Required Report - Public distribution

**Date:** 9/20/2007

**GAIN Report Number:** CH7814

CH7814

**China, Peoples Republic of**

**Market Development Reports**

**Wenzhou: Am Emerging Market on China\'s East Coast**

**2007**

**Approved by:**

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

U.S. Consulate

**Prepared by:**

Susan Zhang

**Report Highlights:**

Wenzhou, with a recorded civilization dating back 4,000 years, has
become a catchword for the entrepreneurial spirit sweeping China in the
past couple of years. With a population of 7.5 million but only a small
amount of arable land per capita, Wenzhou has developed a strong trading
culture. Wenzhou was the first city to set up individual and private
enterprises in China after the free-market reforms started in the early
1980s, and currently over 95% of businesses in Wenzhou are privately
owned. Starting out with distinct disadvantages, Wenzhou is now one of
the richest cities in China. While infrastructure improvement and direct
foreign investment have been modest in recent years, prospects for
imported foods are changing. It is good potential market with high
consumption levels, though it will take some time and a lot of eduction
and promotional efforts to make it a ready market for American food and
beverage products.

Includes PSD Changes: No

Includes Trade Matrix: No

Annual Report

Shanghai ATO \[CH2\]

\[CH\]

**Introduction** - **The Birthplace of the Non-State Owned Economy in
China**

![](media/image2.jpeg){width="6.495833333333334in"
height="1.5729166666666667in"}

Wenzhou, with a recorded civilization dating back 4,000 years, has
become a catchword for the entrepreneurial spirit sweeping China.
Located at the south-eastern coast of Zhejiang Province, one of the
wealthiest provinces in China, Wenzhou is famous for its well-developed
light manufacturing industry and commerce. About 500 kilometers south of
Shanghai, Wenzhou is encircled by mountains and the East China Sea.
Unlike its sister cities Hangzhou or Ningbo, Wenzhou has enjoyed little
investment in infrastructure either from the central or provincial
government due to its special strategic location in the China-Taiwan
confrontation. Until a small airport was opened in 1990, visitors had to
take a ferry from Shanghai and the trip took 24 hours.

Lack of natural resources, shortage of farmland and difficult overland
transport not only forced Wenzhou to develop a strong trading culture,
but also helped foster the characteristics of Wenzhou people, including
perseverance, self-reliance, pragmatism, and solidarity.

Wenzhou was the first city to set up individual and private enterprises
in China after the free-market reforms began in the early 1980s, and
currently over 95% of the enterprises in Wenzhou are private businesses
according to official statistics. Starting with distinct disadvantages,
Wenzhou people developed a native instinct to do business even on a very
small scale. Today, one quarter of all shoes bought in China come from
Wenzhou and the city makes 70% of the world's cigarette lighters.

**Wenzhou at a Glance**

With a jurisdiction covering three districts, two county-level cities
and six counties, Wenzhou encompasses a total land area of 11,784 square
kilometers(4,550 Square miles), about 11.6% of Zhejiang province. The
population in 2005 was 7.5 million, including 2 million urban residents.
Wenzhou has a coastline of 339 kilometers(211 miles) from north to
south, and Wenzhou Harbor has been listed as one of the 20 main hub
ports along the coastal area of China by the National Ministry of
Communications.

Wenzhou has maintained high economic growth in recent years and ranks
itself the third largest economy in terms of GDP in Zhejiang province
after Hangzhou and Ningbo. Its average annual GDP growth during the past
five years reached 14.3%.

Wenzhou and Wenzhou People: Imbalanced Development of Personal Wealth
and Public Infrastructure

Almost everybody in Wenzhou, man or woman, wants to be his or her own
boss. The phrase "rather be a big fish in a small pond than a small one
in a big pond" is widely valued in Wenzhou.

The Wenzhou people were among the first group of Chinese who reacted to
the government\'s call to develop individual private businesses when
China initiated its economic reforms in early 1980s. The nationally
famous "Wenzhou Model" represents the dynamics of the private sector --
Wenzhou people excel in the manufacturing as well as trading of light
consumer goods, though generally they develop small-scale, often family
owned manufacturing plants and distribution networks between producers
and consumers all over the country. These companies often have their own
sources of financing and their own way of marketing and management
styles. 

The success of Wenzhou can also be attributed to the tradition for
Wenzhou people to travel extensively in conducting trade business.
Statistics show that currently approximately 2 million people from
Wenzhou are doing business while living in other areas across China.
Many Wenzhou people are also traveling to work or conduct business in
overseas countries.  It is estimated that there are about 0.5 million
Wenzhou people living in Europe.  The large number of Wenzhou people
networks both in China and overseas contributed to the development of
Wenzhou's trading activities. These people created over half of
Wenzhou's GDP according to Wenzhou's government statistics.

![](media/image3.jpeg){width="2.4166666666666665in"
height="2.4166666666666665in"}By contrast, the wealth in Wenzhou
people's pockets has not been reflected in the city's infrastructure.
Touring in Wenzhou, there is an inconsistency between the appearance of
its commercial and business districts and the city known in China for
its wealth. This imbalance can be attributed to several factors:

-   Wenzhou, located very close to Fujian Province and therefore close
    to Taiwan, has occupied a precarious yet strategic role since the
    founding of the PRC. As a result, it has not received financial
    investment in infrastructure from the central and provincial
    governments as much as other cities in Zhejiang.

-   Wenzhou people are known for their strong desire to set up
    businesses of their own and their ability to endure hardships and
    hard work during this process. On the one hand, this has created a
    large number of vital private businesses; on the other hand,
    however, this has meant that the industrial structure of Wenzhou
    tends to be small in size, focusing on lower-end production.

-   The spirit of pragmatism that is deeply rooted in Wenzhou culture
    and the pursuit of more personal wealth has encouraged Wenzhou
    people to keep working hard and investing in business, instead of
    driving them to improve the region's infrastructure and enjoying
    life more.

-   As a consequence, foreign direct investment and investment from
    other parts of China has not played an active role in Wenzhou due to
    its outdated infrastructure and transportation conditions.

Sector Analysis

[Retail Sector]{.underline}

According to Wenzhou Municipal Government officials, Wenzhou is
identified as a second-tier city in China's commitment to the WTO
Agreement; it therefore only became open to international retail giants
in 2006. This partly explains why until recently there were no
Carrefour, Metro, or Auchan stores in this city. Currently only 1
international retailer, Lotus, operates a store in the economic
development zone in the suburbs of Wenzhou. Trust-mart plans to have 4
stores and has already opened 3 of them, but their scale is modest and
similar to local stores such as Lianhua.

The retail sector development in Wenzhou has also been hindered by
several other factors:

1\. [Undeveloped infrastructure and high land prices]{.underline}

> Wenzhou suffers both from an existing underdeveloped infrastructure
> and skyrocketing land prices. In fact, the global retail giants have
> been paying attention to this rich city for a long time. According to
> Wenzhou officials, senior executives from certain global retail giants
> visited Wenzhou four times last year to discuss the issue of opening
> stores there. Unfortunately, they never reached an agreement with the
> Wenzhou Municipal Government on the location to open their stores.

2\. [The traditional consumption habits of Wenzhou people]{.underline}

> A lot of Wenzhou people still prefer to give a phone call to the
> convenience stores in their community and have the commodities
> delivered directly to their homes. When touring inside the recently
> opened Lotus store, one would hardly notice the difference between it
> and any other Lotus store in Shanghai; however, its business has never
> been satisfactory since its opening due to its remote location from
> the downtown area. Although 20% of households in Wenzhou own family
> cars, the highest percentage in Zhejiang Province, it appears that
> they have not yet become accustomed to the habit of driving to a
> hypermarket to purchase necessities for the week.

![](media/image4.jpeg){width="2.0833333333333335in"
height="1.5625in"}The local retailer C&U (Ren Ben) enjoys the highest
market share in the food retail sector in Wenzhou. Entering the retail
business in 1997 in Wenzhou, C&U has successfully expanded its business
to Taizhou and Jinhua, the other two cities in Zhejiang Province, and
Ningde of Fujian Province. It currently has 220 stores in total,
including 80 supermarkets, 125 convenience stores and about a dozen
hypermarkets. Despite its dominant position in the food retail sector,
imported products are rarely found in C&U stores. There are only a few
brands of imported infant-formula milk powder from New Zealand and
Europe, and a few wines from France on the shelves. Some tree nut
products such as almonds and pecans claim to be from the U.S., but they
are processed and packaged in China under local brands. Red Delicious
apples, Granny Smith apples and Sunkist oranges and lemons are found in
the fresh product area, but most of them are not very professionally
displayed; for example, some green-color apples produced in Chile are
mixed with Granny Smith apples from the U.S., and the presentation of
the products is unattractive due to moisture loss.

Lack of mature distribution channels for imported food products is one
of the major barriers for the very limited availability of imported food
products in the local retail sector. During ATO Shanghai's interviews,
C&U reported that they had tried to increase imported food SKUs for
trial sales in their supermarkets, but these efforts confronted many
difficulties: on the one hand, they are unfamiliar with many foreign
food product brands and there are no qualified local importers in
Wenzhou, so they had to rely on importers and distributors from larger
cities like Shanghai for product sourcing; on the other hand, since C&U
can only place small quantity orders and at their current stage of
development cannot commit to long-term cooperation, they were often
asked to make cash orders with these importers and distributors from
Shanghai. In addition, it takes time and money to educate local
consumers to try and accept imported food products. Wenzhou people are
willing to spend a lot of money on famous brand products that can
reflect their wealth and social status, such as watches, shoes and
jewelry, or even a car license plate with lucky numbers, but they will
hesitate to buy an imported food product whose brand is not familiar to
them and with a price often double that of its domestic counterpart.
These difficulties and risks are also faced by other local food
retailers like Lianhua and Minfeng.

![](media/image5.jpeg){width="2.4166666666666665in"
height="1.8125in"}The supermarket in D&L Mall, a high-end department
store specializing in famous brand commodities from around the world, is
the only store where 70% of its food products are imported. Frozen
Alaska king crabs, Land 'O Lakes cheese, Heinz sauces and baby food,
California plums, prunes, table grapes, Sun Maid raisins, Post cereals,
and Carlo Rossi wines are beautifully and professionally displayed on
the shelves of this store. According to the management we interviewed in
the store, these food products are distributed by importers from
Shanghai, Shenzhen and Beijing, and their main consumers are expatriates
and local people who have traveled overseas. However, the managers of
D&L Mall admitted that since its opening in late 2006, sales have been
sluggish, attributing this to an inconvenient location, high prices of
the food products, and the consumption habits of Wenzhou people.

Despite all these difficulties and barriers, professional retailers in
this "fast moving train" of Wenzhou are seeing the light at the end of
the tunnel -- greater attention to food safety and health are driving
consumers to purchase food more frequently in specialized food stores
and supermarkets with good reputations, while the market share of
small-scale mom and pop stores and wet markets is shrinking, and high
quality imported products and western lifestyles are becoming ever more
popular among the younger generation with active lifestyles. According
to the Wenzhou Retail Association, a "Sourcing Alliance" consisting of
all the important retailers in Wenzhou will be organized in 2008 to
consolidate the sourcing of imported food products, to strengthen the
bargaining power of Wenzhou retailers against food importers.

It is also widely recognized by industry insiders that the mass
consumers need guidance and education on where to buy, what to buy and
how to buy in terms of food selection. Although the education, as well
as the infrastructure improvement, will take time and enormous energy,
it should not be too long before we see a much more prosperous retail
sector in Wenzhou, thanks to its already high consumption level and the
enthusiasm of the international retailers in this market.

[Food Service Sector]{.underline}

As a land of fish and rice, Wenzhou enjoys more than 400 varieties of
seafood delicacies. Locally produced live seafood such as swimming crab,
grouper, eel, anchovy, prawn and jelly fish are well known. Wenzhou
cuisine features the use of less oil and less starch, and attaches great
importance to freshness. Many high-end restaurants do not have a menu;
instead, they have a display area where customers can see all kinds of
fish and lobsters swimming in water tanks, bubbling tanks filled with
fresh crabs, or fish laying beautifully on ice that were still alive 1
or 2 days ago.

![](media/image6.jpeg){width="2.1666666666666665in"
height="1.6319444444444444in"}The Wenzhou Restaurant Service Association
has around 150 corporate members, including most star-rated hotels and
famous restaurants in Wenzhou. There is 1 five star hotel and around 10
four star hotels and all of them are locally owned. Currently no
international hotel chains have locations in Wenzhou, although
Shangri-La is building its first hotel due to be completed by the end of
2008. Wu Ma Restaurant, Xin Ding Xiang Restaurant and A Wai Lou
Restaurants are the most famous restaurants engaging in Wenzhou cuisine,
known as the "Ou Cuisine", with a long history.

Nowadays, local consumers tend to dine out more frequently. The younger
generation has developed a strong interest in western food, and they can
afford it. Currently the most frequently used imported food ingredients
in the Wenzhou HRI sector are beef from New Zealand and Brazil, salmon
from Norway, lobsters from Australia, and abalone and bird's nest from
South Africa and Thailand. U.S. food products such as Alaska seafood
have a very low awareness level due to the lack of promotion efforts.

According to the statistics of the Wenzhou Restaurant Service
Association, the total revenue of its member restaurants reached RMB 7.0
billion (US\$933 million) in 2006, and the actual figure could be double
this official number. Wenzhou people spend a lot of money on food when
they think it is necessary. For example, wedding banquets in hotels are
no cheaper than those in Shanghai, and one Australian lobster per table
is widely regarded a must-serve dish for a decent wedding banquet, which
normally has 40-50 tables. Wenzhou people also favor shark's fin,
abalone and bird nests. Restaurants specializing in sharks' fin and
abalone are mushrooming in this city, mainly as business banquet venues.

Local distribution channels are under-developed. According to the
Wenzhou Restaurant Service Association, there are only 3-4 large scale
comprehensive distributors for the food service sector in Wenzhou, but
none of them directly import food ingredients from overseas. Instead,
they completely rely on domestic importers from bigger cities such as
Guangzhou and Shanghai for imported food ingredients. Imported meat
products are mainly distributed by importers in Shenzhen, and imported
seafood products come mainly from distributors in Guangzhou. With the
absence of big retailers like Metro or Carrefour, hotels and restaurants
also rely heavily on wet markets for aquatic products, though meat
products like pork are regularly supplied by local distributors. For
beverages, most imported wines are from France, Spain and Italy.
American wines and beers have a very low awareness level as few
distributors have promoted them. Local beers and wines both enjoy good
market shares.

Distributors do not have enough knowledge of imported foods and
beverages, not to mention U.S. food & beverage products. The market is
not well regulated either. Beef for example, currently imported from
Brazil or New Zealand, normally does not have a certificate of origin;
instead, distributors judge from the credibility of the importers
whether the beef is truly from its claimed origin.

The interest of Wenzhou people in high quality and nutritious food need
guidance and further education to facilitate the sales of American food
ingredients. Improving the status of American food products, fostering
the consumer market demand and educating the distribution channels to
increase product varieties need to be addressed in parallel. Local food
service professionals recommend that U.S. products should start with
star-rated hotels with menu promotions and chef training, aimed at
educating the professionals and building up the brand for U.S. products
among the high-end market segments, then utilize popular restaurants to
foster the atmosphere of consuming U.S. products among the mainstream
population.

["The Capital of Footwear in China"]{.underline}

Though not a big consumer yet for American foods, Wenzhou is a huge
market for non-food agricultural products including hides & skin, and
leather products from United States.

![](media/image7.jpeg){width="2.2569444444444446in"
height="1.6805555555555556in"}

The quality of Wenzhou-made products has improved significantly in the
past decade, and some of their products have become national brands.
Footwear is a representative industry seeing this amazing transition.
Moving from the notorious "fake and low-quality shoemaker" to the major
famous brand shoemaker and even the largest shoe exporter to overseas
markets took only ten years in Wenzhou. Meanwhile supportive industries
including hides and skins processing, components and complimentary
materials for shoe-making are well developed, and there are more than 10
different trade associations related to footwear production in Wenzhou.
Many local shoe-making companies have opened plants in other countries
like Italy as well as several African countries and sell their products
directly to these markets to avoid export barriers.

Unlike Haining, Wenzhou has only small and medium-scale leather
processing plants, whose development has been restricted by the local
government due to environmental concerns. Therefore the vibrant shoe
making industry relies not only on the locally processed leather but
leather produced from other parts of China and even from overseas.

Local leather processing plants report that around 70% of their raw
hides and skins are imported from the U.S., and the rest from Australia,
South American countries and domestic suppliers. However, they are very
concerned about the ever-rising price and ever-dropping quality of U.S.
hides and skins with increased scratches, holes and scores in recent
years. They warned that U.S. hides will lose their leading position in
the China market if this trend continues. To address these concerns,
eight major leather processors in China have reached a preliminary
agreement to have a serious discussion with U.S. hides exporters during
the All China Leather Show in September in Shanghai.

Best sales prospects for U.S. products in Wenzhou

+-----------+-------------------+--------------------------------------+
| ######### |                   |                                      |
|  **Wenzho |                   |                                      |
| u: Best P |                   |                                      |
| roduct Pr |                   |                                      |
| ospects** |                   |                                      |
+-----------+-------------------+--------------------------------------+
| **        | **Market          | **Notes**                            |
| Product** | Segment**         |                                      |
+-----------+-------------------+--------------------------------------+
| Fruits    | Retail            | Already present in the market and    |
|           |                   | have built up awareness. Product     |
|           |                   | damage due to limited cold chain     |
|           |                   | during transport and storage need to |
|           |                   | be improved. More professional       |
|           |                   | in-store display required.           |
+-----------+-------------------+--------------------------------------+
| Nuts      | Retail and HRI    | Already present in the market. Brand |
|           |                   | awareness needs to be strengthened.  |
|           |                   | Main competition is from domestic    |
|           |                   | counterparts.                        |
+-----------+-------------------+--------------------------------------+
| Beverages | Retail            | Younger generation between ages of   |
|           |                   | 18-35 show stronger interest in      |
|           |                   | beverages with new flavors. Children |
|           |                   | are also good potential consumers.   |
+-----------+-------------------+--------------------------------------+
| Cereals   | Retail            | With increasing health               |
|           |                   | consciousness, breakfast with milk   |
|           |                   | and cereal is becoming popular,      |
|           |                   | hence consumption is on the rise.    |
+-----------+-------------------+--------------------------------------+
| Wine      | HRI and Retail    | Imported wine consumption is on the  |
|           |                   | rise especially in HRI sector.       |
|           |                   | Competition is mainly from the "old  |
|           |                   | world wines" of Europe.              |
+-----------+-------------------+--------------------------------------+
| Snack     | Retail            | Imported by major                    |
| Foods     |                   | importers/distributors in Shanghai.  |
|           |                   | Becoming popular among the younger   |
|           |                   | generation who are greatly           |
|           |                   | influenced by TV commercials         |
|           |                   | advocating western lifestyles.       |
+-----------+-------------------+--------------------------------------+
| Infant    | Retail            | The one-child policy has made        |
| food and  |                   | Chinese parents very generous in     |
| milk      |                   | baby food purchases. Main            |
| powders   |                   | competition is from European and     |
|           |                   | Australian brands. Local brands are  |
|           |                   | very weak.                           |
+-----------+-------------------+--------------------------------------+
| Beef      | HRI               | With more and more steakhouse and    |
|           |                   | western restaurants established,     |
|           |                   | food service professionals and       |
|           |                   | eventually consumers will become     |
|           |                   | more brand sensitive and demanding   |
|           |                   | on quality-- a good trend for U.S.   |
|           |                   | beef once it regains access to the   |
|           |                   | China market.                        |
+-----------+-------------------+--------------------------------------+
| Potato    | HRI               | Mashed potato and other potato       |
| products  |                   | products are especially well         |
|           |                   | received in western restaurants, and |
|           |                   | increasingly in coffee bars.         |
+-----------+-------------------+--------------------------------------+

**ATO activities planned**

ATO Shanghai is planning a multi-level promotion in Wenzhou in May 2008.
The activities will include a seminar, cooking demonstration, food
tasting reception, one-on-one meetings with local traders, and an
in-store promotion. This will help U.S. food suppliers and American food
importers set up direct trade contacts with local distributors,
restaurants and retailers, and expose local consumers to the enormous
variety of American high-value food products. A PR campaign will be
designed to educate consumers about American food products and build
consumer confidence in and demand for these products.

###### Contact Information

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>

Website: [www.USDAChina.org](http://www.USDAChina.org/)