Voluntary Report - public distribution

**Date:** 2/4/2005

**GAIN Report Number:** CH5803

CH5803

**China, Peoples Republic of**

**Market Development Reports**

**Chengdu: An Emerging City Market In China\'s Heartland**

**2005**

**Approved by:**

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

U.S. Consulate

**Prepared by:**

Ralph Bean

**Report Highlights:**

The city of Chengdu is one of the most prosperous and affluent cities in
China\'s interior. Capital of Sichuan province, Chengdu is world famous
for its spicy Sichuan-style cuisine, but as ATO/Shanghai\'s recent
experience indicates, is also very much open to U.S. foods and food
ingredients. Distribution remains the primary obstacle for imported
products in this deep inland city. Best product prospects for this
market are outlined in the report.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Shanghai ATO \[CH2\]

\[CH\]

# Gateway to West China

Located deep in China's interior, Chengdu is the capital of Sichuan
province and one of the most affluent cities in Western China. The city
has a population of 10 million and a GDP of over RMB 149 billion (\$18
billion) in 2003, making it one of the largest and most economically
important cities in the country. It is also home to some of China's most
successful domestic companies, including the massive Hope Group
conglomerate, which originated as a food processing company, but has
since branched into a wide range of real-estate, investment and
manufacturing enterprises. Chengdu is a relatively well-developed urban
island in a largely agricultural province regarded by many as China's
heartland. Sichuan province ranks 3^rd^ nationwide in population (87
million), 8^th^ nationwide in GDP (\$66 billion) but only 18^th^ out of
32 in per capita income. Interestingly, although per capita food
expenditures are only average, per capita spending on meat and poultry
is among the highest in the country. Sichuan is also growing more
rapidly than most interior provinces, with GDP growth of 11.9% in 2003
that is likely to be matched or exceeded in 2004.

**China's Heartland**

Sichuan lies astride the Yangtze River, with Chongqing (Chunking) on the
east and Tibet on the west. The province forms a giant bowl valley in
the center of China with mountains on both sides, surrounding the
Yangtze River. To the east, the famous Three Gorges formed where the
Yangtze cuts its way through the mountains. The climate varies widely.
The central part of the province, where most of the population lives, is
a humid and rainy valley, with warm summers and winters that are cool
but not cold. The mountains on the west connect to the Himalayas.
Sichuan is an important producer of rice and rapeseed, but is known
primarily as China's largest pork producer. It is also a major tourism
destination, embracing many of China's most famous natural parks,
including the world famous Woolong Panda Preserve and Jiuzhaigou natural
park. Sichuan and Chengdu loom large in China's history, and several
sites in or near Chengdu have been granted World Heritage Site status by
UNESCO. Bordering on both Tibet and Yunnan, Sichuan is also home to a
large number of China's ethnic minorities.

![](media/image2.jpeg){width="2.0347222222222223in"
height="2.7131944444444445in"}

Chengdu, the capital of Sichuan, has been the focus of most of the
province's development efforts. Always a major rail hub for west and
southwest China, new highways and a new airport have further reinforced
the city's position as the primary transportation hub for the region.
Industrial growth in nearby cities is also helping to support Chengdu:
nearby Mianyang is a major manufacturing center for television
components, and a significant economic center in its own right. Every
Spring, Chengdu hosts China's largest domestic food show, Tangjiuhui
(the Spirits and Candy Festival). Tangjiuhui is a gargantuan event that
attracts the entire range of food manufacturers from all parts of China.
The city has also taken advantage of the Chinese government's efforts to
develop the West, and will open a new trade show, Go West, in Spring
2005. ATO/Shanghai will participate in this event.

**A Booming Market**

Retail development in Chengdu is both strong and appropriate to the size
and economic strength of the city. Carrefour, Lotus, Auchon, Ito Yokado
and Metro are all present, and Wal-Mart is constructing several stores.
Despite this, retailers report that margins are good compared to other
cities in West China, where recent expansion of retail outlets has
outstripped demand. One retailer has stated that Chengdu is the only
city in the region to show consistently strong growth in sales over the
past several years. ATO/Shanghai's recent retail promotion with Ito
Yokado confirmed the potential of this market (see GAIN report CH4831).
Although per capita incomes are lower than some coastal cities, the
residents of Chengdu have a consuming interest in food, and those with
the wherewithal are happy to pay a premium for higher quality. While
foreign-invested companies are a major factor in hypermarket retail, the
supermarket and convenience store sectors are dominated by Chinese-owned
chains. Convenience in particular has developed much more rapidly than
in other interior cities, and is overwhelmingly dominated by a local
Chengdu chain called Hongqi (Red Flag). China's supermarket giant
Lianhua has also established a presence.

Chengdu is ground zero for China's famously spicy Sichuan cuisine,
recognized worldwide as one of the four major styles of Chinese cooking
(the others being Hunan, Cantonese, and Yangzhou). Reflecting both local
residents' obsession with food and Chengdu's role as a major tourism
center, the restaurant industry is well developed, but lacks knowledge
about imported products and cooking methods. The Chengdu Cuisine
Association has noted that not only are restaurant chefs and owners
unfamiliar with imported products, but the distributors themselves have
little knowledge about correct handling and preparation. Although
ATO/Shanghai's market development activities in this market have
included training for distributors, there is still a great deal of work
to be done.

The Chengdu Cuisine Association (CCA) is unique in China, being an
entirely private, for-profit organization run by a successful local
restarauteur. By contrast, most industry organizations in China are run
by ex-government officials. The Association has been extremely
aggressive in popularizing Sichuan-style food and sees the incorporation
of imported ingredients into Sichuan cuisine as an effective way of
standardizing and popularizing the style outside of Sichuan. Their
efforts have been recognized by the Chinese government, which has
awarded this association a national prize for its unique market-driven
approach. In September, 2004 ATO/Shanghai worked with the CCA in a
market development exercise that successfully introduced a wide range of
US products to Chengdu's restaurants. (This was part of a larger program
that included chef training, product table-top shows, a chef
competition, a baking competition and demonstration and retail and menu
promotions, all profiled in GAIN report CH4831). Surprisingly, in the
heartland of China's pork production area, the hit of the restaurant
activity was boneless pork butt, which sold out several times,
underscoring the point that Chengdu's restaurant owners and customers
are sensitive to product quality and willing to pay for that quality
when they understand the product.

**Bright Prospects**

As a market for imported products, Chengdu is still small relative to
both its population and income, but is certain to grow quickly. The
market is largely undeveloped for imported foods, and competition comes
almost entirely from local products. Due the lack of imported and
foreign foods, early arrivals in this market are likely to have a
disproportionate impact on local resident's ideas about foreign foods.
ATO/Shanghai's recent success in developing the market for US pork in
Chengdu made clear that even where locally-produced substitutes are
easily available at low prices, local residents tend to view imports as
a separate category of product, making the competition less direct than
might otherwise be expected. Apart from ready-to-eat processed foods,
taste is not a major barrier, as Sichuanese appear more than happy to
adapt and incorporate new products into their own cuisine. A more
serious concern is the impact of counterfeits, i.e. domestic products
masquerading as imports. The extremely high prevalence of counterfeits
has made consumers suspicious of the authenticity of any product
claiming to be imported. During ATO's activity at Ito Yokado, the
presence of guest chef Eric Perez (courtesy WUSATA's Healthy Foods
Program), triggered much larger than expected sales as it gave consumers
confidence that the products were genuine imports.

**Obstacles**

![](media/image3.jpeg){width="2.6222222222222222in"
height="1.9666666666666666in"}

The primary obstacle to food imports in Chengdu and most other interior
markets is the lack of distribution channels. ATO's initial research
into this market discovered that sensitive products such as meat and
seafood were being imported into Shanghai, then re-sold several times on
their way to Chengdu, changing ownership as many as four or five times
before reaching retailers and restaurants. As a result, prices were
substantially higher and quality often deteriorated by the time products
reached consumers. As with most other parts of China, retailers appear
uninterested in importing directly, preferring instead to buy from a
local distributor---only the largest chain restaurants source directly
from Shanghai or Guangzhou. During recent market development activities
with retailers and restaurants, ATO and participating USDA cooperators
were able introduce Shanghai-based importers and distributors to their
counterparts in Chengdu, and reduce the number of times product changed
hands. Nonetheless, distribution remains an enormous problem. As a
case-in-point, there is still only one reliable distributor in Chengdu
for imported frozen meat, seafood and quite a few other imported
products. Further market development efforts are clearly needed, and
ATO/Shanghai will continue its efforts in Chengdu.

**A Target Market**

As noted elsewhere, ATO/Shanghai has made the development of markets in
Chengdu a priority. To this end, in September 2004 ATO launched a major
market development exercise with retailers and restaurants in Chengdu,
designed to establish and streamline distribution channels for US
products, while introducing new food products to consumers and chefs.
ATO has also participated for several years in the Tangjiuhui trade
show. These activities and ATO's interviews with distributors,
retailers, restaurant owners and media indicate good potential for a
variety of products.

+-----------------+----------+-----------------------------------------+
| **Chengdu: Best |          |                                         |
| Product         |          |                                         |
| Prospects**     |          |                                         |
+-----------------+----------+-----------------------------------------+
| **Product**     | **       | **Notes**                               |
|                 | Market** |                                         |
+-----------------+----------+-----------------------------------------+
| Dried fruit and | retail   | Already present in the market. Nuts     |
| nuts            | and      | sell best in-shell. Retail sales are    |
|                 | re       | particularly strong. Main competition   |
|                 | staurant | appears to be Iranian pistachios and    |
|                 |          | Xinjiang (West China) sweet almonds and |
|                 |          | raisins. Hawaiian macadamias are        |
|                 |          | present, albeit on an irregular basis.  |
+-----------------+----------+-----------------------------------------+
| Beef short      | retail   | Imports of US beef have been suspended, |
| plate           | and      | but retail contacts indicate this was   |
|                 | re       | one of their top-selling products prior |
|                 | staurant | to the ban. Popular in super-spicy      |
|                 |          | Sichuan hot pot, which is common in     |
|                 |          | both restaurants and at home.           |
+-----------------+----------+-----------------------------------------+
| Boneless pork   | re       | This new-to-market product sold out     |
| butt            | staurant | several times during ATO's market       |
|                 |          | development activity. Distribution,     |
|                 |          | however, is a major obstacle.           |
+-----------------+----------+-----------------------------------------+
| Table grapes    | retail   | US red grapes have proved remarkably    |
|                 |          | popular. Logistics for fresh fruit is a |
|                 |          | major obstacle, however, and            |
|                 |          | competition from local product is       |
|                 |          | rising.                                 |
+-----------------+----------+-----------------------------------------+
| Apples          | retail   | Popular primarily as a prestige or gift |
|                 |          | item.                                   |
+-----------------+----------+-----------------------------------------+
| Sca             | re       | Popular but expensive in this           |
| llops/shellfish | staurant | seafood-starved inland area.            |
|                 |          | Distribution is a major obstacle, and   |
|                 |          | consumers and restaurants both require  |
|                 |          | education in proper cooking methods.    |
|                 |          | Competitor products (New Zealand,       |
|                 |          | Korea, Canada) are available, but only  |
|                 |          | infrequently and in small quantities.   |
|                 |          | US crab has sold well when available.   |
+-----------------+----------+-----------------------------------------+
| Poultry         | retail   | Only recently returned to the Chinese   |
|                 | and      | market, the most popular items are      |
|                 | re       | offals such as wingtips and feet. Local |
|                 | staurant | distributors are frequently unaware of  |
|                 |          | the availability or non-availability of |
|                 |          | imported poultry.                       |
+-----------------+----------+-----------------------------------------+
| Potato products | food     | Widely used in US-style fast food       |
|                 | service  | restaurants and hotels, there is still  |
|                 |          | room for expansion. Distribution is a   |
|                 |          | significant problem, and product is not |
|                 |          | as readily available as on the coast.   |
+-----------------+----------+-----------------------------------------+
| Salmon          | re       | Still a relatively new product in this  |
|                 | staurant | market. Norwegian salmon is also        |
|                 | and      | present, on a seasonal basis. Popular,  |
|                 | retail   | but consumer education is needed, and   |
|                 |          | salmon faces the same distribution and  |
|                 |          | logistics problems as other meat and    |
|                 |          | seafood.                                |
+-----------------+----------+-----------------------------------------+
| Condiments/     | re       | Heinz products are already present in   |
|                 | staurant | the market, mostly being supplied to    |
| seasonings      |          | hotel restaurants.                      |
+-----------------+----------+-----------------------------------------+
| Fresh           | re       | At least one distributor is supplying   |
| vegetables      | staurant | imported fresh vegetables, albeit on an |
|                 |          | infrequent basis. Logistics is a major  |
|                 |          | obstacle, and loss due to spoilage is   |
|                 |          | extremely high.                         |
+-----------------+----------+-----------------------------------------+
| Frozen          | re       | Frozen sweet corn and frozen mixed      |
| vegetables      | staurant | peas/carrots/corn are as popular here   |
|                 | and      | as they are elsewhere in China.         |
|                 | retail   |                                         |
+-----------------+----------+-----------------------------------------+
| Dairy (cheese   | retail   | Local retailers believe there is        |
| and butter)     | and      | substantial demand for these products,  |
|                 | re       | though competition from Australia is    |
|                 | staurant | strong and logistics are a problem.     |
+-----------------+----------+-----------------------------------------+
| Wine            | retail   | Retailers indicate strong potential,    |
|                 | and      | but note that wines over \$12 per       |
|                 | re       | bottle can only sell as high-end gifts. |
|                 | staurant |                                         |
+-----------------+----------+-----------------------------------------+

**Contact Information**

ATO/Shanghai is continually working on new activities in Chengdu as well
as other Emerging City Markets throughout the Yangtze River basin. For
more information, 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@usda.gov>