Required Report - public distribution

**Date:** 1/5/2005

**GAIN Report Number:** CH4838

CH4838

**China, Peoples Republic of**

**Retail Food Sector**

**Mainland China Food Retail Annual Report**

**2005**

**Approved by:**

![](media/image1.wmf)Ralph Bean

U.S. Consulate

**Prepared by:**

Ralph Bean

**Report Highlights:**

China\'s food retail sector continues to grow and develop as hypermarket
and convenience store chains expand across the country. Foreign-invested
hypermarkets are likely to continue growing as restrictions on their
activity and ownership are scheduled to be loosened in 2005.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Shanghai ATO \[CH2\]

\[CH\]

**Table of Contents**

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

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

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

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

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

[II. Road Map for Market Entry 18](#ii.-road-map-for-market-entry)

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

[II.B Convenience Stores 23](#ii.b-convenience-stores)

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

[III. Competition 25](#iii.-competition)

[IV. Best Product Prospects 26](#iv.-best-product-prospects)

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

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

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

# I. Market Summary 

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

The transformation of China's retail sector is continuing, and all three
of the leading cities, Shanghai, Guangzhou and Beijing, are now home to
multiple hypermarkets and convenience store chains. Supermarkets
continue to be the most common retail format, but hypermarkets are
gaining in popularity, and are now present in most medium and large
sized cities. Having reached saturation levels in Shanghai and
Guangzhou, convenience store chains have turned their attention to other
cities. Although progress has been slow, Beijing has finally become home
to several convenience store chains. Meanwhile, many chains have found
fertile ground in the booming cities that dot the landscape around
Shanghai and Guangzhou. Growth in the cities of Shanghai and Guangzhou
may slow somewhat, as both markets are close to saturation levels,
particularly with hypermarkets. Beijing shows more potential for
near-term growth, but the fastest development is likely to take place in
two areas: satellite cities near Shanghai and Guangzhou, and the large
second and third-tier cities further inland. Most foreign-invested
retailers already present in China have opened stores in these areas and
have ambitious plans for further expansion.

In the leading three cities, the emphasis appears to be shifting toward
differentiation, with chains pursuing different strategies to
distinguish themselves from the competition. Some with longstanding
reputations hope to cash in by offering more house-brand products, while
others offer extended store hours or more ready-to-eat products. In all
cases, competition is driving down margins and forcing stores to
supplement their revenue from other sources. One of the most widely
favored sources of income are ever-higher listing fees charged to
suppliers of new products. These are becoming an obstacle to innovation,
as suppliers are unwilling to take the chance that a new product will
not be able to recover the substantial layout for the listing fee. In
the post-SARS environment consumers have become more sensitive than ever
to food-safety concerns. This has been reinforced by a continuous
drumbeat of food adulteration and food poisoning scandals that receive
wide coverage in local papers. This heightened awareness has helped to
drive consumers to the major chain stores, which are generally seen as
less likely to carry counterfeit or unsafe products. On the other hand,
at least one major foreign-invested chain in Shanghai was itself caught
producing food under unsafe conditions. If repeated, such incidents
could undermine the reputation of the entire chain.

The Chinese government has expressed concern over the rapid expansion of
foreign-invested chains, and is making efforts to ensure that domestic
chains are able to compete. These efforts have taken a number of
different forms. Late in 2003, the government hinted that it would
pursue violations of the complex licensing rules more aggressively.
Carrefour was the most prominent victim, having its expansion plans
suspended until issues related to the share of foreign ownership were
resolved. The central government also warned local and provincial
governments that approvals for foreign-invested retail projects would be
contingent on tighter licensing procedures. At the same time, the
government is attempting to make Chinese chains more competitive by
encouraging mergers. The largest of these was the merger of China's two
largest retail chains, Lianhua and Hualian, both state-owned
enterprises.

**[Supermarket chains]{.underline}** remain the largest retail format.
This sector is dominated by Shanghai-based Chinese chains with Lianhua
and Hualian the largest players, followed by Nonggongshang and regional
chain Suguo (Jiangsu province). The merger between Lianhua, Hualian and
two other companies, has created a massive entity called Bailian. This
has had relatively little impact on the retail scene as of yet, as both
chains appear to be operating as separate entities. The merger appears
to still be in the process of rationalizing the diverse holdings of the
four companies: the latest action involves the separation and merger of
department store and shopping center assets into a single company called
Shanghai Brilliance. Much more significant, Lianhua is ramping up its
acquisitions of smaller local chains. In late 2004 the company paid
\$9.3 million to acquire Wanlifu Supermarket Co. in Hebei province, and
another \$18.1 million to acquire a shopping center in Hangzhou,
(Zhejiang province). The firm announced that it will increase its budget
for acquisitions from \$73 million to over \$100 million in 2005.
Lianhua officials have noted that foreign acquisitions in the
hypermarket field have inflated prices throughout China's food retail
sector. A number of strong regional chains have also emerged, including
Suguo in Jiangsu, Jinkelong and Wu Mart in Beijing and Hongqi
(convenience stores) in Chengdu. Although Lianhua and Hualian remain the
only truly nationwide supermarket chains, Shanghai's Nonggongshang has
expanded through much of the Yangtze River basin and into Beijing.
Surveys indicate that Chinese supermarkets place their emphasis on dry,
and frozen goods, with less than one-third of floor space dedicated to
fresh products, including fruit, vegetables, eggs and meat.

The supermarket format has lost ground to hypermarkets and convenience
stores in recent years. This trend is likely to continue for the near
term, but may be limited by a combination of factors. The first is the
very limited product variety and high prices in convenience stores.
Convenience stores act less as major food outlets than as service
centers offering bill paying and other services, as well as impulse
purchases. Few convenience stores offer much beyond snack foods and some
boxed lunches. The second factor is the high population density of
Chinese cities, combined with the small size of most supermarkets. This
allows for a very large number of locations: in cities like Shanghai,
most homes have a supermarket within walking distance. Hypermarkets, by
contrast, are typically located in less densely populated suburbs.
Although private car ownership is rising, the vast majority of Chinese
households must rely on public transport to reach these hypermarkets,
making daily excursions inconvenient, while the relatively small size of
Chinese refrigerators (and apartments in general) makes monthly
mass-buying trips less practical. The current supermarket format may,
however, get a run for its money from discount stores specializing in
shelf-stable products at deep discounts. Carrefour recently introduced
its Dia brand discount stores in Shanghai and has extremely ambitious
plans (up to 3,000 stores by 2007) for this chain. The store size is
similar to a small Chinese supermarket, although the product selection
is much more limited.

**[Hypermarkets]{.underline}** have seen the most activity in the past
year. This sector has by far the largest foreign presence, and interest
is growing as the promised date of December15, 2004 approaches. This is
the date when China has agreed to remove restrictions on foreign
investment in retailing. Current regulations require foreign retail
chains to establish joint ventures with Chinese companies. This has
created a complex web in which foreign chains often have joint ventures
with Chinese competitors. Although there may be considerable delay as
various administrative and regulatory details are ironed out, this date
is still viewed by many as a watershed. Wal-Mart appears to have been
waiting on this date before establishing stores in Shanghai. Having
constructed a distribution center in the city sometime earlier, it
recently announced that it's first store in Shanghai will open in
summer, 2005, followed by two others. Japanese retailer Ito Yokado,
already owner of five joint-venture stores in China, has announced plans
to establish wholly-owned stores as well.

Changes in the ownership regulations raise important questions about the
status of existing joint ventures. Regulations limiting foreign Much
will depend on precisely how the liberalization takes place. Some chains
are expected to buy out their joint venture partners if possible, since
these are often competitors. Some chains, however, seem content to
continue with the joint venture arrangement. Germany's Metro, for
example, has been quoted as saying that it has no plans to buy out
partner Jinjiang Group. (This may be because Metro's partner, Jinjiang
Hotel Group, is not seen as a competitor. In fact, Jinjiang's strength
in the hotel business works well with Metro's strategy of acting as a
supplier for restaurants and hotels). Likewise, although it has
announced its intention to establish wholly-owned stores, Ito Yokado
does not appear to have plans to buy out the partners in its existing JV
stores.

**[Convenience Stores]{.underline}** remain one of the most dynamic
categories for food retail, though development in Shanghai and Guangzhou
appears to have slowed from the frenetic pace of previous years. The
sector is dominated by domestic chains, though the imminent appearance
of 7-11 in Beijing will finally give it a toehold outside of South
China, and Japan's Family Mart recent established itself in Shanghai.
(Interestingly, Ito Yokada is an investor in both 7-11 Beijing and
Family Mart in Shanghai).

Many chains are seeking to expand into new markets where competition is
less fierce. Development in second and third tier cities appears to be
taking on two paths: expansion by chains that are already established in
the key markets, and development by a strong local chain. In the areas
surrounding Shanghai and Guangzhou, the first pattern appears to
dominate, as local giants Quik and Kedi (in Shanghai) and 7-11 (in
Guangzhou) expand to nearby cities such as Suzhou, Wuxi and Shenzhen.
Beijing is also following the first pattern, as Quik and 7-11 are moving
into that large and still underdeveloped market. The second pattern
seems to dominate further inland. In Nanjing local chain Suguo is the
major player, while convenience in Chengdu is overwhelmingly dominated
by local chain Hongqi (Red Flag).

The other means being pursued to maintain profits while expanding is
niche marketing. Last year Quik announced an agreement with a subsidiary
of Sinopec Petroleum to provide convenience stores in gas stations, and
Kedi is pursuing similar deals. The gas-station store trend is most
advanced in Guangzhou, where British Petroleum is already one of the
largest convenience store chains. Other stores are seeking very specific
market niches, including high-end malls and combining operations with
other types of retailers. Convenience continues to be dominated by
domestic chains, although the imminent appearance of 7-11 in Beijing
will give it its first presence outside of southern China. The largest
chains are directly or indirectly connected to either major
supermarket/hypermarket chains (such as Lianhua, Hualian and
Nonggongshang) or food processing companies.

**[Traditional markets]{.underline}** continue to be a presence
throughout China, although many of the wet markets in big cities are
being closed or consolidated. Local authorities in most cities view wet
markets as unsanitary, not to mention that tax revenues from these
markets are small relative to those from supermarkets. The SARS outbreak
provided a pretense for intensifying closures and consolidations in
major cities such as Beijing and Shanghai. For those markets that
remain, regulation is much tighter than before. Despite this, wet
markets persist. The main reason is the lack of quality fresh meat and
vegetables at local supermarkets and the inconvenience of traveling to
hypermarkets for fresh products. In fact, street vendors selling fresh
vegetables outside of supermarkets are a common sight, and appear even
to be encouraged by the supermarkets as a way of generating foot
traffic.

The other major traditional formats include small variety stores
(xiaomaibus) and fruit stands. The typical xiaomaibu is much smaller
than a convenience store, privately owned, and stocks an eclectic mix of
products. Although facing a serious challenge from convenience stores,
the xiaomaibus remain a significant presence in Chinese cities, and
appear likely to continue for some time. The convenience chains have
focused their attention on high-traffic sites near schools, bus and
subway stations and hospitals, leaving ample territory for the
xiaomaibus, which often serve a single apartment complex. Small scale
and private ownership also allow the xiaomaibus to tailor their product
selection to match the specific needs of individual customers. Like
convenience stores, most xiaomaibus offer a range of other services,
such as bill payment and IP card sales. Fruit stands fill another gap
left by convenience stores, most of which carry few if any fresh
products. They are further supported by the Chinese tradition of giving
a gift, often of fruit, when visiting friends. While imported products
are virtually nonexistent in xiaomaibus, fruit stands stock a surprising
number of imported and counterfeit-imported products.

## I.B Major Food Retail Chains in China

**[Revenue, Lies and Statistics]{.underline}**

All statistics on China's food retail industry have serious
shortcomings, a result more of the tangled web of ownership than any
shortcoming in reporting. A particular problem is reporting income for
foreign invested joint-venture stores. Sometimes the income is listed
under the Chinese JV partner, sometimes separately. In cases where
Chinese JV partners report income from the JV, it is often unclear what
proportion of the JV income is being included. In addition, many
companies have other lines of business, such as logistics or hotels,
which are not separated when income is reported. On the other side, it
can be difficult putting together the total income of a foreign chain
operating in China, because many form JVs with different partners in
different regions.

Compounding this are similar complexities in patterns of domestic
ownership. For example, the Kedi chain of convenience sotres is owned
indirectly by Nonggongshang through its ownership of Bright Dairy, but
is listed separately in most statistics. Nonggongshang, however, also
owns the Alldays convenience store chain. While Alldays is not listed
separately in any statistics, it is not entirely clear whether it is
included in the total numbers for Nonggongshang. Likewise, Lianhua's
Quik convenience store chain, the largest in China, is not listed
separately, but is clearly not included in the number of stores reported
by Lianhua in 2002. Lianhua's store number more than doubles in 2003,
however, indicating that the convenience stores are likely now being
included. Whether Quik's revenues were also excluded from Lianhua's in
2002 is unclear, though it seems unlikely as the change from year to
year was quite small. Lianhua also happens to be the JV partner for
Carrefour in the Shanghai area. How much of the income from the
Carrefour JV is being reported in Lianhua's revenue figures is unclear.

Keeping these shortcomings in mind, the following table provides some
sense of the size of the food retail sector and the key players.

  -------------- ----------- ------- ---------------- ----------- ------- ---- ----------- -------------
  **Table 1. Top                                                                           
  Ten Retailers                                                                            
  in China**                                                                               

                                                                                           

                 2003                                 2002                                 

                 Company     Store   Revenue (Billion Company     Store        Revenue     
                             No.     RMB)                         No.          (Billion    
                                                                               RMB)        

  1              Lianhua     2579    24,031.20        Hualian     1921         21,473.00   
                                                      Group                                

  2              Hualian     1388    18,033.00        Lianhua     1200         18,330.02   

  3              Beijing     62      13,600.00        Beijing     53           10,300.00   
                 Hualian                              Hualian                              

  4              Carrefour   41      13,436.82        Carrefour   35           10,693.45   

  5              NGS         1213    12,381.40        NGS         702          8,730.00    

  6              Hualun      467     10,323.59        Hualun      456          8,591.07    
                 Wanjia                               Wanjia                               

  7              Suguo       1162    9,580.00         Suguo       931          7,054.00    

  8              Beijing     518     8,504.51         Beijing     357          5,067.25    
                 Wumei                                Wumei                                

  9              Wal-Mart    33      5,853.29         Wal-Mart    25           4,739.58    

  10             Metro       18      5,620.64         Metro       16           5,310.29    

                                                                                           

  Source: China                                                                            
  Chain Store &                                                                            
  Franchise                                                                                
  Association,                                                                             
  2003                                                                                     
  -------------- ----------- ------- ---------------- ----------- ------- ---- ----------- -------------

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

+----------------------------------+-----------------------------------+
| **Table 2. Strengths and         |                                   |
| Challenges for U.S. Products In  |                                   |
| the Retail Food Market**         |                                   |
+----------------------------------+-----------------------------------+
| #                                |                                   |
+----------------------------------+-----------------------------------+
| Advantages                       | Challenges                        |
+----------------------------------+-----------------------------------+
| Chinese consumers generally      | U.S. products are routinely       |
| regard U.S. products as being of | counterfeited.                    |
| high quality.                    |                                   |
+----------------------------------+-----------------------------------+
| Chinese consumers spend over 1/3 | Consumers are extremely price     |
| of their income on food.         | sensitive, and are often          |
|                                  | unwilling to risk spending on     |
|                                  | products they are unfamiliar      |
|                                  | with.                             |
+----------------------------------+-----------------------------------+
| U.S. brands are widely known and | Many U.S. companies have          |
| respected in China's urban       | established plants in China,      |
| markets.                         | manufacturing their products      |
|                                  | using Chinese ingredients.        |
+----------------------------------+-----------------------------------+
| Incomes are growing rapidly in   | Distribution and logistics remain |
| second-tier cities, creating a   | underdeveloped, making            |
| whole new range of               | distribution of imported products |
| opportunities.                   | to interior cities extremely      |
|                                  | difficult.                        |
+----------------------------------+-----------------------------------+
| Food is a central part of        | Lack of knowledge about U.S.      |
| Chinese culture, and consumers   | products and how to prepare them  |
| enjoy trying new tastes.         | makes consumers more hesitant to  |
|                                  | buy.                              |
+----------------------------------+-----------------------------------+
| China's entry into the WTO has   | Labeling and sanitary             |
| reduced tariffs on many imported | restrictions act as non-tariff    |
| products.                        | barriers. Enforcement of these    |
|                                  | rules is haphazard, creating      |
|                                  | additional uncertainty.           |
+----------------------------------+-----------------------------------+
| The Agricultural Cooperation     | U.S. exporters that have relied   |
| Agreement opened the Chinese     | on gray market channels in the    |
| market to many U.S. products     | past lack direct contact with     |
| that were previously banned.     | Chinese buyers.                   |
+----------------------------------+-----------------------------------+
| Rapid growth in retail food      | Purchasing by most retail chains  |
| chains has created more          | remains decentralized. Few        |
| opportunities for bulk           | purchase imports directly, so     |
| purchasing.                      | exporters must establish a        |
|                                  | relationship with a distributor.  |
+----------------------------------+-----------------------------------+

## I.D. Regional Market Profiles

FAS has four offices in China, with Agricultural Trade Offices in
Beijing, Shanghai and Guangzhou, and an Agricultural Affairs Office in
Beijing. Office coverage is divided as shown on the map below. Each area
has its own unique aspects, as noted in the regional profiles that
follow.

**[Beijing Region]{.underline}** -- Beijing's retail scene has the most
room for future development of China's 'big three' cities, a byproduct
of its relatively slow development. Beijing's retail sales growth rate
is among the highest in China, at 19.1% in 2003, compared to 12.2% for
Shanghai. Unlike Guangzhou or Shanghai, Beijing is not at the center of
a wider web of economic development, with Tianjin the only nearby city
worth mentioning. The broader region, however, is home to some of
China's most dynamic coastal cities, including Dalian and Qingdao, and
the major cities of Northeast China such as Harbin. Shandong province in
particular, shows signs of becoming a major industrial and commercial
center.

In Beijing proper, the most rapid development is taking place in the
rapidly expanding suburbs, where car ownership has skyrocketed. Retail
sales for the first quarter of 2004 amounted to \$12.9 billion (out of a
national total of \$304.9 billion). Many **hypermarkets** are locating
in the borderline areas between the city and suburbs, in hopes of
attracting customers from both. The sudden surge in car ownership means
that, for the first time, parking lots have become a major necessity. By
the end of 2003 there were nearly 100 large food retail units, including
large supermarkets, hypermarkets and warehouse stores, with another 20
in the planning or development stage. Beijing's unique status as the
national capital has allowed it to attract an extremely large and varied
expatriate community which supports a large number of boutique and
specialty grocery stores that carry imported products. In addition to
expatriates, these stores target the growing number of upscale Chinese
consumers who have lived or studied abroad. The presence of the
expatriate community is also felt in department stores, which often
include high-end food sections as part of their operations.

As in other areas, hypermarket development has been led by
foreign-invested companies including Wal-Mart, Pricesmart, Carrefour and
Metro. Other entries include Fu-Mart from Japan, and Trust-Mart, RT Mart
from Taiwan and Hymall, which was recently purchased by Tesco. These
companies all operate in a similar manner to their foreign parents, and
have been a major factor in the rapid improvement of supply chains and
distribution. Domestic retailers such as Beijing Hualian and Wu-Mart
have been quick to imitate their methods and have become major players
in this market. CRC Vanguard, which started in South China, has expanded
into the North and hired talent away from foreign-invested competitors.
Tianjin-based HomeWorld is also regarded by some as a strong potential
competitor in the warehouse/price-club sector. While many domestic
chains remain hampered by a state-owned management structure, some have
become formidable competitors, cashing in on local knowledge and
influence with local political institutions. Chinese regulators
routinely favor domestic firms at the expense of foreign operators, and
some SOE's continue to receive 'soft loans' from state-run banks to
finance retail expansion.

**Table 3. Major Hypermarkets/Supermarkets in Beijing**

+-------------+--------+--------------+-----------------+------------+
| *           | *      | **Total      | **% of sales    | **No. of   |
| *Retailer** | *Owner | sales in     | increase        | outlets**  |
|             | ship** | 2003**       | compared to     |            |
|             |        |              | 2002**          | **(Dec     |
|             |        | **(Million   |                 | 2003)**    |
|             |        | USD)**       |                 |            |
+-------------+--------+--------------+-----------------+------------+
| Beijing     | China  | 1642.5       | 32              | 62         |
| Hualian     |        |              |                 | (n         |
| Group       |        | (nationwide) |                 | ationwide) |
+-------------+--------+--------------+-----------------+------------+
| Beijing     | China  | 1027         | 68              | 518        |
| Wu-mart     |        |              |                 |            |
+-------------+--------+--------------+-----------------+------------+
| Beijing     | China  | 633.2        | 23              | 156        |
| Jingkelong  |        |              |                 |            |
+-------------+--------+--------------+-----------------+------------+
| Beijing     | China  | 490.9        | 3               | 112        |
| Chaoshifa   |        |              |                 |            |
+-------------+--------+--------------+-----------------+------------+
| Beijing     | China  | 238.5        | 0               | 75         |
| Shoulian    |        |              |                 |            |
+-------------+--------+--------------+-----------------+------------+
| Beijing     | China  | 69           | 21              | 17         |
| Shuntianfu  |        |              |                 |            |
+-------------+--------+--------------+-----------------+------------+
| Carrefour   | France | 1622.8       | 25.7            | 41(n       |
|             | JV     | (nationwide) |                 | ationwide) |
+-------------+--------+--------------+-----------------+------------+
| Wal-mart    | US     | 706.9        | 23.5            | 33         |
|             |        | (nationwide) |                 |            |
+-------------+--------+--------------+-----------------+------------+

Source: CCFA / ATO Beijing

Despite the strength of its expatriate community, the percentage of
imported food in Beijing hypermarkets rarely reaches more than 2-3% of
sales. Stores routinely adjust the quantity of imported food in a
particular store based on local incomes and the presence of expatriates.
Warehouse stores generally target higher-income consumers (who own
cars), and thus generally stock more and higher-value imports. Sam's
Club stores in Beijing sell three times as much imported food as
Wal-Mart Super Centers, but the ratio of imported products is still only
2-3% of sales. Beijing retailers hold US products in high regard for
their quality. Shelf surveys reveal special sections devoted to imported
beer, fruit and wine. Dairy cases have expanded, and often display
imported cheeses. Substantial displays of imported breakfast cereals
have also become more common. Although most stores boast extremely large
frozen food sections, they remain stocked mainly with frozen dumplings,
with the exception of imported frozen mixed vegetables as well as corn
and peas.

Hypermarkets in the Beijing area generally expect to make higher profits
on imported foods, because the market risk is higher. They also expect
promotional assistance for new-to-market items, including in-store
demonstrations and sampling, as well as negotiated fees for promotional
efforts. Some retailers charge slotting fees, such as Carrefour where
the cost can reach as high as RMB 10,000 (\$1,200) per slot per store.
Other retailers, such as Wal-Mart and Auchan appear to put most of their
effort into keeping prices as low as possible. The hypermarket format is
expanding rapidly throughout North China, although same store sales fell
by 10% nationwide in 2003, largely due to increased competition.

Modern **convenience stores** are just beginning to make an appearance
in Beijing and other northern cities. Most are operated by the same
state-owned supermarket chains that dominate Shanghai and other parts of
China. The stores can be characterized as clean, well-managed and
heavily automated, with real-time inventory sytems. In many places they
are rapidly replacing the traditional xiaomaibu stands that sell snacks
and drinks, but stock few imported products. Initial reports indicate
that convenience chains are having to adjust their strategies to match
the differences in Beijing's consumer culture, with one noting that
24-hour service is less of an advantage in the cold North than in the
southern areas where most of China's convenience chains are based.

In the race to develop Beijing and North China, state-owned behemoth
Lianhua has moved quickly into the lead with its Quik chain. 7-11, with
a strong foothold in South China, began opening stores in Beijing in
April, 2004 but has proceeded slowly. The rapid growth in car ownership
has created great interest in gas marts, which should be an important
source of growth for the sector in the near future. Overall, however,
the convenience sector has been relatively slow to develop. Beijing's
government has made a concerted effort to limit growth in the sector,
fearing both overdevelopment as seen in Shanghai, and the displacement
of traditional family-owned stores. The generally unfavorable regulatory
climate may also be a factor, as permits and licenses can be difficult
to obtain at the best of times.

**Beyond Beijing** retail growth has been impressive. Of Carrefour's 56
retail stores in China, 25 are located in North China. While
hypermarkets in Beijing have begun catering to car owners, this has not
been the case in other northern cities, where shoppers most often walk,
ride bikes or use public transportation. As a result, the volumes that
can be purchased on a single shopping trip are limited. Shoppers at
warehouse stores are more likely to drive cars or small trucks, or to
arrange for delivery. One variant on the hypermarket in China are
department stores with large food sections. Most are older stores, but
Malaysian-invested Parkson's is trying to develop a niche in imported
food. Stores often measure more than 30,000 square meters. Although the
food departments are generally about the size of a domestic supermarket,
they stock higher quality products and a higher percentage of imports.
This particular format is still important in parts of North China and in
inland provinces, although the expansion of modern retailers has placed
their long-term viability in doubt.

Shandong, a coastal province to the south of Beijing, is home to a
number of growing industrial cities and rising incomes. Climate and soil
conditions are ideal for a variety of food and agricultural products
such as poultry, beef fruit, peanuts and aquatic products. Companies
from nearby Japan and South Korea have invested heavily in the
development of the province's modern infrastructure, including cold
chain and container port facilities. While no single city has per-capita
incomes approaching those of Beijing, the cities of Qingdao, Yantai,
Weihai and Jinan are among some of the most prosperous in China, and
have developed a significant middle class. In addition, Shandong's long
history of trade has made the local culture more open to imported
products than most other parts of China. In August, 2004, ATO/Beijing
partnered with Carrefour to launch its Shandong American Retail Food
Promotion in the cities of Qingdao and Jinan. The promotion ran 15 days
and introduced 200 new-to-market consumer-ready products. In Qingdao the
event coincided with the International Beer Festival and garnered strong
support from the local and provincial governments. Sunkist oranges,
California table grapes, U.S. potato products, Alaska Salmon and a
number of consumer-ready food products did particularly well in Qingdao,
which is home to a large expatriate community.

Another standout market is the port city of Dalian, the gateway to
China's Northeast. Similar in many ways to Qingdao, Dalian is a
trade-oriented city with heavy investment from Japan and Korea. Dalian
has excellent infrastructure and high disposable incomes compared to
other cities. Harbin, the capital of Heilongjiang province in the far
Northeast, is the largest provincial capital in China, and has become a
hotspot for retail development. A few short years ago this city of 10
million had no large supermarkets. Last November, it hosted the opening
of its third Carrefour store, and will see the opening of its third
Wal-Mart store before February, 2005. ATO/Beijing estimates that, by the
end of 2005, the greater Harbin area will be home to 20 domestic and JV
hypermarket operations.

In other parts of North and Northeast China, retail development has
lagged due to a legacy of large and unproductive state-owned
enterprises. These holdovers from the Mao-era's command economy still
dominate much of production and employment in this part of the country,
and have acted as a drag on both development and reform. Despite this,
modern retailing has come to every major city in the region, and
development is likely to continue for the foreseeable future, creating a
wealth of opportunities.

**[Shanghai Region]{.underline}** -- The city of Shanghai sits at the
center of the Yangtze River delta and, along with Guangzhou, is one of
China's two major zones of economic development. Massive infrastructure
development has supported the drive for development, and local press
reports that Shanghai has now passed Rotterdam as the world's largest
container port. Combined with the neighboring provinces of Jiangsu and
Zhejiang (greater Shanghai), Shanghai accounts for 20% of China's retail
sales and roughly ¼ of GDP. Although there are ports dotted along the
coast, the vast majority of imported food products, even those destined
for port cities such as Ningbo, enter through Shanghai. Although quite
large, Shanghai's expatriate community is not as diverse as Beijing's
and is overwhelmingly dominated by Taiwanese (estimates vary widely,
placing the Taiwanese population in the greater Shanghai area at as much
as 300,000). The Taiwanese bring with them a strong familiarity with
U.S. and Japanese brands and products. Shanghai itself is aggressively
cosmopolitan, deriving much of its identity from its up-to-the-second
knowledge of international fashions and brands, making it an ideal venue
for imports.

The **hypermarket** and supermarket sectors in Shanghai are quite well
developed. In general, western-invested hypermarkets are receptive to
import food promotions, though these often come with strings attached,
such as steep slotting fees for new products, which form a serious
barrier to the introduction of new products. Taiwanese chains such as
RT-Mart and Trust Mart are also important players, and are generally
favorable to imports, though some lack experience with western-style
promotions. Domestically owned chains are less favorable to imports and
less interested in promotions. Although transportation and distribution
infrastructure is among the best in China, procurement by chains is
still often piecemeal. Although many chains have centralized procurement
for some products, many other products, including many imports, are
procured through local agents adding to the price and making quality
control more difficult. This is beginning to change as hypermarkets
build their supply systems and distributors and consolidators team up to
simplify the process.

The scale of stores in Shanghai tends to be small, reflecting the
crowding in one of Asia's most densely populated cities. Hence what are
commonly called supermarkets are often little larger than grocery
stores, while many hypermarkets are considerably smaller than their
western counterparts. Another common feature in the region are urban
hypermarkets that act as both anchor store and mini-shopping mall: the
ground floor of the building is rented out to various small shops and
boutiques to form a small mall, while the upper floors are taken by the
hypermarket. One of the few chains to follow the more traditional 'big
box' approach has been Germany's Metro. Metro has targeted Shanghai's
30,000 plus licensed restaurants as its customer base, and thus acts in
many ways as a restaurant supply wholesaler, providing bulk sales and
even chef training.

+-------------+-------------------------+--------------+---------------+---+
| **Table 4.  |                         |              |               |   |
| Selected    |                         |              |               |   |
| Hyp         |                         |              |               |   |
| ermarkets/S |                         |              |               |   |
| upermarkets |                         |              |               |   |
| in          |                         |              |               |   |
| Shanghai**  |                         |              |               |   |
+-------------+-------------------------+--------------+---------------+---+
|             |                         |              |               |   |
+-------------+-------------------------+--------------+---------------+---+
| Retailer    | Ownership               | Revenue      | No. of Stores |   |
|             |                         | (2003)       |               |   |
+-------------+-------------------------+--------------+---------------+---+
| Lianhua     | China/SOE               | 240.31       | 12 (hypermkt  |   |
|             |                         |              | only)         |   |
+-------------+-------------------------+--------------+---------------+---+
| Hualian     | China/SOE               | 180.33       | n/a           |   |
+-------------+-------------------------+--------------+---------------+---+
| No          | China/SOE               | 123.81       | 260           |   |
| nggongshang |                         |              |               |   |
+-------------+-------------------------+--------------+---------------+---+
| Carrefour   | France JV (Lianhua)     | 32.55        | 8\*           |   |
+-------------+-------------------------+--------------+---------------+---+
| Metro       | Germany JV (Jinjiang)   | 56.21        | 4\*           |   |
+-------------+-------------------------+--------------+---------------+---+
| Auchan      | France JV               | 8.52         | 4\*           |   |
+-------------+-------------------------+--------------+---------------+---+
| RT-Mart     | Taiwan JV               | 104.27       | 5\*           |   |
+-------------+-------------------------+--------------+---------------+---+
| Hymall      | Taiwan/UK JV            | NA           | 11\*          |   |
+-------------+-------------------------+--------------+---------------+---+
| Jieqiang    | China/SOE               | 16.26        | 90\*          |   |
+-------------+-------------------------+--------------+---------------+---+
| Lotus       | Thailand JV             | 34.07        | 13\*          |   |
+-------------+-------------------------+--------------+---------------+---+
| Homegain    | China                   | 14.50        | 95            |   |
+-------------+-------------------------+--------------+---------------+---+
| E-Mart      | Korea JV                | 3.05         | 1             |   |
+-------------+-------------------------+--------------+---------------+---+
| Tops        | China                   | 2.13         | 33            |   |
+-------------+-------------------------+--------------+---------------+---+
| Source:     |                         |              |               |   |
| Shanghai    |                         |              |               |   |
| Statistical |                         |              |               |   |
| Yearbook    |                         |              |               |   |
| 2004,       |                         |              |               |   |
| A           |                         |              |               |   |
| TO/Shanghai |                         |              |               |   |
| research    |                         |              |               |   |
|             |                         |              |               |   |
| Note: Store |                         |              |               |   |
| numbers as  |                         |              |               |   |
| of          |                         |              |               |   |
| December,   |                         |              |               |   |
| 2003,       |                         |              |               |   |
| except \*   |                         |              |               |   |
| November    |                         |              |               |   |
| 2004.       |                         |              |               |   |
+-------------+-------------------------+--------------+---------------+---+

Supermarket chains, dominated by Shanghai-based giants Lianhua, Hualian
and Nonggongshang, are omnipresent not only in Shanghai but throughout
most of East China. Lianhua is probably the only food retailer with true
nationwide reach (with the possible exception of Hualian). The
supermarket industry, however, has lost ground in competition with
foreign-invested hypermarkets. In the first quarter of 2004, 53% of
consumer goods were sold through hypermarkets. This shift has prompted a
sharp response from both supermarkets and the Chinese government. First,
China's domestic supermarket chains have launched their own
hypermarkets, complete with distinct branding, such as Lianhua's Century
stores or Nonggongshang's NGS hypermarkets. Second, the Chinese
government has taken a direct interest in supporting China's retail
industry. One of their first actions in this vein was to merge the two
largest chains, Lianhua and Hualian, into a larger company called
Bailian. The merger has been slow to take off however, and both chains
continue to operate and report income independently. Part of the reason
for this slowness is a third major change: the larger Shanghai-based
chains are pursuing a strategy of acquiring smaller local or regional
chains outside of the Shanghai area. While there have been difficulties
in incorporating these acquisitions into the parent company's management
structure, it is giving these chains unprecedented nationwide reach, as
well as providing a presence in smaller cities where there is less
competition and higher profit margins.

Intense competition is affecting hypermarkets as well, and many are
seeking new ways to build foot traffic. Thailand-based Lotus recently
extended the hours at its flagship store in Shanghai to 24 hours, in
order to attract busy urban professionals and customers seeking to avoid
the massive daytime crowds. Lotus has openly admitted that the strategy
was designed to raise their profile rather than profits, in anticipation
of future expansion. Carrefour's flagship store at Gubei quickly
followed suit, announcing extended hours. More recently, Nonggongshang's
NGS hypermarkets in Shanghai took a different approach, announcing that
they will begin labeling non-genetically modified foods on their
shelves. This turns existing regulations, which require labeling of
products containing GM material, on their heads, and appears designed to
build a following among Shanghai's increasingly sensitive consumers.

Despite the competition, the hypermarket industry is set to grow, both
in Shanghai and beyond. After many delays, Wal-Mart announced its entry
into Shanghai, and is scheduled to open its first store in the city in
mid to late summer, 2005, followed shortly by two more. Lotus has also
announced aggressive expansion plans, as has E-Mart (owned by Korea's
Shinsegae), which plans to open 10 new stores in the next four years.
British retailer Tesco also established a presence this year when it
purchased shares in Taiwan-owned Hymall. What impact this will have on
Hymall's activities in Shanghai is not entirely clear, but the chain has
announced plans to open 10 new stores through 2005. In late 2004,
according to press reports Japan's Ito Yokada announced plans to open an
office in Shanghai to operate wholly-owned stores in China. Local
retailers are also continuing to expand: Lianhua announced it will spend
over \$100 million on acquisitions in 2005. At the same time, it is
continuing to integrate prior acquisitions, converting its Jiayou stores
in Hangzhou to the Lianhua and Century Lianhua format. Hualian has
undergone a change in management, and appears to have shelved expansion
plans for the time being.

In the wake of SARS, concerns over food safety are having a profound
impact on food retailing in Shanghai. As in all major cities in China,
the Shanghai city government has long been pursuing a policy of shutting
down wet markets, with only limited success. City governments generally
view wet markets as unsanitary, difficult to regulate, and inferior as
sources of tax revenue. Shoppers still prefer wet markets, however, due
to their convenience, price, and above all the freshness of meat and
quality of produce available. The SARS and avian influenza crises have
led to considerable refinement in the government's strategy: rather than
focusing on closure of wet markets, Shanghai is now insisting that they
meet stricter sanitation standards. Following the avian influenza
outbreak, for example, all markets selling live birds have been required
to isolate bird pens and slaughter facilities from customer areas.

The other half of this strategy has been to encourage the development of
'fresh' supermarkets to replace wet markets. These are defined as
supermarkets that dedicate at least one half of their floor space to
fresh vegetables, fruit, meat, dairy and eggs, as compared to the
average one-third of space dedicated to these items in conventional
supermarkets. If successful, this strategy has a much greater potential
for displacing wet markets. It will also have profound implications for
the development of supply and distribution channels for fresh produce
throughout the area, as supermarket chains taking up this approach will
have to become far more active players in the produce markets.
Nonggongshang in particular, appears to be committed to this strategy,
and has already converted over 100 of its supermarkets to the 'fresh
supermarket' format.

The conversion of supermarkets to a 'fresh' format may be hastened by
the appearance of **discount stores**. Carrefour has introduced its Dia
brand discount stores that feature a limited range of shelf-stable
products at deep discounts, and expects to open a total of 300 Dia
stores in Shanghai alone. Competition from these stores may create more
incentive for supermarket chains to adopt the 'fresh supermarket' format
in order to avoid competing head-to-head on dry goods. The discount
stores are also leading the way in the development of house brand
products. High-profile retailers are hoping to capitalize on consumer
fears and cash in on their reputations by offering products carrying
their own logos. Dia stores are leading the way, with roughly 30% of
their 1,000 SKUs being house brands. Chinese chains are following suit,
and Lianhua has developed four in-house brands covering 2,000 SKUs. The
appearance of house brands may not be a particularly favorable
development for food imports. Some chains appear to be using house
brands as a way of cashing in on their reputation as a guarantor of
quality. Since imports tend to sell on the basis of perceived high
quality, this may place them in competition with the house brands.

The **convenience store** industry in Shanghai remains by far the most
developed in China. The largest players by far are all local chains,
with deep-pockets parents in the food retail or food processing
industries. Management at all is exceptional, with real-time inventory
tracking and heavily automated management systems. The largest chain,
Quik, is owned by Lianhua, while Alldays is owned by Nonggongshang, and
Kedi by Bright Dairy group of Shanghai (which is, in turn, owned by
Nonggongshang). Other major players include Shanghai Buddies (formerly
Liangyou), which grew out of the old state-owned grain and oil stores;
Mei, which is owned by food and beverage manufacturer Aquarius;
Lawson's, a joint venture between Lawson's Japan and Hualian; 21^st^
Century, recently sold by supermarket chain Jiadeli to Maya; and
C-Store, owned by Taiwan-based RT-Mart. No exact figures are available
for the total number of convenience stores in Shanghai proper, but
estimates put the number at over 4,100.

+----------------+---------------------+--------------+---------------+
| **Table 5.     |                     |              |               |
| Major          |                     |              |               |
| Convenience    |                     |              |               |
| Store Chains   |                     |              |               |
| in Shanghai**  |                     |              |               |
+----------------+---------------------+--------------+---------------+
| Company        | Ownership           | Number of    | Locations     |
|                |                     | Stores       |               |
+----------------+---------------------+--------------+---------------+
| Quik           | China/Lianhua       | 1,500        | North China   |
|                |                     |              |               |
|                |                     |              | East China    |
|                |                     |              |               |
|                |                     |              | South China   |
+----------------+---------------------+--------------+---------------+
| Alldays        | China/Nonggongshang | 1,000        | Shanghai      |
+----------------+---------------------+--------------+---------------+
| Kedi           | China/Bright Dairy  | 1,000        | Shanghai      |
|                |                     |              |               |
|                |                     |              | Jiangsu       |
|                |                     |              |               |
|                |                     |              | Zhejiang      |
|                |                     |              |               |
|                |                     |              | Guangdong     |
+----------------+---------------------+--------------+---------------+
| Shanghai       | China/Liangyou      | 500          | Shanghai      |
| Buddies        |                     |              |               |
+----------------+---------------------+--------------+---------------+
| Lawsons        | Japan JV/Lawson's,  | 210          | Shanghai      |
|                | Hualian             |              |               |
+----------------+---------------------+--------------+---------------+
| Mei            | China/Aquarius      | 300          | Shanghai      |
+----------------+---------------------+--------------+---------------+
| 21 Century     | China/Maya          | 576          | Shanghai      |
+----------------+---------------------+--------------+---------------+
| C-Store        | Taiwan JV/RT-Mart,  | NA           | Shanghai      |
|                |                     |              |               |
|                |                     |              | Jiangsu       |
+----------------+---------------------+--------------+---------------+
| Family Mart    | Japan JV/Ito        | 40           |               |
|                | Yokada, CITIC       |              |               |
+----------------+---------------------+--------------+---------------+
| Source:        |                     |              |               |
| ATO/Shanghai   |                     |              |               |
| research       |                     |              |               |
+----------------+---------------------+--------------+---------------+

Growth has continued despite declining per-store revenues and cutthroat
competition. Japan's Family Mart entered the crowded field this year,
opening 40 stores in Shanghai. Competition has led to greater efforts by
existing chains to carve out new markets. Quik and Kedi have pursued
deals with gas station operators to open convenience stores in gas
stations throughout China. China's rapidly growing freeway system,
combined with concerns about the quality of products carried in
mom-and-pop stores may make this a winning strategy. Lawson's has moved
in the other direction, targeting high-end malls and other shopping
venues. Since these traditionally house plenty of high-end sit-down
restaurants, but lack options for shoppers or office workers, Lawson's
has taken to stocking Japanese-style box lunches. Another convenience
chain, 21^st^ Century, was purchased by a well-known chain of music
stores, Maya, and is now offering music and movies at their convenience
stores and opening combined-format stores. Alldays is bucking this
trend, announcing that it will open no new stores, after doubling in
size last year.

Many chains are also showing increased interest in carrying high-value
products in order to raise per-store sales. ATO/Shanghai partnered with
Lawson's to conduct a first-ever U.S. food promotion in 55 stores in
Shanghai. The remarkable success of this promotion led to a follow-on
promotion with the Alaska Seafood Marketing Institute, which featured
Alaska Salmon in Lawsons' box lunches. Box lunches have traditionally
been viewed as a price-driven market in which imported products had
little chance: most box-lunch makers target a total cost of well under
\$1 per lunch. This promotion has made clear, however, that even
traditionally difficult market niches may contain lucrative sub-niches.
Another emerging trend is the use of franchising to support expansion.
Both 21^st^ Century and Shanghai Buddies are relying on franchise stores
for most of their new store openings in Shanghai.

**Beyond Shanghai** is the Yangtze River delta, with a huge number of
fast-growing cities and tremendous market potential. Retail development
is likely to be fastest in those areas near Shanghai that are connected
to its web of transportation and logistics. Retailers have already
spotted this potential, and nearly every major city within 3 hours drive
of Shanghai is host to both foreign-invested and Chinese hypermarkets
and supermarkets. Beyond this, foreign-invested hypermarkets have moved
into nearly every major city of China's interior, and some now boast
multiple outlets. Yunnan in particular has been a hotbed of retail
development despite relatively low per-capita incomes. At last count the
capital, Kunming, was home to three Wal-Mart, two Carrefour, two
PriceSmart, two Trust-Mart and one Parkson hypermarket, though this
number has probably grown. Most recently, Wal-Mart announced plans to
expand into smaller cities beginning with Yuxi in Yunnan province.
Precisely why Yunnan has been the focus of so much development is
unclear, but other cities have also seen remarkable growth. Chengdu, in
Sichuan province, is home to multiple Ito Yokada, Carrefour and Wal-Mart
stores, and is one of the few cities of the interior to show consistent
growth in retail revenues.

ATO/Shanghai recently carried out a major multi-level promotion in
Chengdu in cooperation with Ito Yokada. Consumers showed remarkable
enthusiasm for the imported products, which included seafood, pork,
poultry and dried fruit and nuts, and several products (particularly
pork) sold out several times during the course of the promotion.
Logistics and distribution constitutes one of the largest obstacles in
these interior markets. Most imports are sourced through local agents,
who in turn source from a nearby transportation hub, which in turn
sources from Shanghai. The large number of hands that products pass
through raises not only prices, but significant concerns about the
quality of the product by the time it reaches the far end of the
distribution chain. ATO Shanghai has found that one of the most valuable
outcomes of its promotions in interior cities is to help build links
between retailers and distributors, smoothing out this long supply
chain.

For convenience chains, these logistical limits are an even more serious
issue. In the Shanghai area, most development has been limited to cities
that fall within Shanghai's web of transportation and distribution
services: Suzhou and Wuxi, and to a lesser extent Hangzhou and Nanjing.
Quik, Kedi and C-Store have been the quickest to expand into these
nearby markets. Interviews with Kedi indicate that they rely entirely on
their Shanghai distribution network to supply stores in Suzhou.

**[Guangzhou Region]{.underline}** -- Located in South China, Guangdong
has the highest GDP of any single province in China, with retail sales
of consumer goods increasing to 560.6 billion RMB in 2003, accounting
for 12% of China's total sales. At the heart of Guangdong's economy is
the Pearl River Delta (PRD) Economic Zone, which accounted for 80% of
the province's GDP in 2003. Like Shanghai, the city of Guangzhou sits in
the center of a web of development that spreads well beyond Guangdong
and into neighboring provinces. Also like Shanghai, retail development
in Guangzhou itself is approaching saturation point, with the strongest
growth opportunities likely to take place in nearby cities such as
Shenzhen. The Chinese government has targeted the Pearl River delta and
several adjacent provinces for future investment as a means to offset
the growing influence of Shanghai. Rapid expansion of the freeway system
has helped to extend Guangzhou's influence throughout southern China by
cutting shipping times to interior cities like Changsha (Hunan province)
down to a single day.

International retailers, including Wal-Mart, Carrefour, Metro, Jusco,
Park 'N Shop, and Trust-Mart have all opened stores in major cities such
as Guangzhou, Shenzhen, Dongguan, Zhuhai and Fuzhou, and have plans to
further expand their operations in South China in the next few years.
For example, Wal-Mart and Carrefour are currently establishing large
purchasing centers in Shenzhen.

Domestic competition is also on the rise. China's top ten retailers,
including Lianhua, Hualian, CRC Vanguard and A. Best have proposed to
open more stores in Guangdong in order to increase their market share.
However, they still lag far behind their foreign counterparts in terms
of management experience and capital strength. There is also a movement
in South China to upgrade traditional wet markets, since these will
continue for the near future to be the main food source for lower income
consumers with limited purchasing power and access to transportation.
Many of these markets are being cleaned up and moved into structures
with roofs and proper cold storage and food handling facilities.

Regional supermarkets and hypermarkets purchase products from local
importers, wholesalers and distributors, with many facing various
difficulties in obtaining and/or transporting imports to the mainland.
For example, some lack sufficient information on where to source
imported food and beverage products. However, many directly and
indirectly purchase foreign products that have been transshipped to the
mainland from Hong Kong. This allows importers and distributors to avoid
paying VAT and customs duties, and exposes the market to some products
currently banned from the mainland. The gray channel trade makes it
difficult for US exporters and most western-style supermarkets that
insist on using proper channels to be competetive with contraband
products.

South China consumers have a strong preference for U.S. food products in
part due to the reputation for high quality, but also for health reasons
since many locally-produced foods are alleged to have high
concentrations of pesticide residues. Nonetheless, consumers are very
price-sensitive, and many buy domestic products because they cannot
afford higher-priced imports. The most popular imports include baby
foods/infant formula, chocolates, dried fruit and nuts, fresh fruit and
vegetables, potato chipa, popcorn and canned foods such as soup.

+-----------+---------+----------------+-------+-------+-------------+
| Retailer  | Ow      | Sales in       | N     |       | Locations   |
|           | nership | Guangdong      | umber |       |             |
|           |         | (RMB)          | of    |       |             |
|           | (Base)  |                | Ou    |       |             |
|           |         |                | tlets |       |             |
|           |         |                |       |       |             |
|           |         |                | 2003  |       |             |
|           |         |                | 2004  |       |             |
+-----------+---------+----------------+-------+-------+-------------+
| CRC       | Ch      | 10.3 billion   | 321   | 346   | Throughout  |
| Vanguard  | inese-S |                |       |       | Guangdong   |
|           | henzhen |                |       |       |             |
+-----------+---------+----------------+-------+-------+-------------+
| A. Best   | Ch      | 5.9 billion    | 26    | 30    | Guangzhou   |
| (Xin Yi   | inese-S |                |       |       |             |
| Jia)      | henzhen |                |       |       | Shenzhen    |
|           |         |                |       |       |             |
|           |         |                |       |       | Jiangmen    |
+-----------+---------+----------------+-------+-------+-------------+
| Minren    | Ch      | 2.2 billion    | 21    | 111   | Throughout  |
|           | inese-S |                |       |       | Guangdong   |
|           | henzhen |                |       |       |             |
+-----------+---------+----------------+-------+-------+-------------+
| Renren    | Ch      | 3.2 billion    | 7     | 12    | Shenzhen    |
|           | inese-S |                |       |       |             |
|           | henzhen |                |       |       | Huizhou     |
|           |         |                |       |       |             |
|           |         |                |       |       | Jianmen     |
|           |         |                |       |       |             |
|           |         |                |       |       | Zengcheng   |
+-----------+---------+----------------+-------+-------+-------------+
| Park'n    | Hong    | 5.9 billion    | 8     | 27    | Thoughout   |
| Shop      | Kong    |                |       |       | Guangdong   |
+-----------+---------+----------------+-------+-------+-------------+
| T         | Taiwan  | N/A            | 11    | 17    | Guangzhou   |
| rust-Mart |         |                |       |       |             |
|           |         |                |       |       | Shenzhen    |
+-----------+---------+----------------+-------+-------+-------------+
| Wal-Mart  | U.S.    | 2.4 billion    | 10    | 13    | Shenzhen    |
|           |         |                |       |       |             |
|           |         |                |       |       | Dongguan    |
+-----------+---------+----------------+-------+-------+-------------+
| Lotus     | T       | 11 billion     | 4     | 6     | Guangzhou   |
|           | hailand |                |       |       |             |
+-----------+---------+----------------+-------+-------+-------------+
| Carrefour | French  | N/A            | 5     | 6     | Guangzhou   |
|           |         |                |       |       |             |
|           |         |                |       |       | Zhuhai      |
|           |         |                |       |       |             |
|           |         |                |       |       | Shenzhen    |
+-----------+---------+----------------+-------+-------+-------------+
| Metro     | German  | 1.6 billion    | 1     | 1     | Dongguan    |
+-----------+---------+----------------+-------+-------+-------------+
| Jusco     | Japan   | 438 million    | 5     | 6     | Guangzhou   |
|           |         |                |       |       |             |
|           |         |                |       |       | Shenzhen    |
+-----------+---------+----------------+-------+-------+-------------+
| Homecity  | Chi     | 4 billion      | 25    | 50    | Guangzhou   |
|           | nese-Gu |                |       |       |             |
|           | angzhou |                |       |       |             |
+-----------+---------+----------------+-------+-------+-------------+
| Sources:  |         |                |       |       |             |
| ATO/      |         |                |       |       |             |
| Guangzhou |         |                |       |       |             |
| Telephone |         |                |       |       |             |
| Interview |         |                |       |       |             |
|           |         |                |       |       |             |
| All       |         |                |       |       |             |
| listed    |         |                |       |       |             |
| hyp       |         |                |       |       |             |
| ermarkets |         |                |       |       |             |
| and       |         |                |       |       |             |
| sup       |         |                |       |       |             |
| ermarkets |         |                |       |       |             |
| rely on   |         |                |       |       |             |
| agents    |         |                |       |       |             |
| and       |         |                |       |       |             |
| dis       |         |                |       |       |             |
| tributors |         |                |       |       |             |
| for       |         |                |       |       |             |
| p         |         |                |       |       |             |
| urchasing |         |                |       |       |             |
| products. |         |                |       |       |             |
+-----------+---------+----------------+-------+-------+-------------+

**Convenience stores** and mini-marts at foreign-owned gas stations such
as Esso, BP and Shell have a strong presence in the Guangzhou area.
While convenience stores place a greater emphasis on ready-to-eat foods,
snacks, newspapers and magazines, gas station mini-marts have not become
western-style one-stop-shops, offering only a very limited range of soft
drinks and local products. 7-Eleven, the most competetive convenience
chain in Guangdong, has plans to open ten additional stores by the end
of this year. Circle K (OK), Kedi and Quik have recently challenged
7-Eleven's dominance in South China, and have plans to aggressively
expand their presence there.

The most interesting item to note about convenience stores in the region
is their price competetiveness with hypermarkets. The market is so price
sensitive that convenience stores are forced to keep their prices in
line with larger retailers, definitely a point of divergence with their
western counterparts. As incomes rise and more consumers own cars,
state-owned gas stations that currently only sell gasoline are rapidly
being converted into full-service stations with mini marts. For example,
BP only had some 25 gas station mini-marts at the end of 2002, but now
has over 170 such stations and is continuing to refit older ones.

+---------------------+--------------------------------+---------------+
| **Table 7.          |                                |               |
| Convenience Stores  |                                |               |
| and Gas Mini-Marts  |                                |               |
| in Guangdong        |                                |               |
| Province**          |                                |               |
+---------------------+--------------------------------+---------------+
| Retailer            | Ownership                      | No. of        |
|                     |                                | Outlets       |
|                     |                                |               |
|                     |                                | \(2004\)      |
+---------------------+--------------------------------+---------------+
| 7-Eleven            | President / Taiwan (franchise  | 185           |
|                     | holder)                        |               |
+---------------------+--------------------------------+---------------+
| Kedi                | Shanghai / Chinese             | 17            |
+---------------------+--------------------------------+---------------+
| Quik                | Lianhua (Shanghai) / Chinese   | 100           |
+---------------------+--------------------------------+---------------+
| Meiyijia            | Dongguan / Chinese             | 300           |
+---------------------+--------------------------------+---------------+
| C-Store             | Taiwan                         | 54            |
+---------------------+--------------------------------+---------------+
| Jiadeshi            | Hong Kong                      | 42            |
+---------------------+--------------------------------+---------------+
| Esso                | US / Petrol China              | 6             |
+---------------------+--------------------------------+---------------+
| BP                  | BP / Petrol China              | 176           |
+---------------------+--------------------------------+---------------+
| Circle K (OK)       | Ya Li Group / Hong Kong        | 16            |
+---------------------+--------------------------------+---------------+

# II. Road Map for Market Entry

**[Ground Rules]{.underline}**

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

**1) Understand the importance of relationships.** China's legal system
is developing, but remains inconsistent. Enforceability of contracts
varies widely. In lieu of a strong, consistent legal system, business in
China relies heavily on personal contacts and influence (referred to as
'guanxi'). For companies with a serious interest in the China market, no
investment will be more important to their success than the network of
relationships that they establish in China. For more pointers on this,
please see ATO/Shanghai's report CH 4835, Chinese Business Etiquette.

**2) Get to know the market**. As noted above, China is a surprisingly
diverse place. Tastes, customs, culture, business practices and
government regulations vary from place to place. Experience in other
markets will not necessarily help you in China. Chinese buyers are often
unfamiliar with U.S. product sources, quality standards and contract
practices, while many U.S. exporters are not familiar with China's sales
practices, distribution channels and consumer preferences. Visits to
China give exporters the chance to assess the market, establish
relationships and determine where their greatest difficulties and
opportunties will be.

**3) Find a local partner and/or distributor.** An exporter's success in
China often hinges on his local partner, distributor or representative.
Business in China is based on relationships: regular contact with
buyers, distributors, consumers and government officials is crucial to
success. For larger companies and companies with a long-term commitment
to China, establishing a representative office or a joint venture
partnership may be worthwhile. Smaller companies, however, are likely to
rely on a local importer/distributor to handle marketing and regulatory
issues, which makes the choice of a good partner absolutely critical.
Hastily made partnerships are perhaps the most common cause of business
failure in China. It is also important to ensure that the incentive
structure of your partnership is designed to keep you and your partner
working in the same direction.

**4) Keep an open mind.** Things don't always work as expected in China.
This can sometimes be a good thing, provided you are poised to take
advantage of opportunities as they arise. Time and time again, ATO
promotions have turned up unexpected opportunities. A few examples: At a
mall promotion in Shanghai, high-end beef cuts, long regarded as too
expensive and inappropriate to Chinese cooking methods, was the hot
item. Two years later, at the exact same venue, fresh pears and cherries
sold out within hours of opening. Another promotion in Wuhan, deep in
the interior, saw Mexican foods sell out in short order. In Chengdu, at
the center of one of China's largest pork producing provinces, U.S. pork
sold out several times during a promotion. By the same token, a product
may find its niche in an unexpected place. Washington apples have shown
remarkable strength in China despite brutal price competition from
domestic apples, because their excellent appearance makes them ideal for
the gift market, where price is less of a consideration.

**5) Invest (wisely) in market research.** From the perspective of an
outsider, Chinese tastes can seem fickle. Tastes poorly received in the
U.S. may prove successful in China, while products targeted to one
market niche may end up finding their greatest success in a completely
different one. To avoid unpleasant surprises and find new opportunities,
exporters with a long-term interest in China are advised to research the
market and ultimately to test their products directly. Be careful how
you invest research money, however. Due to a dearth of reliable
government statistics and laws that limit their activities, the quality
of research by international market research firms is often not
significantly better than that of much less expensive local companies.

**6) Adapt your product to the Chinese market.** Exporters should be
prepared to adapt their products to the demands of their Chinese
customres. This includes flavors, packaging, prices and labeling. Small
changes to flavors or packaging, based on market research, may make the
product more viable in China. For example, Chinese consumers are often
unwilling to buy products they can't see, so including a transparent
window in the box can help sales. Products that are marketed as gifts,
such as wine, should place extra emphasis on the packaging, as this is
considered an important part of any gift. Many exporters seeking to
break into the gift market have special packages manufactured in China.
Labeling is another major issue, as China has detailed regulations on
food labeling (a good distributor should be able to help with this).

**7) Find your market niche and focus on it.** China is a very, very big
place. A common mistake made by exporters is to spread themselves too
thin by trying to cater to the entire market spectrum. The mass market
is driven by price, and China's fragmented logistics systems make it
difficult to service more than one geographic area at a time. Exporters
with limited resources are well advised to identify the best market
niche for their product, and serve it faithfully and consistently until
they are sure of success before moving on. Examples of potential market
niches might be along the lines of 'young mothers in Shanghai' or
'affluent teens in Guangzhou' or 'business travelers in Beijing.'

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

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

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

Distribution and logistics channels vary significantly within China and
across all sectors. As a general rule, the 'big three' cities of
Shanghai, Guangzhou and Beijing have the best infrastructure. All
sectors have certain things in common, however.

\- China is still subject to import licensing and currency exchange
restrictions. Although import licensing is due to go away in 2005, the
reality is likely to take somewhat longer, and currency exchange
restrictions will continue. Since most import transactions rely on the
licensed importer to handle currency exchange as well, the effect on
transactions is likely to be limited. Few distributors or traders hold
import or currency exchange licenses and very few licensed importers act
as distributors, so the import licensing and currency exchange is
primarily a legal convention, adding paperwork (and fees) to the
process. Even if payment is made on delivery, the entire foreign
exchange process can take several weeks from the time the goods arrive.

\- Good distributors, especially those with significant geographic
reach, are in extremely short supply. The most important task for an
exporter is to identify a distributor they can work with. This company
must be able to handle all the import formalities (including finding a
licensed importer, customs clearance, logistics, warehousing, quarantine
and inspection), and have a network of retail customers. Some products,
such as wine and poultry, have a community of specialized distributors
with a wealth of experience in those products.

\- Indirect sales through Hong Kong still take place, but are declining
in importance. In this case, exporters sell to an agent in Hong Kong,
who then resells the product into China. Exporters who lack the tie or
resources to become directly involved in China often take this route, as
business practices in Hong Kong are more familiar, language barriers
less of an issue, and risks are generally lower. In doing so, however,
exporters lose control of their products, which may be adulterated
before reaching the final consumer. This can undermine the product's
reputation if it causes problems with quality. Exporters also lose the
opportunity to make contact with their ultimate buyers.

\- Gray market channels, an extralegal version of indirect sales,
persist although their importance has declined in recent years. Gray
market sales evade tariffs and VAT taxes, as well as bans or quotas on
certain products. They are also notoriously opaque and subject to
frequent crackdowns. Declining tariffs and increased openness in direct
trade with the mainland have reduced the incentives to move products
through this channel.

\- Once a product clears customs, it is usually stored in a warehouse
rented by the distributor, with the storage costs borne by the exporter.
As a result, most shipments arrive as consolidated containerloads
ordered by one or more retailers.

\- Port services in China are becoming more sophisticated. Most major
ports now include free trade zones and companies that provide
comprehensive logistics services. Free trade zones provid bonded storage
that allows exporters to avoid paying VAT and duties until the product
ships out of the FTZ. Many also allow value-adding (such as repacking or
processing) to take place in the FTZ, with VAT paid only on the original
import value of the product. Logistics service providers operating in
the FTZs can provide warehousing, inventory control and shipping. Some
offer temperature-controlled storage and on-line inventory.

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

Although China's logistics infrastructure is developing rapidly,
integrated supply and distribution networks are rare outside the three
major cities, and must be peiced together one component at a time. ATO
and cooperator promotions often do much of this work for you, making
these promotions an excellent opportunity to build distribution networks
in new areas. The following chart provides a simplified overview of the
flow of goods from a U.S. supplier to a Chinese retail outlet.

**Figure 7. Imported Goods Marketing Chain**

In addition to the difficulty of peicing together a distribution chain,
Chinese regulations on import licensing and currency exchange can make
financial transactions quite complex. Payment terms and specific
arrangements vary according to the product. The following chart follows
an actual transaction for a shipment of celery. While every transaction
is unique, it provides some notion of the complexities involved in doing
business in China.

**Figure 8. Import Transaction Flow: Case Study (U.S. Celery)**

Exporters working with a reliable distributor can avoid getting involved
in these details. Experienced distributors can handle currency exchange,
import licensing and product registration requirements, and inform
exporters of the export documentation and labeling requirements.
Nonetheless, knowing how the transaction works is important, should
problems crop up later. Certain items peculiar to the above transaction
are also worth note. Payment of 50% on shipment is not typical of sales
to retailers, most of whom do not pay until after they receive the
shipment, and many of whom will demand 90-180 days' credit. Also, first
shipments of new products will require additional time and paperwork for
product registration and registration and approval of product labels.

## II.A Hypermarkets, Supermarkets and Warehouse Outlets

Hypermarkets and warehouse outlets are one of the fastest growing
sectors, and offer the best opportunities for U.S. exporters. Dominated
by chain stores, this sector has more centralized purchasing than most
others. Foreign-owned or managed chains are prominent in this sector,
and have solid experience in dealing with and promoting imported
products. Leading hypermarket chains such as Carrefour and Wal-Mart owe
part of their success to the fact that they have managed to bypass
China's inefficient wholesale system and are ordering some products
directly from suppliers and manufacturers. It is important to note
however, that these buyers often rely on local agents or distributors
for logistics and import formalities, and an exporter may still find it
necessary to line up a distributor before the chain will agree to carry
their products. Although supermarket chains have wider reach than the
hypermarkets, the largest chains are state-owned and suffer from a lack
of integrated management. Supply and distribution chains for
supermarkets tend to be localized, giving them less purchasing volume
than the biggest hypermarket chains. In addition, their focus tends to
be on lowest price rather than quality or novelty.

Exporters interested in this market segment are advised to familiarize
themselves with their prospective buyers, as purchasing practices vary
between different chains. Since most of these chains rely on
distributors to some extent, it is also useful to become familiar with
them as well. In some cases, the more aggressive distributors will
actually market new products to the retailers, who may be reluctant to
stock items with uncertain prospects for success. Support from the
distributor can make a tremendous difference, since hypermarkets often
charge exorbitant slotting fees to carry new products. These fees are
usually covered by the distributor, making their support critical to
success. Both hypermarkets and distributors are generally supportive of
promotional campaigns, as they both have a stake in the product's
success. However, retail chains often attach a number of strings to
promotions, charging numerous fees for use of their space and requiring
that the supplier buy back any products not sold by the end of the
promotion.

## II.B Convenience Stores

The convenience store industry is quite new to China. As a result, it
remains geographically concentrated in the coastal areas around Shanghai
and Guangzhou, with a growing presence along China's freeways and in the
Beijing area. At the same time, it is the most modern in terms of
management and distribution networks, with centralized procurement for
most chains. Convenience stores also act as service centers, selling
phone cards and providing bill-paying services. Until recently,
penetration of imported products was limited primarily to dried fruit
and nuts. However, fierce competiton has led many chains to diversify
their product lines, especially in the direction of higher-value and
ready-to-eat products. Ice cream, including premium brands such as
Haagen Dazs, have become a staple for many stores. Promotional
activities, once based almost exclusively on price-cutting or
two-for-one offers, have become more sophisticated. Most recently,
Lawson's stores in Shanghai participated in a first-ever U.S. Food
promotion organized by ATO Shanghai, following which the chain worked
with the Alaska Seafood Marketing Institute to feature Alaska Salmon in
its boxed lunches.

Movement of convenience stores into niche markets is creating more
opportunities for U.S. exporters. The aforementioned promotion of Alaska
Seafood, for example, was made possible by Lawson's recent movement into
high-end retail venues with large numbers of white collar workers but
few fast-dining options. The growing number of gas-mart convenience
stores, for example, raises possibilities such as products aimed at
traveling businessmen, while combined music-convenience stores in
Shanghai may offer possibilities for product tie-ins.

Exporters seeking to work with these chains should keep several points
in mind. First, they are very strongly focused on consumer demographics.
Most chains have a very clear idea of who the customer base for a given
store is, and proposals that focus on key demographic groups will get a
better reception. Key groups include working parents, young urban
professionals and schoolchildren. Products will have to be adapted to
suit impulse buyers: single-serving portions will do best. Customers at
these stores are brand-conscious (otherwise they'd be shopping at the
xiaomaibu), but also price-sensitive. Key price points are 1 and 10
RMB/unit. At least one importer has built success on repacking U.S.
prunes into single-serving packages that are sold to schoolkids for 1
RMB apeice. Convenience chains are also extremely sensitive to their own
standards and store layouts. Promotions are likely to require quite a
few meetings in order to work out a program that all participants are
happy with.

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

Wet markets are on the decline, but remain dominant in smaller cities
and still retain a significant presence in even the most developed big
cities. Freshness and price are the key reasons for the persistence of
wet markets. Chinese consumers prefer to buy the freshest products
possible, and often purchase chickens and fish live, to be butchered on
the spot. This is in part an effort to ensure quality, as meat processed
out of sight is not always regarded as trustworthy. Vegetables are
generally of higher quality at the wet markets as well, since
supermarkets often have cumbersome supply chains and products are not
well handled. Hypermarkets are a poor alternative for most consumers,
who rely on public transportation or bicycles, and do not have the space
to store large quantities of perishable foods. Government efforts to
clean up wet markets took on a more serious tone following the SARS and
avian influenza outbreaks. A recent effort by Shanghai to create a
serious alternative to wet markets may succeed, provided traditional
supermarkets are able to make the transition to the 'fresh supermarket'
format.

The traditional variety store, the xiaomaibu, continues to hold on, even
in convenience store saturated Shanghai. These family-owned stores are
typically smaller than convenience stores, and stock a heterogenous mix
of drinks, snacks, household items, hardware, bicycle parts and whatever
else the owner thinks to stock. In Shanghai these shops have found their
niche by marketing to areas that are ignored by the convenience stores,
which tend to focus only on high-traffic areas such as schools and
subway stops. Most apartment complexes have at least one xiaomaibu on
site. Xiaomaibus also have found an advantage in marketing to
micro-niches, sometimes carrying utterly obscure products that, for one
reason or another, are in demand in that specific neighborhood, or even
by a single customer. Like convenience stores, many xiaomaibus also sell
telephone calling cards and provide bill-paying services and the like.

Fruit stands are a distinct variant of the xiaomaibu. Like the
xiaomaibu, these are very small, family-owned shops. Unlike the
xiaomaibu, they typically stock only fruit, and often carry imported
products. Most also offer gift baskets, which can be custom ordered,
assembled and wrapped on the spot. Counterfeits are also commonplace in
these shops. Like xiaomaibus, promotions are non-existent in the fruit
stands, and small size and dispersed ownership makes promotional
campaigns virtually impossible.

Supply and distribution channels for wet markets, xiaomaibus and fruit
stands are primitive, with store owners making daily trips to nearby
wholesale or wet markets to stock up. Preserving the identity of
imported products is nearly impossible, and many consumers tend to
assume that all products are local, regardless of packaging or claims on
the part of the seller. Packaged products are often broken up for resale
in smaller units, regardless of whether they were intended to be sold
that way.

# III. Competition

The most serious competition for U.S. food exporters are local and
joint-venture producers and processors. On the one hand, the quality of
fruit, vegetables and processed foods in China is improving rapidly. On
the other, many international companies have established processing
plants in China to take advantage of low labor costs. While supermarket
shelves are often stocked with famous foreign brands such as M&Ms and
Coca Cola, close inspection will reveal that most of these products are
manufactured in China or in Southeast Asia. These local products often
have the additional advantage of being formulated specifically for the
Chinese market. This, along with omnipresent counterfeiting, has made
Chinese consumers somewhat cynical. While they generally associate
imports with high quality, it may be difficult to convince them that a
product is genuinely imported. Domestically manufactured products have
completely cornered the market in several broad categories, including
soft drinks, beer, processed meat and low-end confections. Competition
is becoming quite serious in other areas as well, including
low-to-mid-range wines, confectionery and pet food. Chinese products
have traditionally competed on price alone, but improvements in quality
and efforts to develop recognizable brands have made these products
increasingly competitive at all levels. It should be noted that in any
category, niche markets exist. Hence, while domestically manufactured
beer dominates the overall market, a strong niche market exists for
high-quality imported beer. The fact that this particular 'niche'
amounted to \$50 million in 2003 (UN data) gives an idea of just how
important these niches can be.

In product categories where imports are prominent, competition tends to
be strongest with Pacific Rim neighbors such as Thailand, Australia, New
Zealand and the Philippines. Competition from EU countries tends to be
strongest in high-value niche markets, such as wine, cheese and premium
chocolates. For certain products, specific countries have maintained a
strong market presence. (Based on UN data for 2003: note that US exports
of poultry and beef fell during 2004 as a result of sanitary barriers).

\- Oranges: U.S., New Zealand, South Africa

\- Grapes: U.S., Chile

\- Apples: U.S., Chile, New Zealand

\- Cherries: U.S.

\- Lemons and Limes: New Zealand, U.S.

\- Red Meat (fresh/chilled/frozen): U.S., Canada, Denmark, New Zealand,
Australia

\- Breakfast Cereal: United Kingdom, U.S., Philippines

\- Cheese: New Zealand, Australia, EU, U.S.

\- Frozen Processed Potatoes: U.S., New Zealand, Canada

\- Frozen Corn: U.S.

\- Dairy (other than cheese): New Zealand, France, Australia, U.S.

\- Poultry: U.S., Brazil

\- Tree Nuts: Korea (chestnuts), Russia, U.S. (almonds, pistachios,
walnuts, hazelnuts), Iran (pistachios), Turkey (hazelnuts)

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

\- Premium Ice Cream: France

\- Seafood: Russia, North Korea, U.S., Japan, Canada, Norway

\- Wine: Chile, France, Australia, U.S.

\- Ginseng: U.S., Canada

The U.S. remains the largest overall exporter of consumer oriented food
products to China, with a 30% share of total imports in the category.
China is attracting considerable attention from other countries,
however, and many have established trade promotion offices in China,
including Australia, Canada, France, Great Britain, Italy, the
Netherlands, New Zealand, Thailand, Malaysia and the Philippines. In
addition, China has concluded bilateral or multilateral trade agreements
with many of its neighbors, particularly in ASEAN. The fastest growth in
exports has been seen with Vietnam and Chile, and Vietnam is now the
fourth largest exporter of consumer-oriented agricultural products to
China.

# IV. Best Product Prospects

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

\- Nuts and dried fruit

\- Seafood

\- Poultry meat

\- Red meat

\- Frozen vegetables (esp. sweet corn)

\- Infant formula

\- Baby food

\- Dairy products (esp. ice cream)

\- Frozen potato products

\- Fresh fruit (oranges, apples)

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

\- Premium Ice Cream

\- Fresh fruit (cherries, pears)

\- Processed/dried fruit (blueberries, cranberries)

\- Mexican food

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

\- Organic foods (niche market)

\- Functional foods

# V. Post Contact and Additional Resources

FAS has four offices in China:

**Agricultural Affairs Office, Beijing**

5-2 Qijiayuan Diplomatic Compound

Jianguomenwai, Beijing, 100600

Phone: (8610) 6532-1953

Fax: (8610) 6532-2962

E-mail: agbeijing@usda.gov

**Agricultural Trade Office, Beijing**

Kerry Center, Beijing

24^th^. Floor, Suite #2425

Phone: (8610) 8529-6418

Fax: (8610) 8529-66922

E-mail: atobeijing@usda.gov

**Agricultural Trade Office, Guangzhou**

China Hotel Office Tower, 14/F

Guangzhou 510015, China

Phone: (8620) 8667-7553

Fax: (8620) 8666-0703

E-mail: atoguangzhou@usda.gov

**Agricultural Trade Office, Shanghai**

Shanghai Center, Suite 331

1376 Nanjing West Road

Shanghai 20040, China

Phone: (8621) 6279-8622

Fax: (8621) 6279-8336

E-mail: atoshanghai@usda.gov