Voluntary Report - Public distribution

**Date:** 9/6/2007

**GAIN Report Number:** CH7819

CH7819

**China, People's Republic of**

**Market Development Reports**

**Hangzhou: A Growing Market in a Fertile Land**

**2007**

**Approved by:**

![](media/image1.wmf)Wayne Batwin

U.S. Consulate

**Prepared by:**

Bryan Stewart, updated by Katherine Hanson and Sarah Wegmueller

**Report Highlights:**

Hangzhou is at the cutting edge of economic growth and has been ranked
as "Mainland China's Best Commercial City" for three consecutive years.
The city is ideally located near Shanghai and nestled in the Yangtze
River Delta, providing opportunities for international trade as well as
market development further inland. The World Bank has listed Hangzhou as
one of six "Golden Cities" for outstanding investment environment in
China.

Includes PSD Changes: No

Includes Trade Matrix: No

Annual Report

Shanghai ATO \[CH2\]

\[CH\]

# Introduction: The cutting edge of commercialism 

Hangzhou is the capital of Zhejiang province and lies just 150
kilometers south of Shanghai. It is an ancient city that has enjoyed
economic prosperity and growth for centuries. Hangzhou's good fortune is
due largely to its strategic location in the heart of the Yangtze River
Delta, near the port city of Shanghai. The modern city of Hangzhou is
bustling with a booming tourism industry, and residents and travelers
alike enjoy ideal living conditions. As business flourishes in Hangzhou,
the city has earned a reputation as a center for information technology,
software development, and telecommunications equipment. Zhejiang
province is one of the wealthiest in all of China, and its GDP per
capita is ranked second only to Shanghai in the region.

# Background: Blessed by Geography and History

![](media/image2.png){width="2.582638888888889in"
height="2.582638888888889in"}

A warm, subtropical climate, bountiful green hills, and a tranquil lake
allure tourism and business to Hangzhou. Within the city limits,
numerous parks invite peaceful reflection amidst the excitement of a
metropolitan city. The West Lake is famous throughout China, and draws
countless visitors year-round. Although Hangzhou's economic prosperity
creates a fast-paced, competitive business environment, the city has a
relaxed, high quality standard of living.

When Marco Polo visited Hangzhou, he declared the city "beyond dispute
the finest and the noblest in the world". At that point historians
calculate that Hangzhou had over 1 million people and was the most
populous city in the world. Hangzhou is one of the seven ancient
capitals of China and is well-known for its Longjing (Dragon's Well)
green tea. Silk has been central to the Hangzhou economy for centuries
as well; the city originally was chosen as the eastern post of the
ancient Silk Road. Centuries later, Hangzhou became the southern
terminus of the Beijing-Hangzhou Grand Canal used today, supplying
northern China with rice and vegetables.

As noted earlier, the key to the city's economic growth is its central
location in the Yangtze River Delta (YRD). The YRD has emerged as one of
China's two economic powerhouses (alongside the Pearl River Delta in
Guangzhou), and accounts for some 25% of China's total GDP. At the
center of the YRD lies Shanghai, boasting one of the best-developed
logistics and distribution networks in the country. Hangzhou is linked
to Shanghai and the other cities of the YRD by a modern network of
expressways and railways. Travel time to Shanghai is roughly two hours
either by road or rail, and many products imported to Hangzhou are
shipped through Shanghai. Hangzhou's Xiaoshan International Airport
serves regional hubs throughout East Asia, while nearby Shanghai Pudong
International Airport receives flights from across the globe.
![](media/image3.wmf){width="2.3125in" height="1.5416666666666667in"}

## A Modern Marketplace

In 2006, 53 Hangzhou-based companies made the list of China's top 500
companies. And no wonder: with lower real estate prices and less traffic
congestion than Shanghai, as well as a healthy balance of private
capital and foreign direct investment, Hangzhou is an ideal location for
business. Originally famous for silk, textiles still play an important
role of Hangzhou's industry. The city is becoming an increasingly
popular tourist destination, however, with tourism revenues reaching
\$7.2 billion in 2006. Higher education is central to the economy:
Zhejiang University (one of China's largest universities), among others,
continually feeds the local economy with a pool of new graduates. Dubbed
a "Mecca for IT Firms", Hangzhou is fast becoming an information
technology and software development hub.

## 

Although Hangzhou, along with the rest of the YRD, is heavily urbanized,
it has a long history of agricultural production. The most famous
products to come from this region are silk and the acclaimed Longjing
green tea. These industries are still present, though the Longjing tea
in particular has suffered heavily from competition from low-priced
counterfeits. In volume, the major agricultural products of the Hangzhou
area include rice (6.9 MMT in 2004), sugar (1.06 MMT), pork (217 TMT)
and aquaculture (140 TMT). Note, however, that Zhejiang is not a major
center for sugar refining: rather, much of the cane grown in this area
is used in cooking the traditionally sweet local cuisine.

![](media/image4.jpeg){width="2.3965277777777776in"
height="3.0833333333333335in"}

Hangzhou cuisine is recognized as one of the eight major Chinese
cuisines. It is renowned for its fresh and pure ingredients, and is
often characterized as having light and natural flavors. Although sweet,
it is lighter and less oily than the cuisine of nearby Shanghai, and
much less so than that of Suzhou. Chicken, fish, shrimp and green
vegetables are the most favored ingredients, but dishes include a wide
range of different flavors, and chefs are always ready to innovate.
Famous dishes include Beggar's Chicken, West Lake Carp (in a
sweet-and-sour sauce), Longjing Shrimp, Dongpo Pork, and Stewed Duck.

# Sector Analysis

## Hotel, Restaurant and Institutional (HRI):

There are over 9,700 licensed restaurants, more than 300 cafes, and
countless unlicensed eateries in the city. In addition, there are
hundreds of bars and nightclubs throughout the city that feature
imported drinks and snacks. The restaurant industry is extremely
sophisticated; however, it lacks a strong selection of international
cuisines. Because of the city's fame as a center for cuisine, most
visitors are interested in sampling local dishes. Only a handful of
restaurants in the city have truly international menus. As a result, the
best strategy for promoting food imports is through local dishes,
emphasizing both the high quality and new possibilities that such
imports provide. Still, among local residents, American-style fast food
is becoming increasingly popular and has created a strong market for
certain imported products such as frozen potato products and corn on the
cob.

The hotel industry represents the cutting edge of cuisine in Hangzhou,
and innovations pursued by hoteliers are often imitated by local
competitors. In 2006 there were 241 hotels with a star-level rating in
the city, including ten 5-star hotels. As the hotel industry grows, the
demand for high quality imports grows as well, particularly meats, wine,
beer, spirits, cheese, pastries, baking ingredients, butter, specialty
oils, coffee, jams and condiments.

## Retail:

Hypermarkets, supermarkets and convenience stores are shooting up
everywhere in Hangzhou. Retailers rely heavily on new stores to fuel
sales growth; in fact, one hypermarket manager described sales for old
stores as relatively flat. A Wal-Mart was built in Hangzhou in October
2004, and two more were constructed soon thereafter. Upon Wal-Mart's
arrival, the world's largest food retail chains are now all represented
in Hangzhou, targeting mid-market Chinese consumers.

Domestically-owned supermarkets in Hangzhou underwent considerable
consolidation in 2004 and 2005 in order to better compete with larger
markets. Chinese-owned supermarkets are typically smaller than their
western counterparts, often functioning as localized, corner grocery
stores.![](media/image5.png){width="3.0368055555555555in"
height="2.2729166666666667in"}

# Prospects

Although Hangzhou is a prosperous and wealthy city, its imported foods
market remains underdeveloped compared to Shanghai's. This budding
growth, combined with the explosive growth in the international hotel
industry in Hangzhou, bodes extremely well for future import
opportunities. Exporters who have already established themselves in
Shanghai will find in Hangzhou a particularly favorable market, as it
shares both tastes and distribution networks with Shanghai.

At the retail level, the standard assortment of U.S. nuts, dried fruit,
and frozen corn that are common in Shanghai is also widely available in
Hangzhou. However, experience has led ATO/Shanghai to believe that the
retail food market for imports in this city is underserved. In an
ATO-organized nationwide retail promotion involving 24 Carrefour stores,
the Hangzhou store ranked 7^th^ in sales: ahead of Guangzhou and
following stores only in Shanghai (four stores) and Beijing (two
stores). In addition, the Hangzhou store was extremely aggressive to
recruit distributors and products for the event, and ultimately carried
far more items than originally agreed.

ATO/Shanghai has conducted both retail- and Hotel Restaurant
Institutions (HRI)-focused activities in Hangzhou in the past few years.
In HRI, the products with the best growth potential include meat,
seafood, wine, condiments, and coffee. Top hotels have expressed a
strong interest in broadening their menus to include the best imported
ingredients, understanding that a top-notch and innovative menu is far
more important to their customer base than price. Zhejiang province is
also home to one of the most active provincial chef associations in
China, and ATO/Shanghai has worked closely with the Zhejiang Chef
Association to recruit and train elite chefs in the handling and
preparation of U.S. food ingredients.

Although demand for international dishes is growing quickly and
prospects look good for continued growth, international cuisine
represents only a very small fraction of the prepared foods market. To
achieve commercially significant sales, imported ingredients need to be
incorporated into local dishes appealing to local tastes.

For example, U.S. beef (when it had legal access to the China market)
achieved its greatest success as an ingredient in traditional
Hangzhou-style dishes. Local distributors recognize products that are
relatively new to the market as having great potential. Furthermore,
there is significant promise in the future of prepared foods. Rising
income levels and two-income families create a demand for quick
gastronomical solutions. Various ready-to-eat or heat-and-eat meal
timesavers are already popular. Prepared foods are also likely to gain
appeal as space-savers in cramped urban apartments.

  ----------------- ------------ ------------------------------------------
  **Hangzhou: Best               
  Product                        
  Prospects**                    

  **Product**       **Market**   **Notes**

  Beef              retail and   Imports of US beef are currently
                    restaurant   suspended; however, retail contacts
                                 indicate that it was one of their
                                 top-selling products prior to the ban. Due
                                 to extraordinary popularity, dishes
                                 prepared with US beef made their way onto
                                 menus at virtually every high-end
                                 restaurant in Hangzhou. Presently, high
                                 quality beef is imported from Australia.

  Apples            retail       Popular as a prestige or gift item,
                                 American varieties are increasingly known
                                 for their high quality and appearance.

  Poultry           retail and   Poultry is a central element in Hangzhou
                    restaurant   cuisine, found in such dishes as *Beggar's
                                 Chicken*.

  Potato products   retail and   Although already widely used in US-style
                    restaurant   fast food restaurants and hotels, potato
                                 products are now increasingly popular in
                                 local restaurants. The most successful
                                 have been frozen pre-processed varieties
                                 such as potato balls with butter inside
                                 that simply require frying. Other
                                 potentially successful varieties are more
                                 unique, such as curly fries.

  Salmon            retail and   Enjoys growing popularity. Originally, the
                    restaurant   demand was met with Alaskan and Norwegian
                                 salmon. However, local distributors remark
                                 that the increase in quantity and
                                 improvement in quality of
                                 domestically-raised fish weaken the demand
                                 for imports.

  Codfish           retail and   Gained popularity in just the past five
                    restaurant   years. Currently two major varieties are
                                 on the market: Chilean silver codfish and
                                 Alaskan black codfish.

  Frozen fruit,     retail and   Local distributors note blueberries to be
  jams and          restaurant   particularly appealing. There is a
  preserves                      constant demand from high-end hotels for
                                 jams and preserves. A significant amount
                                 of fruit, jam and preserves are currently
                                 imported from Australia.

  Sweet corn        restaurant   U.S.-style fast food restaurants import a
                                 notable amount of corn on the cob.

  Dairy (cheese and retail and   Local F & B managers see a growing demand
  butter)           restaurant   for these products, though considerable
                                 competition exists from sources such as
                                 Australia and Italy.

  Wine              retail and   Retailers indicate strong potential.
                    restaurant   

  Baking            retail and   Demand is set to increase, particularly in
  ingredients and   restaurant   niche markets such as 5-star hotels, which
  bread bases                    are expected to double in number within
                                 the next two years.

  Dried fruit and   retail,      U.S. dried fruit and nuts are common items
  nuts              restaurant   found in Shanghai's retail sector and
                    and food     already appear in Hangzhou.
                    processing   
  ----------------- ------------ ------------------------------------------

## 

## Join Us!

ATO is constantly planning and organizing market development activities
in Hangzhou and nearby cities in the Yangtze River Delta region. In
addition to ATO-organized activities, Hangzhou has a regular schedule of
locally arranged events. Events organized by the local government
include:

-   West Lake Exposition: October 20^th^-November 5^th^, 2007. The West
    Lake Expo is an annual two-week exhibition. This year's featured
    events include a food festival and chef contest. In addition, there
    will be an international tourism and leisure commodities show, two
    furniture shows, an international silk fair and a building and
    decoration materials fair.

-   Hangzhou hosted the 2006 World Leisure Expo, an ambitious 6-month
    event taking place between April and October 2006. It consisted of
    numerous events revolving around relaxation and leisure, including a
    grandiose worldwide city exhibitions hall.

-   Hangzhou is the host of an international tea trade fair in the
    spring.

For more information on upcoming activities, please contact us directly.

U.S. Agricultural Trade Office, Shanghai

Shanghai Center, Suite 331

1376 Nanjing West Road

Shanghai 200040, China

Phone: (86-21) 6279-8622

Fax: (86-21) 6279-8336

E-mail: <atoshanghai@fas.usda.gov>