 10 RMB/unit. At least one importer has found
success by repacking U.S. products in very small, single-serving
packages that are sold to school kids for 1 rmb apeice. Chains are also
very sensitive to their own standards and store layouts: promotions will
have to be closely coordinated with management.

## II.C Traditional Markets, Wet Markets and "Mom and Pop" (Xiaomaibu) Stores

Wet markets are on the decline in China, but continue to dominate
smaller cities, and remain a presence even in the largest cities. These
outlets are unlikely to disappear entirely, as they remain the preferred
venue for low-cost fresh vegetables and meat. Freshness and price are
the chief concerns for Chinese consumers, to the extent that they often
prefer to buy poultry and fish live, to be butchered on the spot.
Supermarket chains tend to fall short in pricing, freshness and variety
for meat and vegetables, while Hypermarkets are generally located too
far away for daily shopping. Local governments, in an effort to improve
both sanitation and tax revenues, are closing and consolidating the wet
markets. Many governments are attempting to transform at least some of
the wet markets into supermarket--style venues where multiple vendors
can operate in a cleaner environment. SARS dealt a serious blow to wet
markets, as sanitary concerns became a major concern. Wet markets are
also the primary venue for sales of exotic meats, which were widely
blamed for the SARS outbreak.

Likewise, the traditional variety store, the xiaomaibu, continues to
persist even in convenience store-saturated Shanghai. Considerably
smaller than even convenience stores, these family-owned shops offer an
eclectic mix of drinks, snacks, household items, hardware, bicycle parts
and whatever else the owner thinks to stock. Since convenience stores
are heavily concentrated in the high traffic areas near subways,
schools, bus stations and rail stations, xiaomaibus tend to fill in the
spaces in between, often serving as the corner store for a particular
apartment block or office building. The fact that these shops have
complete flexibility in what they stock also allows them to serve
extremely localized (even unique) market niches.

In all cases, management and distribution of product in these
traditional venues is heavily improvised. Although imported products
(particularly fruit) do, occasionally make their way in, by the time
they reach the retail level, their identity as imports is lost.
Counterfeiting is also routine, and strange and unusual products like
Sunkist apples are not uncommon. These markets are driven almost
exclusively by price. As a result, these venues are an extremely poor
prospect for promotions.

# III. Competition

The most serious competition for U.S. food exporters is local or joint
venture producers and processors. While supermarkets are often stocked
famous foreign brands such as Bugles, Coca-Cola, and M&Ms, close
inspection reveals that most of these products are actually manufactured
in China. The quality and variety of domestically produced foods has
improved quickly, and many are now able to compete with imports with the
added advantage of being specifically formulated to suit the local
market. Domestically manufactured products have completely cornered the
market in several categories, including beer, soft drinks, processed
meat and low-end confections. Competition is also growing in other
areas, such as wine and fresh fruit. Chinese products have traditionally
competed on price alone, but improvements in quality and efforts to
develop identifiable brands have made these products increasingly
competitive in these areas as well.

In the categories where imports are prominent, the competition tends to
be strongest with Pacific Rim neighbors such as Thailand, Australia, New
Zealand, and the Philippines. Competition from European countries tends
to be strongest in high-end niches such as wine, cheese and premium
chocolates. For certain commodities, specific countries have managed to
maintain a consistent market presence:

\- Fresh fruit: Thailand, U.S., South Africa, New Zealand, Australia,
Philippines, South Africa

\- Beef: U.S., Australia

\- Breakfast cereal: U.S.

\- Cheese: Australia, France, and U.S.

\- Frozen potatoes: U.S., Canada

\- Butter: New Zealand

\- Poultry: U.S., Brazil

\- Tree nuts: U.S. (almonds, pistachios), Iran (pistachios), Turkey
(hazelnuts)

\- Premium chocolate: Switzerland, Belgium, Italy, France

\- Premium ice cream: U.S.

\- Seafood: Norway, Russia, Canada, Australia, U.S.

\- Variety meats/offals: U.S., New Zealand, Canada

![](media/image4.wmf)

\- Ginseng: Korea, U.S., Canada

  -------------------------------------------------- --------------------
  **Table 8. CHINA: Top Imports of Consumer Foods in 
  2002, By Type**                                    

  Product                                            Value (\$million)

  Poultry Meat                                       426

  Dairy (excl. cheese)                               281

  Fresh Fruit                                        276

  Process Fruit & Veg.                               260

  Red Meat                                           200

  Wine and Beer                                      76

  Infant Foods (190110)                              74

  Food Prep. NES (210690)                            74

  Snack Foods (excl. nuts)                           70

  Tree Nuts                                          61

  Source: UN Data                                    
  -------------------------------------------------- --------------------

Although the U.S. is the dominant player in this market with a
20-percent share, other countries are pursuing it as well. A number of
countries have set up trade promotion offices which are active in
conducting trade promotions, including Australia, Canada, France, Great
Britain, Italy, the Netherlands, New Zealand, Thailand, Malaysia and the
Philippines. Vietnam has increased its share of imports very rapidly
over the past few years, and is now an important player in the market.

# IV. Best Product Prospects

## IV.A Products Present in the Market Which Have Good Sales Potential

\- Nuts and dried fruit

\- Seafood

\- Poultry meat

\- Red meat

\- Frozen vegetables

\- Breakfast cereals

\- Infant formula

\- Pet foods

\- Fruit juice

\- Baby food

\- Dried fruit

\- Dairy products

\- Frozen potato products

## IV.B Products Not Present in Significant Quantities, Which Have Good Sales Potential

\- Premium Ice Cream

\- Ready-to-cook and ready-to-eat foods

\- Non-native berry products

\- Ingredients and flavorings

\- Mexican food

\- Functional foods

# V. Post Contact and Additional Resources

FAS has four offices in China:

# Agricultural Affairs Office, Beijing

5-2 Qijiayuan Diplomatic Compound

Jianguomenwai, Beijing, 100600

Phone: (8610) 6532-1953

Fax: (8610) 6532-2962

E-mail: agbeijing@usda.gov

# Agricultural Trade Office, Beijing

Kerry Center, Beijing

Phone: (8610) 8529-6418

Fax: (8610) 8529-9962

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

E-mail: atoguangzhou@usda.gov

# 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