Required Report - public distribution

**Date:** 3/15/2006

**GAIN Report Number:** CH6402

CH6402

**China, Peoples Republic of**

**HRI Food Service Sector**

**Mainland China HRI sector Annual Report**

**2006**

**Approved by:**

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

U.S. Embassy, Beijing

**Prepared by:**

Yang, Mei

**Report Highlights:** As one of the earliest sectors opened to foreign
investment, China's Hotel Restaurant and Institutional (HRI) sector
continued to enjoy phenomenal and sustained growth in 2005 with revenues
totaling US \$110 billion. While the sector continues to undergo
significant change, branding, franchising, off-site catering,
informational technology, and portion control are all increasingly
playing a role. Prosperous urban consumers are also changing with
preferences moving rapidly toward healthy, nutritious, fast, and safe
menus. High-end HRI markets have moved well beyond traditional major
markets of Beijing, Guangzhou and Shanghai and into China's major
Emerging City Markets (ECM).

Includes PSD Changes: No

Includes Trade Matrix: Yes

Annual Report

Beijing \[CH1\]

\[CH\]

Table of Contents

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

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

[B. Sub-sector Profiles 5](#b.-sub-sector-profiles)

[1. Hotels and Resorts 5](#hotels-and-resorts)

[2. Restaurants 6](#restaurants)

[3. Fast Food 7](#fast-food)

[4. Institutional Food Service 7](#institutional-food-service)

[C. Regional Market Profiles 8](#c.-regional-market-profiles)

[Beijing Market Summary 8](#beijing-market-summary)

[Food Service 9](#food-service)

[Restaurants 10](#restaurants-1)

[Hotels 11](#hotels)

[Shanghai Market Summary 11](#shanghai-market-summary)

[Food Service 12](#food-service-1)

[Restaurants 12](#restaurants-2)

[Hotels 13](#hotels-1)

[Guangzhou Market Summary 14](#guangzhou-market-summary)

[Food Service 14](#food-service-2)

[Restaurants 15](#restaurants-3)

[Hotels 16](#hotels-2)

[D. SWOT Analysis for US Food Products
17](#d.-swot-analysis-for-us-food-products)

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

[A. Market Structure 18](#a.-market-structure)

[1. Target Population 18](#target-population)

[2. Distribution 18](#distribution)

[B. Entry Strategy 20](#b.-entry-strategy)

[1. Overview 20](#overview)

[2. Marketing, Sales and Education 21](#marketing-sales-and-education)

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

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

[5. Entry Tips 23](#entry-tips)

[Part III: COMPETITION 23](#part-iii-competition)

[Part IV: BEST PRODUCT PROSPECTS 26](#part-iv-best-product-prospects)

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

# Part I. Market Summary

## A. Market Overview: 

As one of the earliest sectors opened to foreign investment in the
1980's, China's Hotel Restaurant and Institutional sector developed
slowly until taking off in the early 90's. Driven by rapid and steady
economic growth, rising urban incomes, and sustained prosperity, the
sector has continued to enjoy double-digit expansion for each of the
last 15 years. A growing urban consumer base combined with rising
incomes has made the sector a key consumption driver. According to the
Ministry of Commerce (MOFCOM), despite Avian Influenza, SARS, and other
scares, HRI revenues totaled \$109.53 billion in 2005 or 16.8% over last
year, accounting for 13.9% of total domestic consumption sales revenue.

![](media/image2.jpeg){width="4.888888888888889in"
height="2.454861111111111in"}　　

China's HRI market is 159 times larger now than it was in 1978, and is
characterized by: Annual per capita consumption of RMB 677 (US \$84.20)
in 2005, or 17.6% higher than any previous level attained; Stable market
conditions with less volatile growth; High-risk investment and expansion
less common; Direct franchising is on the rise with profit margins
averaging near 50%; Value of branding widely accepted and chain
stores-franchising are key HRI elements; Consumer preference are moving
toward healthy, nutritious, and safe menus.

HRI sales typically peak in December, and hit bottom in April. Working
social events, outings with family & friends, biz entertaining all drive
HRI revenue. As holidays tend to be concentrated in the last four months
of the year, such as Mid-Autumn Festival, Christmas, National Day, and
Solar New Year growth is more skewed to the second half of the year.

Consumers with the highest disposable incomes tend to be concentrated in
cities along the Pearl River Delta, Shanghai and Beijing. Perhaps not
surprisingly, in 2004 Shanghai's per capita dining out consumption
levels were 3 times the national average with Tianjin, Beijing and
Guangdong Province 2 times the average. However, Guangzhou at US
\$515.30 per capita spent on dining out annually is clearly the
undisputed leader at 7 times the national average in China. In Shanghai,
consumers increasingly prefer to save time spent on cooking at home,
even if on average it's US \$7 more expensive to eat out.

Chinese families like to celebrate holidays and personal milestones by
going out to eat at restaurants, because most urban Chinese still live
in small apartments with limited kitchens. Western-style fast food
restaurants often run birthday promotions for children, while hotel
restaurants target families. A family that might spend RMB 600 (US \$74)
for a week's food at home will easily spend RMB 300 (US \$37) per person
for a weekend meal, according to one Shanghai restaurateur who targets
such business. Prosperity is spreading as the economy develops, bringing
new tastes and higher-end dining to a much larger segment of the
population. In fact, cities all across the country such as Qingdao,
Dalian, Xiamen, Wuhan, Changsha, and others are all enjoying China's
considerable economic prosperity.

Official government and business meals comprise a huge and growing
market. The importance of 'face' dictates hosts pour out plenty for
expensive meals, often featuring high-end imported or domestic products.
Many more dishes than could ever possibly be consumed at one sitting are
ordered since such meals are expensed and cost is not a factor.
Restaurateurs are paying more attention to atmosphere, venue and décor
to attract high-end business. In fact, one informal study completed last
year estimates at least a quarter of the sector's \$109.53 billion was
composed of expensed meals and beverages in 2005. Social, business and
family occasions are all celebrated with a meal, where preparation,
quality, and ingredients are often topics of passionate focus and
discussion. Western and other cuisines including imported food are
increasingly figure prominently into the HRI mix.

Insiders also cite curiosity and a growing taste for Western food as key
drivers for food imports. In addition to fast food, Chinese are being
drawn to more sophisticated Western-style food. Head Chef Shan, Chun-Wei
of Maxim's de Paris, says most of the clientele at his Beijing
restaurant used to be foreigners, but since 2004 about half are Chinese,
and at the current rate expects the percentage to be nearer 75% by 2008.
"Eating imported food at business-social events is regarded as
conferring high social status here," says Chef Shan.

There has also been a large increase in overseas Chinese from Taiwan,
Hong Kong and other places, as well as expatriates from Australia,
Europe, Japan, Korea and the U.S. In some cities expatriate groups are
large enough to create a market for international food by themselves,
often introducing Chinese friends and associates to new tastes,
preparations and hygiene. Qingdao may be a good example where large
numbers of Korean expatriates have had a large influence on local
cuisine in recent years. The middle class has become more aware of
health and hygiene issues, propelled by SARS and Avian Influenza (AI)
scars, and a series of adulterated-unsanitary food scandals. This has
helped imported food indirectly as imports are perceived as safer; and
it supports larger, cleaner restaurants serving higher-quality and more
hygienic food. Fast food operators such as KFC, McDonald's, Pizza Hut,
etc., have managed to survive food scandals such as Sudan 1,
carcinogenic French fries, etc., by showing great flexibility in
localizing menus to maintain market position. Nevertheless, social
accountability is a new and key element for HRI operators in China,
domestic and foreign.

**Olympic Games Symbolize Global Integration:** The 2008 Olympic Games
should provide an opportunity to expose the China market even further to
the world. Beijing is the focus, but the impact will no doubt be felt
well beyond the capital in many other parts of China, especially Olympic
cities like Tianjin, Qingdao, Qinhuangdao, Shanghai, and Shenyang.
Dozens of new hotels are being built to accommodate the expected flood
of visitors, and chefs from around the world have been invited to train
local chefs to cook for athletes, tourists, and visitors. The Beijing
Olympic Organizing Committee adopted Western Kitchen food that will
reportedly account for as much as 70% of Olympic Village menu offerings,
with Chinese cuisine making up the remainder. Caterers and catering
service operators can apply for consideration as suppliers to the 2008
Olympics through an open-global tendering system.

2008 Olympic Games linked promotions are planned nationwide and many
Chinese tourists are expected to sample international food for the first
time as part of their Olympic experience. However, first and foremost,
Beijing's HRI sector will directly benefit with US \$2.2 billion in
incremental revenue expected in 2008. A recent provision stipulating
food service operators with capacities of 100 or more must have a
qualified nutritionist overseeing menu preparation. With China's
extremely low ratio of 1 nutritionist for every 900 people, Beijing is
desperate to meet the estimated deficit of 14,000 nutritionists in the
capital alone.

+--------------+------+---------------+----+---------+--------------+
| **Largest    |      |               |    |         |              |
| Restaurant   |      |               |    |         |              |
| and Hotel    |      |               |    |         |              |
| Companies in |      |               |    |         |              |
| 2004**       |      |               |    |         |              |
+--------------+------+---------------+----+---------+--------------+
| **Company    | *    | **Outlet Name | *  | **Loca  | **           |
| Name**       | *Sal | & Type**      | *O | tions** | Purchasing** |
|              | es** |               | ut |         |              |
|              |      |               | le |         |              |
|              |      |               | ts |         |              |
|              |      |               | ** |         |              |
+--------------+------+---------------+----+---------+--------------+
| Yum Group    | \$1  | KFC, Pizza    | 14 | N       | Direct from  |
|              | ,439 | Hut, Taco     | 00 | ational | manufacturer |
|              |      | Bell, A&W     |    |         |              |
|              |      | (Fast Food)   |    |         |              |
+--------------+------+---------------+----+---------+--------------+
| McDonald\'s  | \$75 | McDonald\'s   | 6  | N       | Direct from  |
|              | 7.58 | (Fast Food)   | 00 | ational | manufacturer |
+--------------+------+---------------+----+---------+--------------+
| Inner        | \$52 | Little Sheep  | 7  | N       | n/a          |
| Mongolia     | 4.85 | Hot pot       | 03 | ational |              |
| Xiaofeiyang  |      | (Family       |    |         |              |
|              |      | Style)        |    |         |              |
+--------------+------+---------------+----+---------+--------------+
| Inner        | \$34 | Little Tail   | 4  | N       | n/a          |
| Mongolia     | 1.31 | Sheep Hot Pot | 17 | ational |              |
| Xiaoweiyang  |      | (Family       |    |         |              |
|              |      | Style)        |    |         |              |
+--------------+------+---------------+----+---------+--------------+
| Jinjiang     | \$32 | Jinjiang,     | 1  | S       | Own buying   |
| Hotel Group  | 5.16 | Wanli, Xinya  | 60 | hanghai | subsidiary   |
|              |      | (Various)     |    | Region  |              |
+--------------+------+---------------+----+---------+--------------+
| Inner        | \$17 | Little Mu     | N  | North   | n/a          |
| Mongolia     | 8.18 | Sheep Hot Pot | /A | China   |              |
| Xiaomuyang   |      | (Family       |    |         |              |
|              |      | Style)        |    |         |              |
+--------------+------+---------------+----+---------+--------------+
| Chongqing    | \$14 | Chongqing De  | 2  | North   | Central      |
| Dezhuang     | 8.80 | Zhuang        | 40 | China,  | buying for   |
|              |      | (Family       |    | Ch      | own outlets; |
|              |      | Style)        |    | ongqing | franchisees  |
|              |      |               |    | Sichuan | buy locally  |
+--------------+------+---------------+----+---------+--------------+
| Chongqing    | \$14 | Little Swan   | 3  | N       | Central      |
| Little Swan  | 6.10 | Shi Fu        | 08 | ational | buying for   |
|              |      | (Family       |    |         | own outlets  |
|              |      | Style)        |    |         |              |
+--------------+------+---------------+----+---------+--------------+
| Taiwan       | \$12 | Dicos (Fast   | 3  | N       | Direct       |
| Dingxin      | 2.25 | Food)         | 83 | ational | importers    |
| Group        |      |               |    |         |              |
+--------------+------+---------------+----+---------+--------------+
| Quanjude     | \$12 | Quan Ju De    | 55 | B       | Central      |
| Group        | 0.36 | (Family Style |    | eijing, | buying from  |
|              |      | Peking Duck)  |    | S       | distributors |
|              |      |               |    | hanghai |              |
+--------------+------+---------------+----+---------+--------------+
| Zhongshang   | \$11 | Haigang,      | 54 | South   | Buy from     |
| Haigang      | 5.50 | Prince        |    | China   | distributors |
|              |      | (Family       |    |         |              |
|              |      | Style)        |    |         |              |
+--------------+------+---------------+----+---------+--------------+
| Qinma        | \$10 | Qinma Old Hot | 2  | N       | Central      |
| Cultural     | 2.23 | Pot (Family   | 62 | ational | buying for   |
| Food &       |      | Style)        |    |         | own outlets  |
| Beverage     |      |               |    |         |              |
+--------------+------+---------------+----+---------+--------------+
| Shanghai     | \$9  | Xinghualou,   | 34 | Sh      | Individual   |
| Xinghualou   | 1.27 | Xinya, others |    | anghai- | restaurants  |
|              |      | (Family Style |    | Yangtze | do own       |
|              |      | & Fast Food)  |    | Delta   | buying       |
+--------------+------+---------------+----+---------+--------------+
| Chongqing    | \$8  | Qi Hot Pot    | 1  | N       | Individual   |
| Huiyuan Hot  | 7.27 |               | 50 | ational | restaurants  |
| Pot          |      |               |    |         | do own       |
|              |      |               |    |         | buying       |
+--------------+------+---------------+----+---------+--------------+
| Shaanxi      | \$8  | Various       | 60 | Shaanxi | Pork,        |
| Xi\'an       | 5.45 | (Family       |    |         | chicken      |
| Catering     |      | Style)        |    |         | central      |
| Service      |      |               |    |         | supply       |
| Group        |      |               |    |         |              |
+--------------+------+---------------+----+---------+--------------+
| Chongqing    | \$8  | Cai Geng      | 1  | Ch      | Central      |
| Oriental     | 5.14 | Xiang         | 38 | ongqing | Purch        |
| Caigengxiang |      |               |    |         | asing-Direct |
|              |      |               |    |         | buying       |
+--------------+------+---------------+----+---------+--------------+
| Sales unit:  |      |               |    |         |              |
| Million USD  |      |               |    |         |              |
|              |      |               |    |         |              |
| Source:      |      |               |    |         |              |
| China        |      |               |    |         |              |
| Cuisine      |      |               |    |         |              |
| Association; |      |               |    |         |              |
+--------------+------+---------------+----+---------+--------------+

## 

## B. Sub-sector Profiles

### 1. Hotels and Resorts

Currently only slightly more than 20% of the hotels in China are
profitable according to industry insiders, and most of these are either
Joint Ventures or internationally branded-managed hotels. About two
thirds of the 200 five star hotels in China are foreign brands. However,
with continuing economic development and a rapidly expanding tourist
industry along with the 2008 Beijing Olympics and 2010 Shanghai World
Expo, China's hotel industry is embracing new market opportunities.
According to the latest National Tourism Administration statistics there
are more than 10,000 star-rated hotels in China, with business hotels
currently experiencing a boom. In addition to international management
services, vocational training efforts are being strengthened to meet
growing demand for food service workers. Most multinational hotel groups
continue to look at the use of value added products, although executive
chefs and purchasing managers continue to be driven mostly by price.
Imported food traditionally makes up 30-50% of the value of food
purchased by internationally managed five-star hotels although this can
vary greatly from city to city.

Most Chinese hotel chains are still state-owned, but many are being
forced to modernize management and develop efficient and profitable food
service operations. China's largest hotel group, the Jinjiang Group,
owns eight 5-star hotels in Shanghai and operates many others all over
China with reported sales of US \$300 million in 2004. Jinjiang spun off
the group's food purchasing unit into a subsidiary and hired overseas
consultants to modernize restaurant management. Chinese managed
five-star hotels buy far less imported food than internationally managed
ones, with \$350,000 the annual average for such properties.

![](media/image3.jpeg){width="5.083464566929134in"
height="2.541732283464567in"}Hotels in tourist destinations like
Beijing, Suzhou, Hangzhou, Xian, etc., are more likely to have larger
imported food budgets than business destinations like Dalian, Qingdao,
etc. Influence of Japanese and/or Korean cuisine in northern cities is
often significant in determining local tastes and food imports.

### 2. Restaurants

The high-end restaurant sector is growing exponentially, although from a
very low base. Restaurants specializing in non-Chinese food has tripled
since 2000 in Shanghai, from 130 to 380, and nearly doubled in Beijing
from 95 to 179. This market segment is more difficult to define and
serve than the 5-star hotel market given import volumes are lower, with
monthly expenditures typically running in the range of US \$7,500-30,000
per restaurant. Perhaps the most encouraging development is that more
Chinese-style restaurants are using imported products. The Greenery,
which specializes in modified foreign dishes, spends hundreds of
thousands dollars a month on imported food. Louwailou, a tourist
restaurant on West Lake in Hangzhou, only began buying imported food
products in 2001. However, it's cuisine is 100% Chinese, but by the end
of 2004 it has spent more than \$20,000 a month on beef fat; goose, duck
and chicken feet; turkey; soup; wine; butter; cheese, and jam.

The appearance of 'fusion and modern Chinese' cuisines are helping
create a new up-market tier in the Chinese Kitchen market segment, with
higher checks and margins to justify imported food use. Chef Jereme
Leung, at 'The Whampoa Club' on Shanghai's Bund has deliberately tried
to create premium 'Shanghainese Cuisine' via a standalone restaurant
outside a hotel where visiting foreign dignitaries or Chinese CEOs can
comfortably be entertained. Another example of the internationalization
of Shanghai's food map is the arrival of Hooters in 2004 although it
took 3 years of market study for Hooters to finally make its move. The
Group plans to move north to Beijing after securing the Shanghai market.

Successfully launching operations in Beijing and Shanghai in 2003, FLO
Brasseries, the French restaurateur recently announced plans to bring
new restaurant concepts to China this year with their higher end brands
'Hippopotamus and Romain' for French Cuisine seekers. Hippopotamus
mainly serves steaks and barbecued foods and has 81 outlets world-wide
while Romain is an Italian or South of France cuisine concept so far
only present in France.

### 

### 3. Fast Food

Yum Brands and McDonald's are by far the largest fast food chains in
China. Yum has more than doubled its outlets over the past four years,
from 650 to 1908 with 1,758 KFCs, 150 Pizza Huts, several Taco Bells and
A & W's completing the mix. McDonald's has boosted its presence to over
666 outlets and plans to open up to 100 new outlets annually from 2006.
After 15 years of successful business by rivals KFC and McDonald's in
China, Burger King finally entered the market in Shanghai with its first
directly managed outlet in June 2005. The company plans to develop the
East China market first, then expand North to Beijing. Starbucks entered
the China Market in 1999, and currently operates 165 coffee shops in 18
cities through franchisees although a transition to direct management of
what the company predicts will become its largest future market.
Taiwanese Dicos is another large and important player, and Yonho a
traditional Chinese fast food chain that recently acquired Taiwan brand
"98 Pizza" plans to expand outlets in the Yangtze Delta Region from
2006.

These companies import 5-10% of their food, a lower percentage than
previously, although the volumes are not small. Often the suppliers of
the companies above aren't Chinese domestic companies, rather
multi-national manufactures in China. These companies have created their
own standalone supply chains that overlie the domestic Chinese market.

![](media/image4.jpeg){width="5.166535433070866in"
height="2.5929133858267717in"}Many new ethnic food chains are appearing
such as Mongolian Hot Pot, dim sum, Beijing/Shanghai style dumplings,
Cantonese, and Sichuan food in new geographic locations. And, successful
chains are quickly and more often than not shamelessly imitated. Food
courts in malls have also become extremely popular although virtually
none of these use imported products. A recent study found China's per
capita HRI consumption is about 1/20 of that in the US. Considering the
level of economic development, purchasing power, and percentage of fast
food expenditures compared to total HRI revenue (60% in the US, 20% in
China), it appears the fast food sector in China has room for
development.

### 4. Institutional Food Service

In 2004 as much as 40% of HRI expenditures came from institutional food
service. Working lunches, student meals, catering services for office
and factory workers, travelers, exhibitions and event visitors are all
contributing to a growing HRI segment. Institutional food service has
gradually developed into a real market with several successful players
such Shanghai's Fu Ji Food and Catering Service listed on the Hong Kong
Stock Exchange in 2004 after reporting doubling of revenues in just one
year. International companies such as Eurest, Sodexho, and Gate Gourmet
have joined the market with a number of others reportedly on the way.
However, absence of regulations, standards and transparency continues to
hinder further development of this segment and to some extent prevents
international brands from entering the market. Recently issued catering
business guidelines attempt to streamline procedures and at the same
time tighten sanitary and health standards and awareness.

Sodexho first entered the market by winning the contract to serve
Shanghai's American School catering needs in 1995, and now has over 250
food service operation points in 10 cities with revenues of more than US
\$38 million in 2005. More than 90% of their business is a result of
offering on-premise or built-in catering services to various production,
R&D and other multinational corporate institutions and organizations.
The growth of international schools catering to children of resident
expatriates has given imported food a wedge in the market. There are now
more than 25 such schools in Shanghai, 15 in Beijing and seven in
Guangzhou. Meal budgets average RMB 25 (US \$3), and allow for the use
of imported food like salmon, and other high-end products to be included
several times a month.

Food service clients include cafeterias at schools, government bureaus,
hospitals, factories and other businesses. In the past, when most
institutions were state-owned, each ran its own cafeteria, but now
services are outsourced. For example, Fu Ji's client base includes such
notables as: electronics manufacturer Panasonic, Shanghai Public
Security Bureau (police) and the Suzhou Industrial Park. Individual meal
budgets are low and imported ingredients seldom make it into the mix.
However, Chinese workers demand a warm meal for lunch and clients are
increasingly more demanding because a good cafeteria attracts and keeps
good employees. Airline catering has expanded along with China's high
growth airline industry, and is now estimated to generate revenues of
RMB 2 billion or more than \$240 million annually. Imported food content
ranges up to 50% on international flights, but is much, much lower for
domestic flights, and includes products like juices, nuts and dried
fruit.

China's catering ind![](media/image5.jpeg){width="5.166666666666667in"
height="2.5833333333333335in"}ustry is in its infancy, yet over the last
decade momentum has been building, first in the urban areas of Beijing,
Shanghai, and Guangzhou as well as more recently in other high traffic
cities for business and tourism. A rough estimate puts the number of
Chinese Kitchen catering businesses near 1 million, and in Shanghai
catering companies with more than US \$10 million in annual revenues
continue to emerge. Local surveys indicate 90% of consumers would like
to try catered food or catering services provided the food is delivered
in both a timely and hygienic way.

## C. Regional Market Profiles

### Beijing Market Summary

As China's capital, Beijing is a large metropolis with numerous
political, diplomatic, cultural, educational, R & D and business
institution elite. In 2004, the city enjoyed a US \$53 billion GDP and
urban per capita disposable income of US \$2,000 annually. Large events
and international conferences happen frequently, with resulting
socialization normally taking place over lunch, dinner and banquets.
With unique World Heritage historic sites such as the Forbidden City,
Summer Palace, Great Wall, etc., Beijing played host to 120 million
Chinese and 4 million overseas tourists in 2004. Beijing is one of the
major HRI markets in China, and is the fastest and largest growth sector
among consumer businesses here. At the end of 2004, there were over
40,000 food services outlets, employing nearly 400,000 people in
Beijing. Retail HRI sales revenue here has been grown at an average of
20.1% 1980 to 2000. Beijing's HRI sector had \$2.5 billion in HRI sales
in 2004 and continues to enjoy growth in the number of outlets, and
trade volume. In 2004, 94% of the outlets were privately operated with
local as well as overseas Chinese invested businesses emerging as key
market players. Branding and chain operations appear to be two high
growth areas for the future, and with the 2008 Olympics just two years
away, the city's hotel, restaurant and catering sectors are all gearing
up with a more focused and aggressive marketing effort. The sector is
looking at a healthier, service oriented, and environmentally friendly
approach in hopes of capturing a slice of the Olympic Games HRI revenue
pie expected to exceed US \$2.2 billion.

Beyond Beijing, with continued economic expansion, rising incomes, and
growing tourism in North China, Qingdao, Dalian and Harbin have all
quickly emerged as major restaurant heavy destinations. ATO Beijing
seized the opportunity to partner with local HRI operators in Harbin to
promote American food via the Chinese Kitchen. Based on the response
from local media and consumers US food products prepared Chinese style
were a big hit in Harbin last year.

#### Food Service

Food service-catering in Beijing can be divided into 2 major cost
categories:

1\. Low and mid-end market segments are strongly dominated by Lihua Food
Services, developer of no-outlet food delivery service in modern China.
Lihua reportedly provides food delivery service to workers at more than
100 Embassies, major sporting and other events such as Spring Festival,
National Day and express train service, etc. Almost no one is untouched
by the long reach of this food service giant since most office workers
in Beijing have their lunch supplied by Lihua at least once a week or
more. The operation has a well developed website with an online ordering
and online bidding platform for food ingredient and packaging material
suppliers. Lihua's advantage is price, with meals starting from less
than US\$ .80 including free delivery, meat and vegetable dishes plus
soup and rice. The enormous purchasing and distribution power of the
operator has made Lihua the 'King of Catering' in Beiijng. The company
now operates more than 80 service centers in 11 major cities throughout
China, but Beijing remains the largest and most important focus.

2\. High-end institutional food service continues to develop in Beijing
but several large players such as Sodexho, and Eurest dominate. Pizza
Hut and several others offer Home Delivery service that is also changing
the way catering is evolving in this market. Pizza Hut Home Delivery
offers a full range of meals by phone delivered within 30 minutes. The
company also has a membership based online ordering site where set menus
for 2 are priced around US \$10 plus a \$ 0.50 delivery charge. Papa
John's Pizza followed suit in offering free delivery when it entered the
market last year. While this niche market is still small it's growing
rapidly as consumers become more sophisticated and time conscience. In
addition, most Beijing neighborhood restaurants, Chinese and other
cuisines, offer off-premise boxed meal delivery on a cash and carry
basis within limited geographic areas. Increasingly, neighborhood food
service delivery is a way for restaurants to capture business during
winter or bad weather days as well as attract new and repeat customers.

The 2008 Olympic Game's will produce a huge catering market opportunity
for businesses in Beijing. In addition to the actual venues and Olympic
Village, the entire city of Beijing should provide enormous growth.
Organizing Committee estimates predict more than 270,000 players,
officials, staff, media and 7 million visitors will have to be fed.
Another forecast puts the number of tourists in excess of 125 million in
2008, with 5 million coming from outside China's borders. Catering
services within the Olympic Village will be 24-hour operations, with
22,000 people eating meals daily, 50,000 meals per day, or 6,000 per
hour consuming 100 tons of food. The good news is the Olympic Organizing
Committee decided to adopt western food as the main menu offering along
with Chinese food inside the Olympic Village. Western food will account
for up to 70%. Catering service providers can participate in an open and
global tendering system to compete for this business.

#### 

#### Restaurants

The history and culture of food here dates back several dynasties with
often colorful and highly diversified descriptions used to describe
Beijing's restaurants. Time-honored brands such as Quan Jude Roasted
Duck, Dong Laishun Mutton Hotpot and others represent the essence of
Chinese Cuisine. Modern day imitations of 'Imperial Snacks' serve to
attract the eyes, noses and tongues of Chinese as well as overseas
tourists. At the crossroads, all regional and ethnic cuisines meet in
Beijing, with international flavors adding yet another dimension to the
gastronomic landscape. Maxim's, FLO, Outback Steakhouse, KFC, Pizza Hut
and McDonald's, along with Yoshinoya, and Mawaru Sushi are all familiar
brands not to mention recent entrant Papa John's Pizza now with 5
outlets in the Beijing area.

Twenty years ago, the city closed down early and was shut up tight by
8:00 pm. Today, in the city that never sleeps more or less everything is
available, anytime of the day or night. Wealthy and fashion conscious
Chinese, expatriate residents and visitors have an exhausting list of
options from which to chose. Sanlitun, once the legendary heart of
Beijing\'s nightlife is known for its wide stretch of bars, restaurants
and other entertainment. However, by the end of 2005, South Sanlitun was
well on its way to being only a memory although North Street continues
to thrive, albeit, a more well-heeled clientele. Drinking places such as
Boys & Girls, Lan Kwai Fong, Poachers, etc., all offer live music and
small dancing floors. At first glance there is not much in central
Sanlitun but upon closer inspection there are a number of places behind
the hotels and shopping malls, like Rock and Roll Disco, and Salsa
Caribe. Worker\'s Stadium, west of the Sanlitun is also packed with
notable bars, restaurants and entertainment places such as the Outback
Steak House, Baby Face, Vic's and Mix with the latest top-40 hip hop
chart busters. Houhai, situated around a man-made lake at North of
Beihai Park appears to slowing but surely replacing Sanlitun as
Beijing's major bar and restaurant destination. Intentionally
reminiscent of 1920's Shanghai, the gentle waves of the lake and old
Beijing courtyards (Hutongs) set the scene. Much different from
Sanlitun, Houhai is place for people to meet friends for drinks and
discussion. Women\'s Street (Nu Ren Jie) and surrounding environs of
Chaoyang Park are places fashionable Chinese and international types go
for live jazz, rhythm of blues and Pop.

While elite niche markets have become the hallmark of Beijing's
restaurant trade, middle class, white-collar and the huge tourist influx
sustain the mid-market. Consumption per meal is around US \$8 per
person. Present dining patterns are changing with people under 40 eating
out to save time and the work of home meal preparation based on a recent
survey where 14% of Beijinger's gave the above reasons for eating out.
Demand has gone from filling the stomach to enjoying delicious and
healthy food as gastronomic entertainment.

  ------------- ------------- --------------- --------------- -------------
  **Beijing                                                   
  Hotel                                                       
  Industry                                                    
  Statistics                                                  
  2003-2004**                                                 

  Year          Total         Five Star       Four Star       Others

  2004          562           29              62              471

  2003          486           26              56              404

  Source:                                                     
  Beijing                                                     
  Statistical                                                 
  Yearbook 2004                                               
  and 2005                                                    
  ------------- ------------- --------------- --------------- -------------

#### Hotels

During 2005, the run-up to the Olympics has prompted a refurbishing and
construction frenzy of both old and new hotels in Beijing. For the first
time since its inception, the 42^nd^ Annual Conference of International
Hotel and Restaurant Association was held in Beijing in 2005.
International exchanges are predicted to reach new heights in the coming
2 years as the Games approach. China's continued economic growth has
expanded tourism in the capital as in other parts of the country, and
2006 through 2008 is expected to provide steady growth in Beijing's
hotel market now characterized by occupancy rates well above 85%. To
better prepare for the large influx of tourists, domestic and foreign,
management and staff training is being reinforced. Last October when the
Director of the Beijing Tourism Bureau attended meetings in the State of
Nevada, agreement with the Las Vegas Institute of Hotelier Industry was
reached to provide 40 senior hotel managers from Beijing opportunities
to receive professional training in top Las Vegas properties. Room
availability must grow by 45,000 units by the summer of 2008 Olympics,
with 100 four and five star hotels needed to meet this ambitious target.
Several overseas players including Carlson, a large leisure and vacation
industry services provider, and Inter-Continental Hotels are seizing the
opportunity to open new hotels in Beijing. With the Olympic Game's
looming the travel, food and cruise service operators of the world are
lining up to get into the China market.

High-end hotels in Beijing have served or should continue to serve as
excellent mediums for the introduction of new cuisines and foods.
Mainstream locations, elegant décor and quality service all characterize
such establishments that are a good place to test market and learn
first-hand what the market demands. The Palace Peninsula, a five-star
hotel located a block from the WanFuJing Pedestrian Street in the center
of Beijing generated revenues of more than US \$11 million in 2005. The
property's performance results from 600 restaurant seats generating
nearly US \$20,000 per seat annually. Surprisingly, 85% of revenues come
from non-resident customers. Other hotels like the Shangri-la Group
operate not one but three five-star and one four-star Beijing hotels
with more on the way by 2008.

![](media/image6.wmf){width="2.122047244094488in"
height="3.8043307086614173in"}Beyond Beijing, Olympic co-host Qingdao is
the city with the most momentum in this sector. Kempinski, Accor, and
Marriott groups are all competing to get enter the market there either
via licensing or direct investment. Earlier market entrants such as:
Holiday Inn, Crown Plaza and Shangri-La are all well established with
highly successful high-end restaurant and catering businesses.

### Shanghai Market Summary

Shanghai is one of China's leading commercial centers and home to its
largest port. With a population of 20 million and a 2004 GDP estimated
at \$93 billion, the city is at the center of a massive web of
development. Shanghai's economy is becoming increasingly focused on
finance and services, as rising prices drive manufacturing further
afield, while international companies continue to pour in. Shanghai is
an aggressively cosmopolitan city, which derives much of its strong
sense of identity from bleeding-edge knowledge of international brands
and fashions. Hence, while Shanghai has a very distinct food culture of
its own, the Shanghainese are very open to new tastes, making it an
excellent market for imported food. As with the rest of China, food
plays a central role in all aspects of Shanghai's life. Business,
networking, celebrations and friendly get-togethers are invariably
conducted in conjunction with a meal. Food is widely given as a gift and
an important niche market. Shanghai is also an affluent city, and local
residents are more than willing to pay for quality products, provided
they can be persuaded the product is truly special. As an example of
this, a top local delicacy in Shanghai, the Yangcheng Lake 'hairy crab',
can sell for as much as \$200/kilogram for selected 'live' crabs.

#### Food Service

Shanghai had a total of 30,800 registered restaurants in 2004, slightly
less than in 2003. Revenues, however, jumped by almost 20% to reach RMB
7.5 billion (\$937 million). The declining number of entities relative
to income reflects continued consolidation in the industry as chain
stores and professional food service operations continue to displace
small enterprises. It's also important to keep in mind: a.) this number
lumps restaurants and catering together, and b.) the number almost
certainly grossly understates the size of the industry, as many small or
informal restaurants go unregistered.

Traditionally, the catering industry has been viewed as a poor venue for
imported products, due to its focus on box lunches produced at a cost of
less than \$1 per unit. This is starting to change, however, as consumer
concerns about food safety have led many Shanghainese to distrust box
lunch manufacturers. In response, several high-end restaurants have
started producing box lunches, and several retailers (including Lawson's
convenience stores) have begun offering Japanese-style box lunches.
Significantly more expensive than traditional box lunches, the main
appeal is combination of high quality with convenience. This has created
a potential opportunity for U.S. products, and several companies have
held discussions with Lawson's with an eye to including their products
in box lunches.

Off-site catering has also become a booming business. All of the city's
five-star hotels report offsite catering has mushroomed, and some report
higher revenues from this than from onsite restaurants. Element Fresh,
one of the city's first restaurants to stress healthy eating with large
amounts of fresh, raw vegetables and functional foods, has also found
big business in offsite catering. Element is also benefiting from the
growing trend in favor of organic foods (noted below in the restaurant
section).

#### Restaurants

Shanghai is home to one of China's most vibrant and innovative
restaurant scenes. Although separate statistics on the restaurant
industry are not available, the city has seen tremendous development.
Shanghai now hosts a cohort of world-class restaurants, including
Jean-Georges, Sens et Bund and Laris, catering to the city's growing
business elite. Pizza restaurants are becoming increasingly popular, and
important demand driver for cheese.

One of the most important trends in Shanghai's restaurant industry is
the rapid emergence of high-end Chinese restaurant chains, such as
Shanghai Uncle, Xiaonanguo, and Lulu's. Chinese typically prefer to
entertain guests in restaurants rather than at home, and gain a great
deal of 'face' by taking guests to a high-end restaurant. This is
especially true for business dinners, which place a premium on
over-the-top displays of generosity. At the same time, they prefer to go
to a place that is seen to have reliable quality: foreign cuisines are
interesting, but unfamiliar and unsuitable for some occasions. These
high-end chain restaurants specialize in providing a reliably excellent
dining experience with high-end ingredients and consistent preparation,
at a price. They innovate in recipes, but only within certain limits.
These restaurants' demand for consistent high quality, willingness to
pay higher prices and very high volume (Xiaonanguo has twenty large
restaurants), makes these an excellent venue for imported ingredients.
All already serve imported wine, and most import a number of other
ingredients. Shanghai Uncle has an exclusive arrangement with Gallo
Wines, and Lulu's featured fresh Washington Cherries as part of a
promotion last fall.

Shanghai also has a large community of western restaurants, serving a
mixed clientele of western expatriates, Taiwanese and local Chinese who
have either lived abroad or are just interested in trying something new.
Unofficial estimates put the number of western restaurants at 1,600,
serving 20 different cuisines, to an expatriate community estimated at
350,000. Western restaurants are important both as customers for high
end products such as wine, and as a means of introducing new products to
the market. Some western restaurants have expanded to the point that
they generate significant volume on their own: Moon River Diner (U.S.
owned and operated), for example, now has three outlets in Shanghai.
Specialty restaurants and ethnic restaurants are becoming increasingly
common, creating niche markets for very high-end products. Organic food
is also becoming an emerging trend, with at least two high-end organic
restaurants opening in the past year. Demand is so strong that one local
retailer has established strictly controlled greenhouse vegetable farms
in the suburbs to cater to the needs of these restaurants.

Demand for knowledge about the preparation and handling of western food
is at a premium, and the city suffers from a chronic shortage of
well-trained western chefs. One estimate put the number of fully
qualified chief chefs (for western food) at 100, most of them working in
the star-rated hotels. This constitutes an excellent opportunity for
exporters and distributors willing to commit the time to introduce and
explain their products. In conjunction with the local chef associations,
ATO/Shanghai regularly organizes chef seminars throughout East China
that are invariably packed. These events provide USDA cooperator groups
such as the Alaska Seafood Marketing Institute, the U.S. Meat Export
Federation, the USA Poultry and Egg Export Council, Sunkist Growers, and
the California Table Grape Commission, the opportunity to not just
introduce new or unusual products, but to explain the proper preparation
techniques and potential innovative uses of their products. ATO has
taken these activities far beyond Shanghai to Chengdu, Chongqing,
Hangzhou and Nanjing, and received an outstanding response from the
local restaurant communities.

#### 

#### 

#### 

#### 

#### 

#### 

#### 

#### Hotels

Shanghai's hotel sector is already extremely well developed, but is
expanding rapidly under pressure from overwhelming demand. Five and four
star hotels are routinely fully booked, and during peak seasons there
may be no rooms available at this level in the city. At the end of 2004
Shanghai had 359 star-rated hotels, of which 61 were rated four stars or
higher---an increase of 21 over the previous year, 11 of which were four
or five star hotels. Expansion is likely to continue or accelerate:
Marriott has specifically targeted the Yangtze River Delta for
development, while Holiday Inn plans to build hotels in every city in
China with an airport in the next few years, including 7 new hotels in
Shanghai. Business revenues for Shanghai's hotel industry amounted to
over \$1.7 billion in 2004, and average room rates for 5-star hotels
reached roughly \$150/night, according to local government statistics.

Restaurants and four and five star hotels continue to form the cutting
edge of cuisine in Shanghai, despite growing competition from
world-class standalone restaurants. This makes the hotel industry an
ideal entry point for new-to-market and high-end imported food
ingredients. As noted earlier, top hotel restaurants have the most
qualified chefs for foreign cuisine, and are generally more familiar
with imported products. Whereas other restaurants are willing to be
convinced of new product virtues, ATO's experience indicates top
restaurants aggressively seek them out. They are also more familiar with
menu promotions, and their high profile in the restaurant trade means
that other operators tend to follow their lead.

Beyond Shanghai are literally dozens of boomtowns like Suzhou and
Hangzhou, with growing expatriate communities. Hotel restaurants there
often serve as the center of community life, giving them an even greater
level of influence over the restaurant trade in their respective cities.
Introducing new products into distant cities requires close coordination
with local distributors, which is generally much more forthcoming with
support of one of the city's top hotels. Once established, these
distribution channels tend to persist, with product finding its way into
additional venues. ATO has seen tremendous success cooperating with top
hotels in these-other cities, like Wuxi, Chengdu and Chongqing, to
introduce imported products.

### Guangzhou Market Summary

Guangdong is often called the economic engine of Mainland China, and in
2004 the province's GDP reached RMB 1.60 trillion (US\$200billion), a
14.5% increase over the previous year. Disposable per-capita income in
Guangdong is near US \$1,700 or 7.3% above 2003. With more than two
decades of development, the Pearl River Delta (PRD) in Guangdong is one
of the richest areas in China. The 2004 GDP of the PRD was RMB 1.36
trillion (US \$170 billion), a 19% increase from the year prior and 4.7%
higher than the province's average. The provinces surrounding Guangdong
are also developing at a rapid rate, with many emerging cities like
Xiamen, Changsha, Fuzhou, Nanning, Guiyang, Sanya and Guilin.

The HRI sector in Guangdong province, and mainly within the PRD
continues to develop at a relatively fast pace. Guangdong's HRI industry
revenue in 2004 reached RMB 99.751 billion (US \$12.47 billion), a 13.7%
increase over the previous year. The Cantonese are famous for eating and
very open-minded toward trying new products. In Guangzhou, the capital
city of Guangdong, per capita expenditures for dining out continue to
rank as the highest among all cities in Mainland China at RMB 4143
(US\$515). Imported food products generally enjoy a good reputation for
quality among consumers in South China.

+-----------------+-----------------+-----------------+-----------------+
| ###             |                 |                 |                 |
| #### South Chin |                 |                 |                 |
| a HRI Sector Bu |                 |                 |                 |
| siness Revenues |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+
| Province        | Revenues in     | Revenues in     | Percentage of   |
|                 | 2003 (billion   | 2004 (billion   | change (%)      |
|                 | RMB)            | RMB)            |                 |
+-----------------+-----------------+-----------------+-----------------+
| Guangdong       | 87.729          | 99.751          | 13.7%           |
+-----------------+-----------------+-----------------+-----------------+
| Guangxi         | 11.528          | 13.712          | 18.9%           |
+-----------------+-----------------+-----------------+-----------------+
| Fujian          | 21.122          | 25.265          | 19.6%           |
+-----------------+-----------------+-----------------+-----------------+
| Hainan          | 3.099           | 3.543           | 14.3%           |
+-----------------+-----------------+-----------------+-----------------+
| Hunan           | 2.699           | 3.174           | 17.6%           |
+-----------------+-----------------+-----------------+-----------------+
| Guizhou         | 7.546           | 10.231          | 35.6%           |
+-----------------+-----------------+-----------------+-----------------+
| Sources: China  |                 |                 |                 |
| Statistics      |                 |                 |                 |
| Yearbook 2004;  |                 |                 |                 |
| US\$ 1 = RMB    |                 |                 |                 |
| 8.04 Yuan       |                 |                 |                 |
+-----------------+-----------------+-----------------+-----------------+

#### 

#### Food Service

Similar to other foodservice markets in China, the catering industry in
South China mainly focuses on providing lunch box types of food, usually
ranging from \$1 to \$2 per unit. The low price puts the imported
products in a difficult position to compete with local products. In
saying that, we do notice that some local catering chains are expanding
and target themselves at a higher position. One of the selling points
used by these catering chains is reliable quality, which suits the
consumers' desire for food safety. The trend towards safety provides
good opportunities for U.S. food products. The higher budget of those
meals, usually around \$3 to \$4 per set, allows the catering company to
consider using some imported products, like poultry, cheese and potato
products.

The expatriate community also creates demand for high quality and
western style catering service. To accommodate the growth of the
expatriates living in the region, more international schools have been
set up. Parents of children at these schools expect safe, high-quality
meals that include a variety of Western-style dishes for their kids.
This has helped give imported foods a wedge in the market.

Off-site catering is getting popular in South China. Most five-star
hotels and high-end restaurants now offer offsite catering service and
reported a steady increase in sales last year. Guangzhou Restaurant, a
famous chain serving Cantonese-style cuisine, is providing both offsite
catering service and whole sets of prepared dishes for take away. In
addition to catering for special events, the holiday season also creates
a large demand for such service. Usually the dishes will include some
expensive ingredients, like lobster, prawns and scallops, due to higher
budgets for offsite catering. Using imported ingredients will add
additional value to the dishes and provides another outlet for imported
food products.

#### Restaurants

Popular throughout China, dining out has always been a priority for
Cantonese people. Famous for its food, Guangzhou is regarded as the
center of delicious cuisines. Different styles of food find their own
market here and the Cantonese are willing to try almost everything,
though they still prefer the traditional Cantonese food. The restaurants
have to be creative and offer innovative new dishes more frequently to
maintain competitiveness. The chefs are integrating new food ingredients
and different styles of preparation from other regions or even countries
into traditional Chinese cooking, to create many "fusion" foods.
California almonds are being used in innovative Chinese dishes in dozens
of restaurants and last year, the "Made in Kitchen" restaurant chain in
South China featured Washington State cherries in its fusion menu
together with sweet and sour pork.

With the increasing awareness on food safety, consumers are more than
willing to pay a premium to eat food prepared with \"green/organic\" and
nutritional ingredients. To meet this growing demand for healthier,
natural foods, more and more restaurants are offering dishes using
natural and better quality ingredients. Some American products are
highly appreciated by Cantonese consumers because of their various
health benefits; two such examples are Wisconsin ginseng and California
almonds. One of the most popular nutritional soups in South China is
Wisconsin ginseng stew with chicken that is being featured in a number
of restaurants due to ATO/Ginseng Board of Wisconsin initiatives.

Western-style restaurants are developing quickly in South China. Leading
Western restaurant chains like the Greenery Café and Green Island serve
a combination of Chinese, Southeast Asian and Western-style foods. Local
owners run all of these chains; thus, the recipes are adjusted to suit
local palates. Some U.S. origin food products are widely used in these
chain restaurants, including pork, poultry, Alaskan seafood, and
seasoning products. With increasing numbers of expatriates living in
South China, more authentic Western-style restaurants are emerging. In
addition to new McDonald's and Kentucky Fried Chicken outlets, new
chains such as Starbucks, Taco Bell, Pizza Hut, Papa John\'s Pizza Hut,
Subway, and Dairy Queen are entering the market place. These restaurants
have been extremely successful and often play a major role in
introducing Chinese consumers to Western cuisine and utilize many
imported ingredients in their dishes. Cheese consumption is expected to
increase rapidly due to the acceptance of pizza and other Italian style
foods.

Wine consumption, especially red wine, has gone up over the past five
years. In addition to old-world French wine, Australian and Chilean
exporters have been very active in the market. US vineyards are slowly
making a foothold in this rapidly developing market. Wine Dinners occur
on a regular basis at leading restaurants in South China. Consumers here
are curious about Western culture and are increasingly interested in
learning more about how to select and pair wine with various cuisines.

Western fast food giants like McDonald's and KFC are expanding their
business in South China. The sales revenues of these two chains in
Guangdong are the highest in China. New ethnic food styles are
introduced to local consumers at restaurants like Taco Bell, which
serves Mexican food. As a result of the increasing number of privately
owned vehicles in South China, McDonald's opened China's first two
drive-through restaurants here during the past six months. About 50% of
French fries used by these fast food chains are imported from the U.S.
These chains also utilize corn on the cob and poultry products of U.S.
origin. Currently most of the counties in Guangdong have coffee shops
and western restaurants. And to meet the demand of late night working
customers, from 2006 on, dozens of outlets of McDonald's in Guangzhou
have been converted into 24 hours operation mode.

Local fast food chains are also striving to increase their market
shares. The emphasis of local fast food chains is more on steamed
foods-noodles, which they claim to be much healthier than fried items.
J-Kungfu, a new Chinese-style fast food chain based in South China, is
promoting its steamed meals and is the first Chinese fast food chain to
have more than 100 outlets in China. Chinese fast food chains tend to
use very limited quantities of imported food products because of their
lower price (usually around \$2) per meal food cost formula.

Educating executives from the HRI sector to properly handle and use
imported food ingredients will continue to be a main task. Education
concerning the unique characteristics of U.S. food ingredients will help
Chinese chefs to better understand the proper use of these products and
how they can add further value to the menu. The rapid development in HRI
sector has already suffered growing pains from the shortage of
experienced and trained personnel, like chefs. One effective way to
solve the personnel shortage is to provide proper training to chefs. ATO
Guangzhou regularly organizes chef seminars and competitions in major
South China cities, often with support from various U.S. producer
associations. In addition to introducing new products, these seminars
emphasize proper handling and preparation techniques as well as create
opportunities for local chefs to understand different ways to
incorporate imported products into menus. These activities are well
attended and help the local industries better understand the
characteristics and benefits of using U.S. food ingredients. Many U.S.
products introduced to local chefs during these seminars have been
widely adopted as a result of these programs. Chefs in South China are
also very curious about US ingredients and western cooking methods. They
are open to enhancing their cooking skills and differentiating their
restaurants from their competitors.

#### Hotels

The hotel sector in Guangzhou is well established with many new comers
entering the market. Guangzhou is going to have three or four new
five-star hotels over the next two years. Many new, high-end hotels will
open soon in South China's emerging markets of Shenzhen, Dongguan,
Sanya, Xiamen, and Changsha. The Shangri-La chain plans to build 18 new
hotels in China over the next few years, with one to open by the end of
2006 in Guangzhou. The JW Marriott, Ritz-Carlton, Shangri-La and Westin
will soon open new hotels in Guangzhou creating more competition in the
sector. Although there are no official statistics for Guangdong's hotel
industry revenues, estimates for 2004 are about RMB 43.04 billion. The
average room rate for 5-star hotels in Guangzhou is somewhere around
US\$100/night, but the price often triples during the Canton Fair
period, held twice annually.

  --------------- -------------- -------------- -------------- --------------
  South China                                                  
  Hotel Industry                                               
  Statistics 2004                                              
  (with star                                                   
  rating)                                                      

  Province/City   Five Star      Four Star      Other Star     Total
                  Hotels         Hotels         Rating Hotels  

  Guangdong       39             124            908            1071

  -Guangzhou      5              23             169            197

  -Shenzhen       10             20             140            170

  -Zhuhai         5              9              59             73

  -Dongguan       13             18             53             84

  -Foshan         1              15             59             75

  Guangxi         5              19             274            298

  Fujian          8              15             70             93

  Hainan          10             37             92             139

  Hunan           8              22             366            396

  Guizhou         2              7              137            146

  Sources: China                                               
  Statistics                                                   
  Yearbook 2004 &                                              
  2005, ATO/GZ                                                 
  Market Survey                                                
  --------------- -------------- -------------- -------------- --------------

The Western-style restaurants in four and five-star hotels continue to
attract customers in pursuit of authentic tastes and higher quality
foods. The executive chefs at these leading hotel restaurants are all
well trained and experienced in using imported ingredients. Many of them
have worked with ATO Guangzhou in the past through various menu
promotions and chef activities, and thus were exposed to a wide variety
of U.S. food ingredients. These highly respected executive chefs are
market leaders in the HRI industry in South China and most of the other
chefs tend to follow their practices. Continuously working with these
market leaders through menu promotions and chef seminars will ensure
they are properly educated and simultaneously generate demand for U.S.
ingredients.

## D. SWOT Analysis for US Food Products

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

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

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

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

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

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

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

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

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

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

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

# 

# Part II: ROAD MAP FOR MARKET ENTRY

## A. Market Structure

### 1. Target Population

## 

The top tier of China's urban population now earns a per capita income
of RMB 3,500 per month, RMB 42,000 or about US \$5,000 per year. These
consumers have both the desire and the means to eat out regularly in
good restaurants; tend to be keen on opportunities for being educated
about real and perceived sophisticated tastes; curious about and seeking
exposure to culinary experiences outside China.

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

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

Suppliers need to keep in mind, however, that the cost profile for
imported food is far higher than for domestic food, and only a small
percentage of China's 1.3 billion people can afford to eat in the kinds
of restaurants that use imported food. Per capita income for 800 million
rural residents was only \$308 in 2003. Urban income was higher, \$1,027
per capita, but at those levels little is left for high-end meals.
Nevertheless, the top 15% of city dwellers in China can now afford
imported food, a market of more than 150 million people at present, and
one that is growing exponentially as incomes continue to rise.

### 2. Distribution

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

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

With the above said, distribution still lags far behind Western
standards, especially outside the three major metropolitan areas and
inland China. Cold chain is often unreliable, and purchasing managers at
major hotels in cities like Xian or Harbin say they take most, if not
all, perishables by air, often personally going to the airport to pick
them up. Even in the major metropolitan areas, unreliable and
inconsistent supply remains a large problem. "We commit to a menu, but
then can't get the product," says one restaurateur. Distributors have
increased warehouse space but still can't keep many items in stock,
partly because of the long lead time for transoceanic orders, and partly
because the import process for food is often complicated by quarantine
or customs delays.

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

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

**Gray Channel**

The Hong Kong gray channel is the main supply route for products going
to the Pearl River Delta and southwestern China, including the provinces
of Sichuan, Yunnan, Hunan, and Chongqing. However, distributors in
northern China say they have reduced reliance on the gray channel to
less than 20% of total food imports, and some to as low as zero. Gray
channel goods are handled by Hong Kong agents who work with other
agents, often family connections, across the border in Guangdong
Province. Cargo is under-invoiced to reduce tariffs. In addition, some
distributors say, it is easier and less expensive to source small
quantities out of Hong Kong, rather than landing full containers in
northern ports.

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

**Direct Imports**

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

Major distribution options include:

-   Full-service distributors, discussed above.

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

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

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

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

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

A new distribution development in 2005 is 4^th^ party logistics, a
concept invented-promoted by Accenture back in 1998 that mainly involves
logistics information management systems. While still in the infant
stage of its lifecycle, market leaders in the HRI sector are among the
first to embrace it. A good example is Beijing's Yoshinoya Fast Food Co.
Ltd., where the innovative system has allowed the company to streamline
purchasing, distribution and integrate accounting with front-line
outlets in real time. The system substantially decreases the response
time to the market while keeping stock loss low and running in the
fiercely competitive 'fast food' market here. While some here have
called the introduction information technology early, the concept
appears to be gaining growing acceptance in the HRI sector.

## B. Entry Strategy

### 1. Overview

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

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

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

# ![](media/image7.wmf)2. Marketing, Sales and Education

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

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

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

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

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

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

### 3. Establishing the Supply Channel

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

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

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

It is crucial your importer or distributor be able to make payments in
hard currency, or you will have trouble collecting payment. The
government has considered plans to make the Renminbi (RMB) also called
Chinese Yuan (CNY), into a fully convertible currency, but that may be
years. For now, companies need special licenses to change RMB into US
dollars. Also, Yuan-Dollar exchange rates fluctuate since it is no
longer a fixed rate as in the past. Thus, it is important to make sure
payments or costs are stated and payable in currencies agreed to by both
the buyer and seller so that no one is surprised later.

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

### 4. Protect Your Intellectual Property Rights

Ideally, IPR protection should begin even before you begin exploring the
China market. It's important to register and protect trademarks in both
English and Chinese languages. China's State Administration for Industry
and Commerce, involved in enforcing trademarks, has announced a special
campaign to improve enforcement of agricultural related trademarks in
the autumn of 2005. Even if US goods are not being sold in China, IPR
protection can be helpful in preventing fake goods produced in China
from being exported to other markets. Chinese Customs provides an
on-line recording service that is usually a prerequisite for customs
detention of outbound infringing goods. Recognizing the large number of
complaints from US manufacturers and traders regarding IPR protection,
and with the aim of helping China develop an IPR system more similar to
the United States, the US Embassy Beijing has developed a website-based
"IPR Toolkit," providing information on Chinese laws and regulations
along with steps-suggestions on how to protect American IPR. The site is
at:

<http://www.usembassy-china.org.cn/ipr>

### 5. Entry Tips

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

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

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

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

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

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

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

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

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

Consider linking your product to special occasions such as weddings,
major business successes, Christmas and Valentine's Day, or
international events like Shanghai's annual Formula I Grand Prix, NBA
team visits, and the 2008 Olympics in Beijing.

# Part III: COMPETITION

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

Future western fast food trends in China include: 1. Westerm food
popularization via mass marketers in China like KFC and McDonald's; 2.
Fusion of the cultural ambiance of western food with local flavors
accepted by consumers as huge new market niche is created; 3. Green and
Healthy western food become mainstream as food safety and nutrition
continue to draw attention; 4. Olympic Games serve as a catalyst in the
acceleration of western food internationalization in China, featuring
self-service, individual western food portions influence the individual
Chinese food servings, perceived as cost saving (good value) and
sanitary.

Currently the big 3 US fast food operators are all present in China,
with Burger King the latest entry. McDonald's and KFC are racing against
time and each other. To extend the market niche, McDonald's opened 2
"drive-through" outlets in Shanghai and Dongguan early in 2006. In
response to consumer demand for "health and nutrition" foods both
McDonald's and Yum announced a departure from traditional western fast
food, stereotyped as high in fat and calories. Yum launched its Chinese
style fast food Dong Fang Ji Bai (The East is dawning) in May 2005.
However, difficulty in standardization of ingredients and fabrication
without losing the flavor and taste of higher calorie ingredients
continues to be a serious impediment to Chinese fast food development.
The ambiance of western fast food restaurants is what Chinese fast food
restaurants lack and customers want most.

US food products have an excellent reputation for consistent quality,
whereas some other supplier countries are considered less reliable.
Chefs and buyers associated with US premium beef, France with up-market
cheese, chocolate and yogurt and Norway with high-end seafood. New
Zealand and Australia with clear advantages in shipping times and cost,
dominate standard dairy imports destined for the HRI Sector here.

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

Some buyers believe China will never be able to produce commodities that
require large-scale corporate farming operations. Fast food chains still
need to import frozen French fries, because Chinese growers can't
produce consistent quality-economically viable potatoes.

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

US products currently have a slight currency advantage given the Chinese
Yuan is no longer linked directly to the US Dollar, and exchange rate
changes have made American products slightly less expensive and European
and Australian products slightly more expensive. However, differences
are minimal given US products tend to be high priced in general.

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

# Part IV: BEST PRODUCT PROSPECTS

## 

There will always be a market for imported food products in China
because restaurants want to provide customers something unique. However,
the nature and product mix is fluid due to intense competition and
domestic substitution. Baked potatoes and onion rings have nearly
vanished, only to be replaced with imported frozen potato wedges. While
many chefs cite products they'd like to access, some successful market
entrants like high-quality US Pork for the up-market HRI trade is a bit
surprising given China' is the world's largest pork producer.

US beef banned in 2004 due to BSE continues to be a product many chefs
and food purchasing managers say they want to order as soon as the ban
is lifted, because of the consistent and unparalleled quality of US
beef. Salmon, from a variety of country suppliers, was the second most
popular import item named by chefs and buyers.

Ready-to-use and value-added products considered unlikely prospects only
a few short years ago because labor was perceived as cheap enough for
restaurants to make nearly any product from scratch. However, today
chefs and purchasing managers increasingly say there is now a market for
ready-made, pre-cooked and portion control sauces, soups, pizzas,
vegetables, fish fillets, meat products, and frozen dough.

+---------------------------------+----------------+------------------+
| **In the Market with            | **Present and  | **Products not   |
| Potential**                     | with Good      | Present or       |
|                                 | Potential**    | Diminishing**    |
+---------------------------------+----------------+------------------+
| Seafood (lobster, tuna, salmon, | Pre-cooked     | Some Fresh       |
| mussels, seaweed)               | sauces, like   | Fruits (domestic |
|                                 | bolognaise,    | substitution of  |
| Beef                            | portion        | apples, pears)   |
|                                 | control fish   |                  |
| Lamb                            | fillet and     | Mayonnaise (JV   |
|                                 | meats, cheese, | manufacturing in |
| Pork                            |                | China)           |
|                                 | Butter,        |                  |
| Veal                            | Mexican, South | Catsup (JV       |
|                                 | American food, | manufacturing in |
| Chicken paws                    | other ethnic   | China            |
|                                 | food items     |                  |
| Cream                           | like Indian,   | French jam (JV   |
|                                 | Italian, etc.  | manufacturing in |
| Premium yogurt                  | Bulk cheese    | China)           |
|                                 | for catering   |                  |
| Nuts and dried fruit            | use.           | Simple cereals   |
|                                 |                | (corn flakes,    |
| Condiments (mustard, meat       | Colors and     | made in China)   |
| tenderizer, hot sauces)         | flavors,       |                  |
|                                 | canned and     | Baked potatoes   |
| Frozen potatoes (French fries,  | maraschino     |                  |
| wedges)                         | cherries.      | Onion rings      |
|                                 | Turkey and     |                  |
| Potato preparations             | other poultry. | Red cabbage      |
|                                 |                | (domestic        |
| Wheat flour                     |                | substitution)    |
|                                 |                |                  |
| Pasta                           |                | Orange juice     |
|                                 |                | (domestic        |
| Olive oil                       |                | substitution)    |
|                                 |                |                  |
| Coffee                          |                | Macadamia nuts   |
|                                 |                | (some Chinese    |
| Chocolate                       |                | say these are    |
|                                 |                | too oily)        |
| Breakfast cereals, including    |                |                  |
| muesli                          |                |                  |
|                                 |                |                  |
| Premium fruit juices            |                |                  |
|                                 |                |                  |
| Fruit (grapes, grapefruit,      |                |                  |
| oranges, Kiwi fruit)            |                |                  |
|                                 |                |                  |
| Frozen berries                  |                |                  |
|                                 |                |                  |
| Wine                            |                |                  |
|                                 |                |                  |
| Beer                            |                |                  |
|                                 |                |                  |
| Bottled water                   |                |                  |
+---------------------------------+----------------+------------------+

# Part V: Post Contact and Additional Resources

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

**Agricultural Trade Office, Beijing**

U.S. Agricultural Trade office, Beijing

Kerry Center, South Tower

24^th^ Floor Suite #2425

No. 1 Guanghua Lu, Beijing 100020

Phone: (8610) 8529-6418

Fax: (8610) 8529-6692

E-mail: <atobeijing@usda.gov>

**Agricultural Trade Office, Guangzhou**

China Hotel Office Tower, 14/F

Guangzhou 510015, China

Phone: (8620) 8667-7553

Fax: (8620) 8666-0703

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

# 

**Agricultural Trade Office, Shanghai**

Shanghai Center, Suite 331

1376 Nanjing West Road

Shanghai 20040, China

Phone: (8621) 6279-8622

Fax: (8621) 6279-8336

E-mail: <atoshanghai@usda.gov>

**Agricultural Affairs Office, Beijing**

5-2 Qijiayuan Diplomatic Compound

Jianguomenwai, Beijing, China, 100600

Phone: (8610) 6532-1953

Fax: (8610) 6532-2962

E-mail: <agbeijing@usda.gov>

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

Room 618, Beijing International Club Office Building

No. 21 Jianguomenwai Avenue

Beijing, China 100020

Phone: (8610) 6532-3212

Fax: (8610) 6532-5813

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