Voluntary Report - public distribution

**Date:** 12/7/2005

**GAIN Report Number:** CH5827

CH5827

**China, Peoples Republic of**

**Market Development Reports**

**Hangzhou: A City For All Seasons**

**2005**

**Approved by:**

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

U.S. Consulate

**Prepared by:**

Bryan Stewart

**Report Highlights:**

Hangzhou is rapidly emerging as one of the most prominent cities in
China, both in terms of its business environment and as a tourist
destination. Riding on a blistering 15% GDP growth rate, it was rated by
Forbes Magazine in 2005 as having the best business environment in
China. A beneficiary of Shanghai's logstics and distribution
infrastructure, it is an excellent potential market for imported foods,
where the primary obstacle is competition.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Shanghai \[CH2\]

\[CH\]

Table of Contents

[**Introduction: On Top of The World
3**](#introduction-on-top-of-the-world)

[Background: Blessed by Geography and History
3](#background-blessed-by-geography-and-history)

[A Modern Marketplace 4](#a-modern-marketplace)

[Sectoral Analysis 4](#sectoral-analysis)

[Hotel, Restaurant and Institutional:
4](#hotel-restaurant-and-institutional)

[Retail: 5](#retail)

[Prospects 5](#prospects)

[ATO Is There! 7](#ato-is-there)

[Join Us! 8](#join-us)

# Introduction: On Top of The World

Hangzhou is an ancient city that combines a modern business environment
and infrastructure with outstanding living conditions and a booming
tourism industry. Forbes Magazine's Chinese edition rated Hangzhou as
the best city to do business in, in both 2004 and 2005, based on the
combination of living standards, infrastructure and business friendly
(i.e., transparent) regulation. This city of 6.5 million has an average
per capita income of \$4,580 and a total GDP of \$31 billion, making it
one of the wealthiest cities in China. The city owes much of its
prosperity, both now and in the past, to its strategic location in the
heart of the Yangtze River Delta (YRD), just 150 kilometers south of
Shanghai. Hangzhou is the capital of Zhejiang province, which has a
population of 46 million and is one of the wealthiest provinces in
China. Hangzhou's booming tourist industry owes its strength to the
city's location on the famous, scenic West Lake. It is now also building
a reputation in information technology, software development,
telecommunications equipment and other electronics.

# Background: Blessed by Geography and History

![](media/image2.jpeg){width="2.689583333333333in"
height="2.029861111111111in"}

Hangzhou is famous throughout China for its beautiful scenery and the
West Lake. In addition to the lake and several rivers, the city is
nested against a range of bamboo-covered hills to the west and south,
Hangzhou Bay (which connects to the Yangtze) to the east, and plains to
the north. The city has numerous parks and green spaces, giving it a
much more relaxed, liveable feel and clean environment that most large
urban areas in China. With a subtropical monsoon climate, it experiences
temperate weather all year round. The key to the city's economic
prosperity is its central location in the Yangtze River Delta (YRD). The
YRD has emerged as one of China's two economic powerhouses (the other is
the Pearl River Delta centered on Guangzhou), accounting for some 25% of
China's total GDP, by even conservative estimates. At the center of the
YRD is the city of Shanghai, with a population of over 20 million and
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, sophisticated network of expressways and railways. Travel
time to Shanghai is roughly 2 hours by either road or rail, and many
products imported into 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.jpeg){width="1.2402777777777778in" height="3.31875in"}

At about the time that Marco Polo allegedly visited Hanghzou, calling
the city "beyond dispute the finest and the noblest in the world",
historians calculate that it had over 1 million people and was the most
populous city on the planet. Hanghzou is one of the seven ancient
capitals of China and it is also well known for its Long Jing (Dragon's
Well) green tea. Silk has been central to the Hangzhou economy for
centuries and it is the starting-point of the ancient Silk Road.
Hangzhou also became the Southern terminus of the Beijing-Hanghzou Grand
Canal, supplying the North of China with its rice and vegetables.

## A Modern Marketplace

In 2004, 53 Hangzhou-based companies made it onto the list of China's
top 500 companies. Reasons to set up shop in Hangzhou include lower real
estate prices and less traffic congestion than Shanghai, and a healthy
balance of private capital and foreign investment. Originally famous for
silk, textiles are still an important part of Hangzhou's industry. The
city is becoming an increasingly popular tourist destination, however,
with tourism revenues reaching \$3.6 billion in 2004. This traffic
includes a growing number of foreign tourists, who accounted for some
\$1 billion of those revenues, making an estimated 1.2 million
person-trips in 2004. Higher education is also central to the economy,
including one of China's largest universities (Zhejiang University),
continually feeding 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. 2004 saw a 42% increase in
sales from software production to \$2.44 billion.

## 

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 its silk and the famous LongJing
green tea, from the village of LongJing in the hills just west of the
city. These industries are still present, though the LongJing tea in
particular has suffered heavily from competition by low-priced
counterfeits. In volume, the key 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: much of the cane grown in this area is used
in cooking the traditionally sweet local cuisine.

![](media/image4.jpeg){width="2.31875in" height="1.6166666666666667in"}

Hangzhou cuisine is recognized as one of the eight major Chinese
cuisines. Widely known for its use of fresh and clean ingredients, it is
often characterized as having light and natural flavors. Although sweet,
it is less sweet and oily than the cuisine of neaby Shanghai, and much
less so than Suzhou. Chicken, fish, shrimp and green vegetables are the
most favored ingredients, but the 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.

# Sectoral Analysis

## Hotel, Restaurant and Institutional:

As the home to one of China's most famous cuisines, Hangzhou is
definitely a city of gourmands. There are over 9,700 licensed
restaurants and an unknown (but very large) number unlicensed eateries
in the city, as well as over 300 cafes serving high quality food and
drinks. In addition, there are hundreds of bars and nightclubs
throughout the city that feature imported drinks and often imported
snacks. The restaurant industry is very well developed, suffering mainly
from a lack of familiarity with and proper handling and preparation of
imported ingredients. 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 as ingredients
in local dishes, emphasizing both the high quality and new possibilities
that such imports make possible. Among local residents, however,
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 2004 there were 203 hotels with a star-level rating in
the city. This included eighteen 4-star and seven 5-star hotels (the
Continental Grand, Radisson Plaza, World Trade Center Grand, Sofitel
Westlake, Zhejiang International, Shangri-La, and Hyatt Regency). One
5-star hotal reported that its clientele this past year consisted of
approximately 68% mainland Chinese, Hong Kong residents and Taiwanese;
18% Japanese; and 12% Westerners. The hotel industry is growing rapidly,
and within just the next 2 years the number of 5-star hotels is expected
to double. These hotels are important importers of high-quality
foodstuffs, including meats, wine, beer, spirits, cheeses, pastries,
baking ingredients, butter, specialty oils, coffee, jams and condiments.

## Retail:

Hypermarkets, supermarkets and convenience stores are quickly evolving
to look more like Shanghai. Growth has continued, but retailers appear
to be relying heavily on new stores to fuel sales growth. One
hypermarket manager described sales for old stores as relatively flat.
Wal-Mart entered Hangzhou in October 2004 and is now in the process of
establishing 3 stores in the city. With Wal-Mart's entrance, the world's
largest food retail chains are now all represented in Hangzhou,
increasing competition as well as variety for Hangzhou consumers.
Wal-Mart's three stores will bring Hangzhou's previously somewhat anemic
hypermarket sector closer to the level of Shanghai. Tesco is represented
through it's acquisition of shares in Taiwan-run Hymall, which has a
number of stores throughout the region, mostly targeting mid-market
Chinese consumers.

Domestically-owned supermarkets in Hangzhou underwent considerable
consolidation in 2004 and 2005, when Shanghai-based Lianhua acquired
several local supermarket chains, including Jia You and Jie Bai. Lianhua
is China's largest food retailer, but the chain has acquired a very
large number of smaller chains over the past few years, and appears to
be having some difficulty integrating them into its management
structure. Wenzhou-based Renben merged with local Baoyu. Although
Renben-Baoyu acquired 9 supermarkets in 2004 it closed 8 in 2005.
Chinese-owned supermarkets are typically smaller than their western
counterparts, often functioning more in the role of corner grocery
stores.

# Prospects

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

ATO/Shanghai has conducted both retail and HRI-focused activities in
Hanghzou in the past year. In HRI, the products with the best growth
potential include meat, seafood, wine and condiments, as well as coffee
and similar products. Top hotels have expressed a strong interest in
broadening their menus to include the best imported ingredients,
regarding a top-notch and innovative menu as being 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 elite
chefs for training in the handling and preparation of US food
ingredients on several past occasions.

At the retail level, the standard assortment of US dried fruit, nuts and
frozen corn that are common to Shanghai is also widely available in
Hangzhou. Experience has led ATO to believe that the retail food market
for imports in this city may be underserved, however. In an
ATO-organized nationwide retail promotion with 24 Carrefour stores, the
Hangzhou store ranked 7^th^ in sales, second only to stores in the far
larger cities of Shanghai (four stores) and Beijing (two stores), and
ahead of Guangzhou. In addition, the Hangzhou store was extremely
aggressive in recruiting distributors and products for the event,
ultimately carrying far more items than originally agreed. The arrival
of Wal-Mart in this city is only likely to sharpen competition even
further. Retailers have expressed an interest in imported breakfast
cereals, microwave popcorn, canned sauces, and fruit drinks, as well as
cheese.

Competition for US high value food products has traditionally come from
third-country exporters, but improved quality has made domestic products
increasingly competetive. For example, competition for Alaska wild
salmon, has traditionally come from lower-cost farmed Norwegian salmon.
In recent years, however, the quality of local farmed salmon has
improved significantly. As in other parts of China, counterfeiting and
inferior products are still a problem, as it is in other major cities,
though not to the extent that it is further inland. Two recent cases of
inferior imported product affecting most major retailers and hotels
operating in Hangzhou involved a coffee brand and a type of bottled
water.

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. U.S. beef, for
example, achieved it greatest success as an ingredient in Hangzhou-style
dishes. Additionally, local distributors see products that are
relatively new to the market and with few substitutes as having good
prospects. Furthermore, there is significant potential growth in
prepared foods. Rising income levels and two-income families are seeking
ways to save time, and various ready-to-eat or heat-and-eat meal
solutions are already becoming popular. Prepared foods are also likely
to become popular 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 Hanghzou. 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, in such dishes as *Beggar's
                                 Chicken*.

  Potato products   retail and   Although already widely used in US-style
                    restaurant   fast food restaurants and hotels, it is
                                 now also 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 those that are
                                 more unique, such as curly fries.

  Salmon            restaurant   Holds a strong and still growing
                    and retail   popularity. Originally, the demand was met
                                 with Alaskan and Norwegian salmon.
                                 However, local distributors argue that
                                 increasing quantity and improving quality
                                 of domestically raised fish is weakening
                                 demand for imports.

  Codfish           restaurant   Gained popularity in just the past 5
                    and retail   years. Currently 2 major varieties are on
                                 the market, Chilean silver codfish and
                                 Alaskan black codfish.

  Frozen fruit,     restaurant   Local distributors noted blueberries to be
  jams and          and retail   particularly appealing. High-end hotels
  preserves                      stated a continued demand for jams and
                                 preserves. A significant amount of product
                                 is currently coming from Australia.

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

  Dairy (cheese and retail and   Local F & B managers see 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 2 years.

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

## 

# ATO Is There!

ATO/Shanghai has identified Hangzhou as one of its priority markets, and
has conducted a number of activities there over the past year. ATO's
cooperation with the Zhejiang Chef Association began in 2004, with a
seminar series that attracted a number of chefs from top-end restaurants
in Hangzhou, as well as other cities. ATO followed up with a cooperative
effort that put the Chef Association together with SUSTA, the U.S. Meat
Export Federation, Alaska Seafood Marketing Institute, and the USA
Poultry and Egg Export Council. This combination seminar series and menu
promotion brought SUSTA guest chef Roy Lyons to the Radisson Plaza
Hangzhou, and again attracted chefs from across the region. In July and
September, ATO targeted the retail sector with July Fresh Fruit and
September Grocery activities at the Hangzhou Carrefour. As noted above,
the results for this store far exceeded expectations, placing its
performance in US food sales in the same class as stores in Shanghai,
Beijing and Guangzhou.

In addition to ATO-organized activities, Hangzhou has a regular schedule
of locally organized events. Upcoming events organized by the local
government include:

-   An annual two-week fall Westlake Expo. The year 2004 saw 10,602
    booths (1,237 of which were of overseas participants) and
    involvement of 13,970 experts. Pertinent events at the expo include
    a food festival and chef contest, an international tourism and
    leisure commodities show, 2 furniture shows, an international silk
    fair and a building and decoration materials
    fair.![](media/image5.jpeg){width="2.4590277777777776in"
    height="1.6243055555555554in"}

-   Hangzhou will be hosting the 2006 World Leisure Expo, an ambitious
    6-month event taking place between April and October 2006. It will
    consist of numerous events revolving around relaxation and leisure,
    including a grandiose worldwide city exhibitions hall, which is
    expected to attract some 10 million people.

-   Hangzhou also hosts an international tea trade fair in the Spring on
    an irregular basis.

## Join Us!

ATO is constantly planning and organizing market development activities
in Hangzhou and nearby cities. 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@usda.gov