Required Report - public distribution

**Date:** 11/7/2007

**GAIN Report Number:** CH7821

CH6804

**China, Peoples Republic of**

**Retail Food Sector**

**All China Retail Annual Report**

**2007**

**Approved b**![](media/image1.wmf)**y:**

Mr. Wayne Batwin

ATO Shanghai

**Prepared by:**

David Kiefner, Sarah Wegmueller, ATO Beijing, ATO Guangzhou

**Report Highlights:**

China's modern food retail sector, comprising supermarkets,
hypermarkets, warehouse clubs and convenience stores, has been growing
by double-digit figures annually since the mid-1990's, displacing wet
markets and other traditional outlets. With markets in the affluent
coastal cities approaching saturation, many chains are expanding to
second- and third-tier urban centers with populations of 3-10 million.
While some retailers are quitting the market or going bankrupt, mergers
and acquisitions are rapidly altering the national retail scene.
Development in procurement systems and retail distribution networks has
not kept pace however, and most retail chains still rely on independent
suppliers. Outside the major urban centers, the penetration of imported
products remains relatively low, although intermediate and
consumer-ready products hold good potential. Growing food safety
concerns in China should particularly benefit multinational retailers
with their reputation for higher food safety and store sanitation
standards.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Shanghai \[CH2\]

\[CH\]

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)

[Retail Distribution Development 6](#retail-distribution-development)

[I.B. Sectoral Overview 7](#i.b.-sectoral-overview)

[I.C. Advantages and Challenges for U.S. Products In the Retail Food
Market
11](#i.c.-advantages-and-challenges-for-u.s.-products-in-the-retail-food-market)

[Table 4. U.S. Products in China's Retail Market
11](#table-4.-u.s.-products-in-chinas-retail-market)

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

[II.A. Basics of Market Entry 12](#ii.a.-basics-of-market-entry)

[General Guidelines 12](#general-guidelines)

[Entry Strategy: Hypermarkets and Supermarkets
14](#entry-strategy-hypermarkets-and-supermarkets)

[Entry Strategy: Boutique Stores 15](#entry-strategy-boutique-stores)

[Entry Strategy: Convenience Stores
15](#entry-strategy-convenience-stores)

[II.B. Market Structure 16](#ii.b.-market-structure)

[Distribution By Market Type 16](#distribution-by-market-type)

[Figure 4. Imported Goods Distribution Chain: Major Port
16](#figure-4.-imported-goods-distribution-chain-major-port)

[Figure 5. Imported Goods Distribution Chain: Emerging City via Major
Port
17](#figure-5.-imported-goods-distribution-chain-emerging-city-via-major-port)

[Industry Profiles 18](#industry-profiles)

[II.C. Regional Market Profiles 19](#ii.c.-regional-market-profiles)

[Shanghai Region 19](#shanghai-region)

[Hypermarkets 20](#hypermarkets)

[Table 7. Structure of Shanghai's Food Retail Sector, 2005
21](#table-7.-structure-of-shanghais-food-retail-sector-2005)

[Supermarkets 21](#supermarkets)

[Convenience Stores 23](#convenience-stores)

[Boutique Stores 24](#boutique-stores)

[Beyond Shanghai 24](#beyond-shanghai)

[Beijing Region 27](#beijing-region)

North China Retailers
\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\.....27

Hypermarkets................................................................................................................................28

Supermarkets................................................................................................................................28

North Retail
Trends......................................................................................................................30

[Guangzhou Region 32](#__RefHeading___Toc182737192)

[Consumer Trends 33](#__RefHeading___Toc182737193)

[Supermarket retailers 35](#__RefHeading___Toc182737194)

[Profiles of select retail outlets 39](#__RefHeading___Toc182737195)

[III. Competition 42](#iii.-competition)

[IV. Best Product Prospects 45](#iv.-best-product-prospects)

[IV.A Products Present in the Market Which Have Good Sales Potential
45](#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
45](#iv.b-products-not-present-in-significant-quantities-which-have-good-sales-potential)

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

# I. Market Summary 

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

In 2006, total retail sales reached USD 979 billion, growing by 12.1%
over the previous year.
![](media/image2.wmf){width="3.8333333333333335in"
height="3.1597222222222223in"}In the first nine months in 2007, China's
retail sales rose 15.9 % year on year to USD 851 billion, according to
the National Bureau of Statistics. The growth rate of retail sales, a
major gauge of consumer spending and an indicator of market movement,
was 2.4 percentage points higher than the growth rate in the same period
last year. Analysts attribute the rise of retail sales to the increase
of people's disposable income as the income of both rural and urban
residents rose more than 13 percent in the first nine months of the
year. Although modern formats and chain retailers are spreading rapidly
across the country, small-scale retail continues to dominate: in 2006
sales by supermarket chain stores accounted for slightly over 2% of the
total retail sales volume. This number is deceptive in that market
penetration of chain retail tends to be very high in the cities and very
low in rural areas. Food sales constitute a large proportion of retail
sales, with food accounting for over 1/3 of average Chinese urban
household expenditures.

Food retailing in China's urban areas is undergoing a rapid
modernization, although the pace varies widely by geographic location.
Major urban centers in Shanghai and Guangzhou lead the way, with Beijing
following close behind. Most major cities now host multiple hypermarkets
and one or more international retailers. With markets in Beijing,
Shanghai and Guangzhou approaching saturation, many chains are expanding
to second and even third tier urban centers with populations of 3-10
million. Development in retail distribution has not kept pace, and over
90% of the products for sale, even in international retailers, are
locally sourced. Outside of the cities of Shanghai, Beijing and
Guangzhou, penetration of imported foods is extremely low, typically
constituting less than 1% of SKUs (this issue is discussed in detail
below). ![](media/image3.wmf){width="3.7291666666666665in"
height="2.751388888888889in"}![](media/image4.wmf){width="2.7493055555555554in"
height="0.21805555555555556in"}

International retailers such as Carrefour, Wal-Mart and Metro have set
the pace for retail development, and domestic and international
competitors have entered these markets in large numbers, bringing the
level of development close to international standards. Ferocious
competition in these cities is leading the major retailers to push out
into increasingly remote markets. China is an immense country and
despite rapid growth and massive investment, all international retailers
combined still account for only 3-4% of total grocery sales and 2.6% of
all retail sales. At the same time, however, in a retail landscape
populated by small shops these international chains stand out: within
the ranks of China's top 100 chain stores, they account for almost one
quarter of total retail sales.

Domestic retailers are developing quickly. State-owned giants Lianhua
and Hualian, both based in Shanghai, remain by far the largest food
retailers in China. At last count, Lianhua operated 4,109 stores, mostly
small supermarkets, across China, with an ambitious goal of 8,000 stores
by 2008. Although Lianhua and Hualian were merged three years ago to
form Bailian, both chains continue to operate as separate entities. Much
of their expansion has been fueled by acquisition of smaller chains.
While this has extended their reach, it is also creating management
problems. Lianhua is establishing stores in Europe, with the intention
of sourcing and selling in both markets. Another state-owned giant,
Shanghai Nonggongshang, which currently operates 1,857 stores, has begun
to expand into cities throughout East China.

Privately-owned domestic chains are growing even more quickly. Key
players include Wu-Mart in Beijing, Jiadeli in Shanghai and Suguo in
Jiangsu province. Relatively small size and narrower geographic focus
makes these chains quicker and more responsive to market conditions. All
are expanding: Wu-Mart has expanded rapidly through a series of
acquisitions of several established chain retailers in Beijing, Tianjin,
and Ningxia Province and is trying to become the leading retailer in the
northern China region; Jiadeli is said to be in talks with a U.S. fund
manager to raise funds for a nationwide expansion; and Suguo received a
boost when China Resources Vanguard (HK), a major player in South China,
raised its stake to 80%. CRV is also said to have hired away a number of
managers from international retailers as they beef up their management
capabilities. All of the major domestic retailers are hedging their bets
by fielding a variety of different store formats. Lianhua, Hualian and
Nonggongshang have developed special, branded hypermarket companies to
compete with international hypermarkets. All three also own convenience
store chains.

The pace of development among international retailers is extraordinary.
Major new players have already entered the market, starting with Tesco's
purchase of a 50% stake in HyMall, which overnight gave it 32 stores in
China. Hong Kong's Sincere also announced plans to enter Shanghai's
crowded convenience store sector, and SPAR has received permission to
establish a wholly-owned foreign enterprise in China, having already
established a joint venture with the Jiejieqiang chain in Shandong.
Their chain store model is likely to appeal to smaller chains looking
for a competitive advantage. SPAR plans to open 15 stores in Shandong
over the next three years. Another voluntary chain, IGA, has signed an
agreement with Sanjiang Shopping Club in Ningbo, Zhejiang province.

Foreign retailers are rushing to tap China's fast-growing economy, large
population and expanding middle class. In an acquisition worth about USD
1 billion, Wal-Mart announced in February the purchase of a 35% stake in
the Bounteous Company, a Taiwan-based group that operates 101
superstores in 34 cities in China. Bounteous, which operates in China
under the name Trust-Mart, will continue using its original brand name
and both sides will open their new stores separately. Wal-Mart currently
has 73 retail stores in China, while European competitor Carrefour has
103 stores. After the purchase is complete, Wal-Mart will exceed
Carrefour in the number of superstores. The deal is part of a larger
trend favoring hypermarkets in China. While Carrefour and Wal-Mart both
plan further expansion in 2007, Tesco, the UK's leading retailer, is
also active. Tesco's stake in its China joint venture, which operates 44
Hymall hypermarkets, has risen from 50% to 90%.

Lotus has quickly but quietly built up to 75 Supercenter stores, with a
target of 100 by the end of 2008. Lotus' efforts are focused on East
China, with 20 stores in Shanghai alone. Its parent company, CP Group of
Thailand, has diversified investments in agricultural processing across
the country, which it may be able to leverage in the future. Like many
other domestic retailers in China, Lotus has no central distribution
center; every store runs independently with its own suppliers. It is
therefore largely dependent on local tastes and local suppliers for
deciding what each store should sell.

Liberalization of China's foreign ownership regulations has added to the
ferment. Prior to 2004, all international retailers were required to
enter into joint ventures with local companies. As a result, most
international retailers were left with joint ventures with partners they
may not have wanted. Carrefour Shanghai, for example, is a joint venture
with its biggest local competitor: Lianhua. While such partnerships can
bring many advantages for a new player trying to establish itself in a
market very dissimilar from its home market, the companies' own values,
goals and strategic objectives are invariably diluted. In the wake of
the reform in late 2004, international retailers either increased their
stake or bought out their partners altogether. In the past year, Lotus
has bought out money- losing stores in Beijing and Tianjin, Carrefour
has bought out partners in Changsha and Kunming, and Metro has increased
its stake in the Jinjiang Group from 60% to 90%. Wal-Mart, however, has
announced that it does not intend to follow this trend, regarding the
joint ventures as important to its relations with the local community.

Increased competition is forcing retailers, both domestic and
international, to adapt. The strategies they are pursuing vary widely.
Some (Carrefour, Wal-Mart and Metro) are resolving geographic imbalances
by opening new stores in areas where they lack a presence. In 2005,
Wal-Mart opened its first store in Shanghai, while in the same year
Carrefour opened its first stores in Fujian (Fuzhou and Xiamen), and
Metro opened its first store in Guangzhou. Another strategy, followed
successfully by Taiwanese retailers Trust-Mart and RT-Mart is to invest
in less well-known but fast-developing cities, avoiding the most
competitive markets. (Trust-Mart and RT-Mart have also cashed in on
their strong knowledge of Chinese culture and products to attract
customers in cities less familiar with foreign trends). Wal-Mart appears
to be following a similar strategy. While it has no stores in Guangzhou,
it has 10 in neighboring Shenzhen, and a list of locations that includes
Guiyang and Taiyuan, the capitals of the mountainous inland provinces of
Guizhou and Shanxi, as well as a very successful venture in Nanchang
(Jiangxi province).

![](media/image5.wmf){width="5.198611111111111in"
height="0.5201388888888889in"}![](media/image6.wmf){width="5.8909722222222225in"
height="2.2215277777777778in"}

The opposite strategy, focusing on a narrower geographic market, has
proved successful for other chains, particularly domestic retailers such
as Wu-Mart, Suguo and Chengdu's Hongqi. This approach allows retailers
to build greater volume and build stronger distribution chains, and is
particularly favored by supermarket and convenience store chains. Lotus
and E-Mart appear to be following this strategy as well, focusing most
of their effort on Shanghai and the neighboring cities. Metro has
focused on a niche of a different sort, having tailored its
cash-and-carry membership model to become a supplier to China's hordes
of small family-owned restaurants and cafeterias. Ito Yokado appears to
be following both a geographic and demographic niche market strategy by
targeting high-end consumers in Beijing.

### Retail Distribution Development 

Retail distribution channels have not grown to match the number and
quality of retail outlets. Roughly the size of the continental U.S.,
China still does not have a nationwide network of trucks, highways and
cold storage warehouses that can efficiently deliver supplies from the
manufacturer or importer to the store shelf. With some notable
exceptions, distribution is handled on a store-by-store or city-by-city
basis, with stores receiving most imports through a local distributor,
often even when alternatives exist. Because of their relative size,
stores are able to negotiate highly favorable terms that include free
return of unsold products, high listing fees for new products, and
credit terms, effectively passing all market risk onto the distributor.
This gives store managers a powerful incentive to favor the local
distributor over alternatives that offer less generous terms. In at
least one case, an international retailer's effort to establish
single-desk distribution of imports failed when their own stores refused
to work with the selected distributor. A second reason for reliance on
local distributors is the tendency of international retailers to expand
rapidly nationwide rather than focusing on a single city or region,
creating large numbers of isolated stores that lack the volume to
support a dedicated distribution network. A final reason has to do with
the role of relationships in Chinese business: local distributors can
provide a store with a network of business and government contacts that
are useful in resolving problems with minimal fuss.

Because of the high level of risk they are expected to absorb,
distributors tend to be extremely conservative about new products,
particularly imports. As a result, penetration of imported foods into
the retail sector is low. Even in relatively affluent cities,
international retailers typically carry less than 1% imported SKUs.
Notable exceptions include stores in Shanghai, Beijing, Guangzhou and
nearby boomtowns, which are home to both large expatriate communities
and to a large number of Chinese with overseas experience. Further
inland, distribution problems are further complicated by China's heavily
fragmented logistics systems, which make it difficult to transport
products directly from the coast to deep inland cities. One survey in
Chengdu found that temperature sensitive items, such as imported poultry
and meat, changed ownership as many as five times before reaching the
final user.

Fragmentation among suppliers of locally sourced products, particularly
of vegetables and meat, helps to perpetuate the dominant role of the
local distributor. One regional chain, Suguo, made repeated attempts to
source produce directly from producers or wholesale markets. The sheer
volume of transactions required to meet their demand was overwhelming,
however, forcing them to give up the effort. Eventually Suguo came to
rely on distributors not just for sourcing, but for most aspects of
marketing---essentially granting the distributor space in the store to
market their products. This is changing slowly, as farmers' professional
associations become more common, giving producers the ability to supply
larger quantities from a single source and at a more consistent level of
quality.

Exceptions to these conditions also exist. Some retailers (e.g. Metro)
have centralized distribution for many imported products, and a few
large distributors have negotiated more favorable terms with retail
chains at the national level, in some cases waiving listing fees. As
chains grow larger and handle increasing volumes, and as Chinese and
foreign suppliers become more organized, the role of the local
distributor in handling imports is likely to decline in the long run.
Nonetheless, for now, distribution remains the key obstacle to sales of
imported processed food in China's retail sector.

## I.B. Sectoral Overview

**Supermarkets** -- This is the oldest modern retail format, and remains
the most common in urban China. The sector is dominated by state-owned
domestic retailers, the largest being the Shanghai-based companies
Lianhua and Hualian. The fastest growing brands were from the smaller
chains like Shanghai Nonggongshang Group and Wuhan Zhongbai Group which
both experienced 30% growth in terms of number of outlets. However, most
of the chained supermarkets in China are small sized regional players,
which are constrained by lack of financial resources for further
expansion. Although Shanghai Nonggongshang is small in terms of outlet
number (1,857), it has the highest value sales of all supermarket
operators in China and therefore strong resources. A number of strong,
privately owned and regionally focused competitors have also appeared in
recent years, exemplified by Beijing's Wu-Mart, Xiuyijia (A. Best),
Jingkelong, Beijing Chaoshifa, and Zhejiang Renti in Zhejiang Province.

Although the supermarket format is losing market share to hypermarkets
and convenience stores, the actual number of stores continues to grow.
In 2006, the number of supermarket outlets in China increased by 10%
from the previous year to nearly 70,000, although the rate of growth has
been slowing in recent years as fewer resources, particularly land, are
available. The durability of the supermarket model is rooted in the
demographics and buying habits of Chinese shoppers. Small apartment
sizes, small refrigerators, relatively low rates of car ownership makes
long trips inconvenient, and limits the amount of food that can be kept
at home. At the same time, Chinese consumers are extremely sensitive to
the freshness and quality of the food that they buy. As a result, most
Chinese prefer to make smaller shopping trips on a daily basis, rather
than going on weekly or monthly shopping expeditions to a distant
superstore (although this pattern is changing with younger, urban
consumers).

The key weakness of China's supermarkets lies in the poor selection and
quality of produce, an item in high demand with daily shoppers. This
mismatch between supply and demand has not gone unnoticed, and it is
common in many Chinese cities to see impromptu wet markets form outside
of some supermarkets to take advantage. Several supermarket chains are
expanding their line of fresh produce in an effort to capture this
business; for example, Lianhua in Shanghai has plans to change the
layout of all its supermarkets to have more of an open market atmosphere
with more fresh vegetables and meat products and fewer non-food
products. Such stores still face steep obstacles however in sourcing the
quantity and quality of produce they need. They are receiving support in
this effort from local officials, who tend to regard wet markets as
unsightly and unsafe, not to mention a source of untaxed commerce. The
movement of supermarkets into fresh produce may prove a boon to fruit
exporters, as fruit is one of the few imports that have been able to
penetrate into the local wholesale markets that supply these stores.

Supermarkets have the poorest penetration of imported products of all
the modern retail formats, even in major cities. The only U.S. imports
routinely found in these stores are frozen corn and mixed vegetables,
frozen potatoes, and occasionally fresh oranges, apples and a limited
selection of wine. This is the result of both customer base and
distribution systems. Chinese supermarkets cater primarily to
middle-market daily shoppers, who are extremely price sensitive. By
contrast, hypermarkets and convenience stores are less price sensitive,
with hypermarkets appealing more to upscale shoppers (particularly those
who own cars), while convenience stores make an open tradeoff between
time and money. The other obstacle to imports lies in the weak
distribution systems for supermarkets, which tend to rely on small-scale
local distributors or local wholesale markets, or to buy directly from
local manufacturers.

**Hypermarkets** -- Hypermarkets have seen the fastest growth of any
sector. International retailers are far stronger in this format than in
any other. Useful statistics are difficult to come by, as chains tend to
lump different retail formats together. This being said, Carrefour
appears to be the dominant player, although Lianhua and Hualian also
have a large number of hypermarkets. As of November 2007, Carrefour
operates 103 stores in China, extending even to the far western city of
Urumqi. In 2006, 21 new hypermarkets were added to Carrefour's Chinese
network and the company plans to continue to open 20 new stores
annually. Many of the new stores are or will be located in markets where
Carrefour previously lacked a presence. Carrefour's recent overall
strategy has been to increase investment and expand into more second
tier cities in China, mainly because real estate in first tier cities is
becoming too expensive and there are few appropriate sites still
available.

Among international retailers, Wal-Mart is in second place with 84
stores, but has ambitious plans for expansion as evidenced by its
acquisition this year of a 35% stake in Trustmart, a Taiwanese-owned
group with over 100 stores in China. Wal-Mart first entered China in
1996 when it simultaneously opened a Supercenter and Sam's Club in
Shenzhen. Until recently, Wal-Mart's development in China had been
mostly limited to the southeastern seaboards where household consumption
is high. In 2005, Wal-Mart finally made an entrance into Shanghai with
the opening of a large suburban outlet. It was the first of three
planned outlets in Shanghai, and added further momentum to Wal-Mart's
drive to catch up with rivals Carrefour and Metro, both of which have an
established presence in China's most prosperous city.

Metro Cash & Carry has expanded more slowly. The German-based retailer
currently has 33 stores in 27 cities across the mainland, but will
expand that number by 6-10 stores per year over the next 3-5 years.
Metro's niche-market strategy of selling directly to restaurants and
food service, however, makes it more of a player in the HRI sector than
in retail, and some international retailers do not regard Metro China as
a real competitor. Thailand's Lotus, by contrast, has expanded at an
extraordinary pace in recent years, with an estimated 75 supercenter
stores, concentrated primarily in or near Beijing and Shanghai.
Stimulated by the growing demand from second and third tier cities, the
company's target is to have a total of 100 stores in the next few years.
This places them ahead of Tesco (UK), which entered the market in 2004
by buying a 50% share of Taiwan-based Hymall, with 47 locations in 2006,
and plans to open about 10 new outlets in 2007. Ito Yokado has staked
out a position as a high-end retailer, with five stores in Beijing and
two in Chengdu, and plans to add five more in Beijing. The long list of
other hypermarket companies operating in China also includes China
Resources/Vanguard (HK), RT-Mart (Taiwan), Auchan (France), Park 'n Shop
(HK), Parkson's (Malaysia), and E-Mart (Korea).

In addition to the major chains, hypermarkets often face competition
(especially in Northeast and Central China) from local department store
operators with one or two locations. These have evolved in the direction
of hypermarkets, adding large food stores, while many hypermarkets have
taken on some attributes of department stores. Hypermarkets in China
tend to be somewhat smaller than their western counterparts, and very
few (excepting Metro) follow the big-box format faithfully. In large
cities, they are typically multi-story operations. Most act as small
shopping malls, setting aside a large amount of space for independent
boutiques and eateries, a habit that tends to reinforce the perception
of hypermarkets as places for occasional shopping expeditions rather
than daily shopping. For the hypermarket proper, the food sales area
typically accounts for about half of the total area. Management within
the stores tends to be quite good, but distribution has not kept pace.
(Please see page 18 for more information on domestic and international
retailers).

**Convenience Stores** -- This has been one of the most dynamic sectors
for development, yet is still the one with the farthest distance to go.
Although the number of convenience store outlets grew at a slower pace
in 2006 compared to the previous year, double digit growth is expected
to continue for several more years. The industry remains overwhelmingly
concentrated in Shanghai, which hosts more than half of the convenience
stores in the country, plus Beijing and Guangzhou. Because convenience
stores generally charge higher prices for their products, the target
customer base is composed mainly of urban white collar workers who lead
hectic lifestyles and students. In most small and medium sized cities,
the lifestyle is not as fast as in first tier cities, which therefore
reduces the need for convenience stores. The industry continues to be
dominated by domestic state-owned retailers, with the largest being Quik
(owned by Lianhua), Kedi (owned by Nonggongshang's Bright Dairy
subsidiary) and Alldays (directly owned by Nonggongshang).

These giants are being challenged on two fronts. International
convenience retailers are expanding more aggressively. 7-Eleven has
broken out of southern China, and now has a small number of stores in
Beijing. Japan's Family Mart (connected to Ito Yokado) and Hong Kong's
Sincere have also entered the market. Other international convenience
chains in China include C-Store (Taiwan) and Lawson's (a JV between
Lawson's Japan and Hualian). The other challenge comes from local
chains. In cities where major chains are not well established or where
local governments make it difficult for regional brands to enter, local
companies are filling the void. Chengdu's Hongqi, Jiangsu's Suguo and
Beijing's Wu-Mart providing examples. Faced with growing competition in
their home markets, retailers are expanding into new territory or
seeking niche markets. Quik and Kedi in Shanghai, and 7-Eleven in
Guangzhou, are both expanding into nearby satellite cities, taking
advantage of their high incomes, close proximity and lack of local
competitors. Other chains, like Lawson's, are seeking niche markets,
targeting office workers in commercial districts, especially in eastern
China.

Chinese convenience stores tend to be somewhat smaller than their
western counterparts, but all have refrigerator cases and microwave
ovens, and most offer a selection of hot food, typically meatballs or
fishballs and tofu on skewers. The vast majority are pedestrian stores,
with no allowance made for parking, although several chains have entered
cooperative agreements to open gas station stores. Since gas sales are
controlled by a small number of petroleum companies, these stores are
actually co-located with gas stations, rather than being gas-and-go
convenience stores, as in the U.S. Convenience stores also offer a
variety of services, including bill payment, IP telecommunication cards
and even inflating bicycle tires, all as a means of generating foot
traffic.

**Traditional markets** -- These continue to be a presence throughout
China, although they are no longer the dominant factor in the larger
cities. Traditional markets fall into three general categories: wet
markets, variety stores (xiaomaibus), and fruit stands. Wet markets
specialize mainly in fresh vegetables, meat, poultry (sold live), eggs,
tofu and to a lesser extent, fruit and staple foods. Sanitary standards
are extremely low, particularly for meat. Officials generally regard wet
markets as an eyesore, as well as a source of both food safety problems
and unregulated (i.e., untaxed) commerce. The SARS epidemic of 2003,
followed shortly by avian influenza outbreaks, provided more impetus to
efforts to reform or close these markets. Nonetheless, they persist. The
main reason for this is a lack of alternatives for buying fresh
vegetables and, to a lesser extent, meat. The selection and quality of
vegetables in most supermarkets is poor, and hypermarkets are too far
for daily shopping trips. Until competitive alternatives are widely
available, wet markets will persist.

The other traditional formats are small variety stores (xiaomaibus) and
fruit stands. The typical xiaomaibu is much smaller than even a
convenience store, family owned, and stocks an eclectic mix of products.
Although they face a serious challenge from convenience stores, the
xiaomaibu persists even in Shanghai. While convenience chains follow
standard formats and target key sites (train and bus stations, schools,
hospitals, etc.), xiaomaibus are infinitely adaptable. Small size and
independent ownership allows these shops to adapt to individual sites
such as apartment complexes, and adapt their product selection even to
match individual consumers. Like convenience stores, xiaomaibus also
offer a range of services, such as bill payment and IP telecommunication
card sales.

Fruit stands fill another gap left by the convenience stores, which
rarely carry more than one or two types of fruit. Sales are boosted by
the tradition of giving gifts when visiting friends, and most fruit
stands will wrap fruit baskets to order. Fruit stands frequently carry
imported fruit, usually for inclusion in fruit baskets. However, they
are generally regarded as poor venues for imported products, as they are
generally price driven, poorly regulated and lack the means to store
fruit properly. Counterfeiting is widespread in these markets, and where
a brand name adds value, it is certain to be copied. As a result, there
is little room for marketing and promotion of imported products. While
both xiaomaibus and fruit stands will likely continue to decline in
numbers relative to convenience stores, China's high urban population
densities are likely to support their continued existence for many
years.

## 

## I.C. Advantages and Challenges for U.S. Products In the Retail Food Market

+----------------------------------+-----------------------------------+
| ## Table 4. U.S. P               |                                   |
| roducts in China's Retail Market |                                   |
+----------------------------------+-----------------------------------+
| Advantages                       | Challenges                        |
+----------------------------------+-----------------------------------+
| U.S. products are regarded as    | Many U.S. products are costlier   |
| high in quality, and             | than their local counterparts.    |
| manufactured with high safety    |                                   |
| standards.                       |                                   |
+----------------------------------+-----------------------------------+
| Urban Chinese consumers spend    | Overall incomes remain relatively |
| 36% of their income on food.     | low, with imports selling mainly  |
|                                  | to higher income groups.          |
+----------------------------------+-----------------------------------+
| Consumers are interested in new  | Consumers are very price          |
| tastes.                          | sensitive, and often unwilling to |
|                                  | risk spending money on unfamiliar |
|                                  | products without trying them      |
|                                  | first.                            |
+----------------------------------+-----------------------------------+
| Many U.S. brands are widely      | Many U.S. companies have          |
| recognized and respected in      | established plants in China,      |
| China's major urban markets.     | manufacturing their products in   |
|                                  | China with Chinese ingredients.   |
+----------------------------------+-----------------------------------+
| Incomes are growing rapidly in   | Distribution and logistics remain |
| second and third tier cities,    | underdeveloped outside of the     |
| creating a whole new range of    | largest urban centers, making     |
| opportunities.                   | distribution of imported products |
|                                  | to interior cities difficult.     |
+----------------------------------+-----------------------------------+
| Western foods are more widely    | Lack of knowledge about U.S.      |
| available than ever, and growing | products and how to prepare them  |
| in popularity with consumers.    | properly makes consumers hesitant |
|                                  | to buy.                           |
+----------------------------------+-----------------------------------+
| China's entry into the WTO       | Labeling regulations and sanitary |
| reduced tariffs on a wide range  | restrictions limit access to the  |
| of imported products.            | market. Enforcement of            |
|                                  | regulations is haphazard,         |
|                                  | creating confusion for exporters. |
+----------------------------------+-----------------------------------+
| The number of qualified          | Many U.S. exporters continue to   |
| distributors for imported food   | rely on gray market channels,     |
| on the mainland is growing,      | reducing their level of contact   |
| along with the volume of direct  | with end users and understanding  |
| exports.                         | of the market.                    |
+----------------------------------+-----------------------------------+
| Rapid growth in retail chains    | Purchasing by most                |
| has created the potential for    | foreign-invested chains remains   |
| bulk sales, with consequent      | decentralized, preventing them    |
| improvement in pricing and       | from sourcing in bulk. Close      |
| handling.                        | relationships between store       |
|                                  | managers and local distributors   |
|                                  | help to reinforce this tendency.  |
+----------------------------------+-----------------------------------+

# II. Road Map for Market Entry

## II.A. Basics of Market Entry

### General Guidelines

China is not a single amorphous market, but a jigsaw puzzle of small,
overlapping markets separated by geography, culture, cuisine,
demographics and dialects. As such, there is no single formula for
success in China. The best approach to marketing a product will vary
depending on the product and the specific market (geographic
[and]{.underline} demographic) being targeted. Nonetheless, there are
some basic guidelines that can be applied to most cases.

**1) Understand the importance of relationships.** China's legal system
is developing, but remains inconsistent. Enforceability of contracts
varies widely, but is generally weak. Business in China instead relies
heavily on personal contacts and influence (referred to as 'guanxi').
For companies with a serious interest in China, no investment will be
more important to their success than the network of relationships that
they establish in China. For more pointers on the role of guanxi in
Chinese business culture, please see report CH4835, Chinese Business
Etiquette.

**2) Find a local partner and/or distributor.** For smaller companies
without the resources to directly market their products in China, a good
distributor is critical to success. Distributors provide the network of
relationships with buyers, regulators and others, that is essential to
doing business in China. Unfortunately, these tend to be in short
supply. ATOs keep lists of well-known distributors. Keep in mind that
contract arrangements with retailers tend to place most of the market
risk for new products onto the distributor, so they may require some
convincing before they will take on an unfamiliar product. Specialized
distributors also exist for certain product categories, most notably
wine, seafood and fruit. Be careful in selecting a partner and in
establishing an incentive structure: partnerships gone sour are the most
common cause of business failure in China. Paying close attention to
payment terms can be an important aspect of this (confirmed letters of
credit are standard).

**3) Know the rules.** Chinese regulations are often vaguely worded,
arbitrarily enforced and opaque. Your distributor can (and should)
handle this for you. However, weak enforcement has made short-cutting a
common practice, and exporters that rely entirely on Chinese partners
for this are often unaware that their products do not conform to the
rules until a problem arises. To defend against the unexpected,
exporters should try to be reasonably familiar the actual regulations.
Product registration, labeling and product expiry dates are the top
concerns in this area. To enter the retail market, food products must
receive a hygiene certificate from the local government where the
product will be sold. Food products must also be labeled in accordance
to Chinese government standards, with the labels pre-approved by the
government. Functional or health foods must obtain a health-food
certificate, and claims of health benefits on packaging or in
advertising are strictly regulated. Foods containing GMO ingredients may
be subject to additional labeling requirements, as are organics. Please
see the FAS FAIRS reports for China on the FAS website for details
(www.FAS.USDA.gov; attache reports) or the website for China's
Administration for Quality Standards, Inspection and Quarantine (AQSIQ)
at www.AQSIQ.gov.cn.

**4) Get to know the market**. As noted above, China is a surprisingly
diverse place. Tastes, customs, culture, business practices and
government regulations vary from place to place. Experience in other
markets will not necessarily help in China, and some aspects of the
market need to be witnessed to be fully understood. The best strategy is
to target a specific place and get to know it well. The scope of your
effort will determine whether you select a single city or a whole
region. Travel to China is highly recommended to evaluate partnerships,
build guanxi (see above), and identify new opportunities and potential
obstacles. (Partners are frequently hesitant to mention problems in
formal communications, but will be more forthcoming over informal events
like dinners). FAS market briefs offer a good source of information on
the market, and are available for free on the FAS website noted above.

**5) Find your market niche and focus on it.** China is a very, very big
place. The mass market may be huge, but it is driven entirely by price
and dominated by lowest-cost local producers. Better returns are to be
had from targeting a specific niche. The country has a nearly infinite
number of niche markets, some of them quite large. Examples include the
high-end gift market, where margins are high but packaging is crucial
(wine, ginseng); the expatriate market (famous brands from home like
Kraft, Betty Crocker and Post); or health-conscious young parents
(prunes, almonds, fresh fruit).

**6) Invest (wisely) in consumer research.** To outsiders, Chinese
tastes can seem fickle. Tastes poorly received in the U.S. may prove
successful in China, while products targeted to one market niche may end
up finding their greatest success in a completely different one. To
avoid unpleasant surprises and find new opportunities, exporters with a
long-term interest in China are advised to research the market and test
new products directly. Be careful how you invest research money,
however. The quality of research by international market research firms
is often not much better than that of much less expensive local
companies. ATO-sponsored activities offer good opportunities to field
test new products or packaging.

**7) Adapt your products.** Exporters should be prepared to adapt their
products to the demands of their Chinese consumers. 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
unfamiliar products if they can't actually see them, so including a
transparent window in the box or offering free samples can help sales.
Products that are marketed as gifts, such as wine, should place extra
emphasis on the packaging, as this is considered an important part of
any gift. Many exporters seeking to break into the gift market have
special packages manufactured in China, which can also help to address
labeling issues.

**8) Be flexible.** Things don't always work as expected in China. This
can be a good thing, provided you can take advantage of opportunities
when they arise. Exporters who enter the market with preconceived
notions of how to market their products often miss out. ATO activities
routinely turn up unexpected opportunities: for premium boneless pork in
Chengdu; for d'anjou pears and cherries in Shanghai; for Mexican food in
Wuhan. By the same token, a product may find its best niche in an
unexpected place. Washington State apples have done quite well in China
despite tough competition from local products, because superior
appearance and consistent quality made them the top choice for gift
baskets.

**9) Pursue gradual but sustainable growth.** A common pitfall is the
temptation to pursue explosive growth, focusing on geographic
penetration rather than sustainability. This may produce impressive
short-term results, but exporters with limited means may find themselves
overextended very quickly. If the exporter is unable to meet the
expectations of their customers, they may turn to other sources (such as
local copycats or counterfeiters) or demand may collapse. Alternatively,
the exporter may find themselves overly reliant on local agents that
they do not know well, and who have little interest in the long-term
success of the product. The go-slow approach gives exporters time to
learn the markets, accumulate customer feedback, and build their
distribution channels.

**10) 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 often have advantages on
price, familiarity and local brand recognition, while imports can be
aided by aggressive promotional 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, focused trade shows for your particular market segment is a
good way to start. In-store promotions are also a cost-effective way to
support your product and build relationships 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
strongly advised to explore joint marketing opportunities with ATOs or
with a State and Regional Trade Group (such as MIATCO, WUSATA, Food
Export USA/NE, or SUSTA). These events tend to be cost effective and
draw more attention than standalone promotions.

### Entry Strategy: Hypermarkets and Supermarkets 

[Hypermarkets:]{.underline} The hypermarket sector represents the best
high-volume option for U.S. food exporters. International retailers
generally have a higher level of familiarity with imported brands and
products, and recognize the value of bringing new products to market and
promoting them. Hypermarkets frequently source high-volume merchandise
directly from manufacturers, but rarely do so with imports. Even in the
largest and most sophisticated markets, they tend to source from local
distributors.

The first task is to get to know your retailer. Policies vary widely
among different chains: some charge listing fees, while others do not.
Some require two months' credit, while others pay up front. Although
these problems are usually handled by the distributor, they will affect
your sales. Another reason to get to know your retailer is that
hypermarkets in China tend to develop groups of favored distributors.
They dislike working with unfamiliar companies unless they can offer a
large number of SKUs, strong marketing support or some other sweetener.
Distributors for their part, tend to be very conservative in introducing
new products, due to the high level of market risk (see section I.A.).
As a result, exporters with a limited product range need to work both
ends of the problem at the same time, identifying a retailer that is
interested in the product, and identifying a distributor that either has
an existing relationship or is willing to work with the retailer.

The alternative is to identify a distributor that is willing to
aggressively market the product directly to retailers, and count on them
to find markets for your product. This requires that the distributor be
fully convinced of the marketability of the product, given their high
level of risk. Distributors generally fall into one of two categories.
The largest distributors tend to have longstanding relationships with
the major retail chains, and can source in larger volumes and place
products in a larger number of stores. However, they also tend to carry
a large number of SKUs, and cannot dedicate resources to marketing any
one particular item. Specialty distributors tend to be focused on one
area or product type. Although they sometimes lack the volume and
connections of larger distributors, they tend to be more aggressive in
marketing products and better at identifying and selling into specific
niches. The quality of these smaller distributors varies widely,
however, and exporters need to be extremely careful in selecting a
partner.

Products that are already in the market but being sold mainly through
gray channels or sub-distributors tend to be the most attractive to
distributors. A handful of retailers also act as distributors. Although
they tend to provide less marketing support, they can be an effective
means of getting product to retailers that have already expressed an
interest, but cannot handle the import formalities themselves.

[Supermarkets:]{.underline} Imported food is relatively rare in Chinese
supermarkets. Products that do well in this sector tend to be commodity
products already widely available, such as fresh fruit, frozen
vegetables and nuts. Supermarkets rarely if ever import directly, or
even buy directly from an importer, tending instead to rely on wholesale
markets and local manufacturers or distributors. Stores with a
significant expatriate community nearby are likely to carry imported
breakfast cereals and a perfunctory selection of imported sauces
(especially pasta sauce) and seasonings. The best possibilities are in
the smaller, privately held chains, which are more likely to see the
value of high-margin imports and tend to have better integrated
distribution systems. Such chains may carry products as varied as wine,
exotic fruit (avocados, in one case) or confectionery, but only in low
volumes. Even so, price will remain a consideration. State-owned
supermarket chains generally have less integrated management and
distribution. Opportunities exist, but only on a fitful basis with a
small number of stores, and only for products already present in the
market. For either state-owned or private supermarkets, direct contact
with company officers is the best means of introducing a new product.

### Entry Strategy: Boutique Stores

This category includes expatriate-focused gourmet stores and specialty
stores for organic foods, wine, cheese and similar high-end products.
These stores have proliferated in recent years, particularly in Beijing
and Shanghai. Although volumes tend to be quite small, price pressure is
not as high as in the hypermarkets. In addition, managers tend to be
more aware of famous brands and actively search for niche products not
otherwise available in the market. Many high-end and specialty products
first enter the Chinese market through these types of outlets before
moving on to larger venues. A handful of these companies also include
import/distribution operations, and can assist exporters with issues
such as labeling and product registration. Otherwise, exporters will
need to identify a good distributor. In the case of high-end and
specialty products, HRI-focused distributors (who are familiar with the
products but may lack experience with labeling issues) may be as helpful
as larger retail-oriented distributors (who often lack experience
marketing high-end products), particularly in emerging city markets.
Because of the small scale and highly varied nature of this market
segment, interested exporters should contact the relevant ATO for a list
of potential venues.

### 

### Entry Strategy: Convenience Stores

Convenience stores represent the greatest untapped potential. The sector
is very new, and most chains have cutting-edge management systems and
integrated distribution. The industry also tends to be highly
concentrated geographically, giving chains larger bulk sourcing
capabilities. Competition is also driving a rapid move toward
specialization, in turn creating new niche opportunities. Import
penetration however, tends to be relatively low, despite a high level of
interest on the part of several chains. Being largely domestic
companies, management at convenience store chains tends to be less
familiar with imported products than their counterparts in the
hypermarket sector. A second difficulty faced by imports is packaging:
convenience stores typically require smaller package sizes, being
focused mainly on single-serving products. Exporters are advised to open
discussions directly with chain officials to identify products with
potential, and ensure that packaging meets their needs. Then the
exporter will need to identify a local distributor that can handle the
import paperwork and labeling issues. One alternative to this is to work
with an importer/repacker, who can import in bulk, then package the
products in China with Chinese labels and packaging appropriate to the
convenience market. This strategy has proven extremely successful for
U.S. prunes. Competition also tends to make convenience stores somewhat
conservative about pricing, though ATO/Shanghai's experience indicates
that chain managers are more price sensitive than their customers.

## II.B. Market Structure

### 

### Distribution by Market Type

Distribution varies widely throughout China based on geography, product
type and retail sector. As a general rule, the three cities of Shanghai,
Guangzhou and Beijing have the best infrastructure and the largest
number of experienced distributors. Increasingly, those systems are
being extended to the large webs of satellite cities surrounding
Guangzhou and Shanghai. Ports in these cities offer a growing array of
services, including bonded storage (with temperature controlled
facilities, if needed) and online inventory tracking. Some have
duty-free industrial zones where products can be repackaged or further
processed, with duty paid only on the original import value, and only
after products leave the zone.

##### Figure 4. Imported Goods Distribution Chain: Major Port

Other major cities along the eastern seaboard, beyond the reach of the
'big three,' generally have good logistics infrastructure, but most
still rely on one of the 'big three' as an entry point for imports. The
number of distributors handling imported products in these cities is
usually limited. These tend to be good markets for commodity products
such as meat, poultry, fruit and seafood, as well as sauces, condiments
and wine.

Deeper inland, there are a number of large cities with good market
potential. Logistics can be problematic, but improvements in the
national highway system have made trucking direct from Shanghai or
Guangzhou far easier than it was just four years ago. As a result, high
value and sensitive products shipped by truck directly from the importer
to a local distributor do surprisingly well, while lower value and
shelf-stable products that ship on local roads through conventional
distribution chains face more difficulties. Distribution in these cities
is generally underdeveloped. Many cities have only a single distributor
for imports, particularly high-value or temperature sensitive products.
Products going through conventional distribution channels typically
change hands numerous times before reaching their final destination.
Distribution channels for HRI tend to be better developed, and may be
the best place to start for exporters seeking to develop new markets.

##### Figure 5. Imported Goods Distribution Chain: Emerging City via Major Port

Distribution also varies widely by product type. Channels for
shelf-stable grocery products tend to be the most heavily fragmented and
the most dependent on the good graces of local distributors. This is
partly because market risk is perceived to be higher: although shelf
stable, the number of SKUs tends to be high and turnover low compared to
other product categories. Hence the risk that a product will not sell
(and the distributor will have to accept a return) is higher. Meat,
poultry and seafood also face fragmented distribution, but the combined
demand from HRI and retail venues is sufficient to warrant special
arrangement for these high-value products. Fresh fruit appears to have
the best distribution, working through a patchwork of wholesale markets
and specialized distributors that works better than it should. Imported
frozen corn and mixed vegetables are almost universally available,
reinforcing the notion that the problem is less one of logistics than of
distribution. Wine deserves special mention, due to the presence of a
community of specialized distributors, some of whom act as exporter,
importer and distributor all in one, taking product direct to retailers.

###  

### Industry Profiles

Statistics on China's food retail industry have serious shortcomings,
for a variety of reasons. Mergers, buyouts and cross-investment,
combined with the effects of China's previous requirement for foreign
companies to work through joint ventures, have created a hopelessly
tangled web of ownership. It is difficult to be certain whether revenues
do or do not include income from joint ventures or subsidiary chains.
Store numbers are less opaque, but still present problems. Many
retailers operate a range of different store formats, and it is not
always clear whether a number includes only hypermarkets, supermarkets,
or convenience stores, or some combination of the three. Lastly, the
retail sector is expanding at such a rapid pace that store numbers can
change on a weekly basis. Keeping these difficulties in mind, the
following table provides a rough outline of the current state of the
retail industry.

**Company Profiles**

  ------------------------ ---------------- ----------------- ---------- ----------------
  **Table 5. Leading food                   ** **                         
  retailers in China:                                                    
  2006**                                                                 

  **Company**              **Ownership/     **Business Line** **Stores   **Sales (¥
                           Headquarters**                     (no.)**    billion)**[^1]

  **Domestic Companies**                                                  

  Lianhua                  China SOE[^2]    Super/Hypermkt/   3913       44.0
                                            Convenience                  

  Wumart                   China Pvt        Supermkt/         728        23.1
                                            Convenience                  

  Suguo                    China SOE[^3]    Supermkt/         1612       22.3
                                            Convenience                  

  Beijing Hualian          China SOE        Hypermarket       76         21.2

  Nonggongshang            China SOE        Super/Hypermkt/   1857       19.6
                                            Convenience                  

  Shanghai Hualian         China SOE        Super/Hypermkt/   1955       15.0
                                            Convenience                  

  Xiuyijia (A. Best)       China Pvt        Department        99         14.3

  Jingkelong               China Pvt                          171        6.1

  Kedi                     China SOE        Convenience       1171       2.4

  Zhejiang Renti (C&U      China Pvt        Supermarket       226        1.9
  Supermarket)                                                           

  Beijing Chaoshifa        China Pvt        Supermarket       51         1.7

  **Multinational                                                         
  Companies**                                                            

  China Resources Vanguard Hong Kong JV     Hypermarket       2250       37.9

  Carrefour                France           Hypermarket       95         24.8

  RT-Mart                  Taiwan JV        Hypermarket       68         19.6

  Wal-Mart                 United States JV Hypermarket       71         15.0

  Trust-Mart               Taiwan JV        Hypermarket       101        14.0

  Lotus                    Thailand         Hypermarket       75         13.5

  Metro                    Germany JV       Hypermarket       33         9.4

  Tesco                    United Kingdom   Hypermarket       47         9.3
                           JV                                            

  Auchan                   France           Supermarket       16         6.2

  Parksons                 Malaysia         Supermarket       38         6.2

  Park\'n\'Shop            Hong Kong        Supermarket       44         4.7

  *Source: China Chain                      * *                           
  Store & Franchise                                                      
  Association 2007*                                                      
  ------------------------ ---------------- ----------------- ---------- ----------------

## II.C. Regional Market Profiles

As noted many times before, China is a diverse place, and fragmented
distribution and logistics systems help to reinforce existing divisions.
To assist exporters in dealing with these divisions, FAS maintains five
offices in China, with Agricultural Trade Offices in Beijing, Shanghai,
Guangzhou and Chengdu (opening December 2007), and an Agricultural
Affairs Office in Beijing. Individual market profiles for each region
are offered in the following sections.

### Shanghai Region 

The city of Shanghai is a massive market unto itself, with a population
estimated at 20 million, and incomes among the highest anywhere in
China. As costs in the city have risen, the economy has begun to shift
away from manufacturing and into financial and management services.
Manufacturers seeking to escape high costs in the city while taking
advantage of the infrastructure and massive consumer base have created
an economic boom in the surrounding region. The city is located at the
center of a web of economic development that includes the provinces of
Zhejiang and Jiangsu, and is collectively referred to as the Yangtze
River Delta (YRD). This region accounts for nearly 1/3 of mainland
China's GDP. Massive infrastructure investment has led to major
improvements in logistics and drawn the region closer together. The
opening of the Yangshan deepwater port facility last fall is expected to
make Shanghai the world's largest container port within the next few
years. Shanghai's large expatriate community (estimated at 500,000) is
dominated by Taiwanese, who bring with them a familiarity with foreign
brands and a taste for U.S. and Japanese foods.

Shanghai's retail sector is well developed, and home to a large number
of supermarkets, hypermarkets and an extremely strong convenience store
sector. Supermarkets remain the dominant, and oldest, modern retail
format, with relatively weak management and infrastructure. Supermarkets
are losing ground to hypermarkets and convenience stores. This loss in
market share, however, is counted in growth not captured: new stores
continue to open. The supermarket format is quite durable owing in part
to Shanghai's high population density (the highest in China and one of
the highest in all of Asia), which makes it possible to have a small
supermarket within walking distance of virtually any place in the city.

  ------------------------- --------------- --------------- ---------------
  **Table 6. Top Players in                                 
  Shanghai Retail, 2005**                                   

  Company                   Total Outlets   Outlets in      Sales Volume
                                            Shanghai        (\$million)

  Lianhua                   3,786           2,105           5,106

  Carrefour Hypermarket\*   101              8              3,516

  RT-Mart                   32              6               2,594

  Nonggongshang             1,572           1,362           2,333

  Hualian                   1937            1362            2,268

  Lotus                     21              19              1,166

  Metro                     27              4               1,006

  Hualian GSM               22              17              538

  Shanghai Lianjia          8               8               526

  Shanghai Homegain         122             104             268

  Jieqiang Tobacco, Sugar & 443             210             210
  Wine                                                      

  Auchan                    4               4               182

  Watson                    28              28              83

  Jiajiale                  37              37              40
  ------------------------- --------------- --------------- ---------------

*Source: Shanghai Statistical Yearbook, 2006 (most recent year
available), except for \* derived from Group Carrefour. Note that CCSFA
and Shanghai Yearbook numbers for Lotus differ sharply.*

#### Hypermarkets

Hypermarkets constitute the single best retail venue for imported
products. International chains such as Carrefour and Wal-Mart are both
familiar with the products, and count large numbers of expatriates in
their customer base. Most are experienced in promoting new products, and
flagship stores like Carrefour's Gubei store or Lotus' Superbrand Mall
store in the Pudong area have it down to a science. Despite this,
imports rarely constitute more than 5% of total SKUs in even the high
profile stores. As elsewhere in China, the most decisive component in
hypermarket food promotion is free sampling. Shanghai consumers are
cautious rather than impulsive buyers, and will rarely spend money on a
product they have not had a chance to try. Hypermarket promotions also
come with many strings attached: most charge listing fees and demand
that promoters be provided at the distributor's expense (some even
charge fees to have the promoters on their premises). Other conditions
include accepting returns of unsold products at the end of the
promotion. (These issues are discussed in detail in Section I.A.).

The hypermarket industry in Shanghai has expanded quickly, reaching an
estimated total of 121 stores by the end of 2005. The sector is
dominated by international retailers, with over 67 outlets in Shanghai
accounting for 76% of the sector's combined 21.4 billion RMB in sales.
Hypermarkets are eating into market share for supermarkets as growing
ownership of cars and larger refrigerators make bulk shopping trips more
practical. Management of these stores is generally modern, and SOE
hypermarkets such as Lianhua's Century stores are bringing in foreign
experts to upgrade their management to compete with the international
retailers.

While Carrefour continues to dominate at the high end, with 12
hypermarkets presently in Shanghai alone, Lotus has quietly expanded and
now actually has 20 stores in Shanghai, although turnover for these
stores is lower than for Carrefour stores. Wal-Mart finally established
a presence in the city by opening its flagship Nanpu store in late 2005
and added two more stores in 2006. Tesco's purchase of 50% of
Taiwan-owned HyMall has given it a foothold in Shanghai, but experience
with Hymall indicates that Tesco may need some time to integrate its
management with HyMall's. Korea's E-Mart, which currently operates five
stores in Shanghai, also plans to ramp up its efforts, having recently
opened a store in Tianjin and with another scheduled to open in Shanghai
in 2006. E-Mart's final target is 33 stores in the region, ten of them
in Shanghai. A total of 14 retailers have hypermarkets in Shanghai,
including Auchan, RT-Mart, Trust-Mart and Hyodo. Most have announced
plans for further expansion.

Under pressure from competition, hypermarkets are seeking ways to
differentiate themselves. Wal-Mart has announced a cooperative effort
with a Chinese pharmacy company to provide pharmacies in their stores,
and Carrefour is in talks to do the same. Lotus' flagship store in the
Superbrand Mall last year became the city's first 24-hour hypermarket.
Although Carrefour's flagship Gubei store quickly extended its hours,
few others have been willing to follow suit. Most hypermarkets in
Shanghai now stock a wide range of ready-to-eat products such as
rotissiere chicken, and have in-house bakeries. House brands are also
becoming popular as retailers seek to cash in on their reputations.
Carrefour leads the way through heavy house branding in its Dia discount
stores. Chinese hypermarkets are following suit, led by Century Lianhua.

+-----------------+----------------+----------------+-----------------+
| ###             |                |                |                 |
| ## Table 7. Str |                |                |                 |
| ucture of Shang |                |                |                 |
| hai's Food Reta |                |                |                 |
| il Sector, 2005 |                |                |                 |
+-----------------+----------------+----------------+-----------------+
| Sector          | Total Sales    | International  | International   |
|                 | (million RMB)  | Retailer Sales |                 |
|                 |                |                | As % of Sales   |
+-----------------+----------------+----------------+-----------------+
| Supermarket     | 67,900         | 630            | 1               |
+-----------------+----------------+----------------+-----------------+
| Hypermarket     | 21,400         | 16,300         | 76              |
+-----------------+----------------+----------------+-----------------+
| Convenience     | 9,300          | 630            | 7               |
+-----------------+----------------+----------------+-----------------+
| *Source:        |                |                |                 |
| Shanghai Daily* |                |                |                 |
+-----------------+----------------+----------------+-----------------+

Metro relies on its niche-market strategy of targeting small and medium
sized restaurants, effectively positioning itself as an HRI wholesaler
and distancing itself from competitors. To this end, Metro has added a
training kitchen to its facilities in Shanghai. ATO has worked with
Metro on a number of occasions, arranging for USDA cooperators to
provide training in the purchase, handling and use of U.S. food
ingredients, while Metro provides facilities, and recruits from their
customer base of restaurants. Parkson's, with a presence across China,
offers relatively small spaces for food sales in their department
stores, but focuses on very high-end products, including some imports.

#### Supermarkets

Supermarkets have the lowest penetration of imported products of all the
modern retail venues in Shanghai. U.S. food products in these venues are
typically limited to frozen corn and mixed vegetables, frozen potato
products and occasionally fruit (apples or oranges). Other items tend to
appear on a haphazard basis: past checks have turned up breakfast
cereals, low-end wines and California avocados. The sparse selection of
imports is rooted in the customer base of these stores, which focus on
working class shoppers, who are notoriously price sensitive and less
inclined to try new products than the more well-heeled customers that
frequent hypermarkets and convenience stores. Distribution is also a
problem, as stores tend to source from local distributors, directly from
manufacturers, or from local wholesale markets.

The supermarket sector in Shanghai is dominated by domestic companies.
The only foreign-invested supermarkets in Shanghai are Tops and
Watson's, which combined registered only 730 million RMB in sales in
2005, out of a sector total of 67.9 billion RMB. State-owned companies
are dominant, with Shanghai serving as headquarters to three of China's
top ten food retailers: Lianhua, Hualian and Nonggongshang, all
state-owned. Although Lianhua and Hualian were nominally merged three
years ago to form the behemoth Bailian, the largest retailer group in
China, they continue to operate as distinct (and competitive) chains.
Bailian appears to be more focused on rationalizing its diverse
portfolio, and developing its shopping mall management component. Both
Lianhua and Hualian have expanded aggressively through acquisitions of
other chains, leaving both companies with the challenge of incorporating
them into already weak SOE management structures. Inspired by
foreign-invested companies (Dia carries 1,000 SKUs of house brands), the
Chinese chains are paying greater attention to branding, and most now
carry a substantial number of house brands.

Despite the dominance of SOE retailers, Shanghai has several smaller,
privately owned chains. The largest of these, Jiadeli, operates some 130
stores in the Shanghai area, and is actually larger than Nonggongshang
in the supermarket sector. All are seeking ways to survive in an
increasingly competitive landscape. Industry sources claim that a U.S.
fund manager plans to buy a 32% stake in Jiadeli, injecting a large
amount of cash to take the brand nationwide. Another local chain,
Jieqiang, is cooperating with China Life Insurance to sell travel
insurance policies through their stores. Lianhua and Alldays convenience
stores are also working with China Life on this project. Most
supermarkets have imitated the convenience chains by offering a wide
range of additional services such as bill payment, at a nominal fee.

Shanghai's supermarkets are small and focus on daily necessities, but
are weak on fresh produce. It is not uncommon to find vegetable sellers
with blankets covered with vegetables for sale outside of supermarkets,
and fruit stands tend to locate close to supermarkets. This started to
change after the SARS and avian influenza scares, and the more recent
food. City officials throughout China tend to regard informal and wet
markets as unsanitary eyesores. In Shanghai, after years of
unsuccessfully trying to shut down informal markets, they are now
attacking the other end of the problem by encouraging supermarket chains
to create 'fresh' supermarkets, expanding the floor space dedicated to
fresh products from less than 1/3 to over 1/2. Shanghainese place an
extremely high value on clean, well-lighted venues, and it is highly
likely that the presence of a reasonable alternative to wet markets will
do more to hasten their decline than efforts to force them to close. To
date, only Nonggongshang has made a public commitment to this strategy,
converting over 100 (current numbers are not available) of their stores.
Supermarkets throughout the region (including Suguo) appear to be moving
in this direction, but are being slowed by problems in sourcing large
quantities of quality product.

Aggressive competition from Carrefour's Dia discount stores may push
more supermarkets to carry fresh products. Dia carries many of the same
staple goods as supermarkets at deep discounts, but does not carry fresh
products. The threat from Dia should not be understated. Although
Carrefour has opened only 150 of these stores in Shanghai to date, they
planned to reach 300 in 2006 and open new stores at a rate of 20 per
month after that. Dia stores are small, carrying a limited range of
products, mostly house brands. Anecdotal information indicates that the
Dia stores are competing quite well. Nonggongshang has also established
a chain of discount stores called 'One Price' or '5 Reminbi,' offering
most products for less than \$1. They planned to open a total of 160
free-standing discount stores by the end of 2005.

All three major SOE supermarket chains (Lianhua, Hualian and
Nonggongshang) have hedged their bets. Lianhua owns the Quik convenience
store chain and is the partner in Carrefour's Shanghai joint venture.
Hualian is the JV partner with Japan's Lawson's in their chain of
convenience stores in Shanghai. Nonggongshang owns the Allday's chain of
convenience stores, as well as the area's largest dairy company, Bright,
which owns yet another major convenience store chain, Kedi. All three
have also opened branded hypermarkets in and beyond Shanghai, and
Lianhua is putting a particularly strong effort into its Century Lianhua
hypermarkets. Although Nonggongshang's market share has slipped, it is
attempting to expand its reach to match Lianhua and Hualian, opening NGS
hypermarkets in distant cities like Nanchang, with mixed results.

#### Convenience Stores

Convenience stores are rapidly becoming a more favorable environment for
imported foods, as stores seek ways of distinguishing themselves, while
the higher prices for higher-quality imports provide a better per sale
return. Again, Lawson's is leading the way in this field, having worked
with ATO/Shanghai and U.S. product distributors in 2005 to launch a U.S.
food festival in selected stores, promoting Sun Maid Raisins, Planter's
Nuts and macadamia nuts from Hawaii, among other things. The results
made clear that products need to be adapted to the convenience store
format, most particularly in terms of reducing package sizes. One of the
most successful suppliers of U.S. product to the sector imports U.S.
prunes and re-packs them into single-serving packets that are sold to
students at 1 RMB (about 12 cents) apiece. U.S. frozen potato products,
cooked and sold ready-to-eat, have also been successful in this format.

Shanghai's convenience store industry is by far the most developed in
the country, with the city playing home to an estimated 4,500
convenience stores---nearly half of the national total. One source
estimates the number at 1 store per 3,800 residents (not including
immigrant workers), comparable to saturation levels in Japan and the
U.S. Despite this, the sector continues to grow. Shanghai's convenience
sector is overwhelmingly dominated by subsidiaries of the giant SOE
supermarket chains: Quick (Lianhua), Alldays (Nonggongshang), Kedi
(Nonggongshang via its Bright Dairy subsidiary) and Lawsons (a JV
between Hualian and Lawsons Japan). However, new investment is coming
from international convenience chains. Japan's Family Mart entered the
city two years ago, and now has in the range of 120 stores in Shanghai,
with plans for 350 by the end of 2006. Hong Kong's Sincere has announced
plans to enter the market with 300 stores by the end of 2006. Aside from
Family Mart and the Lawson's JV, Taiwan's C-Store franchise is the only
international convenience retailer currently with stores in Shanghai.
Stores compete aggressively for good locations, and it is not uncommon
to see three different convenience stores within 100 feet of each other
in prime areas.

Management in convenience store chains is probably the best of any
retail sector. All stores have refrigerator and freezer sections,
microwave ovens, and most have a selection of hot snacks (mostly
meatball or tofu on skewers). More to the point, most chains have
integrated distribution systems, including fully automated, real-time
inventory and ordering. The main exception is for fresh products (mostly
dairy and prepared meals) which are often distributed directly by the
manufacturer. Store layouts are highly standardized, although some
chains have developed more complex systems that customize product
selection to the peculiar location based on past sales patterns.

Ferocious competition has spurred efforts to innovate and to target
niche markets. Quik and Kedi have both entered into deals with gas
station operators to open markets in their stations. Lawson's pioneered
efforts to target white collar employees and service staff in shopping
districts with high-quality Japanese style lunch boxes. Kedi is now
following this lead with a 'Korean Taste' campaign, providing all three
daily meals in Korean styles and a selection of other Korean food under
a house-brand label. Family Mart expects to benefit from superior
management and technology (they may be surprised by the local
competition). As noted earlier, nearly all convenience stores offer a
range of services to draw foot traffic, with Alldays ushering the latest
innovation by providing China Life travel insurance policies at their
stores. 21 Century went a different direction, merging with the Maya
music chain to create food and music stores.

#### Boutique Stores

Boutique and specialty food stores in Shanghai have multiplied, becoming
a force unto themselves. Expatriate grocery stores continue to expand.
The most venerable, City Supermarket, continues to be one of the best
single venues for imported food in Shanghai, and now does significant
business as a distributor of imports to other stores. Chiro Group's
(Singapore) Pines The Market stores are providing City Supermarket with
competition, carrying a high-end selection of gourmet products. Another
trend is in specialty wine retailing: several specialty wine outlets
have opened (not to be confused with the traditional state-owned hard
liquor and tobacco stores). The most notable is Cheese and Fizz, which
features a wide range of wines and imported cheeses. Yet another trend
is in organics. While City Supermarket markets its own brand of locally
grown organic vegetables, and also sells those products to other
retailers, California's O-Store opened its first all-organic food store
in Shanghai in 2005, with ambitious plans as both a retailer and
distributor of imported organics. O-Store imports mainly from Germany,
Japan and the U.S.

#### Beyond Shanghai

The immediate area surrounding Shanghai (the Yangtze River Delta, or
YRD) is a beehive of industrial and commercial activity. In the key
cities, retail development is already well advanced. Suzhou and Hangzhou
are home to Carrefour and other hypermarkets (including Auchan, Lotus,
RT-Mart, Tesco/Hymall and Trust-Mart) and Quik, Kedi and C-Store
convenience stores. Hypermarkets throughout the region source imports
through Shanghai, taking advantage of the region's outstanding logistics
and Shanghai's large community of experienced food importers. The
supermarket sector in these cities is typically dominated by either
Lianhua, Hualian or Nongongshang, but with a preponderance of
independents (with the notable exception of Nanjing's Suguo).

The capital of Zhejiang Province, **Hangzhou** is home to Carrefour,
Metro, Lotus, Auchan, Wal-Mart, Lianhua, and Hymall, among other super-
and hypermarkets. Hangzhou's retail market is doing far better than
expectations: in an ATO-organized nationwide retail promotion involving
24 Carrefour stores, the Hangzhou store ranked 7^th^ in sales: ahead of
Guangzhou and following stores only in Shanghai (4 stores) and Beijing
(2 stores). In addition, the Hangzhou store was extremely aggressive to
recruit distributors and products for the event, and ultimately carried
far more items than originally agreed. (Please see
[CH7819](http://usdachina.org/info_details1.asp?id=1714)).

**Suzhou**'s market is steadily growing, and a privately-owned cold
chain already exists, with temperature-controlled warehouses and
delivery trucks. Metro has established itself in Suzhou as the
destination for one-stop shopping, and its membership is already 130,000
strong. To further stimulate market growth, the city's infrastructure is
developing at light speed. Several new highways were built recently;
bridges cross the Yangtze River, and a light rail system has been
scheduled for completion in 2008. (Please see
[CH7816](http://usdachina.org/info_details1.asp?id=1712)).

Development is now moving on to a third tier of cities. Particularly
notable are **Wuxi**, which has become a major distribution center for
seafood and meat products in the YRD area; **Ningbo**, which has average
incomes on par with Shanghai but a less well-developed retail sector;
and **Nanjing**, the capital of Jiangsu province.

**Nanjing**'s market and imported product consumption have increased
substantially. Based on ATO/Shanghai interviews, major retailers
including Metro, Walmart and Carrefour stated that the higher the
percentage of imported food items in their store, the better their
sales, indicating the high potential for imported food in Nanjing.
Nanjing is also home to Suguo, a retail giant which dominates more than
fifty percent of the city's market share.

Although **Wenzhou** is one of the richest cities in China, its market
for foreign imports is still relatively underdeveloped. Wenzhou was only
opened to international retail giants in 2006 and while its market was
slow to open, the retail sector is growing quickly. The ATO/ Shanghai is
planning a multi-level promotion in Wenzhou in May 2008. According to
the Wenzhou Retail Association, a "Sourcing Alliance" consisting of all
the important retailers in Wenzhou will be organized in 2008 to
consolidate the sourcing of imported food products, to strengthen the
bargaining power of Wenzhou retailers against food importers. (Please
see [CH7814](http://usdachina.org/info_details1.asp?id=1728)).

Many of these cities are home to relatively strong independent chains,
particularly those further from Shanghai. Voluntary chain IGD has
entered into talks with Ningbo's Sanjiang Shopping Club. Interestingly,
Sanjiang is linked through a voluntary association to Shandong's
Jiajiayue, which is working with voluntary chain SPAR. Local officials
in China tend to protect local businesses aggressively, a fact that
could work to the advantage of voluntary chains, particularly in the
community of wealthier cities with distinct identities that lay at the
edges of the YRD, such as Wenzhou, Nanjing and Ningbo.

Farther inland, the picture becomes less clear. Retail development has
progressed at different paces and with widely differing results. Most
large cities host at least one international hypermarket, typically with
several local imitators and independent supermarket chains. The
following section touches briefly on the key markets and offering some
perspective as to the degree of variation.

**Kunming**, in Yunnan province, developed at an astounding pace,
ultimately attracting 10 international hypermarkets, including Wal-Mart,
Carrefour, PriceSmart and Metro, in the space of a few years. This pace
exceeded local demand, however, and many of the stores have languished
with a few closing. **Chengdu**, by contrast, developed more slowly, and
is now home to more than 6 international hypermarkets, all of which
appear to be doing well. One international retailer referred to Chengdu
as the only city in West China where they routinely turned a profit.
Incomes are generally lower than in coastal cities, but the residents of
Chengdu appear to have a very high propensity to spend, particularly on
food. ATO/Shanghai's efforts with both Ito Yokado and Carrefour stores
in this city were immensely successful. Nearby **Chongqing** is less
well developed. Although it has strong potential for the future, the
best opportunities appear to be in the HRI sector.

**Wuhan**, in Hubei province offers a mid-range prospect. It has a
reasonably well-developed retail sector, with Metro, Carrefour and
Wal-Mart all represented. As income levels rise throughout urban areas
in China, potential markets are emerging in growing cities everywhere.
In September and October 2007, the ATO/Shanghai led a multi-level
campaign promoting U.S. food products in Wuhan, in cooperation with the
Hubei Culinary Association and Wuhan Wushang Bulk sale Chain Co. Ltd. As
the sales revenues generated in the Wuhan catering industry rose by 17%
in the first half of 2007, the ATO's promotion further promulgated the
city's potential market through a seminar, cooking demonstration and
contest, tabletop shows, food tasting reception, one-on-one meetings
with local traders, and two week in-store promotion. The city itself
seemed receptive to American products, and with the rapid increase of
supermarkets, hypermarkets and convenience stores, as well as more than
40,000 restaurants, it has a reasonably developed retail sector.

Wal-Mart's remarkable success in **Nanchang**, the capital of Jiangxi
province, provides a good case study for retail in China. Nanchang was
not generally regarded as a retail market in the same class as Kunming
or Chengdu. However, close cooperation with local officials netted
Wal-Mart a prime location, just as the city launched a major
redevelopment effort, making for a major success. The success of this
venture is all the more striking given the relatively weak performance
of Nonggongshang's NGS hypermarket, established several years earlier in
the same city, and demonstrates the value of local market knowledge.

### Beijing Region

**North Retail Market Overview**

North China's retail food sector continued to experience highly
explosive growth over the past 5 years, evolving from a highly
fragmented industry composed of mostly small, independent retail
outlets, and transformed into a retail sector characterized by
hypermarkets, supermarkets at the high end, and convenience as well as
discount stores at the low end. As multinational retailers aggressively
seek new growth opportunities in China's Emerging City Markets (ECM)
(*please see [CH7403](http://usdachina.org/info_details1.asp?id=1619)*)
and local operators expand to protect market share, the transformation
continues. The growth is largely due to the China's geographic and
economic structural changes along with the momentum of strong public and
private sector investment and development. "There has been a trend in
recent years of the most dynamic economic growth in China shifting away
from the south and toward the north of the country", according to the
Development Research Centre of the State Council. Retail deregulation,
which came late in 2004 as a requirement for China's accession to the
WTO, allows international companies to hold 100% equity in Chinese
firms. This in turn has triggered the recent acceleration in China\'s
retail growth and expansion. The heightened pace of new store openings
has been so rapid that some local governments are now considering new
regulations aimed at actually impeding or restricting growth. For
example, in early 2007, Beijing's Municipal Government announced plans
to adopt a policy that would prohibit construction of new hypermarkets
or supermarkets with total areas in excess of 6,000 square meters within
the 3^rd^ Ring Road of Beijing.

Major factors limiting North China's retail growth are income, price and
distribution. The vast rural population in North China still largely
remains beyond the reach of modern retail due to consumer income and
price constraints. Nevertheless, as economic development continues to
spread into rural areas, good potential for long-term market penetration
and sales growth in rural consumer groups is apparent. In the short
term, however, many populations are still outside the scope of most
large retailers due to income disparity between rural and urban
consumers. The lack of advanced infrastructure, logistical and
management systems pose serious impediments to getting goods to market
since distribution is often underdeveloped and very uneven. While
improving rapidly, inadequate infrastructure in many parts of North
China prevents retailers from opening or acquiring new stores at a pace
they would like, due to the difficulties associated with developing
effective, cost efficient distribution systems. Concomitantly, the
wholesale sector which evolved in large part to meet the demands of
China's earlier retail expansion continues to lag behind the retail
sector given a variety of structural issues in China, and North China.

**North China Retailers**

Top multinational retailers in the north include retail giants such as
Wal-mart, Carrefour, Metro and Tesco. Carrefour, the largest of the four
major multinationals operating in China, continues to dominate the North
China retail market. Leading local retailers such as Beijing Hualian,
Beijing Wu-mart, Beijing Jingkeolong and Dalian Dashang have
demonstrated an ability to adapt to the market and modern retail
practices. Thus, these domestic retailers continue to be key and often
formidable players in the current retail market. In addition, domestic
regional and national retailers continue to reap the benefits of their
unique local and cultural knowledge of the market as well as government
support.

Hypermarkets in Beijing have begun to cater to car owners, offering
larger shopping carts and more parking spaces to accommodate the ever
increasing number of shoppers arriving at retail stores in automobiles.
However, this trend has yet to catch on in hypermarkets in other
northern cities. A common strategy employed by hypermarkets, as well as
by other retail formats and venues, is to adjust the quantities and
variety of imported food products based on neighborhood average income
and consumer preference. Sam's Club sells 3 times as much imported food
as the Wal-mart Super-Centre in Beijing, although the ratio of imports
is only 3-5% of sales.

Supermarkets have been the preferred format for multi-national and
domestic operators because these formats provide a good balance of the
floor space required for expansion, and product mix to attract shoppers
yet remain profitable. Most supermarkets in Beijing are located within
walking distance of neighborhood consumers, thus shoppers tend to visit
stores more frequently but purchase less each time. Beijing had more
than 1,377 supermarkets operating with total retail sales of USD18
billion Jan-May, 2007.

Discount stores have proved to be a popular format to attract low income
consumers. Carrefour-owned discount store DIA currently has 115 outlets
throughout Beijing. The stores target consumers with annual household
incomes of USD 6,000-10,000. Very limited numbers of imported food items
are sold in these formats at present. However, according to one DIA
Fresh Produce Purchasing Manage post interviewed, DIA normally purchases
imported fruit for sale during major holiday periods.

While convenience stores are expanding in urban centers and appeal
mostly to young and more discerning consumers. These stores can be
characterized as clean, well managed and heavily automated with real
time inventory systems and offer single servings, etc. In many places,
these stores have rapidly replaced the traditional family-owned stores
or kiosks that sell snacks and drinks, but stock very few imported
products. However, there are rumblings at play that indicate at least
some convenience store chains are re-thinking their strategies to
accommodate Beijing's burgeoning car owner class, much in the same way
hypermarkets have attempted to attract this growing segment. In
addition, 24-hour service is somewhat less of an advantage in the colder
North. Consequently, some local convenience store chains, particularly
in the northeast operate on fixed hour schedules to accommodate local
market preferences.

**Table 8. Major Hypermarkets/Supermarkets in Beijing**

+-------------+----------+-------------+---+-------------+---------------+
| *           | **Own    | **2006      |   | *           | **No. of      |
| *Retailer** | ership** | Total Sales |   | *Percentage | Outlets**     |
|             |          | (Million    |   | of Sales    |               |
|             |          | USD)**      |   | Increase    | **(As of Oct. |
|             |          |             |   | Over 2005** | 2007)**       |
+-------------+----------+-------------+---+-------------+---------------+
| Beijing     | China    | 108         | 2 |             | 100           |
| Hualian     |          |             | 7 |             |               |
| Group       |          |             |   |             |               |
+-------------+----------+-------------+---+-------------+---------------+
| Beijing     | China    | 670.6       | 3 |             | 659           |
| Wu-mart     |          |             | 7 |             |               |
|             |          |             | . |             |               |
|             |          |             | 4 |             |               |
+-------------+----------+-------------+---+-------------+---------------+
| Beijing     | China    | 596         | 9 |             | 180           |
| Jingkelong  |          |             | . |             |               |
|             |          |             | 9 |             |               |
+-------------+----------+-------------+---+-------------+---------------+
| Carrefour   | France   | 3,501       | 2 |             | 103           |
|             | JV       | (           | 1 |             | (nationwide)  |
|             |          | nationwide) |   |             |               |
+-------------+----------+-------------+---+-------------+---------------+
| Wal-mart    | USA      | 1,980       | 3 |             | 86            |
|             |          | (           | 0 |             | (nationwide)  |
|             |          | nationwide) |   |             |               |
+-------------+----------+-------------+---+-------------+---------------+
| Metro       | Germany  | 1,100       | 1 |             | 34            |
|             | JV       | (           | 6 |             | (nationwide)  |
|             |          | nationwide) | . |             |               |
|             |          |             | 7 |             |               |
+-------------+----------+-------------+---+-------------+---------------+

*Source: Business Monitor, CCFA/ATO Beijing*

**North Region Update**

In Beijing proper, the most rapid development is taking place in the
fast expanding suburbs, which also experienced a surge in car ownership.
Unlike Shanghai or Guangzhou, Beijing is not at the center of a broad
economic development web, with Tianjin the only nearby urban area worthy
of mention. However, the Northern border region is home to some of
China's most dynamic coastal Emerging City Markets, including the cities
of Dalian, Qingdao and major industrial powerhouses of Shenyang and
Harbin. Beijing is one of China's largest and most affluent consumer
markets accounting for nearly 5% of national retail sales. In 2006,
growth in retail sales increased by 12.6%, although still below the
record high 14.5% in 2004. Retail demand remains steady, especially in
the food and beverage market segments, and multi-national retailers such
as Carrefour, Wal-mart and Metro, as well as most domestic

retail operators enjoyed significant expansion and substantial growth
during 2006-2007.

Beijing based Jingkelong Company Limited opened 19 retail outlets in
2006 with 180 outlets in total by October 2007 which includes
hypermarkets, supermarkets and convenience stores. The company
accelerated its greater Beijing area coverage by consolidating its
regional focus in Chaoyang District in Beijing. Surprisingly, known as
the largest State-run retailers in the city, Jingkelong established
imported food sections in some of its stores targeted at consumers in
middle-income neighborhoods, even though international invested
retailers remain the major retail suppliers of imported food. In recent
years, Jenny Lou's, a local imported food and beverage specialty
retailer developed a good business serving the needs of expatriates, and
overseas Chinese in and around diplomatic compounds and embassies.
However, increasingly shoppers at Jenny Lou's, and several other
specialty retailers that target imported food product consumers, are
up-market Chinese consumers who are wealthy or lived abroad or both.

Shopping centers continue to mushroom and Beijing is now home to many of
the country's largest and most famous shopping malls, such as the
Lufthansa Shopping Center, The Place, Shin Kong Plaza, etc. Most of
these have high-end supermarkets with a large percentage of imported
food and beverage items. Beijing retailers hold US products in high
regard for their quality and increasingly safety, although European,
Korean and other suppliers are also rising in popularity. Shelf surveys
reveal special sections devoted to imported beer, fruit juice, wine,
etc. Dairy cases are expanding, often displaying imported as well as
local cheeses. Substantial displays of imported breakfast cereals,
cookies and beverages are also not uncommon. According to some major
importers-suppliers in Beijing, imported food and beverage product sales
are expected to rise at the retail (supermarket) level as the cost of
domestic food products increases, as in 2007, and the price difference
between domestic and imported products narrows. This is being driven by
a rise in domestic prices as well as the positive effect of the
Dollar-Yuan exchange rates relative to products from the U.S. Based on
interviews with several store managers of major supermarkets in Beijing,
it appears that individual store sales in Beijing are already a vibrant
market for up-market or high-income consumer purchases. Post forecasts
retailers are likely to receive a significant boost from the effects of
domestic as well as international tourism related to the 2008 Olympic
Games being held here in August of next year, and the continuing
development of retail infrastructure and consolidation in Beijing.

In Tianjin, several international retailers like Carrefour, Wal-mart and
Metro have good penetration in a mostly local retail market there. In
addition, imported food products are not widespread and are even less
common in smaller retail formats. The large and modern port area,
including Tanggu and Tianjin Economic Development Area (TEDA), has
proven to be a better market for imported goods and food products due to
the large number of expatriates living there. However, Tianjin realized
a significant 24 percent increase in the import of U.S. food products
during the period 2004-2006. In August 2007, the largest organic
supermarket in China was established in the Binhai District of Tianjin
with a retail area greater than 400 square meters, and a total
investment of more than a half million US dollars. (Please see
[CH7417](http://usdachina.org/info_details1.asp?id=1716)).

Shandong, a coastal province south of Beijing, is home to a number of
growing industrial cities characterized by rising consumer incomes. As
one of the largest consumer markets in China, Shandong retail sales of
consumer goods increased 16.3% to USD 93.7 billion in 2006, which
accounted for 9.3% of the national total. Retail sales in the urban
markets reached USD 70 billion compared to 23.7 billion in the rural
market. Major commercial centers are located in Jinan, Qingdao, Yantai,
and Weihai. Companies from nearby Japan and Korea have invested heavily
in the development of the province's infrastructure, including the cold
chain creating ideal conditions for retail expansion. SPAR, the largest
voluntary retail chain in Europe, entered the China market after
entering into an agreement with Shandong retailer Jiajiayue
Supermarkets. The arrangement resulted in the opening of 25 new SPAR
supermarkets nationwide with 15 in Shandong the end of 2007. In Qingdao,
foreign retailers Jusco and Carrrefour remain the major players in the
market, while Li Qun Group, a local counterpart, has doubled its number
of outlets over the past few years. Jusco in downtown Qingdao has the
largest shelf space for imported food and beverage products in the city.
It should also be noted that the Sunshine Department Store, a premier
luxury shopping destination in Qingdao, opened its own supermarket in
November 2006 featuring primarily imported products of which nearly 80%
were of US origin. According to one of the stores major supplier's,
breakfast cereal, cheese, canned soup, salad dressing and corn chips
from the US are hot selling items there (please see
[CH6414](http://usdachina.org/info_details1.asp?id=1213)).

A flurry of retail development swept China's Northeast or 'Dongbei'
region in 2006-2007. Like other regions across China, as local economies
and consumers mature in Northeast China, traditional wet markets are
disappearing and rapidly being replaced by modern retail formats.
However, unlike the residents of other areas in China, Northeasterners
for the most part prefer to purchase groceries in bulk once a week or
longer rather than to shop daily. As Gateway to the Northeast, the port
city of Dalian is a major transportation hub and food distribution
centre for Northeast China. The city can be characterized by highly
developed and modern infrastructure as well as very high consumer
incomes, compared to other cities in the Northeast. Retail formats in
Dailan went through a radical transformation several years ago with
multinational retailers like Carrefour and Wal-mart tapping into the
excellent market conditions there along with local retail expansion. The
Dalian Dashang Group remains the largest retailer in the city, with more
than 130 stores in Dalian, Shandong and the Northeast. Compared to
domestic retailers, imported products have a significant presence in
international invested and operated supermarkets even though imports
accounts for less 3-4% of total store offerings in Dalian. According to
local retail operators in Dalian, consumers there, particularly at the
mid-high income level exhibit great interest in imported food products
although most have limited knowledge about how to use these products.
Harbin offers retailers a fast-growing market with significant consumer
purchasing power. Key retailers expanding into the Harbin market include
Wal-mart, Carrefour, Metro, Lianhua, Yuanda and others. The volume and
diversity of imported products available in local retail formats has
increased significantly in recent years although from a very low base.
For example, Yuanda Supermarket expanded its imported food offerings in
2006, and increased both the volume and variety of US products which led
to the development of an entire imported products section in this
high-end store (see
[CH6406](http://usdachina.org/info_details1.asp?id=1106)).

**Table 9. 2005-2006 Major Northern City Retail Sales (Billion USD)**

  ----------------- ----------------- ----------------- -----------------
  **City**          **2005**          **2006**          **% increase**

  Beijing           38.2              43                12.6

  Tianjin           15.7              17.9              14

  Qingdao           11.4              13.3              16

  Dalian            10                11                10

  Harbin            10.4              11.8              13.2
  ----------------- ----------------- ----------------- -----------------

*Source: Global in Sight, Statistical Yearbooks 2006-2007, People's
Daily Online, tdctrade.com*

**North Retail Trends**

*Expansion & Consolidation*: Expansion and consolidation in the retail
industry is a continuing trend. Post expects significant change to take
place in the current retail market formula with fewer stores yet larger
scale (volume) formats in North China. In mid-January 2007, Carrefour
stated it would invest 150million Euros annually on opening new stores
in China. In 2006, 21 hypermarkets were added to Carrefour's Chinese
network. In August 2007, Carrefour opened its 101st store in
Tiantongyuan, Beijing. The company has also has stated in plans to
continue to seek acquisition opportunities across China, particularly in
regions where it does not have a strong presence. The German retail
giant Metro Group is looking to press further into North China's first
and second tier cities. With a 24% jump in Chinese retail sales in 2006,
Metro plans to open as many new stores per year as possible, with a
special scouting team focusing exclusively on locating suitable
properties. After opening a trial outlet on the 4^th^ Ring Road in
Beijing, Tesco revealed it plans to open 10 Tesco branded stores
annually for the foreseeable future in China. Somewhat different from
other retailers in China, Tesco is focusing on affluent first-tier
cities like Beijing, Shanghai, and Guangzhou. In February, 2007,
Wal-mart purchased a 35 percent interest in Bounteous Company Limited
(BCL) which operates hypermarkets in China under the Trust-Mart banner. 
As a leading hypermarket operator, BCL has 101 Trust-Mart retail stores
in 34 cities across China. "Through this investment in Trust-Mart we
have the opportunity to expand our presence in China, one of the world's
fastest growing retail markets," according to a Wal-Mart executive. 
"This is an important step in bringing additional scale to our China
retail business and enabling us to do what we do best -- serving our
customers with improved service, high quality and innovative products,
and lower prices."

As all there major multi-national retail operators have stepped up the
pace of retail expansion, domestic supermarkets to have accelerated the
pace of opening more stores. As a leading retailer in Beijing, Wu-mart
operates 659 grocery stores across the supermarket, hypermarket and
convenience store formats, in addition to a number of drug stores.
Although Wu-mart's focus is likely to remain in Beijing, it is keen to
become a nationwide operator and leading player in North China
aggressively seeking acquisition opportunities to further this aim. The
company plans to expand to around 1,000 stores over the next 5 years.
Beijing based Chaoshifa plans to open 8-10 supermarkets during 2008.
While domestic retailers accelerate expansion, they have also begun to
speed up the pace of integration, making them stronger as well as
larger. Store openings are still costly due to the level of investment
which is required to develop distribution and supply chain
infrastructure. So while retailers seek regional expansion, they have
also placed development of an efficient distribution system at the top
of their agenda.

*Development & Growth of High-End Retail Stores*: The rapidly rising
number of middle and upper class consumers in Beijing provides a
constant flow of new consumers for high end retail stores offering a
wide variety of imported food and beverage products. Consumers are
increasingly more sophisticated in their demands, making decisions on
far more factors than price alone. The supermarket called The Market
Place under the management of the CRC Group and located in the new Shin
Kong Plaza in Beijing is a good example of this as fresh produce, frozen
foods and ready-to-go food make up nearly 80% of store floor space. More
than 50% of the produce is imported with the rest mostly organic. Most
of the products are 2 to 3 times higher than comparable prices in most
other retail stores. For example, a pound of California organic lettuce
sells for USD 8.9, and one Kilo of Japanese beef steak at USD 120.
According to the store's manager, the supermarket has successfully
positioned itself in a highly niche yet profitable market by promoting
high-end or trendy and healthy lifestyles, which targets middle to high
income consumers. The store has enjoying strong and very promising sales
since its opening in Beijing this past August.

*Food safety and Food tracking system*: The World Health Organization
estimates that illness caused by tainted food cost China approximately
\$4.7 billion along with another \$14 billion in medical care and
productivity losses annually. China's Ministry of Health reported 144
instances of food poisoning involving 4,922 people October through
December 2006, or a 42% increase over a year earlier. Many retailers in
Beijing have already taken action to respond to this national concern.
In August 2007, Carrefour established its own Food Safety Testing Lab in
Beijing to randomly test fruit, vegetables, mushrooms, meat, seafood and
noodles for sale in its stores. The tests look for at a variety of
contaminants including pesticide residues, ractopamine, and nitrous
acid, etc. Post understands the State Administration for Industry and
Commerce plans to establish a nationwide grocery tracking system to
ensure food safety. By the end of 2007, all food markets and
supermarkets in cities above the county level will have to implement the
system which requires invoices and documents attached to purchased
commodities. In August 2007, the Beijing Wu-mart-Miyun store installed
the first food tracking equipment in the city. Shoppers can now scan
their purchases to find out product origin, manufacturing and expiration
dates, and quality certifications, etc. Several supermarkets in Beijing
such as the Market Place in the Shi Kong Plaza, and Huarun Supermarket
in the Kerry Center also have installed these food tracking systems
although not all of these are fully operational at the present time.

*Organic*: According to research completed by China's Ministry of
Commerce, more than 60% of the country's 562 million city dwellers are
willing to pay more for produce certified safe, green or organic.
Retailers such as Wal-mart and Carrefour are among those that have taken
advantage of the market opportunities related to this trend. Sales of
organic vegetables at Wal-mart stores in Beijing soared more than 88% in
2006. "Organic food is becoming increasingly popular," according to a
Wal-mart spokesperson in Beijing, "we see good growth potential in the
long term." Every Carrefour store in Beijing has a special section that
sells organic fruit and vegetables, although the space allocated to
these sections varies based on the demographics of the particular
neighborhood. However, organic food products in North China are
relatively new and many of them are not up to international standards.
The other challenge is that consumers have limited knowledge about
organic food, and definitions somewhat such as green foods, etc.

*The Impact of the Beijing 2008 Olympics*: Among other things, Beijing's
pre-Games makeover includes permanent upgrades to the city's
transportation, communications, infrastructure and logistics affecting
nearly every aspect of modern life in this ancient city. This has
created an excellent platform for retailers in Beijing to further
improve the operations efficiencies as logistics and distribution
systems are being improved. In addition, Beijing began a daily food
safety report mechanism as part of the "Good Luck Beijing" one year
countdown August 8, 2007, a test run for the food safety monitoring
system to be put in place for the 2008 Olympic Games in Beijing.
According to the Beijing Municipal Government Food Safety Office,
Beijing is going to share and expand this system with other Olympics
co-host cities including Tianjin, Shanghai, Shenyang, Qingdao and
Qinhuangdao. The system monitors ten specific food safety factors
including production, processing, the sale and preparation of food. It
should be a large boost for Beijing as well as other cities in improving
and enhancing food safety in retail outlets. In addition, a large
increase in retail sales is expected in the run-up to the 2008 Olympics,
especially in places such as Beijing and Qingdao. In fact, Beijing has
identified the retail sector here as one of 7 key pillar industries
expected to account for more than half of the city's total GDP in the
next several years.

### South China Retail Market Overview

Southern China's retail industry is widely considered to be at the
forefront of the nation's rush towards a developed market economy. In
many ways the retail food sector is leading this charge as an increasing
number of Chinese purchase their groceries in modern international style
hypermarkets and supermarkets instead of traditional wet markets.

Retail sales for South China were estimated at USD227 billion in 2006,
up 15.3 % from the previous year. Food accounts for 36% of this total
retail figure, and demand for imported foods is rising. However,
imported foods account for less than 5% of total food sales in this
region.

**Table 10.** Southern Population and Retail Sales Volume (2005-6)

+-----------+-----------+------------+---+------------+----------------+
|           | **Total   |            |   | **Retail   |                |
|           | Pop       |            |   | Sales** *( |                |
|           | ulation** |            |   | in         |                |
|           | *(in      |            |   | billions)* |                |
|           | m         |            |   |            |                |
|           | illions)* |            |   |            |                |
+-----------+-----------+------------+---+------------+----------------+
|           | 2005      | 2006       | 2 |            | 2006           |
|           |           |            | 0 |            |                |
|           |           |            | 0 |            |                |
|           |           |            | 5 |            |                |
+-----------+-----------+------------+---+------------+----------------+
| **Gu      | *91.94*   | **93.04**  | U |            | US\$119.97     |
| angdong** |           |            | S |            |                |
|           |           |            | \ |            | *RMB911.80*    |
|           |           |            | $ |            |                |
|           |           |            | 1 |            |                |
|           |           |            | 0 |            |                |
|           |           |            | 3 |            |                |
|           |           |            | . |            |                |
|           |           |            | 7 |            |                |
|           |           |            | 2 |            |                |
|           |           |            |   |            |                |
|           |           |            | * |            |                |
|           |           |            | R |            |                |
|           |           |            | M |            |                |
|           |           |            | B |            |                |
|           |           |            | 7 |            |                |
|           |           |            | 8 |            |                |
|           |           |            | 8 |            |                |
|           |           |            | . |            |                |
|           |           |            | 2 |            |                |
|           |           |            | 6 |            |                |
|           |           |            | * |            |                |
+-----------+-----------+------------+---+------------+----------------+
| *         | *35.35*   | **35.58**  | U |            | US\$35.58      |
| *Fujian** |           |            | S |            |                |
|           |           |            | \ |            | *RMB270.42*    |
|           |           |            | $ |            |                |
|           |           |            | 3 |            |                |
|           |           |            | 0 |            |                |
|           |           |            | . |            |                |
|           |           |            | 8 |            |                |
|           |           |            | 7 |            |                |
|           |           |            |   |            |                |
|           |           |            | * |            |                |
|           |           |            | R |            |                |
|           |           |            | M |            |                |
|           |           |            | B |            |                |
|           |           |            | 2 |            |                |
|           |           |            | 3 |            |                |
|           |           |            | 4 |            |                |
|           |           |            | . |            |                |
|           |           |            | 5 |            |                |
|           |           |            | 8 |            |                |
|           |           |            | * |            |                |
+-----------+-----------+------------+---+------------+----------------+
| **Hunan** | *63.26*   | **63.42**  | U |            | US\$37.29      |
|           |           |            | S |            |                |
|           |           |            | \ |            | *RMB283.42*    |
|           |           |            | $ |            |                |
|           |           |            | 3 |            |                |
|           |           |            | 2 |            |                |
|           |           |            | . |            |                |
|           |           |            | 3 |            |                |
|           |           |            | 6 |            |                |
|           |           |            |   |            |                |
|           |           |            | * |            |                |
|           |           |            | R |            |                |
|           |           |            | M |            |                |
|           |           |            | B |            |                |
|           |           |            | 2 |            |                |
|           |           |            | 4 |            |                |
|           |           |            | 5 |            |                |
|           |           |            | . |            |                |
|           |           |            | 9 |            |                |
|           |           |            | 1 |            |                |
|           |           |            | * |            |                |
+-----------+-----------+------------+---+------------+----------------+
| **        | *46.60*   | **47.19**  | U |            | US\$21.06      |
| Guangxi** |           |            | S |            |                |
|           |           |            | \ |            | *RMB160.08*    |
|           |           |            | $ |            |                |
|           |           |            | 1 |            |                |
|           |           |            | 8 |            |                |
|           |           |            | . |            |                |
|           |           |            | 3 |            |                |
|           |           |            | 8 |            |                |
|           |           |            |   |            |                |
|           |           |            | * |            |                |
|           |           |            | R |            |                |
|           |           |            | M |            |                |
|           |           |            | B |            |                |
|           |           |            | 1 |            |                |
|           |           |            | 3 |            |                |
|           |           |            | 9 |            |                |
|           |           |            | . |            |                |
|           |           |            | 7 |            |                |
|           |           |            | 0 |            |                |
|           |           |            | * |            |                |
+-----------+-----------+------------+---+------------+----------------+
| *         | *8.28*    | **8.36**   | U |            | US\$4.06       |
| *Hainan** |           |            | S |            |                |
|           |           |            | \ |            | *RMB30.83*     |
|           |           |            | $ |            |                |
|           |           |            | 3 |            |                |
|           |           |            | . |            |                |
|           |           |            | 5 |            |                |
|           |           |            | 3 |            |                |
|           |           |            |   |            |                |
|           |           |            | * |            |                |
|           |           |            | R |            |                |
|           |           |            | M |            |                |
|           |           |            | B |            |                |
|           |           |            | 2 |            |                |
|           |           |            | 6 |            |                |
|           |           |            | . |            |                |
|           |           |            | 8 |            |                |
|           |           |            | 6 |            |                |
|           |           |            | * |            |                |
+-----------+-----------+------------+---+------------+----------------+
| **        | *37.30*   | **37.57**  | U |            | US\$9.08       |
| Guizhou** |           |            | S |            |                |
|           |           |            | \ |            | *RMB68.98*     |
|           |           |            | $ |            |                |
|           |           |            | 7 |            |                |
|           |           |            | . |            |                |
|           |           |            | 9 |            |                |
|           |           |            | 9 |            |                |
|           |           |            |   |            |                |
|           |           |            | * |            |                |
|           |           |            | R |            |                |
|           |           |            | M |            |                |
|           |           |            | B |            |                |
|           |           |            | 6 |            |                |
|           |           |            | 0 |            |                |
|           |           |            | . |            |                |
|           |           |            | 6 |            |                |
|           |           |            | 9 |            |                |
|           |           |            | * |            |                |
+-----------+-----------+------------+---+------------+----------------+

Fueled by the emerging 'middle class' living primarily in capital cities
and leading urban areas, Chinese consumer spending power is on the rise.
With increasing disposable incomes, the capacity to buy higher value
goods and services means U.S. producers need to take note of this
significant market of the future.

Many of the global retail giants have already established firm footholds
in the Guangzhou and Shenzhen markets. Having achieved early positive
results, they, along with local retail chains, must now shift gears and
target second and third tier cities throughout the south.

**Table 11.** Southern Market Disposable Incomes -- Urban & Rural
(2005-6)

+-----------+-------------+-------------+-------------+---------------+
|           | *Disposable |             | *Net Income |               |
|           | Income -*   |             | -* **Rural  |               |
|           | **Urban**   |             | Residents** |               |
+-----------+-------------+-------------+-------------+---------------+
|           | 2005        | 2006        | 2005        | 2006          |
+-----------+-------------+-------------+-------------+---------------+
| **Gu      | *US\$1,943* | US\$2,107   | *           | US\$668.42    |
| angdong** |             |             | US\$617.10* |               |
|           | *RMB14,770* | *RMB16,016* |             | *RMB5,080*    |
|           |             |             | *RMB4,690*  |               |
+-----------+-------------+-------------+-------------+---------------+
| *         | *US\$1,621* | US\$1,810   | *           | US\$636.18    |
| *Fujian** |             |             | US\$585.53* |               |
|           | *RMB12,321* | *RMB13,753* |             | *RMB4,835*    |
|           |             |             | *RMB4,450*  |               |
+-----------+-------------+-------------+-------------+---------------+
| **Hunan** | *US\$1,253* | US\$1,382   | *           | US\$446.05    |
|           |             |             | US\$410.26* |               |
|           | *RMB9,524*  | *RMB10,505* |             | *RMB3,390*    |
|           |             |             | *RMB3,118*  |               |
+-----------+-------------+-------------+-------------+---------------+
| **        | *US\$1,222* | US\$1,303   | *           | US\$364.47    |
| Guangxi** |             |             | US\$328.29* |               |
|           | *RMB9,287*  | *RMB9,899*  |             | *RMB2,770*    |
|           |             |             | *RMB2,495*  |               |
+-----------+-------------+-------------+-------------+---------------+
| *         | *US\$1,069* | US\$1,236   | *           | US\$428.42    |
| *Hainan** |             |             | US\$395.26* |               |
|           | *RMB8,124*  | *RMB9,395*  |             | *RMB3,256*    |
|           |             |             | *RMB3,004*  |               |
+-----------+-------------+-------------+-------------+---------------+
| **        | *US\$1,078* | US\$1,200   | *           | US\$261.18    |
| Guizhou** |             |             | US\$246.97* |               |
|           | *RMB8,195*  | *RMB9,117*  |             | *RMB1,985*    |
|           |             |             | *RMB1,877*  |               |
+-----------+-------------+-------------+-------------+---------------+

*(Source: 2007 Guangdong Statistical Yearbook)*

Rivalry is fierce, and retailers compete aggressively to win prime new
shopping mall anchor tenant status. One interesting example is
*Vanguard*'s *Mix-City* in Shenzhen. The site extends over 180,000
square meters and is zoned for a retail supermarket operation. However,
to attract teens and young working adults with high disposable incomes,
high-end fashion shops, fast food restaurants, a movie theater and
ice-skating rink have also been added to the site. Along the same lines,
several big shopping mall projects are being developed in neighboring
cities such as Dongguan, Foshan, Zhuhai, Zhongshan, as well as other
fast developing cities throughout the *Pearl River Delta*.

This growing trend of combining leisure and culture experiences with
retail developments is fairly new, but gaining ground. Up and coming
developments following this same trend include the *Metromall* in
Nanhai; *Tour Mall* in Foshan, Dongfang Plaza, *Qixing Street* in
Zhaoqin; new *Dehui Mall* in Shishi, Fujiang as well as *Wangguo
Metropolis,* a one-stop shopping mall in Haikou, Hainan.

Another growing trend is in convenience chain stores following the early
success of *'7-Eleven'* in South China. Franchise branded stores appear
to dominate this developing sector of the market.

Specialty imported food retail stores are also becoming more prevalent.
Examples include *Oliver Supermarket, Corner Deli,* and *Gourmet Fine
Food Store* in Guangzhou. Retail wine shops specializing in imported
wines are also on the rise. Two of the prominent importers of wine in
the south are *Aussinot* and *Jointek.*

**Table 12.** The Pearl River Delta Economic Data

+------------------------+---------------+-------------+-------------+
|                        | **2005**      | **2006**    | **Growth    |
|                        |               |             | Rate**      |
+------------------------+---------------+-------------+-------------+
| **Permanent            | 43.15         | **44.47**   | **3.1%**    |
| Population**           |               |             |             |
|                        |               |             |             |
| *( Millions)*          |               |             |             |
+------------------------+---------------+-------------+-------------+
| **Total Retail Sales** | US\$76.20     | **US\$87.9  | **15.3%**   |
|                        | billion       | billion**   |             |
|                        |               |             |             |
|                        | *(RMB579.60   | *(          |             |
|                        | billion)*     | RMB668.20)* |             |
+------------------------+---------------+-------------+-------------+
| **GDP**                | US\$2,376.23  | **US\       | **16.9%**   |
|                        |               | $2,818.98** |             |
|                        | *(R           |             |             |
|                        | MB18,059.38)* | *(RMB       |             |
|                        |               | 21,424.28)* |             |
+------------------------+---------------+-------------+-------------+

*Source: 2007 Guangdong Statistical Yearbook*

*\*The Pearl River Delta Economic Zone includes 13 cities and counties
(districts), including Guangzhou, Shenzhen, Zhuhai, Foshan, Jiangmen,
Dongguan, urban districts of Huizhou, Huidong County, Boluo County,
urban districts of Zhaoqing, Gaoyao County- level City and Sihui
County-level City. The data on banking refer to the sum of the nine
cities in the Pearl River Delta, including Guangzhou, Shenzhen, Zhuhai,
Foshan, Jiangmen, Dongguan, Zhongshan, Huizhou and Zhaoqing.*

Local retail management expertise is still in its infancy compared to
international best practices. From product pricing strategies to
promotion optimization, local retail management needs to better
understand consumer demands and think in terms of providing solutions to
win customer loyalty rather than short term cash generation.

Good examples are being set by Japanese and American retailers, and some
local retail chains have recognized the importance of this
customer-oriented approach to managing their operations, but they are
the exception rather than the norm.

**Mergers & Acquisitions**

Recent M&A activities include *Wal-Mart* China Investment, purchasing
35% of *Trust-Mart*. Industry insiders believe this was a move to assist
them in gaining access to the Guangzhou market where to date, they still
have not been successful in gaining permission to open an outlet.

**Cold Chain**

Cold chain infrastructure development is also a major concern for
retailers in the South. New distribution centers and modern expressways
are better connecting ports with key markets throughout the South. This
is now enabling more imported foods to be reliably distributed
throughout the region effectively. However, while local importers and
distributors are expanding operations, Hong Kong transshipments still
play a significant role in food trade.

#### Other Significant Consumer Trends

Rapid urbanization and economic growth, particularly in the mainland's
leading cities has provided a boon for local and international
retailers. Local produce still dominants the market, however with the
outbreak of SARS in 2003 and quite recently the H5N1 (bird flu) virus,
consumers have concerns about food safety. The result has been an
increasing demand for high-quality, well-respected imported food brands.
In more affluent areas interest is growing for "green" and "organic"
foods, but it remains a rather small niche market.

There has been an increasing demand for imported food items in the past
five years. The most popular imports include baby foods/infant formula,
chocolates, dried fruit and nuts, fresh fruit and vegetables, potato
chips, popcorn and canned foods such as soup.

European and South East Asian exporters entered southern markets earlier
than U.S. equivalents. In part this was due to the price sensitive
nature of local consumers, but at the same time U.S. exporters were
initially hesitant in building their brands. Today though, Washington
apples, Sunkist oranges and California table grapes are commonly found
in many supermarket shelves throughout the South as are durians and
lychees from Thailand, butter from New Zealand and cheese originating
from France and Australia.

While California wines are readily available, they need to compete with
French, Italian, Australian, South African and Chile equivalents in this
market.

Other fresh and packaged foods from the United States are also widely
available today, however consumers lack the basic knowledge of how to
prepare and serve them prompting most consumers to hesitate rather than
buy. In response, the ATO in Guangzhou actively encourages U.S. produce
exporters to register their products and provide labels in Chinese.

**Table 13.** 2006 Major Selected Hypermarkets/Supermarkets in South
China (10,000yuan)

+-------+--------+--------+-------+-----+------+--------+-----+----+
| **    | **N    | **     | **    | **% | *    | **Exp  | **  | *  |
| Retai | ationa | Type** | Sales | Sa  | *No. | ansion | No. | *K |
| ler** | lity** |        | Reve  | les | of   | Rate   | of  | ey |
|       | *of*   |        | nue** | Gr  | St   | %**    | Sto | Mk |
|       | *      |        |       | owt | ores |        | res | ts |
|       | *Owner |        |       | h** | (    |        | (So | ** |
|       | ship** |        |       |     | Chin |        | uth |    |
|       |        |        |       |     | a)** |        | Ch  |    |
|       |        |        |       |     |      |        | ina |    |
|       |        |        |       |     |      |        | )** |    |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| **CR  | Hong   | Super  | 3,78  | **2 | 22   | 11     | 200 | Na |
| Vangu | Kong   | center | 5,344 | 6** | 05\* |        |     | ti |
| ard** |        |        |       |     |      |        |     | on |
|       |        | Super  |       |     |      |        |     | wi |
|       |        | market |       |     |      |        |     | de |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| **C   | France | Super  | 2,48  | **5 | 1    | 53     | 22  | Na |
| arref |        | center | 0,000 | 3** | 08\* |        |     | ti |
| our** |        |        |       |     |      |        |     | on |
|       |        |        |       |     |      |        |     | wi |
|       |        |        |       |     |      |        |     | de |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| **    | **     | Super  | 1,51  | 30  | 90\* | 27     | 2   | Na |
| Wal-M | U.S.** | center | 3,181 |     |      |        | 5\* | ti |
| art** |        | &      |       |     |      |        |     | on |
|       |        | Sam's  |       |     |      |        |     | wi |
|       |        | Club   |       |     |      |        |     | de |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| **Tr  | Taiwan | Super  | 1,40  | **  | 101  | 5      | 29  | Na |
| ust-M |        | center | 0,000 | 6** |      |        |     | ti |
| art** |        |        |       |     |      |        |     | on |
|       |        |        |       |     |      |        |     |    |
|       |        |        |       |     |      |        |     | wi |
|       |        |        |       |     |      |        |     | de |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| **Me  | G      | War    | 93    | **2 | 34   | 22     | 3   | Na |
| tro** | ermany | ehouse | 6,733 | 4** |      |        |     | ti |
|       |        | memb   |       |     |      |        |     | on |
|       |        | ership |       |     |      |        |     | wi |
|       |        |        |       |     |      |        |     | de |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| **P   | Hong   | Super  | 47    | **1 | 44   | 22     | 16  | Gu |
| ark'N | Kong   | market | 0,794 | 3** |      |        |     | an |
| s     |        |        |       |     |      |        |     | g- |
| hop** |        |        |       |     |      |        |     | do |
|       |        |        |       |     |      |        |     | ng |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| **Lo  | Th     | Super  | 135   | **3 | 75   | 23     | 14  | Na |
| tus** | ailand | market | 0,000 | 4** |      |        |     | ti |
|       |        |        |       |     |      |        |     | on |
|       |        |        |       |     |      |        |     | wi |
|       |        |        |       |     |      |        |     | de |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| **Min | Sh     | Super  | 18    | **2 | 121  | 9      | 121 | Gu |
| run** | enzhen | market | 5,709 | 7** |      |        |     | an |
|       |        |        |       |     |      |        |     | g- |
|       |        |        |       |     |      |        |     | do |
|       |        |        |       |     |      |        |     | ng |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| *     | Sh     | Super  | 5,62  | **3 | 23   | N/A    | 23  | Gu |
| *Rain | enzhen | market | 8,632 | 2.2 |      |        |     | an |
| bow** |        |        |       | 5** |      |        |     | g- |
|       |        |        |       |     |      |        |     | do |
|       |        |        |       |     |      |        |     | ng |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| A.    | Sh     | Super  | 1,42  | **2 | 99   | 25     | 99  | Gu |
|   **B | enzhen | center | 5,490 | 1** |      |        |     | an |
| est** |        |        |       |     |      |        |     | g- |
|       |        |        |       |     |      |        |     | do |
|       |        |        |       |     |      |        |     | ng |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| *     | Japan  | GMS    | 32    | **2 | 11   | 22     | 11  | Gu |
| *AEON |        |        | 1,955 | 3** |      |        |     | an |
| Ju    |        |        |       |     |      |        |     | g- |
| sco** |        |        |       |     |      |        |     | do |
|       |        |        |       |     |      |        |     | ng |
+-------+--------+--------+-------+-----+------+--------+-----+----+
| **    | Sh     | Super  | 72    | **  | 52   | 30     | 52  | Gu |
| Renre | enzhen | market | 0,000 | 7** |      |        |     | an |
| nle** |        |        |       |     |      |        |     | g- |
|       |        |        |       |     |      |        |     | do |
|       |        |        |       |     |      |        |     | ng |
+-------+--------+--------+-------+-----+------+--------+-----+----+

*Sources: Linkshop, CCFA & interviews by ATO Guangzhou*

#### New Opportunities for U.S. Importing Foods into Southern China

Southern Chinese palates are opening to Western-style foods. As their
purchasing power grows so does their willingness to buy such premium
priced imported food items. Brand reputation and quality assurance are
the key drivers as health and food safety concerns grow.

Promising U.S. food categories with little presence today include:
cheese, beef, fresh fruits, baby food, nuts, natural fruit/vegetable
juices, snack foods and ice-cream.

+--------------------------------------+-------------------------------+
| **Popular U.S. imported items**      | **Main foreign competitors**  |
+--------------------------------------+-------------------------------+
| *Oranges*                            | New Zealand, South Africa     |
+--------------------------------------+-------------------------------+
| *California Table Grapes*            | Chile                         |
+--------------------------------------+-------------------------------+
| *Washington Apples*                  | Chile, N. Zealand             |
+--------------------------------------+-------------------------------+
| *Red Meat (beef)*                    | Australia                     |
+--------------------------------------+-------------------------------+
| *North West Cherries*                | New Zealand                   |
+--------------------------------------+-------------------------------+
| *Breakfast Cereal*                   | U.K.                          |
+--------------------------------------+-------------------------------+
| *Frozen Potatoes*                    | Canada, New Zealand           |
+--------------------------------------+-------------------------------+
| *Dairy & Cheese*                     | New Zealand, Australia, EU    |
+--------------------------------------+-------------------------------+
| *Poultry (chicken wing)*             | Brazil, China                 |
+--------------------------------------+-------------------------------+
| *Nuts: (pistachio, almonds)*         | Iran                          |
+--------------------------------------+-------------------------------+
| *Wine*                               | > Australia, France, Italy,   |
|                                      | > Spain                       |
+--------------------------------------+-------------------------------+
| *Fruit juice*                        | France, Japan                 |
+--------------------------------------+-------------------------------+
| *Vegetable juicy*                    | Japan                         |
+--------------------------------------+-------------------------------+
| *Alaska seafood (king crab, salmon)* | Canada, Norway, Russia        |
+--------------------------------------+-------------------------------+
| *Spaghetti Sauce*                    | Italy, France, EU             |
+--------------------------------------+-------------------------------+
| *Coffee*                             | Japan, France, South Africa   |
+--------------------------------------+-------------------------------+
| *Candy & Chocolate*                  | Swiss, Italy, France,         |
|                                      | Belgium, Japan                |
+--------------------------------------+-------------------------------+

**Guangzhou Retail Market Update**

Guangdong Province has the highest GDP at USD344 billion (RMB2,620
billion) of any single province in China, with retail sales valued at
over USD120 billion (*RMB 911.8 billion*) in 2006, up 15.7% on 2005
figures. Driving Guangdong's economy is the Pearl River Delta (PRD).
Guangzhou city sits at the apex of the PRD and its economic and
political influence resonates throughout Guangdong and into neighboring
provinces.

Major international retail operators that have set up their operations
in Guangzhou include *Metro*, *Jusco* and *Carrefour*. Jusco *Teem He
Plaza* store and *China Plaza store* took the early lead. *Jusco* is
said to have recorded daily sales revenue as high as USD460,526 in one
single store, with food accounting for 40 percent of this turnover.

*Carrefour* currently has four stores in Guangzhou and leads the
imported food sector. ![](media/image10.png){width="2.029861111111111in"
height="2.328472222222222in"}

*Metro* initiated a fairly unique 'membership strategy' in the market:
targeting small and medium-sized restaurants as well as families.

All three international retail operators have helped boost imported food
items into Guangzhou targeting mostly high-end consumers in the region.
The notable exception is *Wal-Mart* which has not been able to establish
a Guangzhou outlet up to this point.

Hong Kong-based *Park'N shop with 44 stores* and Taiwan-based
*Trust-Mart* with 100+ outlets both play important roles in the dynamic
Guangzhou market. *Lotus* and *Homecity* supercenters are also lifting
their presence. It is reported that food sales account for 40-50% of
their total sales.

Smaller locally-operated supermarkets face stiff competition from these
larger international players. Subsequently they have tried to adapt
quickly to retain their market share, but have already lost considerable
ground.

Convenience stores remain one of the most dynamic retail sectors in
Guangzhou. Many have started to stock imported food items on their
shelves as well as fast food counters to boost profits over
lower-margin, daily need items. Store managers adjust product selection
to fit each neighborhood. For example, they might stock fresh fruit and
imported products in a store located near a five-star hotel; while a
middle-class residential neighborhood store would stock more locally
appealing products. Recent initiatives include fast-food and other
value-added services such as phone card sales and subway card recharging
service. *7-Eleven* has taken the lead in the South with more than 400
outlets concentrated in Guangzhou, Shenzhen and neighboring cities like
Dongguan and Zhuhai. In 2004 *Dairy Farm* began a joint venture in
Shenzhen and since then has opened 100 stores as a franchise operation
in which they hold a 65% interest.

Taiwan-based *XiShiduo (C-Store)* has 72 convenience stores in the
Guangzhou area. Most of them are located in up-market communities.
Management have recognized the potential for stocking imported items and
recently placed prominent point of sale displays promoting 'imported
items' in 69 of its stores. Currently, imported items account for 5% of
their total sales. Origins of imported products are marked with their
national flags. The most popular imported items include candy, chocolate
and cookies presented in gift packaging. Plans are underway to establish
a branch office in Shenzhen and open more stores there along with the
possibility of adopting a franchise management approach in the future.

Hong-Kong based *OK Liya (South China) Convenience Store Ltd*. was
established in 2002, and operates 40 outlets. *OK* announced recently
their goal is to open more than 500 new outlets in the next three years.
About 80% of its sales were generated from the sale of food items, again
primarily packaged candies and chocolate.

**Other Major Southern China Retail Markets**

**Shenzhen** is the second largest city in the PRD and is conveniently
located at the main boarder crossing between Hong Kong and Guangdong. As
far as retail is concerned, Shenzhen leads the market in terms of
shopping mall quality, hypermarkets and modern retail supermarket
penetration.

Enjoying a Special Economic Zoning status and easy access to Hong Kong
and Macau, Shenzhen has attracted a large affluent migrant population
from all over the mainland and abroad. It has also benefited from the
recent Closer Economic Partnership Arrangement (CEPA) between Guangdong
and HK SAR. CEPA has helped many trans-border operators move their
products more freely *(some estimates say that around 50 percent of all
food products imported into Hong Kong are immediately shipped to the
mainland).*

Shenzhen is the headquarters for *Wal-Mart* in China and the same goes
for *Jusco* and other large local operators such as *CR-Vanguard,
Rainbow, A' Best and Renrenle*.

Retail market growth in the downtown area of Shenzhen has slowed
recently as it nears the saturation point. However, ambitious plans are
now underway to expand across the mainland. International retailers such
as *Wal-Mart*, *Carrefour, Metro, Jusco* are now in a virtual race with
HK based *Park'N Shop*, *CR Vanguard* and domestic operators to win
market share in China's emerging markets as they quickly develop. Many
have already set up stores in satellite cities around Shenzhen such as
in **Longgangand Nanshan** *district*. Supermarkets continue to be the
most common retail format, but hypermarkets are gaining in popularity
and are now present in most medium and large-sized cities.

PRD cities experiencing the fastest growth include **Dongguang, Zhuhai,
Zhongshan** and **Foshan.** Others that will likely follow suit include
Zhanjiang, Shantou and Huiyang as they are seen as fast emerging
markets.

In nearby provinces such as Fujian and Hunan, **Xiamen** and
**Changsha** are also seen as attractive locations for retailers. In the
near future, **Quanzhou, Zhangzhou, Jinjiang** in Fujian, and **Loudi,
Yueyang** in Hunan are also recognized as high potential markets.

With this growth in mind many retailers such as *Wal-Mart, Carrefour and
Jusco* have already established large purchasing centers in Shenzhen to
support American, French and Japanese product standards and sales
management principles into their southern China operations.

Regional supermarkets and hypermarkets purchase products from importers,
wholesalers and distributors, because they face difficulties in
obtaining and/or transporting such items into the mainland. Some lack
the knowledge and resources to source imported foods and beverages, so
many of them use agents in HK and ship products into Shenzhen or other
regional distribution centers.

This demand allows importers and distributors to avoid paying VAT and
customs duties that they would normally be exposed to in the HK retail
market. This practice has created a "grey channel" that makes it
difficult for U.S. exporters and most western-style supermarkets to
source from, because they need proper invoices and health certificates
before they can stock such products on their shelves. The ATO offices in
China are encouraging U.S. companies to do their homework and develop
direct trade relationships with buyers on the mainland to avoid this
unofficial 'grey channel' and look more towards long-term relationships
within the mainland.

Domestic competition is also rising. Local operators in Shenzhen
include: *CR Vanguard, Rainbow, Park'N shop and A.Best as well as
ShuiBao;* all likewise plan to open more stores throughout Guangdong to
retain their market share. However, they still lag behind the larger
foreign operators in terms of management expertise and capital strength.

Another trend in the South is the upgrading of traditional wet markets.
Local authorities and consumers alike will likely continue to purchase
daily food items from this traditional retail channel at least into the
near future.

**Profile of the key retailers**

Retailers introduce imported food items to differentiate themselves from
others and enhance the store image. Every so often, these retailers will
launch 'in-store food festivals' and promotions to attract more traffic.
Many U.S. imported food items are available on the shelves of the key
retailers in South China. *Jusco, Metro and Sam's Club* are the best
venues for U.S. imported products sales while other retailers carry
fewer SKUs. Some branded items are selling well in these hypermarkets
and supermarkets. Popular U.S. food items include Sunkist oranges,
Washington apples, Northwest cherries, Alaska seafood, and U.S. poultry
as well as various grocery items such as breakfast cereal,
fruit/vegetable juices, spaghetti sauces, candy and wines etc.

***Wal-Mart:***

*Wal-Mart* continues to aggressively open new stores with the goal of
penetrating into mainland second- and third-tier cities. Up to now,
*Wal-Mart* has opened 90 stores in the mainland, 26 in the South alone.
It is notable that *Wal-Mart* has now 13 stores in Shenzhen and five in
neighboring cities such as Dongguan, Foshan, Shantou and Maomin, yet
none in Guangzhou. It is estimated that several new stores will be
opened in other second- and third-tier cities across Guangdong including
Foshan, Huiyang, Shaoguan and Zhanjiang by year's
end.![](media/image11.png){width="2.651388888888889in"
height="2.073611111111111in"}

*Wal-Mart's* supercenter called Sam's club warehouse store has gained a
good reputation in introducing imported food to local consumers. To
date, three Sam's Clubs have been opened, including one in Shenzhen, one
in Beijing, and another in Fuzhou. The Shenzhen store is reported to be
one of the most profitable Sam's Club stores in the world.

Three supercenter stores have been opened in Xiamen, four in Fuzhou and
one each in Jingjiang, Quanzhou and Zhangzhou respectively. The
company's headquarters for the mainland is located in Shenzhen. Last
year, the company celebrated its 10th anniversary in China.

To upgrade its supercenter stores' image, *Wal-Mart China* jointly held
an American Food Festival in its 32 selected high-profile stores in 17
cities with the support of the ATO offices last summer. Later they
reported sales of U.S. foods were valued at USD206,748 during the
promotion. They also anticipate sales for U.S. food products will
increase by 10% in the coming 12 months. *(For more details, please
refer to [GAIN report
CH7602](http://www.fas.usda.gov/scriptsw/AttacheRep/attache_lout.asp))*

***Metro***:

This German chain, regarded as the third largest retailing group in the
world, opened its first cash-and-carry hypermarket in Guangzhou in
January 2006. Today, they have 34 stores in the mainland and three in
Guangdong including Guangzhou, Shenzhen and Xiamen and two new stores
are planned for Quanzhou and Shenzhen. Imported food items in large
package sizes could be found on the shelves. Metro is also well-known
for its imported meat section. Wines from France, Italy, Australia,
Chile and the United States are also available.

***Carrefour*:**

Carrefour's headquarters for southern China is located in Guangzhou.
They claim their sales volume has increased by 25 percent from 2005 and
expect the same for 2007. Today they have 103 stores in China, with 22
in the South. By the end of 2005, this French-based giant had 12 stores;
in 2006 they opened anther 10 new ones in the cities of Shenzhen,
Changsha, Foshan, Zhuhai and Xiamen. Stocking imported items such as
fruits, snacks, biscuits, wines, gift packages, etc., but generally
speaking they carry fewer SKUs compared with Jusco and Metro.

***AEON-Jusco*:**

*Jusco* is a key retailer in Southern China adopting a Japanese GMS
(General Merchandise Store) merchandising approach. *AEON Jusco* stores
have an excellent reputation locally for carrying high quality, imported
foods.

![](media/image12.png){width="2.6194444444444445in"
height="1.9527777777777777in"}

Their target customers are mid-to-high income consumers. *Jusco* stores
encourage a wide variety of food categories and also cater to the
expatriate community in the Pearl River Delta. The management of these
stores is also very eager to carry U.S. food and beverage products to
meet the demands of their customers. Customer traffic in Shenzhen stores
typically exceeds 20,000 shoppers per day.

Last year Jusco worked with the ATO Guangzhou office to hold an American
Food Festival in its 11 supermarkets. It reported sales in excess of
USD295,480 (over RMB2 million) during this the two-week promotion, up
30% from the previous year. They also expect sales of U.S. products will
continue to increase in the coming year. *(For more details, please
refer to GAIN report
[CH7614](http://www.fas.usda.gov/scriptsw/AttacheRep/attache_lout.asp)).*

***Trust-Mart***:

With over 100 stores in mainland China and 29 in the south, Trust-Mart
is one of the biggest retailers in the country. Trust-Mart recently sold
a 35% stake in its China business to Wal-Mart. This Taiwanese company
has 19 stores in Guangzhou, four in Shenzhen and one in Changsha, as
well as others in the second-tier cities such as Dongguan and Zhanjiang.

***CR Vanguard***

As one of China's leading retail chain operators in China, this HK
operator manages supermarkets, supercenters and superstores under the
*Vanguard* brand name. In a recent interview, one of their managers
stated he "foresees a new format in the future called their 'super
center plus', which means a new format introducing more licensee shops
inside the *CR Vanguard store*, aimed at aligning licensed shops to
trade on their first floor where customers are more price-sensitive.
Generally speaking, *Vanguard* targets customers likely to buy local
produce; however increasingly, higher income shoppers are beginning to
show interest in high-quality U.S. imported foods.

*Vangurd*'s *Ole store* in Shenzhen has been successful in introducing
imported foods such as cheeses, chocolates, coffee, wine, liquor,
biscuits and fresh fruits at higher prices. Undermining this early
success is an unstable supply chain and lack of promotion initiatives to
support further demand growth.

**Fujian Province & Xiamen**

Fujian Province's retail market, including convenience stores, is also
rapidly expanding. Fuzhou and Xiamen are the two key markets for
imported foods. Quanzhou, Zhanzhou, and Jijiang are the emerging markets
that most retailers have targeted including Wal-Mart, Carrefour and
Metro. Carrefour was the first to open with two supermarkets on in
Fuzhou city and the other in Xiamen.

Currently *Wal-Mart* has four supercenter stores in Fuzhou and three
stores in Xiamen. All carry imported food items. It has been said that
Xiamen's *Wal-Mart store* recorded the 3^rd^ highest turnover in a day
(USD789,470 with only a 12,000 square meter layout). *Wal-Mart* plans to
open two more stores in Xiamen by year's end.

While today there are only 150 convenience stores in Xiamen, industry
analysts believe it has the capacity for one convenience store per every
3,000 inhabitants; that equates to a potential of 400 stores to satisfy
the population of 1.2 million. *Beatrice* is locally regarded as the
leading operator in this retail sector and is headquartered in Xiamen.
Opening its first store in 1997, the company now has 27 local stores.
They also recently opened *Beatrice* stores in Suzhou (70), Chengdu (2)
and Guangzhou (15 -- but these are franchises rather than company-owned
and operated).

Stores in each city only purchase what they believe best meets local
demand. *Beatrice* normally sources their imported items from brokers.
Before 2003, all *Beatrice* stores' individually covered 200-300 square
meters. Originally, the stores carried fresh fruits, but management
discovered customers preferred to source them from local wet-markets.
The most popular items they sell include instant breakfast, salty
biscuits, nuts, preserved plums, candy, and juices. In their newest
stores, U.S. imported food items are available including frozen chicken,
almonds and pistachios. After *Wal-Mart, Carrefour* and *Metro* entered
Xiamen, *Beatrice* adjusted their business focus and today open smaller
operations typically in the 80-100 square meter floor space range and
typically located near hotels and restaurants and in higher income
neighborhoods.

In comparison, *7-11* stores (with no presence in Xiamen) typically
cover 30-50 sq. meters. Eighty percent of *Beatrice* products are food
items and the remainder tend to be daily household consumer items.
*Beatrice* targets young working adults (18-40 years) with higher
disposable incomes. Popular food items include fresh baked bread, sweet
corn and preserved eggs.

**General Market Entry Tips**

It is important to conduct taste tests locally to gauge the market's
response to new flavors and packaging design before launch. Leveraging
strong distributors as your key channel is crucial for U.S. exporters.
This approach would ideally involve the following steps:
![](media/image13.png){width="2.3055555555555554in" height="1.725in"}

1.  Market research analysis to identify key markets (which cities and
    which retail outlets best reflect your product's target customers).

2.  Capability to negotiate with ideal retailers and gain best shelf
    placement

3.  Point of sale displays that attract target customers

4.  In-store promotions to raise awareness and encourage taste testing
    with trial offers as the early adoption phase in building your
    brand.

To best manage this process, a realistic marketing plan needs to be
prepared reflecting the important steps identified above to ensure early
and longer term success.

# III. Competition

The most serious competition for U.S. food exporters comes from local
and joint venture food producers and processors. The quality of fruit
and vegetables in particular has increased rapidly, and many local
traders now contend that the best of China's fruit is similar in quality
to imports. The general lack of coherent marketing systems continues to
plague China's industry, however, making it difficult to source
significant quantities of products with consistent quality. While
oranges similar in quality to U.S. navel oranges are available, the
transaction costs of dealing with large numbers of small farmers, then
sorting and packing raises the final market price to levels similar to
imports. The formation of farmers' voluntary organizations such as the
Zhejiang Pear Association has the potential to reduce these problems,
but such organizations are still relatively new.

![](media/image14.wmf){width="4.666666666666667in"
height="3.252083333333333in"}

Competition is equally intense for processed foods, although differences
in taste mean that the primary competition comes from third country
competitors or joint venture manufacturers. Shelves may appear to be
stocked with famous foreign brands such as Kraft, Lays and M&Ms, but
close inspection reveals that most of these products are manufactured
locally or in Southeast Asia. This allows manufacturers to cash in on
brand identification, take advantage of low labor costs in China, and
adapt their products to Chinese tastes and labeling regulations, all at
the same time. Years of food adulteration scandals have made Chinese
consumers cynical, however, and most will attribute a higher level of
quality safeguards to food products that are genuinely imported.

![](media/image15.wmf){width="3.9166666666666665in"
height="3.21875in"}The general trend to date has been for local
manufacturers to push imports out of the price-driven mass market and
into niche markets where quality and novelty are more important than
price. This has already happened to varying degrees with pet food (Mars'
locally manufactured Pedrigree and Whiskas labels dominate the middle
market), wine (Chinese labels dominate at the low end), apples
(Washington State apples sell extremely well in gift markets) and
confectionery (Mars). Growing local competition has emerged for table
grapes, and domestic sweet cherries, lemons and almonds appear to be
improving in both volume and quality, albeit from a very low base.
Certain products, particularly western-style prepared foods, face little
or no competition from local manufacturers, constituting a niche unto
themselves. Improvements in quality and increased efforts at brand
development are allowing Chinese companies to compete more effectively
for some niche markets, but local manufacturers face the same
distribution problems as imported products, as well as a high level of
skepticism among consumers.

Third country competition comes in two distinct areas: commodity-type
products such as frozen meat, poultry, seafood and fresh fruit, and
western-style niche products such as canned and prepared foods and
ethnic cuisines and ingredients. Competition in the fresh and frozen
meat, fruit and vegetables arena, as well as dairy, comes primarily from
Pacific rim neighbors, including Thailand, New Zealand, Australia,
Canada and Chile, as well as South Africa and Brazil. Competition for
western-style prepared foods is much more global, with competitors
playing to their strengths in individual products such as olive oil,
wine, pasta and pasta sauces.

The U.S. remains the largest single exporter of consumer-oriented food
to China, with a 20% share of China's total imports in 2006, and is the
only exporter with a presence in most categories. China is attracting a
growing level of interest from other countries, however, and has signed
or is negotiating bilateral trade pacts with many of its neighbors. The
following is a brief outline of key products and competitors.

+-------------------+--------------------------------------------------+
| **Top Products    |                                                  |
| and Competitors** |                                                  |
+-------------------+--------------------------------------------------+
| **Oranges**       | New Zealand, South Africa                        |
+-------------------+--------------------------------------------------+
| **Grapes**        | Chile                                            |
+-------------------+--------------------------------------------------+
| **Apples**        | Chile, New Zealand                               |
+-------------------+--------------------------------------------------+
| **Cherries**      | New Zealand                                      |
+-------------------+--------------------------------------------------+
| **Lemons and      | New Zealand                                      |
| Limes**           |                                                  |
+-------------------+--------------------------------------------------+
| **Red Meat        | Canada, Denmark, New Zealand, Australia          |
| (f/c/f)**         |                                                  |
|                   | *Currently beef and related products from the    |
|                   | U.S. are not allowed in China*                   |
+-------------------+--------------------------------------------------+
| **Breakfast       | United Kingdom, Australia, Korea                 |
| Cereal**          |                                                  |
+-------------------+--------------------------------------------------+
| **Cheese**        | New Zealand, Australia, EU                       |
+-------------------+--------------------------------------------------+
| **Frozen          | Canada, New Zealand                              |
| Processed         |                                                  |
| Products**        |                                                  |
+-------------------+--------------------------------------------------+
| **Frozen Corn**   | Australia, EU                                    |
+-------------------+--------------------------------------------------+
| **Dairy (not      | New Zealand, Australia, France                   |
| incl. cheese)**   |                                                  |
+-------------------+--------------------------------------------------+
| **Poultry**       | Brazil                                           |
+-------------------+--------------------------------------------------+
| **Tree Nuts**     | Russia, Korea (chestnuts), Iran (pistachios),    |
|                   | Mongolia                                         |
+-------------------+--------------------------------------------------+
| **Premium         | Switzerland, Belgium, Italy, France              |
| Chocolate**       |                                                  |
+-------------------+--------------------------------------------------+
| **Premium Ice     | France, New Zealand                              |
| Cream**           |                                                  |
+-------------------+--------------------------------------------------+
| **Seafood**       | Russia, North Korea, Canada, Norway, Japan       |
+-------------------+--------------------------------------------------+
| **Wine**          | Chile, France, Australia, Italy                  |
+-------------------+--------------------------------------------------+
| **Ginseng**       | Canada, Korea                                    |
+-------------------+--------------------------------------------------+

# IV. Best Product Prospects

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

**- Nuts and dried fruit (prunes, raisins)**

**- Seafood**

**- Poultry meat**

**- Red meat (U.S. beef and related products are currently
[not]{.underline} permitted entry into China)**

**- Frozen vegetables (esp. sweet corn)**

**- Infant formula**

**- Baby food**

**- Dairy products (cheese and butter)**

**- Baking ingredients and bread bases**

**- Frozen potato products**

**- Fresh fruit (oranges, apples)**

**- Premium ice cream**

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

**- Fresh fruit (cherries, pears)**

**- Processed/dried fruit (blueberries, cranberries)**

**- Mexican, Indian food**

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

**- Organic foods (niche market)**

**- Functional foods**

# V. Post Contact and Additional Resources

FAS has five 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

24^th^. Floor, Suite #2425

Phone: (8610) 8529-6418

Fax: (8610) 8529-66922

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

**Agricultural Trade Office, Chengdu**

US Consulate General, Chengdu\
Agriculture Office

4 Lingshiguan Lu\
Chengdu, Sichuan, PRC 610041

Phone: (86) 1380-821-2410

Fax: (8628) 8513-8698

E-mail: <atochengdu@usda.gov>

**VI.** **Other Relevant Reports:**

**[Business Etiquette
Report](http://usdachina.org/info_details1.asp?id=369)** GAIN Report
#CH4835

**Emerging City Markets**

-   [Hangzhou](http://usdachina.org/info_details1.asp?id=1714) GAIN
    Report #CH7819

-   [Suzhou](http://usdachina.org/info_details1.asp?id=1712) GAIN Report
    #CH7816

-   [Wenzhou](http://usdachina.org/info_details1.asp?id=1728) GAIN
    Report #CH7814

-   [Tianjin](http://usdachina.org/info_details1.asp?id=1716) GAIN
    Report #CH7417

-   [Emerging City Markets: The Next Economic
    Miracle](http://usdachina.org/info_details1.asp?id=1619) GAIN Report
    #CH7403

**[Jusco In-Store Promotion Evaluation Report
2007](http://www.fas.usda.gov/scriptsw/AttacheRep/attache_lout.asp)**
GAIN Report #CH7614

**Market Development Report**

-   [Qingdao](http://usdachina.org/info_details1.asp?id=1213) #CH6414

-   [Harbin](http://usdachina.org/info_details1.asp?id=1106) #CH6406

**[Wal-Mart Great American Food In-Store Promotion
2006](http://www.fas.usda.gov/scriptsw/AttacheRep/attache_lout.asp)**
GAIN Report #CH7602 (referenced page 39)

[^1]: Sales include food and non-food items

[^2]: SOE= State-Owned Enterprise

[^3]: Joint venture with China Resources Vanguard