Required Report - public distribution

**Date:** 8/10/2004

**GAIN Report Number:** CH4405

CH4405

**China, Peoples Republic of**

**Retail Food Sector**

**North China**

**2004**

**Approved by:**

![](media/image1.wmf)LaVerne E. Brabant

U.S. Embassy, Beijing

**Prepared by:**

China Food & Agricultural Service Inc., ATO Beijing

**Report Highlights:**

China\'s retail food revolution has been rolling across the country for
nearly a decade, replacing traditional wet markets and food stalls with
modern hypermarkets, warehouse and convenience stores. At the same time,
growing prosperity on the part of top-tier urban consumers has fueled
both economic access and desire for high-quality imported food products.
Improving distribution and logistics are making it possible for US
exporters to supply this extremely competitive and rapidly expanding
retail market in North China.

Includes PSD Changes: No

Includes Trade Matrix: Yes

Unscheduled Report

Beijing \[CH1\]

\[CH\]

Table of Contents

[**I. Market Summary: Growth of a Modern Retail Industry
3**](#i.-market-summary-growth-of-a-modern-retail-industry)

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

[B. Market Drivers 4](#b.-market-drivers)

[C. Food Sales (Charts) 5](#c.-food-sales-charts)

[D. SWOT Analysis for US Food Imports
8](#d.-swot-analysis-for-us-food-imports)

[II. Road Map for Market Entry 8](#ii.-road-map-for-market-entry)

[A. Rules of the Road 8](#a.-rules-of-the-road)

[B. Distribution and Logistics 11](#b.-distribution-and-logistics)

[C. Distribution Flow Chart For Northern China
13](#c.-distribution-flow-chart-for-northern-china)

[D. Retail Sector Profiles 13](#d.-retail-sector-profiles)

[E. Case Study: For Sam's Club, A Growth Business in Imports
16](#e.-case-study-for-sams-club-a-growth-business-in-imports)

[III. Competition 17](#iii.-competition)

[IV. Best Product Prospects 20](#iv.-best-product-prospects)

# 

# I. Market Summary: Growth of a Modern Retail Industry

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

China's retail food industry revolution is reaching into northern China.
The most basic infrastructure for providing food to consumers, from
production to supply chain to retail outlet, is modernizing.
Hypermarkets are replacing wet markets, warehouse stores are supplying
restaurants and other businesses, and chain convenience stores are
replacing little "mom and pop" stalls. The highway network is expanding,
logistics and cold chain are improving, and food can be shipped in
better condition over longer distances to market.

This development of the modern retail food industry, which has been
accelerating since 2000, is part and parcel of the basic drive for
growth and modernization that is transforming China. Driven by rising
urban incomes, consumption patterns are changing and expectations are
rising. There is for the first time a segment of the population that is:
curious about non-Chinese food; can afford imported products; seeks
status, and not just nutrition.

These changes came first to the Pearl River Delta, in South China across
the border from Hong Kong, and then spread to the Yangtze River Delta
around Shanghai. Now the retail revolution is reaching Northern and
Northeastern China. Major hypermarkets, including international
powerhouses like Carrefour, Wal-Mart and Metro, are extending their
reach into the major cities of the north and northeast. Strong local
competitors are also fighting for market share. In many once-isolated
cities, there are retail stores that view imported food as a profitable
niche, and branding has become a feasible marketing strategy.

North China covers an area larger than the eastern half of the United
States, but retail development has been focused in a few large cities
and two coastal provinces. Beijing has the highest income levels,
followed by Tianjin, which has become the focus of multi-national
investment. These large metropolitan areas border each other, with
Beijing linked to Tianjin's Port by a modern superhighway. Growth of the
middle class has been significant in both.

In Beijing, the modern retail market is developing most quickly in the
growing suburban residential areas, where car ownership is skyrocketing.
Many hypermarkets are locating in an urban-suburban border zone, hoping
to appeal to both sides. Parking lots have for the first time become a
necessity for stores in these areas. By the end of 2003, there were
nearly 100 hypermarkets, warehouse stores or large supermarkets in
Beijing, with another 19 in the planning or development stage. In
addition, Beijing as the government and diplomatic capital has a
significant population of well-off expatriates. This has created enough
demand to support small groceries that specialize in imported products
aimed at the expatriate community. Department stores also often include
a high-end food market.

The government has however tried to limit growth in the convenience
sector after watching the Shanghai convenience market spin out of
control and become oversaturated. 7-Eleven, which has long had stores in
southern Guangdong Province, began opening stores in Beijing in April
2004, but a chain of gas station marts catering to the booming
population of drivers has not developed as rapidly as planned.

The modern retail food industry is also highly developed in Shandong
Province, a fertile peninsula south of Beijing that juts into the Yellow
Sea. The climate and conditions there are ideal for producing a variety
of commercial food products, including poultry, beef, fruit and aquatic
products. Companies from nearby Japan and South Korea are heavy
investors and modern infrastructure including cold chain and container
port facilities is well developed.

While no city in Shandong has the per capita income of Beijing, cities
like Qingdao, Yantai, Weihai and Jinan are all among the most prosperous
in China, meaning there is a developing middle class cohort that is
attracted to and can afford imported food products. In addition,
Shandong has long been exposed to the outside world, and people there
have a good awareness of management innovation, technology and food
products from abroad.

Other areas where the modern retail market is taking hold include
Dalian, a port in Liaoning Province where Japanese and Korean investment
has also been heavy; and Xian, in interior Shaanxi Province. Economic
development in many northern cities has, however, lagged because of a
legacy of large and unproductive state-owned enterprises, holdovers from
the Mao-era command economy that still dominate production and
employment. Despite this, elements of modern retail markets have emerged
in every large city in North China.

Prosperity and modernization has not, however, reached the rural market,
where two-thirds of the population still lives. Imported products are
simply too expensive for this sector, where cash income can be as little
as \$100 per year. Unless a food product can be sold for an average
price of 1 Rmb (about 12.5 US cents) per item, it will be too expensive
for this market. Domestic food processors shrink portion sizes or use
inexpensive or cheap ingredients to reach these price points. In
addition, distribution and retailing infrastructure remain rudimentary
in most of China's countryside.

## B. Market Drivers

Prosperity and economic development in China is generally located at the
contact points between regional, national and global economies. In the
north, Beijing, Tianjin, Dalian, and Shandong Province have the
strongest connections to the national and global economies. They have
the largest share of the growing middle class, and it is also in these
areas where the physical elements of the modern retail market -- the
retail outlets, the cold chain and other logistics -- are developing
most quickly.

Virtually all market drivers are related to this basic structure of
development, in which exposure to the developing national and global
economies leads to rising expectations, prosperity, modern concerns and
attitudes and ever increasing contact with the outside world. The
pattern began with the development of the Pearl River Delta in the
1980s, and is now accelerating in northern China.

The status of overall foreign investment is a good indicator of
development, and therefore the presence of modern market drivers, in a
particular region or city. Beijing, Tianjin, Dalian and Shandong have
all been focuses of investment, but domestic and foreign investment has
also spread into secondary cities like Shenyang, Changchun, and Harbin.

Market drivers, all of them related to the thrust for modernization and
development, include:

-   Aspirations: Following years of poverty and isolation, Chinese want
    to be part of the modern world, and have their country to take its
    rightful place in the modern world.

-   Status-seeking: Buying imported products, and being seen to afford
    imported products, confers status and "face."

-   Curiosity: Younger Chinese are curious about new foods, both from
    other regions of the country and from abroad.

-   Health consciousness: Consumers are concerned about hygiene and
    health, concerns heightened by episodes of SARS, avian flu and
    adulterated food scandals.

-   Convenience: People work harder, earn more, live busier lives and
    have less time to shop and cook. Working couples are the standard.
    Demand for convenience and ready-to-eat food is skyrocketing.

```{=html}
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```
-   Exposure to foreign tastes: US fast food outlets like KFC,
    McDonald's and Pizza Hut have broadened Chinese tastes, with outlets
    frequently located at or near hypermarkets. In addition, the growing
    expatriate community has increased exposure to imported food, and
    more and more Chinese are traveling and studying abroad, bringing
    back a taste for the food.

```{=html}
<!-- -->
```
-   Olympic Run-up: The run-up to the 2008 Olympic Games is priming
    development in Beijing and the Shandong port of Qingdao (site of
    some of the water sports events), as well as reinforcing trends like
    curiosity and exposure to foreign tastes. In Beijing, new logistical
    facilities including cold warehouses are under construction.

## C. Food Sales (Charts)

There are few detailed government statistics on retail food sales or
breakdowns of per capita consumption in China. These statistics can also
be inaccurate, since few are gathered by scientific sampling methods.
Nevertheless, the statistics do give a general picture of steady
economic development and indicate the direction of trends.

+------------+-------+------+------+------+------+-------+----+------+
| **Figure   |       |      |      |      |      |       |    |      |
| 1:         |       |      |      |      |      |       |    |      |
| Provinces  |       |      |      |      |      |       |    |      |
| and Cities |       |      |      |      |      |       |    |      |
| of North   |       |      |      |      |      |       |    |      |
| China**    |       |      |      |      |      |       |    |      |
|            |       |      |      |      |      |       |    |      |
| **Size,    |       |      |      |      |      |       |    |      |
| Population |       |      |      |      |      |       |    |      |
| and        |       |      |      |      |      |       |    |      |
| Income**   |       |      |      |      |      |       |    |      |
+------------+-------+------+------+------+------+-------+----+------+
|            |       | Po   |      |      | An   |       |    |      |
|            |       | pula |      |      | nual |       |    |      |
|            |       | tion |      |      | In   |       |    |      |
|            |       | (m   |      |      | come |       |    |      |
|            |       | illi |      |      | (U   |       |    |      |
|            |       | ons) |      |      | S\$) |       |    |      |
+------------+-------+------+------+------+------+-------+----+------+
| **P        | Size  | T    | U    | R    | U    | Urban | R  | %GDP |
| rovinces** | (sq   | otal | rban | ural | rban | Top   | ur | Gr   |
|            | m     |      |      |      |      | 10%\* | al | owth |
|            | iles) |      |      |      |      |       |    | 2002 |
+------------+-------+------+------+------+------+-------+----+------+
| Shandong   | 5     | 90.8 | 26.3 | 64   | 923  | 2,437 | 3  | 12.7 |
|            | 9,073 |      |      |      |      |       | 58 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Xinjiang   | 64    | 19.1 | 6.5  | 12.6 | 904  | 2,231 | 2  | 7.6  |
|            | 2,819 |      |      |      |      |       | 26 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Shanxi     | 6     | 32.9 | 12.5 | 20.4 | 756  | 2,165 | 2  | 13.4 |
|            | 0,336 |      |      |      |      |       | 61 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Henan      | 6     | 96.1 | 24.8 | 71.3 | 757  | 2,143 | 2  | 9.4  |
|            | 4,478 |      |      |      |      |       | 69 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Jilin      | 7     | 27.0 | 13.7 | 13.3 | 803  | 2,045 | 2  | 10.5 |
|            | 2,335 |      |      |      |      |       | 86 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Inner      | 45    | 23.8 | 10.5 | 13.3 | 733  | 2,015 | 2  | 12.2 |
| Mongolia   | 6,954 |      |      |      |      |       | 36 |      |
+------------+-------+------+------+------+------+-------+----+------+
| He         | 17    | 38.1 | 20.2 | 17.9 | 740  | 1,959 | 2  | 10.3 |
| ilongjiang | 5,290 |      |      |      |      |       | 92 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Qinghai    | 27    | 5.3  | 2.0  | 3.3  | 788  | 1,882 | 2  | 13.2 |
|            | 9,001 |      |      |      |      |       | 07 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Ningxia    | 2     | 57.2 | 30.8 | 23.2 | 735  | 1,739 | 2  | 10.2 |
|            | 0,000 |      |      |      |      |       | 32 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Shanxi     | 7     | 36.7 | 29.9 | 6.8  | 767  | 1,627 | 1  | 10.4 |
|            | 9,459 |      |      |      |      |       | 93 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Liaoning   | 5     | 41.4 | 19.2 | 22.3 | 791  | 1,493 | 3  | 8.4  |
|            | 6,371 |      |      |      |      |       | 10 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Hebei      | 7     | 67.0 | 13.4 | 53.6 | 725  | n/a   | 3  | 8.6  |
|            | 2,468 |      |      |      |      |       | 16 |      |
+------------+-------+------+------+------+------+-------+----+------+
| **Cities** |       |      |      |      |      |       |    |      |
+------------+-------+------+------+------+------+-------+----+------+
| Beijing    | 6,489 | 11.4 | 8.1  | 3.3  | 1511 | \*    | 6  | 10   |
|            |       |      |      |      |      | 2,830 | 54 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Tianjin    | 4,602 | 9.2  | 5.4  | 3.8  | 1132 | 2,848 | 6  | 12.5 |
|            |       |      |      |      |      |       | 44 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Qingdao    | 4,114 | 7.2  | 2.5  | 4.7  | 1057 | 2,612 | 5  | 15.4 |
|            |       |      |      |      |      |       | 08 |      |
+------------+-------+------+------+------+------+-------+----+------+
| Source:    |       |      |      |      |      |       |    |      |
| China      |       |      |      |      |      |       |    |      |
| Provincial |       |      |      |      |      |       |    |      |
| S          |       |      |      |      |      |       |    |      |
| tatistical |       |      |      |      |      |       |    |      |
| Offices    |       |      |      |      |      |       |    |      |
|            |       |      |      |      |      |       |    |      |
| \          |       |      |      |      |      |       |    |      |
| *Provinces |       |      |      |      |      |       |    |      |
| and cities |       |      |      |      |      |       |    |      |
| are ranked |       |      |      |      |      |       |    |      |
| by annual  |       |      |      |      |      |       |    |      |
| income of  |       |      |      |      |      |       |    |      |
| top 10% of |       |      |      |      |      |       |    |      |
| urban      |       |      |      |      |      |       |    |      |
| residents; |       |      |      |      |      |       |    |      |
| for        |       |      |      |      |      |       |    |      |
| Beijing,   |       |      |      |      |      |       |    |      |
| top 20%.   |       |      |      |      |      |       |    |      |
+------------+-------+------+------+------+------+-------+----+------+

The relative earning power of the top 10% of urban families gives an
indication where foreign imported foods may be most likely to find
willing and able consumers. (Figure 1).

+------------------------+---------+---------+---+---+----------+-----------+
| **Figure 2: Per Capita |         |         |   |   |          |           |
| Urban Food Purchases   |         |         |   |   |          |           |
| By Income**            |         |         |   |   |          |           |
+------------------------+---------+---------+---+---+----------+-----------+
|                        | 2002    |         |   | 1 |          |           |
|                        |         |         |   | 9 |          |           |
|                        |         |         |   | 9 |          |           |
|                        |         |         |   | 9 |          |           |
+------------------------+---------+---------+---+---+----------+-----------+
| Item (kg)              | Top 10% | Avg     |   |   | Top 10%  | Avg       |
+------------------------+---------+---------+---+---+----------+-----------+
| Grain                  | 71.4    | 78.5    |   |   | n/a      | n/a       |
+------------------------+---------+---------+---+---+----------+-----------+
| Starches and Tubers    | 8.2     | 9.0     |   |   | 15.8     | 13.7      |
+------------------------+---------+---------+---+---+----------+-----------+
| Edible Vegetable Oil   | 7.8     | 8.5     |   |   | 7.8      | 7.8       |
+------------------------+---------+---------+---+---+----------+-----------+
| Pork                   | 22.4    | 20.3    |   |   | 20.2     | 16.9      |
+------------------------+---------+---------+---+---+----------+-----------+
| Beef                   | 2.2     | 1.9     |   |   | 2.4      | 1.9       |
+------------------------+---------+---------+---+---+----------+-----------+
| Poultry                | 13.3    | 9.2     |   |   | 6.3      | 4.9       |
+------------------------+---------+---------+---+---+----------+-----------+
| Fresh Eggs             | 11.1    | 10.6    |   |   | 13.0     | 10.9      |
+------------------------+---------+---------+---+---+----------+-----------+
| Fish                   | 14.5    | 9.6     |   |   | 5.6      | 4.4       |
+------------------------+---------+---------+---+---+----------+-----------+
| Shrimp                 | 2.7     | 1.3     |   |   | 1.5      | 1.0       |
+------------------------+---------+---------+---+---+----------+-----------+
| Wine                   | 0.42    | 0.24    |   |   | 0.28     | 0.17      |
+------------------------+---------+---------+---+---+----------+-----------+
| Fresh Fruit            | 74.7    | 56.5    |   |   | 62.6     | 46.1      |
+------------------------+---------+---------+---+---+----------+-----------+
| Cake                   | 5.6     | 3.8     |   |   | 4.4      | 3.1       |
+------------------------+---------+---------+---+---+----------+-----------+
| Fresh Dairy Products   | 26.5    | 15.7    |   |   | 13.8     | 7.9       |
+------------------------+---------+---------+---+---+----------+-----------+
| Sour Milk\*            | 3.3     | 1.8     |   |   | 1.5      | 0.9       |
+------------------------+---------+---------+---+---+----------+-----------+
| \*Yogurt, sour cream,  |         |         |   |   |          |           |
| etc                    |         |         |   |   |          |           |
|                        |         |         |   |   |          |           |
| Source: China National |         |         |   |   |          |           |
| Statistics Bureau      |         |         |   |   |          |           |
+------------------------+---------+---------+---+---+----------+-----------+

Figure 2 illustrates the differences in diet between the average-income
urban residents and the high-income urban residents, the most likely to
target for imported products. Top-tier urban households eat fewer
grains, starches and oils, and much more fish, wine, fresh fruit, dairy
products and sour milk (mostly yogurt). Consumption of poultry, fish,
shrimp, wine, fresh fruit, cake and dairy products has grown sharply
since 1999.

<table>
<colgroup>
<col style="width: 12%" />
<col style="width: 7%" />
<col style="width: 8%" />
<col style="width: 7%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 6%" />
<col style="width: 1%" />
<col style="width: 7%" />
<col style="width: 6%" />
<col style="width: 6%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 7%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="14"><strong>Figure 3: Per Capita Annual Food Spending of
Urban Residents by Region</strong></td>
</tr>
<tr class="even">
<td></td>
<td colspan="6">2002 (RMB)</td>
<td></td>
<td colspan="6">1999 (RMB)</td>
</tr>
<tr class="odd">
<td><strong>Province</strong></td>
<td>Total Food</td>
<td>Meat</td>
<td><p>Aqua</p>
<p>Tic</p></td>
<td>Vegetable</td>
<td>Cond’mnt</td>
<td>Bev*</td>
<td></td>
<td>Total Food</td>
<td>Meat</td>
<td><p>Aqua</p>
<p>tic</p></td>
<td><p>Vege</p>
<p>table</p></td>
<td>Condiment</td>
<td>Bev*</td>
</tr>
<tr class="even">
<td>Liaoning</td>
<td>2075</td>
<td>386</td>
<td>173</td>
<td>213</td>
<td>41</td>
<td>122</td>
<td></td>
<td>1731</td>
<td>355</td>
<td>122</td>
<td>252</td>
<td>29</td>
<td>96</td>
</tr>
<tr class="odd">
<td>Shandong</td>
<td>1928</td>
<td>332</td>
<td>121</td>
<td>159</td>
<td>24</td>
<td>126</td>
<td></td>
<td>1676</td>
<td>312</td>
<td>112</td>
<td>142</td>
<td>23</td>
<td>115</td>
</tr>
<tr class="even">
<td>Xinjiang</td>
<td>1913</td>
<td>421</td>
<td>54</td>
<td>166</td>
<td>21</td>
<td>92</td>
<td></td>
<td>1609</td>
<td>391</td>
<td>49</td>
<td>162</td>
<td>20</td>
<td>62</td>
</tr>
<tr class="odd">
<td>Qinghai</td>
<td>1851</td>
<td>382</td>
<td>49</td>
<td>170</td>
<td>31</td>
<td>119</td>
<td></td>
<td>1655</td>
<td>312</td>
<td>42</td>
<td>162</td>
<td>25</td>
<td>133</td>
</tr>
<tr class="even">
<td>Shaanxi</td>
<td>1833</td>
<td>254</td>
<td>49</td>
<td>166</td>
<td>31</td>
<td>90</td>
<td></td>
<td>1473</td>
<td>233</td>
<td>36</td>
<td>150</td>
<td>26</td>
<td>67</td>
</tr>
<tr class="odd">
<td>Jilin</td>
<td>1809</td>
<td>334</td>
<td>101</td>
<td>198</td>
<td>34</td>
<td>99</td>
<td></td>
<td>1562</td>
<td>307</td>
<td>83</td>
<td>198</td>
<td>26</td>
<td>79</td>
</tr>
<tr class="even">
<td>Hebei</td>
<td>1795</td>
<td>330</td>
<td>96</td>
<td>207</td>
<td>30</td>
<td>153</td>
<td></td>
<td>1496</td>
<td>280</td>
<td>71</td>
<td>177</td>
<td>24</td>
<td>102</td>
</tr>
<tr class="odd">
<td>Ningxia</td>
<td>1774</td>
<td>308</td>
<td>41</td>
<td>191</td>
<td>26</td>
<td>75</td>
<td></td>
<td>1375</td>
<td>252</td>
<td>42</td>
<td>162</td>
<td>22</td>
<td>62</td>
</tr>
<tr class="even">
<td>Heilong.</td>
<td>1585</td>
<td>304</td>
<td>80</td>
<td>156</td>
<td>27</td>
<td>87</td>
<td></td>
<td>1410</td>
<td>277</td>
<td>66</td>
<td>156</td>
<td>23</td>
<td>75</td>
</tr>
<tr class="odd">
<td>I.Mong.</td>
<td>1532</td>
<td>305</td>
<td>40</td>
<td>139</td>
<td>24</td>
<td>88</td>
<td></td>
<td>1304</td>
<td>263</td>
<td>38</td>
<td>115</td>
<td>20</td>
<td>79</td>
</tr>
<tr class="even">
<td>Shanxi</td>
<td>1531</td>
<td>225</td>
<td>35</td>
<td>171</td>
<td>24</td>
<td>81</td>
<td></td>
<td>1406</td>
<td>203</td>
<td>29</td>
<td>173</td>
<td>24</td>
<td>86</td>
</tr>
<tr class="odd">
<td>Henan</td>
<td>1517</td>
<td>294</td>
<td>38</td>
<td>169</td>
<td>27</td>
<td>98</td>
<td></td>
<td>1428</td>
<td>263</td>
<td>36</td>
<td>140</td>
<td>26</td>
<td>100</td>
</tr>
<tr class="even">
<td><strong>Cities</strong></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td>Beijing</td>
<td>3472</td>
<td>566</td>
<td>163</td>
<td>249</td>
<td>61</td>
<td>242</td>
<td></td>
<td>2959</td>
<td>540</td>
<td>131</td>
<td>248</td>
<td>57</td>
<td>190</td>
</tr>
<tr class="even">
<td>Qingdao</td>
<td>2974</td>
<td>528</td>
<td>374</td>
<td>223</td>
<td>36</td>
<td>181</td>
<td></td>
<td>n/a</td>
<td>n/a</td>
<td>n/a</td>
<td>n/a</td>
<td>n/a</td>
<td>n/a</td>
</tr>
<tr class="odd">
<td>Tianjin</td>
<td>2607</td>
<td>427</td>
<td>232</td>
<td>210</td>
<td>48</td>
<td>148</td>
<td></td>
<td>2460</td>
<td>452</td>
<td>220</td>
<td>215</td>
<td>48</td>
<td>129</td>
</tr>
<tr class="even">
<td colspan="14"><p>*Liquor and other beverages</p>
<p>Source: China Provincial Statistical Offices</p></td>
</tr>
</tbody>
</table>

Figure 3 shows trends in urban food sales. Slight deflation in China
from 1999 to 2003 suggests that consumption increases are actually
larger than they appear in this chart. Spending on meat, aquatic
products, condiments and beverages has increased, while consumption of
wheat and rice (not shown) has fallen. Residents of cities like Beijing,
Qingdao and Tianjin spend much more on meat, condiments and liquor.
Spending in

Qingdao is much higher than for other cities in Shandong Province.

Figure 4 shows that by 2002 most urban households had a refrigerator,
which usually included a small freezer compartment. However, standalone
freezers were unusual even among well-off urban households. Meanwhile,
microwave penetration is soaring. Chinese kitchen equipment is an
important marketing consideration.

## D. SWOT Analysis for US Food Imports

  ----------------------------------- -----------------------------------
  **STRENGTHS & OPPORTUNITIES**       **WEAKNESSES & THREATS**

  US products reputation for          Many other imported products are
  consistent hi-quality among local   vying for the Chinese market
  retailers, consumers                

  Increased awareness and curiosity   High price of US products limits
  about imported food encouraged by   market
  Olympics                            

  US companies understand the         Brands take time and money to
  importance of brands and how to     build; need education along entire
  build them                          value chain

  Importance of 'face' encourages     Domestic replacement if brand or
  purchase of aspirational, branded,  status differential isn't
  hi-status items                     established

  Gift giving culture encourages      Fake products may take market
  purchase of impressive, branded,    share, damage brand image
  hi-status items                     

  Major urban areas are developing    Tremendous pressure on price in
  sizable populations of hi-income    fragmented rural market
  consumers                           

  Improving infrastructure supports   Distributors may not provide good
  more distribution of frozen foods   sales & marketing support
  and produce                         

  Higher living standards, education  Chinese food
  drive demand for quality, safety,   manufacturers-distributors are
  dietary variety                     responding to this pressure

  WTO-required tariff reductions make Protectionist impulses and abrupt
  US imports more competitive         policy shifts raise non-tariff
  vis-à-vis local                     barriers

  Busier lifestyles has created       Small initial shipments may not
  opening for convenience food        make money due to high
                                      transportation costs

  Young consumer generation has       Long lag-time from order to
  created opening for fad foods       delivery due to Trans-Pacific
                                      shipment
  ----------------------------------- -----------------------------------

# II. Road Map for Market Entry

## A. Rules of the Road

The first rule for successful marketing in China, according to
experienced retailers and distributors, is to take the time and spend
the effort to research and develop the market step-by-step, just as you
would with a new product or market in the United States. It is all too
easy to think that the target is so big you can't miss. But even though
China has more than 1.3 billion people, the bull's eye for your product
is probably very small. The country is huge, modern logistics are still
in the development stage, and even in urban centers the percentage of
people willing and able to buy imported products is still relatively
small. The biggest mistake you can make is to spread yourself too thin.
It is best to pick a target city or region where top tier urban income
earners are concentrated, develop a market position and then spread into
new areas as you gain experience. With a solid plan, you will be
positioned to expand along with China's economic development and
prosperity.

Other important principles of a China entry strategy include finding a
good distributor to work with; educating the whole value chain about
your product, including distributors, retailers and, not least,
consumers; and establishing your product as a high-quality, high-status
product worth the import premium.

-   **Finding A Good Distributor**

> Your most important relationship in China will be with your
> distributor, so take time to find one you're comfortable with. The
> best distributors are in demand, but they are also most likely to have
> the experience and savvy to distribute your product. Even the best
> distributors, however, probably won't provide the kind of sales and
> marketing effort that US companies expect, and many find it necessary
> to take the sales initiative themselves, while the distributor handles
> logistics.
>
> A good distributor should be able to coach you on import requirements
> and handle the burden of Customs and health paperwork, either by
> themselves or through a licensed import agent. They should also have
> an extensive catalogue and an established network of customers.
> Equally important, your importer or distributor must be able to make
> or arrange payment in hard currency. The Chinese RMB is a controlled
> currency not freely convertible into US dollars. Although gradual
> liberalization is likely, and some is required by China's World Trade
> Organization accession agreement, currently companies need special
> licenses or status to convert RMB into US dollars.
>
> China has a relationship-based business culture, so face-to-face
> meetings with distributors and retail clients are important. Most
> distributors and retailers simply won't buy from somebody they haven't
> met face-to-face. If they don't meet you or an employee of your
> company, they will suspect you are not committed to the market.

-   **Educating the Value Chain**

> A Western store manager wondered why Chinese consumers wouldn't buy
> any of his imported premium US canned soup. Spot interviews revealed
> the main problem: consumers had no idea how to prepare canned soup.
> There are no similar Chinese products and there were no Chinese
> instructions on the can.
>
> The point: the most basic assumptions about your product may not apply
> in China.
>
> Consumers are curious about imported food, but they need to know
> exactly what it is and how it's prepared before they'll try it. For
> this reason, distributors and retailers unanimously say in-store
> product tasting and preparation demonstrations are key to introducing
> new food products to the retail market.
>
> For some products, education needs to extend all along the value chain
> -- what is it, how to handle it, where to stock it, how to sell it.
> One hypermarket manager describes listening to one of his Chinese
> buyers talk to a distributor's salesman, also a native Chinese. They
> had a sample, but neither knew exactly what it was. They decided
> finally it should be stocked with the jams and jellies. The product?
> Garlic paste.

-   **Adapting to the Market**

> In addition to educating the value chain, suppliers need to consider
> how to adapt both their products and their practices to the Chinese
> market. Every aspect of a product, from packaging to flavor profile to
> preparation and use, needs to be considered. A few examples: many
> Chinese find US food too sweet, because the overall US taste profile
> is sweeter than that of the Chinese; baking products should be pitched
> to expatriates because few Chinese kitchens include a convection oven;
> Chinese do not like to buy economy sizes, so packages should be small,
> which cuts the risk of experimental buying for consumers.
>
> There are also regional differences that need to be considered. People
> in North China generally prefer strong flavors, but not as hot or
> peppery, as in Sichuan or Hunan. Shandong Cuisine is saltier than
> elsewhere in the north. Fresh fruit suppliers say northerners prefer
> oversize fruit that can be given as gifts, compared to southerners
>
> who often prefer more standard size fruit for their personal
> consumption.

-   **Marketing and Branding**

> Food importers must learn to use marketing and branding to battle the
> price challenge from domestic products. An imported product must
> establish that it is worth a premium -- you won't succeed if your
> product is perceived as nothing more than a more expensive version of
> a domestic product. But if you can establish that brand premium, then
> price becomes a much less significant factor (see Section II. D, Sam's
> Club case study).
>
> The biggest market for imported food in China is made up of younger
> urban middle-class Chinese, and marketers say these people are
> attracted to imported food products for three basic reasons:

1.  Their reputation for consistent quality, safety and hygiene;

2.  Curiosity about foreign tastes; and

3.  As modern, progressive, aspirational products that confer status.

> All of these factors can come into play in marketing a product,
> although they must be handled carefully. Many Chinese are skeptical
> about the safety of domestic products, and there are periodic
> scandals, so emphasis on mode of production and prominent display of
> US government approvals may help underline quality and safety values.
> Neat, attractive packaging, unusual on domestic products, can lure the
> curious and reward the status-conscious although domestic producers
> are catching up. And, the fact that imported products are more
> expensive can itself be used to confer status -- and give high-end
> Chinese consumers an opportunity to display both their sophistication
> and wealth.
>
> Western branding techniques can be an advantage for imported products,
> because very few Chinese companies have mastered the concepts. If you
> establish a brand edge, it will be more difficult for competitors,
> imitators and China's infamous "copycats" to steal your market.
> Imitators rarely produce a truly equivalent food product, and if you
> can make aspirational Chinese consumers aware of the differences, they
> will be unable to gain status without buying the real thing.
>
> Just as in the US or Europe, you need to consider exactly which
> segment of the population your product appeals to, who will actually
> buy your product, where they will make the buy, and how they will use
> the product. Imported foods are frequently used as high-status gifts,
> for instance, and if that is your target then packaging and appearance
> are key marketing elements. A health product for seniors may need to
> be pitched towards a housewife who would buy the product for parents
> or in-laws, since the more senior and frugal generation here is much
> less likely to spend on a premium product.

-   Some other market-entry tips and pitfalls:

    -   Have some key target clients in mind before you enter the
        market. If a retailer is a client in the US or Europe, try to
        use them as an entrée to the China branch. Since these large
        retailers like to buy direct from suppliers, this may enable you
        to avoid the problem of finding a distributor at first.

    -   If you have minimum order requirements, waive them at first.
        Most likely you won't be able to ship full container loads for a
        while -- even retail giant Wal-Mart consolidates shipments.

    -   Ship "last in, first out" to China. Shelf life is a major issue
        for Chinese retailers, and many US products arrive too late in
        the cycle. Consider shipping younger or newer product to make up
        for shipping and distribution time.

    -   The payment dilemma: Some US suppliers require full payment in
        advance from distributors, but distributors don't like to take
        ownership of products that haven't proved themselves in the
        market. Easier terms may expand volume, but suppliers say the
        risk of nonpayment is high.

    -   Many imported-product distributors also service the HRI market.
        High-end hotels and restaurants can be a way to introduce
        products, because they are willing to buy premium ingredients,
        and also work to inculcate imported tastes among their
        clientele. Sam's Club sees this as a market niche (see
        Section IV. C, products not in the market).

## B. Distribution and Logistics

For decades China followed a policy of provincial self-sufficiency, so
distribution and logistics were given short shrift. It is only in the
last few years that a national food market has begun to develop, with
more and more food products moving across regional and provincial
boundaries. International hypermarkets like Metro, Carrefour and
Wal-Mart, along with fast food companies like YUM and McDonalds, have
led the way in efforts to achieve fast, high-quality and transparent
shipment. Domestic poultry, dairy, fruit and aquatic products companies
have also helped create a market for better logistics.

However, cold chain logistics are still considered unreliable and in
some cases even dangerous outside large urban areas. Although the
situation is improving, insiders say no outside company should consider
shipping on the China cold chain. Metro Cash 'n Carry says it has built
its own network using heavily supervised third-party providers, and can
guarantee the cold chain from Shanghai to all its outlets in northern
and central China. But most others admit they still can't ship
perishables to all their outlets in China.

Hypermarkets and warehouse clubs handle imported products via central
offices, which take care of buying and distribution. For example,
although Carrefour, Wal-Mart and Metro all have northern regional
offices in Beijing, most imported products come through a single
gateway, Shenzhen for Wal-Mart, Shanghai for Carrefour, Metro and
Shanghai Lianhua.

Most distributors for international food products are based in Shanghai,
Hong Kong or Beijing. They bring containers to their own warehouses,
then ship to other regions and cities. Even for port cities like Dalian
and Qingdao, most imported food enters the country through the gateways
of Shanghai or Beijing/Tianjin, except for imports from Japan and Korea.
Local retailers say these patterns will change as the volumes increase,
and several major players are already developing direct imports in the
north.

Distribution of food products is generally by truck, as shipping by rail
is slow, unreliable and opaque. Domestic producers and exporters ship
large volumes by rail, but only if a firm delivery date is not
important. Even then they may employ special staff to shepherd shipments
through railway stations and major switching points. For example, most
"temperature controlled" shipment uses railcars fitted to hold giant
blocks of ice, which must be replaced by the shipper's representatives
at major rail junctions.

Distribution options for foreign suppliers include:

-   Private distributors, some of them foreign-invested. The best are
    based in Shanghai and Beijing. Those with a Hong Kong connection
    tend to bring products through Hong Kong and southern China, which
    may raise costs for northern distribution.

-   Direct sales to retailers. Chinese retailers who buy a lot of
    imported products send representatives to US food fairs on buying
    expeditions, while multinational retailers like Carrefour, Wal-Mart
    and Metro frequently use their global procurement systems to buy
    products for the China market. This leapfrogs the problem of finding
    a distributor, but may leave you at arm's length from important
    developments in the China market.

-   Third Party Logistics: A small group of foreign-managed companies
    has developed in ports and free trade zones, offering customs
    clearance, foreign exchange conversion, bonded warehousing and
    shipment. Typically, the supplier hires a local representative to
    handle sales and promotion. This route is becoming more viable as
    the logistics sector opens wider as a result of domestic reforms and
    the WTO.

-   "Gray channel." Product is shipped into Guangdong from Hong Kong,
    under-invoiced to slash tariffs. Quarantine inspection is swift or
    non-existent. This route may be less effective in reaching North
    China markets, since tariff savings are eaten up by transit costs:
    Beijing is more than 1,200 miles to the north of Hong Kong, with
    Harbin another 660 miles to the northeast in Heilongjiang Province.
    The central government has been trying to crack down on the gray
    channel to reduce tariff losses, and some hypermarkets now require
    full Customs, VAT and quarantine paperwork that may not be available
    via the gray channel.

-   US consolidators: US consolidators work in two ways: filling direct
    orders for Chinese retailers, and filling orders for China-based
    distributors. As a supplier, you still need to make a pitch to the
    distributor or end-user. The efficiency of US consolidators is an
    advantage for US exporters, and this channel has been growing slowly
    but steadily.

-   Small individual distributors: A large number of entrepreneurs have
    set up small offices and deal in a narrow product line or a few
    SKUs. Their assets frequently run to no more than an office, a desk
    and a fax machine. Some are effective when they understand the
    product and the market they are trying to sell.

-   Repackaging: Some products are imported in bulk, then repackaged or
    bottled for sale in China and elsewhere in Asia using less expensive
    Chinese labor, often in a free trade zone. Products like nuts, dried
    fruit, frozen vegetables; candy, chocolate and wine lend themselves
    to this method.

Any distributor should be able to deal with government paperwork and
procedures, including quarantine and health approvals. Many of these
procedures are deliberately designed as non-tariff barriers that
increase costs and reduce convenience. Proper classification of imported
products for tariff purposes has become another source of conflict, but
the situation is improving as the Customs service becomes more
professional.

## 

## 

## 

## 

## 

## 

## C. Distribution Flow Chart For Northern China

![](media/image1.wmf)

## D. Retail Sector Profiles

**1. Hypermarkets, Warehouse Outlets, Department Stores**

Foreign joint ventures have led developments in the hypermarket and
warehouse sector. Multi-national companies like Wal-Mart, Pricesmart,
Carrefour and Metro and have all established outlets in northern China.
Other entries include Japanese companies like Fu-Mart,

as well as Trust-mart, RT Mart, and Hymall from Taiwan. These companies
operate like their domestic parents, applying modern marketing and
inventory control techniques, and have been a major force in improving
supply chains and access to imported food.

Domestic retailers like CRC Vanguard and Shanghai Bailian have been
quick to imitate the hypermarket format, but many remain inefficient
state-owned enterprises that have difficulty bringing modern management
to bear. Nevertheless they are formidable competitors, due to local
knowledge and large networks. They are also often favored by Chinese
regulators and in many cases can obtain "soft loans" from state banks to
finance expansion.

China's WTO accession agreement calls for an end on current limits to
foreign participation in the retail market after 2004, and there has
been some consolidation among Chinese companies girding themselves for
the anticipated competition. Shanghai Bailian, which now includes
Lianhua hypermarkets, Hualian supermarkets, Quik convenience stores and
some non-food outlets, has become the largest retailer in China. CRC
Vanguard, which began in the south but has spread into northern China,
has hired some highly experienced personnel from foreign JVs. Foreign
operators consider Homeworld, which is expanding from its base in
Tianjin, as a formidable competitor in the domestic warehouse/price club
sector.

The percentage of imported food products found in the hypermarkets and
warehouse stores varies greatly, but rarely reaches even 5% of sales.
Hypermarkets routinely calibrate the amount of imported food in a store
according to both local income and presence of expatriates. Warehouse
stores, which target higher-income local businessmen and women,
generally stock more and higher-value imports. Sam's Club sells three
times as much imported food as Wal-Mart Super Centers, but that is still
only 2-3% of sales.

Generally hypermarkets expect to make a higher profit on imported items,
partly because the risks are higher. Hypermarkets will expect
promotional assistance on new-to-market items. This can include demos
and samples and negotiated fees for other promotional efforts. Some
companies charge slotting fees, with French JV Carrefour the richest at
up to RMB 10,000 per slot per store. Others, such as Wal-Mart and French
JV Auchan, put most of their effort into keeping prices as competitive
(low) as possible.

In Beijing, hypermarket shelf surveys reveal special sections devoted to
imported beer, fruit and wine. Dairy cases have expanded and often
display imported cheeses. There are also substantial displays of
imported breakfast cereals. Beijing retailers hold US products in high
regard for quality. However, frozen sections are huge, stocked mostly
with Chinese dumplings and other similar products, although imported
frozen vegetables are present.

The hypermarket sector is expanding rapidly throughout north China and
same store sales were down almost 10% nationwide in 2003 as a result of
multiplying competition. While hypermarkets in Beijing have begun
catering to car owners, that is not the case in most cities, where
patrons most often walk, ride bikes or take the public bus, limiting the
amount of food they can take home at one time. Some hypermarkets provide
neighborhood bus service. Warehouse store patrons are more likely to
drive cars or small delivery vehicles, or use a tricycle delivery cart
to get purchases to their home or business.

Department stores with large food sections make up a variant of the
hypermarket segment. Malaysian-invested Parkson\'s is trying to develop
a niche in imported food. The stores often measure more than 30,000
square meters of floor space, but the food departments are generally
about the size of domestic supermarkets, although with higher quality
food and

higher percentage of imports.

+-----+------------------------+-------+-------+------+------+-------+
| **  |                        |       |       |      |      |       |
| Fig |                        |       |       |      |      |       |
| II. |                        |       |       |      |      |       |
| C   |                        |       |       |      |      |       |
| (   |                        |       |       |      |      |       |
| 1): |                        |       |       |      |      |       |
| C   |                        |       |       |      |      |       |
| hin |                        |       |       |      |      |       |
| a's |                        |       |       |      |      |       |
| Top |                        |       |       |      |      |       |
| Ret |                        |       |       |      |      |       |
| ail |                        |       |       |      |      |       |
| F   |                        |       |       |      |      |       |
| ood |                        |       |       |      |      |       |
| Ch  |                        |       |       |      |      |       |
| ain |                        |       |       |      |      |       |
| S   |                        |       |       |      |      |       |
| tor |                        |       |       |      |      |       |
| es, |                        |       |       |      |      |       |
| 200 |                        |       |       |      |      |       |
| 3** |                        |       |       |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| R   | Chain name             | 2003  | 2002  | \%   | Out- | \% of |
| ank |                        | Sales | Sales | Rise |      | Food  |
|     |                        | (mn   | (mn   |      | lets |       |
|     |                        | USD)  | USD)  |      | 2003 | I     |
|     |                        |       |       |      |      | mport |
+-----+------------------------+-------+-------+------+------+-------+
| 1   | Shanghai Bailian       | 5,    | 4,    | 21.9 | 4357 | 1-2%  |
|     | (Brilliance)           | 859.5 | 807.1 |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 2   | Dalian Dashang         | 2,    | 1,    | 42.2 | 96   | 1-2%  |
|     |                        | 195.9 | 544.4 |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 3   | Beijing Hualian Group  | 1,    | 1,    | 32.0 | 62   | 2-3%  |
|     |                        | 642.5 | 243.9 |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 4   | Carrefour Corporation  | 1,    | 1,    | 25.7 | 41   | 1-5%  |
|     |                        | 622.8 | 291.5 |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 5   | Shanghai Nonggongshang | 1,    | 1,    | 41.8 | 1213 | 1-2%  |
|     |                        | 495.2 | 054.3 |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 6   | China Resources (CRC)  | 1,    | 1,    | 20.2 | 467  | 5%    |
|     | Vanguard               | 246.8 | 037.6 |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 7   | Suguo Supermarket Co.  | 1,    | 851.9 | 35.8 | 1162 | 1%    |
|     |                        | 157.0 |       |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 8   | Beijing Wu-Mart        | 1,    | 611.9 | 67.8 | 518  | 1-2%  |
|     |                        | 027.1 |       |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 9   | Xinyijia Supermarket   | 712.6 | 459.1 | 55.2 | 46   | n/a   |
|     | Co.                    |       |       |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 10  | Wal-Mart China         | 706.9 | 572.4 | 23.5 | 33   | 1-4%  |
|     | Corporation            |       |       |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 11  | Jiangsu Wenfeng Great  | 690.5 | 527.0 | 31.0 | 326  | 2%    |
|     | World Chain            |       |       |      |      |       |
|     | Development            |       |       |      |      |       |
|     | Corporation            |       |       |      |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 12  | Metro Cash & Carry     | 678.8 | 641.3 | 5.8  | 18   | 5     |
|     | Co., Ltd.              |       |       |      |      | -7.5% |
+-----+------------------------+-------+-------+------+------+-------+
| 13  | Home World Commercial  | 636.7 | 531.9 | 19.7 | 49   | 0.1   |
|     | Grp                    |       |       |      |      | -0.3% |
+-----+------------------------+-------+-------+------+------+-------+
| 14  | Beijing Jingkelong     | 633.2 | 531.7 | 19.1 | 156  | n/a   |
+-----+------------------------+-------+-------+------+------+-------+
| 15  | Trust-Mart Co., Ltd.   | 567.7 | 647.6 | -    | 27   | 3-5%  |
|     |                        |       |       | 12.3 |      |       |
+-----+------------------------+-------+-------+------+------+-------+
| 16  | Beijing Chaoshifa      | 490.9 | 475.8 | 3.2  | 112  | 1%    |
+-----+------------------------+-------+-------+------+------+-------+
| S   |                        |       |       |      |      |       |
| our |                        |       |       |      |      |       |
| ce: |                        |       |       |      |      |       |
| D   |                        |       |       |      |      |       |
| epa |                        |       |       |      |      |       |
| rtm |                        |       |       |      |      |       |
| ent |                        |       |       |      |      |       |
| of  |                        |       |       |      |      |       |
| C   |                        |       |       |      |      |       |
| omm |                        |       |       |      |      |       |
| erc |                        |       |       |      |      |       |
| ial |                        |       |       |      |      |       |
| Ref |                        |       |       |      |      |       |
| orm |                        |       |       |      |      |       |
| and |                        |       |       |      |      |       |
| Dev |                        |       |       |      |      |       |
| elo |                        |       |       |      |      |       |
| pme |                        |       |       |      |      |       |
| nt, |                        |       |       |      |      |       |
| Mi  |                        |       |       |      |      |       |
| nis |                        |       |       |      |      |       |
| try |                        |       |       |      |      |       |
| of  |                        |       |       |      |      |       |
| Com |                        |       |       |      |      |       |
| mer |                        |       |       |      |      |       |
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+-----+------------------------+-------+-------+------+------+-------+

**2. Expatriate Specialty Stores**

A small group of stores has developed in Beijing that caters
specifically to the expatriate niche, which includes numerous Japanese,
Taiwanese and Hong Kongers in addition to Americans and other
Westerners. The outlets are small, located in expatriate heavy
neighborhoods and suburbs, but the percentage sales of imported food
products run from 60% to 90%. The stores stock cheeses, breakfast
cereals, canned goods, snack foods, candy and wine. CRC Vanguard, a
major retailer, runs four such small specialty stores. In other cities,
there is usually at least one store that caters to expatriates. In
Beijing and Dalian, state-run Friendship Stores also fill this niche.

**3. Supermarkets, Wet Markets**

Chain supermarkets actually make up a relatively new sector, having
developed significantly in most cities over the last decade, but they
are already being superceded by hypermarkets. The supermarket sector is
dominated by large state-owned chains, stores are generally crowded;
display is poor and management somewhat unsophisticated. Fresh meat and
produce is substandard due to poor supply chain practices, and
supermarket patrons would usually go to wet markets for these items.

Beijing supermarkets offer a fair sampling of imported products,
including special sections for imported beer, wine and water. Frozen
sections are usually small, frozen products include US peas and corn, as
well as a huge and diverse assortment of dumplings. In other cities,
however, supermarkets display very little imported product.

The number of urban traditional or "wet" markets has fallen since 2000
due to competition and stricter hygiene requirements. These markets
usually consist of a hall housing stalls owned by individual family
businesses. They stock very few imported products, but remain an
important source of fresh meat and produce for consumers.

**4. Convenience Stores**

Modern convenience stores are making their appearance in Beijing and
other northern cities. Most are operated by state-run hypermarket and
supermarket chains, and are clean, well managed and heavily
computerized. In many places they are replacing small "mom-and-pop"
stands that stock soft drinks and snack foods but very few imported
products.

Shanghai Bailian is moving aggressively into Beijing and other cities in
the north with its Quik chain, and 7-Eleven opened in Beijing in 2004
via a Japanese-owned subsidiary. Gas marts located at service stations
are a new entry, and may be ideally placed to sell imported products
because their target customers are wealthy enough to own cars. However,
in 2003 the sector did not develop or grow as quickly as projected.

## E. Case Study: For Sam's Club, A Growth Business in Imports

Wal-Mart China opened its first two stores, a Super Center and a Sam's
Club, in the southern city of Shenzhen on the same day in 1996, and ever
since has followed a slow and steady growth policy as it developed its
understanding of the Chinese market and consumers. The company expanded
in southern China, then in selected cities in the north. By the end of
2003 it was operating 27 Super Centers and four Sam's Clubs. Its first
store in Beijing, a Sam's Club, didn't open until the middle of 2003.

Sam's Club and the Super Centers target very different market segments,
and as a result treat imported products very differently. Super Centers
target the mass market and carry very little imported product -- less
than 1% by overall sales, although the percentage in food is higher.
Sam's Clubs, on the other hand, target small business owners. The owners
buy product for their businesses, but Sam's Club also caters to them as
consumers because they form an important part of the high-income
population and can afford higher-priced consumer goods for themselves
and their families. At Sam's Club, therefore, imports account for 2-3%
of overall sales, with a much higher percentage in certain categories --
about 50% of fresh produce by value, for instance.

"For Sam's Club, we view imported products as very much a growth
business,'' says Ned Irving, Senior Director for Sam's Club
Merchandising in China. "Sam's Club is very much up-market, that's where
the people with the most disposable income are. Affluent Chinese people
are interested in new and different experiences as they relate to
cuisine from outside China. For Sam's Club, that's our customer."

Irving advises US suppliers to make sure they are not just providing a
higher-priced version of something that is produced in China. "If an
item is new and different, though, or conspicuously higher quality, then
the item-price is not that relevant," he says. "The main question is,
are there the logistics to get it here?"

For instance, Wal-Mart buys US cherries in coordination with US Wal-Mart
and flies them in to China. The cherries are far more expensive than
anything domestic, but Sam's Club consumers bit because the quality was
so much higher than domestic Chinese cherries that it was really a
different product.

In North China, Wal-Mart has a regional office in Beijing, which is
responsible for buying local products and keeping track of local tastes.
The supply chain is still the basic bottleneck, especially for
perishable items, but a new distribution center in Tianjin should ease
the problem in northern China. Wal-Mart likes to deal directly with
producers and manufacturers when possible, but also buys from
imported-product distributors in China.

A tour of a Sam's Club outlet demonstrates the marketing strategy. The
outlet feels very much like a store in the US, except that the familiar
blue logo has been tweaked to red, because blue is an unlucky color in
some parts of China. Sam's includes a cosmetic department, expensive
high-tech electronic gear, and a liquor department featuring huge
bottles of prestige cognac with a diamond in the stopper, selling for
around US\$6,000. There is about 80 feet of display for cooked and
prepared food, and a large bakery selling breads, cookies and cakes --
an area where future expansion is planned.

Imports, marked with a small "Imported Product" placard, include
chocolate, fruit, cereal and pastries, including a big hit, South Korean
Orion chocolate pies. There are often in-store imported product
tastings, with young women demonstrators handing out samples. Tastings
and demonstrations are the major product support that Wal-Mart China
asks from its vendors and distributors for imported products in China.

Wal-Mart is so sure imports will be a growth center that it has
designated a vice president, Divisional Merchandising Manager Ricky
Wong, to help foreign suppliers solve problems and achieve success in
the China market. Irving thinks it helps to have a sense of adventure to
succeed in China.

"There are a lot of things that nobody's ever tried here. We try a lot
of things that don't end up working out," says Irving. "You bring
something in and you really don't know if it can sell. There's a big
range of possible results. It's fun, entrepreneurial in a sense,
exploring. I would tell potential suppliers not to be intimidated by the
small numbers of sales in some items. We are interested in developing
all categories."

# III. Competition

The fast-developing Chinese retail market is attracting competitors from
all over the globe, and anyone entering the market must evaluate rivals
carefully. Australia and New Zealand use their relative proximity to
dominate dairy products; Chile and South Africa are strong in counter
seasonal fresh fruit; Southeast Asia exports large amounts of tropical
fruit, and Morocco in frozen strawberries. Some detailed product import
splits for 2003, according to China Customs statistics:

![](media/image2.wmf){width="4.135416666666667in"
height="2.3958333333333335in"}

Total Value: \$12,153,654

![](media/image3.wmf){width="4.385416666666667in"
height="2.3645833333333335in"}

Total Value: \$16,618,584

![](media/image4.wmf){width="3.9166666666666665in"
height="2.2708333333333335in"}

Total Value: \$21,245,353

![](media/image5.wmf){width="4.145833333333333in" height="2.28125in"}

Total Value: \$20,482,442

# IV. Best Product Prospects

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

\--Fish and other seafood, fresh, frozen or chilled

\--Fresh fruit

\--Meat, especially premium beef\*

\--Breakfast cereal

\--Confectionary

\--Premium chocolate

\--Premium cheese

\--Premium wine

\--Frozen vegetables

\--Frozen berries

\--Frozen foods

\--Health food

\--Baby milk powder

\--Pet food

\--Nuts and dried fruit

\*Note: US Beef imports are currently banned by China

B. Products Not Present in Significant Quantities, Which Have Good Sales
Potential

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

Sam's Club believes there's a market gap in availability of Western and
other foreign food for retail consumers. The number of restaurants that
offer non-Chinese food is growing fast, and top-tier urban consumers
patronize those restaurants. Western, Indian, Japanese, and Southeast

Asian food. Consumers would like to be able to cook the same food at

home, but it's not available, either in terms of ingredients or in
frozen,

microwavable or other easily prepared form.

\--Microwavable RTE snacks

\--Baby food

\--Nutritional supplements

\--Food targeted at seniors

\--Premium ice cream

\--Non-native berries and berry products

C. Products Which Are Present, But Have Poor Potential

\--Beer

\--Soft Drinks

\--Canned meat and fish

\--Extruded snacks

\--Yogurt

\--Prepared food for restaurants (in warehouse or club stores)

# 

**V.** **Post Contact and Additional Resources**

For further information about the North China market, as well as
upcoming events and activities, please contact the \*Agricultural Trade
Office in Beijing.

FAS has 4 offices in China:

# Agricultural Affairs Office, Beijing

5-2 Qijiayuan Diplomatic Compound

Jianguomenwai, Beijing, 100600

Phone: 86-10-65321953

Fax: 86-10-65322962

E-mail: <agbeijing@usda.gov>

**\*Agricultural Trade Office, Beijing**

Address: U.S. Agricultural Trade office, Beijing

Kerry Center, South Tower

24^th^ Floor Suite #2425

No. 1 Guanghua Lu, Beijing 100020

Phone: 86-10-85296418

Fax: 86-10-85296692

E-mail: <atobeijing@usda.gov>

# Agricultural Trade Office, Shanghai

Shanghai Center, Suite 331

1376 Nanjing West Road

Shanghai 20040, China

Phone: 86-21-62798622

Fax: 86-21-62798336

E-mail: <atoshanghai@usda.gov>

**Agricultural Trade Office, Guangzhou**

China Hotel Office Tower, 14/F

Guangzhou, 510015, China

Phone: 86-20-86677553

Fax: 86-20-86660703

Email: <atoguangzhou@usda.gov>