Voluntary Report - public distribution

**Date:** 1/10/2006

**GAIN Report Number:** CH6801

CH6801

**China, Peoples Republic of**

**Market Development Reports**

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

**2006**

**Approved by:**

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

U.S. Consulate

**Prepared by:**

Brian Stewart/Ralph Bean

**Report Highlights:**

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

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Shanghai \[CH2\]

\[CH\]

# Gateway to West China

Located deep in China's interior, Chengdu is the capital of Sichuan
province and one of the most affluent cities in Western China. The city
has a population of 10.5 million and a GDP of over RMB 218 billion (\$26
billion) in 2004, making it one of the largest and most economically
important cities in the country. It is also home to some of China's most
successful domestic companies, including the massive Hope Group
conglomerate, which originated as a food processing company, but has
since branched into a wide range of real estate, investment and
manufacturing enterprises. Chengdu is a relatively well-developed urban
island in a largely agricultural province regarded by many as China's
heartland and breadbasket. Sichuan province ranks 3rd nationwide in
population (87.3 million), 9th nationwide in GDP (\$79 billion), but
only 19th out of 32 in per capita income. Interestingly, although per
capita food expenditures are only average, per capita spending on meat
and poultry is among the highest in the country. Like other interior
provinces, Sichuan is growing rapidly, with GDP growth of 12.7% in 2004,
which is likely to be matched in 2005.

# China's Heartland

Sichuan lies astride the Yangtze River, with Chongqing (Chunking) on the
east and Tibet on the west. The province forms a giant bowl valley in
the center of China with mountains on both sides, surrounding the
Yangtze River. To the east, the famous Three Gorges formed where the
Yangtze cuts its way through the mountains. The climate varies widely.
The central part of the province, where most of the population lives, is
a humid and rainy valley, with warm summers and winters that are cool
but not cold. The mountains on the west connect to the Himalayas.
Sichuan is an important producer of rice and rapeseed, but is known
primarily as China's largest pork producer. It is also a major tourism
destination, embracing many of China's most famous natural parks,
including the world famous Woolong Panda Preserve and Jiuzhaigou natural
park. Sichuan and Chengdu loom large in China's history, and several
sites in or near Chengdu have been granted World Heritage Site status by
UNESCO. Bordering on both Tibet and Yunnan, Sichuan is also home to a
large number of China's ethnic
minorities.![](media/image2.jpeg){width="2.0347222222222223in"
height="2.7131944444444445in"}

Chengdu, the capital of Sichuan, has been the focus of most of the
province's development efforts. Always a major rail hub for west and
southwest China, new highways and a new airport has further reinforced
the city's position as the primary transportation hub for the region.
Strong industrial growth is fueled by pro-business policies and
incentives at the municipal, provincial and national levels that have
helped to attract a threefold surge in FDI from 2000 to 2004. Over 98
Fortune 500 Companies have set up shop in Chengdu's development zones in
the past few years. Industrial growth in nearby cities is also helping
to support Chengdu: nearby Mianyang is a major manufacturing center for
television components, and a significant economic center in its own
right. Every spring, Chengdu hosts China's largest domestic food show,
Tangjiuhui (the Spirits and Candy Festival). Tangjiuhui is a gargantuan
event that attracts the entire range of food manufacturers from all
parts of China. ATO/Shanghai frequently participates in Tangjiuhui and
is planning to attend in 2006 with a contingent of U.S. companies and
cooperator groups. The city launched a new trade show, Go West, in the
Spring of 2005. ATO/Shanghai led a group of U.S. cooperators and local
distributors to the trade show, arranging booths, U.S. food samplings
and a chef seminar with a celebrity American chef.

# A Booming Retail Market

Food retail development in Chengdu is both strong and appropriate to the
size and economic strength of the city. Carrefour, Lotus, Auchon, Ito
Yokado and Metro are all present, and Wal-Mart is constructing several
stores. Despite this, retailers report that margins are good compared to
other cities in West China, where recent expansion of retail outlets has
outstripped demand. One retailer has stated that Chengdu is the only
city in the region to show consistently strong growth in sales over the
past several years. ATO/Shanghai's recent retail promotion with Ito
Yokado confirmed the potential of this market (see GAIN report CH4831).
Although per capita incomes are lower than in some coastal cities, the
residents of Chengdu have a consuming interest in food, and those with
the wherewithal are happy to pay a premium for higher quality. The
September 2005 All-China promotion with Carrefour confirmed Chengdu's
strength in retail, with sales of U.S. products in Chengdu performing on
par with more accessible coastal cities such as Qingdao. While
foreign-invested companies are a major factor in hypermarket retail,
Chinese-owned chains dominate the supermarket and convenience store
sectors. Convenience stores, in particular, have developed much more
rapidly than in other interior cities, and are overwhelmingly dominated
by a local Chengdu chain called Hongqi (Red Flag). China's supermarket
giant Lianhua has also established a presence.

**A Burning Hunger**

Chengdu is ground zero for China's famously spicy

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

**Dedicated to Food**

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

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

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

# Obstacles: Distribution Links Are Weak

The primary obstacle to food imports in Chengdu and most other interior
markets is the lack of distribution channels. ATO/Shanghai's initial
research into this market discovered that sensitive products such as
meat and seafood were being imported into Shanghai, then re-sold several
times on their way to Chengdu, changing ownership as many as four or
five times before reaching retailers and restaurants. As a result,
prices were substantially higher and quality often deteriorated by the
time products reached consumers. As with most other parts of China,
retailers appear uninterested in importing directly, preferring instead
to buy from a local distributor---only the largest chain restaurants
source directly from Shanghai or Guangzhou. During recent market
development activities with retailers and restaurants, ATO and
participating USDA cooperators were able to introduce Shanghai-based
importers and distributors to their counterparts in Chengdu, and reduce
the number of times product changed hands. Nonetheless, distribution
remains an enormous problem. As a case-in-point, there is still only one
reliable distributor in Chengdu for imported frozen meat, seafood and
quite a few other imported products. Experience also indicates that
individual retailer stores are hesitant to source directly. Local
distributors serve an important risk-mitigation function for many
retailers, through contracts that, for example, allow stores to return
unsold product at no expense to the retailer. Further market development
efforts are clearly needed, and ATO/Shanghai will continue its efforts
in Chengdu.

The key transportation challenge for Chengdu is that goods shipped in
our out generally must pass through Chongqing, Luzhou or Leshan.
Although roads and rail within the province are excellent, those
connecting Sichuan with neighboring provinces are still not on par with
the east coast. The government has been investing in the airport and a
second runway in order to increase daily flights (including cargo) to
and from destinations throughout China and weekly flights to
destinations in East Asia. However, once the transportation challenges
are mastered, Chengdu can serve as an excellent entry point into more
far-flung markets to the west.

# Target Market

As noted elsewhere, ATO/Shanghai has made the development of markets in
Chengdu a priority. To this end, in September 2004 ATO launched a major
market development exercise with retailers and restaurants in Chengdu,
designed to establish and streamline distribution channels for US
products, while introducing new food products to consumers and chefs.
Chengdu Carrefour participated in the ATO China nation-wide American
Fruit Promotion in July 2005, followed by the grocery promotion American
Food Festival in September 2005. ATO has also participated for several
years in the Tangjiuhui trade show. These activities and ATO's
interviews with distributors, retailers, restaurant owners and media
indicate good potential for a variety of products.

+-----------------+----------+-----------------------------------------+
| **Chengdu: Best |          |                                         |
| Product         |          |                                         |
| Prospects**     |          |                                         |
+-----------------+----------+-----------------------------------------+
| **Product**     | **       | **Notes**                               |
|                 | Market** |                                         |
+-----------------+----------+-----------------------------------------+
| Dried fruit and | Retail   | Already present in the market. Nuts     |
| nuts            | and      | sell best in-shell. Retail sales are    |
|                 | Re       | particularly strong. Main competition   |
|                 | staurant | appears to be Iranian pistachios and    |
|                 |          | Xinjiang (West China) sweet almonds and |
|                 |          | raisins. Hawaiian macadamias are        |
|                 |          | present, albeit on an irregular basis.  |
+-----------------+----------+-----------------------------------------+
| Beef short      | Retail   | Imports of US beef have been suspended, |
| plate           | and      | but retail contacts indicate this was   |
|                 | Re       | one of their top-selling products prior |
|                 | staurant | to the ban. Popular in super-spicy      |
|                 |          | Sichuan hot pot, which is common in     |
|                 |          | both restaurants and at home.           |
+-----------------+----------+-----------------------------------------+
| Boneless pork   | Re       | This new-to-market product sold out     |
| butt            | staurant | several times during one of ATO's       |
|                 |          | market development activities.          |
|                 |          | Distribution, however, is a major       |
|                 |          | obstacle.                               |
+-----------------+----------+-----------------------------------------+
| Table grapes    | Retail   | U.S. red grapes have proven popular.    |
|                 |          | However, logistics for fresh fruit is a |
|                 |          | major obstacle, dampening their sales   |
|                 |          | and marketability. Black table grapes   |
|                 |          | were very successful at the 2005        |
|                 |          | American Food Promotion in Carrefour.   |
+-----------------+----------+-----------------------------------------+
| Apples          | Retail   | Popular primarily as a prestige or gift |
|                 |          | item.                                   |
+-----------------+----------+-----------------------------------------+
| Sca             | Re       | Popular but expensive in this           |
| llops/shellfish | staurant | seafood-starved inland area.            |
|                 |          | Distribution is a major obstacle, and   |
|                 |          | consumers and restaurants both require  |
|                 |          | education in proper cooking methods.    |
|                 |          | Competitor products (New Zealand,       |
|                 |          | Korea, Canada) are available, but only  |
|                 |          | infrequently and in small quantities.   |
|                 |          | U.S. crab has sold well when available. |
+-----------------+----------+-----------------------------------------+
| Poultry         | Retail   | Only recently returned to the Chinese   |
|                 | and      | market, the most popular items are      |
|                 | Re       | offals such as wingtips and feet. Local |
|                 | staurant | distributors are frequently unaware of  |
|                 |          | the availability or non-availability of |
|                 |          | imported poultry. U.S. frozen chicken   |
|                 |          | wings sometimes appear on retail        |
|                 |          | shelves.                                |
+-----------------+----------+-----------------------------------------+
| Potato products | Food     | Widely used in U.S.-style fast food     |
|                 | service  | restaurants and hotels, there is still  |
|                 |          | room for expansion. Distribution is a   |
|                 |          | significant problem, and product is not |
|                 |          | as readily available as on the coast.   |
+-----------------+----------+-----------------------------------------+
| Salmon          | Re       | Still a relatively new product in this  |
|                 | staurant | market. Norwegian salmon is also        |
|                 | and      | present, on a seasonal basis. Popular,  |
|                 | Retail   | but consumer education is needed, and   |
|                 |          | salmon faces the same distribution and  |
|                 |          | logistics problems as other meat and    |
|                 |          | seafood.                                |
+-----------------+----------+-----------------------------------------+
| Condiments/     | Re       | Heinz products are already present in   |
|                 | staurant | the market, mostly being supplied to    |
| Seasonings      |          | hotel restaurants.                      |
+-----------------+----------+-----------------------------------------+
| Fresh           | Re       | At least one distributor is supplying   |
| vegetables      | staurant | imported fresh vegetables, albeit on an |
|                 |          | infrequent basis. Logistics is a major  |
|                 |          | obstacle, and loss due to spoilage is   |
|                 |          | extremely high.                         |
+-----------------+----------+-----------------------------------------+
| Frozen          | Re       | Frozen sweet corn and frozen mixed      |
| vegetables      | staurant | peas/carrots/corn are as popular here   |
|                 | and      | as they are elsewhere in China.         |
|                 | Retail   |                                         |
+-----------------+----------+-----------------------------------------+
| Dairy (cheese   | Retail   | Local retailers believe there is        |
| and butter)     | and      | substantial demand for these products,  |
|                 | Re       | though competition from Australia is    |
|                 | staurant | strong and logistics are a problem.     |
+-----------------+----------+-----------------------------------------+
| Wine            | Retail   | Retailers indicate strong potential,    |
|                 | and      | but note that wines over \$12 per       |
|                 | Re       | bottle can only sell as high-end gifts. |
|                 | staurant | Wine was a top selling item at the 2005 |
|                 |          | American Food Promotion in Carrefour.   |
+-----------------+----------+-----------------------------------------+
| Popcorn         | Retail   | Has done well at the hypermarket level. |
+-----------------+----------+-----------------------------------------+
| Breakfast       | Retail   | Surprisingly, another top selling item  |
| cereal          |          | at the 2005 American Food Promotion in  |
|                 |          | Carrefour.                              |
+-----------------+----------+-----------------------------------------+

# Contact Information

ATO/Shanghai is continually working on new activities in Chengdu as well
as other Emerging City Markets throughout the Yangtze River basin. For
more information, please contact us directly.

U.S. Agricultural Trade Office, Shanghai

Shanghai Center, Suite 331

1376 Nanjing West Road

Shanghai 200040, China

Phone: (86-21) 6279-8622

Fax: (86-21) 6279-8336

E-mail: <atoshanghai@usda.gov>

Website: USDAChina.org