With increased disposal income, urbanization and food safety concerns, Chinese are consuming more U.S. food products; this is partly due to the excellent quality and safety reputation of American food products.
THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY
USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT
Voluntary - Public
GAIN Report Number: CH0816
China - Peoples Republic of
Post: Shanghai ATO
China Retail Annual Report
Retail Food Sector
Leanne Wang, May Liu, Tong Wang and ATO-Chengdu
With increased disposal income, urbanization and food safety concerns, Chinese are consuming more
U.S. food products; this is partly due to the excellent quality and safety reputation of American food
products. While the Chinese economy has slowed this past year, it is still growing faster than any other
major economy. This fact and Chinese customers? growing taste for imported products, makes the
Chinese market very attractive to many U.S. food producers.
In response to rising inflation and food safety concerns, more Chinese people are cutting back on
eating out and are now cooking more and more at home. Consumers of imported food are generally
expatriates and high and upper ?middle income locals. They are least affected by inflation and pay
great attention to food safety. Consumption of western style products continues to grow as they
generally are regarded as good quality, nutritious and safe. Some products, such as fresh fruit, frozen
vegetables and nuts, have much deeper penetration, and some supermarkets and convenience stores
are becoming more interested in imported products. Rapid economic growth has caused the total U.S.
dollar sales value of food and beverages to rise by 26.2% to USD132 billion in 2008.
International hypermarket retailers generally have a high level of familiarity with imported brands
and products, and recognize the value of bringing new products to market. Hypermarkets frequently
source high-volume merchandise directly from manufacturers but rarely do so with imports.
Hypermarkets in China tend to develop groups of favored distributors. They dislike working with
unfamiliar companies unless they can offer a large number of products, strong marketing support, or
some other incentive.
Specialty supermarket stores include those targeted to expatriates, upscale and upper-middle Chinese
consumers and shoppers that want organic foods, wine, cheese and similar high-end products. These
stores have proliferated in recent years, not only in first tier cities such as Shanghai or Beijing but
also in some second tier cities. Originally designed for expatriates, these stores are becoming more
and more popular by Chinese consumers. Some stores market more than 70-80% imported goods.
Retail distribution channels have not grown to match the number and quality of retail outlets. China
does not have a nationwide network of trucks, highways and cold storage warehouses that can
efficiently deliver supplies from the manufacturer or importer to the store shelf. A lack of
appreciation for the value of maintaining the cold chain creates special problems for temperature
sensitive items. With some notable exceptions, distribution is handled on a store-by-store or city-by-
city basis, with stores receiving most imports through a local distributor, often even when
alternatives exist. Because of their relative size, stores are able to effectively pass all market risk
onto the distributor. Distributors, in turn, tend to be very conservative about new products. If goods
do not sell, the distributors are unable to return imported products.
Distribution varies widely throughout China based on geography, product type and retail sector. As
a general rule, the three cities of Shanghai, Guangzhou and Beijing have the best infrastructure and
the largest number of experienced distributors. Increasingly, those systems are being extended to the
large webs of satellite cities surrounding Guangzhou, Shanghai and Beijing. Other major cities along
the eastern seaboard, beyond the reach of the ?big three,? generally have good logistics infrastructure,
but most still rely on one of the ?big three? as an entry point for imports. Farther inland, there are a
number of large cities with good market potential. Logistics can be problematic, but improvements
in the national highway system have made trucking direct from Shanghai or Guangzhou far easier
than it was just a few years ago. As a result, high value and temperature sensitive products shipped
by truck directly from the importer to a local distributor do surprisingly well. Currently, many
secondary cities have only a single distributor for imports, particularly for high-value or temperature-
sensitive products. Multi modal refrigerated rail transportation to inland cities may become viable
over the next several years. Several international companies are currently developing local
partnerships to create modern cold chain and distribution systems across China.
The most serious competition for U.S. food exporters comes from local and joint venture food
producers and processors. The quality of fruit and vegetables in particular has increased rapidly, and
many local traders now contend that the best of China?s fruit is similar in quality to imports. While
some firms are trying to lower the price of imported products, the general trend to date has been for
local manufacturers to push imports out of the price-driven mass market and into niche markets
where quality and novelty are more important than price. The United States remains the largest
single exporter of consumer-oriented food to China, and is the only exporter with a presence in most
China is not a single market but a jigsaw puzzle of small, overlapping markets separated by
geography, culture, cuisine, demographics and dialects. As such, there is no single formula for
success in China. The fragmented distribution and logistics systems help to reinforce existing
divisions. While smaller emerging cities are still relatively small consumer markets compared to
Shanghai, Beijing, and Guangzhou, they are starting to grow faster than the major markets and many
would be considered large cities in countries other than China and India.
Consumer Spending Patterns
In responding to rising inflation and food safety concerns, more and more Chinese people are
reducing the number of times they eat out each week and are cooking more often at home. Imported
food consumers are generally expatriates, and high and upper ?middle locals. They are least affected
by inflation and pay great attention to food safety. Consumption of western style products continues
to grow as they generally enjoy a reputation for good quality, and being nutritious and safe. Industry
sources told post more local consumers are buying imported food products due to health and food
safety concerns. Convenience is also an import factor due to increasingly fast paced lifestyles.
Chilled processed food and frozen processed food will see relatively rapid growth in the near
future. As a result of the melamine contamination scare, many consumers in China switched to soy
milk or soy drink as an alternative dairy protein source.
Strong and continuous economic growth caused urban Chinese to increase their spending on food by
almost 30% from year 2004 to 2009 when measured in U.S. dollars. While average annual food
purchases for all cities was slightly more than $600 per year, per person food consumption in
Shanghai was slightly more than $1,000 per person, and that in Beijing and Guangdong was about
$800 per person. This compares with U.S. food purchases per person of about $2,300/year. Urban
food purchases per person in Sichuan, a province in Western China that contains the city of
Chengdu, come in at the national average for urban areas - demonstrating the potential
of markets in western China. While there are some smaller cities where per capita income is about
equal to that of Shanghai (such as Ningbo), the population and wealth of the three largest urban areas
- Shanghai, Guangdong, and Beijing - lead most exporters to concentrate on at least one of those
Even some of the wealthiest rural areas in China - those in the commercial province of Zhejiang
south of Shanghai - have a lower level of consumption than urban areas in poor
provinces. Disposable income in these areas is rising rapidly however. If the current consumption
data is correct, the rural population in Zhejiang province may achieve Shanghai's current level of
consumption in 15 years. The population in most urban areas will likely still be more wealthy.
China is a very large country and different parts of China are at different levels of
development. However, there are large variations of income and pockets of wealth in all large urban
areas, and Chinese cities are no exception. The variation of wealth in China is illustrated in Table 1
in the Appendix. The wealthiest areas in China are Beijing and Tianjin in the north, Guangdong and
Fujian in the south, and the Shanghai, Jiangsu, Zhejiang area in eastern China.
There are many urban centers in China that westerners have not heard of. Even a "small" city by
Chinese standards may have millions of people. These are becoming much more prosperous,
and their growth rates are starting to exceed those of the three large urban areas. It would be a
mistake to overlook these markets and the potential to develop strong market positions in
them. While there are certainly opportunities in these secondary markets, the number of distributors
handling your type of product may be very limited. Given differences in regional tastes, logistical
difficulties, and the size of China, many exporters choose to focus in a particular region of China
first rather than try to develop the entire market at once. The Chinese Central Government is
promoting aggressive policies to develop these interior regions and many multinational companies
are racing to establish an early presence in many of these major urban centers. Opportunities are
waiting to be found, but require resources and patience.
Market Size and Segments
Determining the size and rate of growth of Chinese purchases of food and beverages is complicated.
The official data does not attempt to pick up the smallest enterprises, and the usual concerns about
data quality in a developing country are compounded by China's legacy of central planning.
The Yuan also rose by about 9.5% against the U.S. dollar from 2007 to 2008. This gave an added
boost to Chinese expenditures when measured in dollar terms. According to China's 2009 Statistical
Yearbook, the total sales value of food and beverages rose by 15.3% in 2008, from 793 billion RMB
in 2007 to 914 billion RMB in 2008. If you are a U.S. exporter, however, the change in U.S. dollars
may be more useful to look at. Using average annual exchange rates, we find that the total sales
volume in U.S. dollars rose by 26.2% in 2008, from $104 billion in 2007 to $132 billion in 2008.
While 2008 sales data for the major retailers is available, it is of limited use when discussing market
segments. This is because retailers in China often cross several market segments. Some domestic
players have hypermarkets, supermarkets, convenience stores, and specialty stores. However, we
can say that most imported products have found their greatest success in the hypermarkets and in
specialty supermarkets. Some products, such as fruits and snacks, have much deeper penetration,
and some supermarkets and convenience stores may be becoming more interested in imported
Hypermarkets: The hypermarket format is much more concentrated than other grocery channels.
While some domestic retailers (including CRV-China Resources Vanguard and Lianhua) have a
significant presence, this format is dominated by foreign operators including Carrefour, Wal-Mart,
Metro, Lotus, Auchan and Tesco. In Shanghai for example, the 82 foreign hypermarkets accounted
for 78.6% of the total hypermarket sales volume in 2008. Other retail channels, most notably
supermarkets, are highly fragmented and controlled by domestic players.
With the strong and sustainable development of China?s macro economy, the urbanization process
continued its stable growth, and hypermarkets benefited from the urbanization trend. In contrast to
people in rural areas, urban inhabitants are more willing to buy branded daily necessities from well-
known hypermarkets, supermarkets and shop in department stores, rather than purchase products
through traditional channels such as independent small grocery stores (xiao mai bu) or wet markets.
Consequently, hypermarkets/supermarkets, particularly well-known names such as Carrefour,
Auchan and Wal-Mart, recorded higher value growth than independent small grocers, thanks
primarily to the urbanization trend.
In addition, they also benefit from their reputation for offering better quality products than most
domestic retailers, thanks to stricter quality control in a country where food safety is a major concern
after several disturbing food scandals in recent years. In food products, especially fresh food,
hypermarket retailers benefit from better hygiene controls and a higher volume flow rate, and are
thus able to ensure better food safety for consumers. As such, an increasing number of Chinese
consumers visit hypermarkets instead of independent food stores for grocery shopping. The
proportion of grocery products in hypermarkets continues to increase, rising from 54% in 2005 to
60% in 2009. As a result, hypermarkets are trying to provide more food categories in order to meet
the demands of consumers. Among them, fresh produce has become an attractive section to draw in
International retailers generally have a higher level of familiarity with imported brands and products,
and recognize the value of bringing new products to market and promoting them. Hypermarkets are
also the major sales venue for imported food products, due to international retailer?s familiarity with
imported products and better management and organization skills. Most are experienced in
promoting new products, and Shanghai flagship stores like Carrefour?s Gubei store or Lotus?
Superbrand Mall store in the Pudong area have it down to a science. Despite this, imports rarely
constitute more than 5% of total SKUs even in high profile stores. Nevertheless hypermarkets are the
single best retail venue for imported products.
Most hypermarket chains vary the proportion of imported goods they carry in individual stores
depending on the income level and foreign population that the store serves.
Meanwhile, the urbanization trend in lower-tier cities has also stimulated leading retailers? expansion
into less developed regions, to seize the opportunity in second-and third tier cities.
The hypermarket has been well accepted by affluent customers due to large parking facilities,
multiple stores and numerous restaurants and coffee shops that enable consumers to combine
shopping and leisure activities. Most hypermarkets in China offer free shuttle bus service to nearby
communities and constantly offer promotional items to attract consumers. These measures
successfully draw heavy traffic to the store, but some consumers go to the store to buy the
promotional items only, reducing the purchase per customer. This active promoting may also drive
away some high-end consumers who desire a less crowded environment and more concentrated
product display. As a result, specialty supermarket stores such as City Shop in Shanghai and Wuhan
Life & Theatre supermarkets, both targeting high and upper-middle class clients, have successfully
attracted customers from the hypermarkets.
The most decisive component in hypermarket food promotion for imported goods is free sampling.
Consumers are cautious rather than impulsive buyers, and will rarely spend money on a product they
have not had a chance to try. Hypermarket promotions also come with many strings attached. Some
charge listing fees, most demand that promoters be provided at the distributor?s expense (some even
charge fees to have the promoters on their premises). Some require two months? credit, while others
pay up front. Other conditions include accepting returns of unsold products at the end of the
promotion. Although these problems are usually handled by the distributor, they will affect your
In addition to the major chains, hypermarkets often face competition (especially in Northeast and
Central China) from local department store operators with one or two locations and specialty
supermarket stores. Department stores have evolved in the direction of hypermarkets, adding large
food stores, while many hypermarkets have taken on some attributes of department stores.
Hypermarkets in China tend to be somewhat smaller than their western counterparts, and very few
(excepting Metro) follow the big-box format faithfully. In large cities, they are typically multi-story
operations. Most act as small shopping malls, setting aside a large amount of space for independent
boutiques and eateries, a habit that tends to reinforce the perception of hypermarkets as places for
occasional shopping expeditions rather than daily shopping. For the hypermarket itself, the food
sales area typically accounts for about half of the total area.
Management within the stores tends to be quite good, but distribution has not kept pace.
Hypermarkets in China tend to develop groups of favored distributors. They dislike working with
unfamiliar companies unless they can offer a large number of SKUs, strong marketing support or
some other incentive. Distributors tend to be very conservative in introducing new products, due to
the high level of market risk. As a result, exporters with a limited product range need to work both
ends of the problem at the same time: identifying a retailer that is interested in the product, and
identifying a distributor that either has an existing relationship or is willing to work with the retailer.
Supermarkets: Domestic players dominated in supermarket sector. Companies like Lianhua, China
Resources Vanguard, and Suguo are the major players in the market. But it?s still quite a fragmented
market; there are a large number of regional small chained or independent supermarkets in the
country, especially in many second and third tier cities. But some international retailers have started
to enter this market in recent years. For example, Tesco launched a new brand called Tesco Express
in mid 2008 in Shanghai, which was designed as an outlet mainly selling fresh food and daily
supplies to nearby communities. In 2009, Wal-mart also opened its neighborhood market outlets.
Post believes more international retailers will enter this market in the future.
Imported food is relatively rare in Chinese supermarkets. Products that do well in this sector tend to
be commodity products already widely available, such as fresh fruit, frozen vegetables and nuts.
Supermarkets rarely if ever import directly, or even buy directly from an importer, tending instead to
rely on wholesale markets and local manufacturers or distributors. Stores with a significant
expatriate community nearby are likely to carry imported breakfast cereals and a perfunctory
selection of imported sauces (especially pasta sauce) and seasonings. The best possibilities are in the
smaller, privately held chains, which are more likely to see the value of high-margin imports and
tend to have better integrated distribution systems. Such chains may carry products as varied as
wine, exotic fruit (avocados, in one case) or confectionery, but only in low volumes and on an
irregular basis. Even so, price will remain a consideration. State-owned supermarket chains
generally have less integrated management and distribution. Opportunities exist, but only on a
limited basis with a small number of stores, and only for products already present in the market. For
either state-owned or private supermarkets, direct contact with company managers is the best means
of introducing a new product.
Import penetration is lower in supermarkets than other modern retail venues. U.S. food products in
these venues are typically limited to frozen corn and mixed vegetables, frozen potato products, some
packaged goods and occasionally fruit (apples or oranges). Other items tend to appear on a
haphazard basis: past checks have turned up breakfast cereals, low-end wines and Washington state
apples. The sparse selection of imports is rooted in the customer base of these stores, which focus
on working class shoppers, who are notoriously price sensitive and less inclined to try new products
than the more well-heeled customers that frequent hypermarkets and upscale convenience stores.
Distribution is also a problem, as stores tend to source from local distributors, directly from
manufacturers, or from local wholesale markets. Supermarkets are often franchised in China and
can have much smaller footprints than is common in the United States.
In order to compete with hypermarkets, Shanghai?s supermarkets are putting more efforts into
enlarging their fresh section, catering to the tastes and demands of local consumers. The local
government is also encouraging supermarket chains to create ?fresh? supermarkets, expanding the
floor space dedicated to fresh products from less than 1/3 to over 1/2. Over 300 stores in Shanghai
have finished the change. And sales of fresh produce are gradually increasing. Supermarkets
throughout the region (including Suguo, a unit of CRV) appear to be moving in this direction, but are
being slowed by problems in sourcing large quantities of quality product. This could also indicate
trend away from low cost, traditional ?wet markets? which are often unable to match hygiene
standards of supermarket/hypermarket chains. However wet markets still dominate sales of those
fruits and vegetables.
Specialty Supermarket Stores and Boutique stores: These stores have multiplied in the last
few years. They are often located adjacent to high-end department stores or upscale business
centers. Built to attract upscale consumers in first and second-tier cities, they have a high proportion
of imported food products ? ranging from 10 to 80 percent of products. They are not only present in
first tier cities such as Shanghai but also in some second tier cities like Wuhan or Hangzhou.
Some high-end and specialty products first enter the Chinese market through these types of outlets
before moving on to larger venues. Some of these companies also include import/distribution
operations, and can assist exporters with issues such as labeling and product registration. Otherwise,
exporters will need to identify a good distributor. In the case of high-end and specialty products,
HRI-focused distributors (who are familiar with the products but may lack experience with labeling
issues) may be as helpful as larger retail-oriented distributors (who often lack experience marketing
high-end products), particularly in emerging city markets. Because of the small scale and highly
varied nature of this market segment, interested exporters should contact the relevant ATO for a list
of potential venues and importers/distributors. China is well covered with ATOs in Beijing,
Chengdu, Guangzhou, Shanghai and Shenyang.
In Shanghai, many retailers have entered this sector to capture opportunities. City Shop Supermarket
continues to be one of the best single venues for imported food, and now does significant business as
a distributor of imports to other stores. Hong Kong based City-Super opened its first outlet and
CRV's Ole opened two stores in Shanghai. Trade sources indicated another Hong Kong based high-
end retailer is coming soon. Product assortment and service are key to be successful in this segment.
The leading boutique retailers in northern China are BHG (Beijing Hualian Supermarket) and Ole in
Beijing, Hisense Plaza in Qingdao and Jin Bou Da in Zhengzhou. Specialized imported food
supermarkets also target high-end customers and expatriates in Beijing, Qingdao and Zhengzhou.
BHG has several stores in Nanjing.
Convenience Stores: Management in convenience store chains is probably the best of any retail
sector. All stores have refrigerator and freezer sections, microwave ovens, and most have a selection
of hot snacks (mostly meatball, tea eggs or tofu on skewers). Store layouts are highly standardized,
although some chains have developed more complex systems that customize product selection to the
peculiar location based on past sales patterns, and neighborhood income levels/spending habits.
Stores are providing more and more services of ?convenience? such as payment services and
The concept of trading higher prices for convenience will take time to be accepted by Chinese
consumers. Competition also tends to make convenience stores conservative about pricing, though
ATO Shanghai?s experience indicates that chain managers are more price sensitive than their
The convenience store sector is relatively saturated in major cities especially in Shanghai. It is said
that the average number of convenience stores per thousand people in Shanghai is even higher than
the number in many developed countries. However, International brands still wants to gain a
foothold in this highly populated and prosperous market in China, 7-Eleven, the World? largest
convenience store chain, entered the market in Shanghai in 2009, and is very strong in South-China.
Import penetration in this sector tends to be relatively low, despite a high level of interest on the part
of several chains. Being largely domestic companies, management at convenience store chains tends
to be less familiar with imported products than their counterparts in the hypermarket sector. A
second difficulty faced by imports is packaging: convenience stores typically require smaller
package sizes, being focused mainly on single-serving products. However the foreign players in the
market, such as 7-Eleven and Family-Mart, have introduced more imported products into their
stores. But these are mainly from Japan and south-east Asian countries. Exporters are advised to
open discussions directly with chain officials to identify products with potential, and ensure that
packaging meets their needs.
Then the exporter will need to identify a local distributor that can handle the import paperwork and
labeling issues. One alternative to this is to work with an importer/repacker, who can import in bulk,
then package the products in China with Chinese labels and packaging appropriate to the
convenience market. This strategy has proven extremely successful for U.S. prunes. One U.S.
distributor in Beijing is directly importing products from the U.S. and is managing his own
paperwork and packing.
Managing logistics for convenience stores is very challenging. Limited shelf and storage spaces
make convenience stores heavily reliant on sophisticated logistic systems that should provide
delivery 2 or 3 times a day. But in Shanghai most convenience stores are guaranteed just one
delivery per day. This adversely affects the ability of these stores to offer the fresh and ready-to-eat
products that are among their most attractive offerings. In addition, the need for small package sizes
limits their set of suppliers.
Traditional Markets: These continue to be a presence throughout China, although they are no
longer the dominant factor in the larger cities. Traditional markets fall into three general categories:
wet markets, variety stores (xiaomaibu), and fruit stands. Wet markets specialize mainly in fresh
vegetables, meat, poultry and seafood (Mostly sold live), eggs, tofu and to a lesser extent, fruit and
staple foods. Sanitary standards are extremely low, particularly for meat. Officials generally regard
wet markets as an eyesore, as well as a source of both food safety problems and unregulated (i.e.,
untaxed) commerce. The SARS epidemics of 2003, followed shortly by avian influenza outbreaks,
provided more impetus to efforts to reform or close these markets. Nonetheless, they persist. The
main reason for this is a lack of alternatives for buying fresh vegetables and, to a lesser extent, meat.
With local government support, however, supermarkets? efforts to expand the fresh section, and
especially with consumers? growing concerns over food safety, these traditional markets will
gradually be phased out.
The other traditional formats are small variety stores (xiaomaibu) and fruit stands. The typical
xiaomaibu is much smaller than even a convenience store, family owned, and stocks an eclectic mix
of products. Although they face a serious challenge from convenience stores, the xiaomaibu persists
even in Shanghai. While convenience chains follow standard formats and target key sites (train and
bus stations, schools, hospitals, etc.), xiaomaibu are infinitely adaptable. Small size and independent
ownership allows these shops to adapt to individual sites such as apartment complexes, and adapt
their product selection even to match individual consumers. Like convenience stores, xiaomaibu
also offer a range of services such as bill payment and IP telecommunication card sales.
Fruit stands fill another gap left by the convenience stores, which rarely carry more than one or two
types of fruit. Sales are boosted by the tradition of giving gifts when visiting friends, and most fruit
stands will wrap fruit baskets to order. Fruit stands frequently carry imported fruit, usually for
inclusion in fruit baskets. However, they are generally regarded as poor venues for imported
products, as they are generally price driven, poorly regulated and lack the means to store fruit
properly. Counterfeiting is widespread in these markets, and where a brand name adds value, it is
certain to be copied. As a result, there is little room for marketing and promotion of imported
products. While both xiaomaibus and fruit stands will likely continue to decline in numbers relative
to convenience stores, China?s high urban population densities are likely to support their continued
existence for many years. Recently, there are new companies engaging in on-line sales of high
quality imported fruits with next day delivery as incomes rise and internet usage increases, online
sales may become good alternative to traditional fruit stand sales in the future.
Retail distribution channels have not grown to match the number and quality of retail outlets.
Roughly the size of the continental United States., China does not have a nationwide network of
trucks, highways and cold storage warehouses that can efficiently deliver supplies from the
manufacturer or importer to the store shelf. With some notable exceptions, distribution is handled on
a store-by-store or city-by-city basis, with stores receiving most imports through a local distributor,
often even when alternatives exist.
Because of their relative size, stores are able to negotiate highly favorable terms that include free
return of unsold products, high listing fees for new products, and credit terms, effectively passing all
market risk onto the distributor. This gives store managers a powerful incentive to favor the local
distributor over alternatives that offer less generous terms. In at least one case, an international
retailer?s effort to establish single-desk distribution of imports failed when their own stores refused
to work with the selected distributor.
A second reason for reliance on local distributors is the tendency of international retailers to expand
rapidly nationwide rather than focusing on a single city or region, creating large numbers of isolated
stores that lack the volume to support a dedicated distribution network. A final reason has to do
with the role of relationships in Chinese business: local distributors can provide a store with a
network of business and government contacts that are useful in resolving problems with minimal
Fragmentation among suppliers of locally sourced products, particularly of vegetables and meat,
helps to perpetuate the dominant role of the local distributor. This is changing slowly, as the
government encourages direct sourcing and farmers? professional associations become more
common, giving producers the ability to supply larger quantities from a single source and at a more
consistent level of quality.
International retailers have recognized the problem and put a greater effort into improving the
logistics system. Right now, Wal-Mart is focusing on building a nationwide distribution network,
and has a recently built distribution center in Tianjin. The German retailer Metro has a centralized
distribution system for many imported products, and a few large distributors have negotiated more
favorable terms with retail chains at the national level, in some cases waiving listing fees. Carrefour
also contracted with a third party logistics company to handle most of its imported grocery items.
Tesco also can provide national distribution and purchasing. But fresh and frozen items still rely on
importers or distributors to deliver to the stores themselves. The role of the local distributor in
handling imports is declining. Nonetheless, for now, distribution remains the key obstacle to sales of
imported processed foods in China?s retail sector.
Because of the high level of risk they are expected to absorb, distributors tend to be very
conservative about new products, particularly imports. As a result, penetration of imported foods
into the retail sector is low. Even in relatively affluent cities, international retailers typically carry
less than 1% imported SKUs. Notable exceptions include stores in Shanghai, Beijing, Guangzhou
and nearby boomtowns, which are home to both large expatriate communities and to a large number
of Chinese with overseas experience. Products that are already in the market but being sold mainly
through gray channels or sub-distributors tend to be the most attractive to distributors. However,
these products are most likely not labeled properly and are not available in market on a consist basis.
Farther inland, distribution problems are complicated by China?s heavily fragmented logistics
systems, which makes it difficult to transport products directly from the coast to deep inland cities.
One survey in Chengdu found that temperature sensitive items, such as imported poultry and meat,
changed ownership as many as five times within China before reaching the final user.
A lack of appreciation for the value of maintaining the cold chain creates special problems for
temperature sensitive items. Even if cold storage is used at the port of entry and the retailer
maintains the appropriate environment, getting drivers to maintain the correct temperature during
transportation has proved difficult. While this is certainly true in secondary markets, where frozen
products often have a frosty covering, it is also true in the major costal markets.
Distributors generally fall into one of two categories. The largest distributors tend to have
longstanding relationships with the major retail chains, and can source in larger volumes and place
products in a larger number of stores. However, they also tend to carry a large number of SKUs, and
cannot dedicate resources to marketing any one particular item. Specialty distributors tend to be
focused on one area or product type. Although they sometimes lack the volume and connections of
larger distributors, they tend to be more aggressive in marketing products and better at identifying
and selling into specific niches. The quality of these smaller distributors varies widely, however,
and exporters need to be very careful in selecting a partner.
A handful of retailers also act as distributors. Although they tend to provide less marketing support,
they can be an effective means of getting product to retailers that have already expressed an interest,
but cannot handle the import formalities themselves. One major importer in Shanghai who is familiar
with several large grocery consolidators in the United States has opened two retail outlets
showcasing these products, one in Nanjing in Central China and the other in Tianjin in China?s
northeast coast. The company distributes products to specialty stores as far west as Lanzhou and
Kunming and hopes to buy certain snack foods directly from U.S. manufacturers in the future.
Geographic Differences in Distribution
Chinese Distribution Channels
Distribution varies widely throughout China based on geography, product type and retail sector. As
a general rule, the three cities of Shanghai, Guangzhou and Beijing have the best infrastructure and
the largest number of experienced distributors. Increasingly, those systems are being extended to the
large webs of satellite cities surrounding Guangzhou, Beijing and Shanghai. Ports in these cities
offer a growing array of services, including bonded storage (with temperature controlled facilities, if
needed) and online inventory tracking. Some have duty-free industrial zones where products can be
repackaged or further processed, with duty paid only on the original import value, and only after
products leave the zone.
Other major cities along the eastern seaboard, beyond the reach of the ?big three,? generally have
good logistics infrastructure, but most still rely on one of the ?big three? as an entry point for
imports. The number of distributors handling imported products in these cities is usually limited.
These tend to be good markets for commodity products such as meat, poultry, fruit and seafood, as
well as sauces, condiments and wine.
Farther inland, there are a number of large cities with good market potential. Logistics can be
problematic, but improvements in the national highway system have made trucking direct from
Shanghai or Guangzhou far easier than it was just a few years ago. As a result, high value and
sensitive products shipped by truck directly from the importer to a local distributor do surprisingly
well, while lower value and shelf-stable products that ship on local roads through conventional
distribution chains face more difficulties. Distribution in these cities is generally underdeveloped.
Many cities have only a single distributor for imports, particularly high-value or temperature-
sensitive products. Products going through conventional distribution channels typically change
hands numerous times before reaching their final destination. Distribution channels for HRI tend to
be better developed, and may be the best place to start for exporters seeking to develop new markets.
Distribution by Product Type
Distribution also varies widely by product type. Channels for shelf-stable grocery products tend to
be the most heavily fragmented and the most dependent on the good graces of local distributors.
This is partly because market risk is perceived to be higher: although shelf stable, the number of
SKUs tends to be high and turnover low compared to other product categories. Hence the risk that a
product will not sell (and the distributor will have to accept a return) is higher. Meat, poultry and
seafood also face fragmented distribution, but the combined demand from HRI and retail venues is
sufficient to warrant special arrangements for these high-value products. Fresh fruit appears to have
the best distribution, working through a patchwork of wholesale markets and specialized distributors
that works better than it should. Imported frozen corn and mixed vegetables are almost universally
available, reinforcing the notion that the problem is less one of logistics than of distribution. Wine
deserves special mention, due to the presence of a community of specialized distributors, some of
whom act as exporter, importer and distributor all in one, taking product directly to retailers and food
New Trends in Retail
Merger and acquisition deals have been quite active in recent years and will continue in the near
future. The whole market will become more consolidated and integrated. For example, Lotte group,
the largest retailer in south Korea, purchased Jiangsu Times Supermarket chain. And Carrefour just
finished its acquisition deal of a local retailer in Hebei province. With the increasing maturity and
sophistication of Chinese consumers, the importance of brand awareness and loyalty will be more
and more evident in the future. The current leading companies, such as Carrefour, Auchan and Wal-
mart, will benefit from expansion of the urban market, while relatively small and regional companies
will be phased out of the market.
Direct sourcing of food and agricultural products from farm cooperatives has been adopted by many
retailers in Shanghai and is growing elsewhere. This allows retailers to address consumers? concerns
about food safety, reduced cost, and possibly improve product quality. On the imported product
side, more and more retailers especially those in the specialty supermarket section are looking for
direct sourcing channels. But not all of them are successful. Post heard from industry that one high-
end retailer in Beijing purchased a consolidated container of goods directly from the United States
and ended up selling at a heavy loss, due to product selection problems. International players have
also moved in this direction. Wal-Mart started to directly source and import U.S.cherries. Metro
established its own Hong Kong trading company to deal with direct sourcing, but decision making is
still done by its buyers based in Shanghai.
Neighborhood Supermarkets opened by Wal-Mart, Carrefour and Tesco have reinforced their
expansion into the supermarket format. These outlets offer low prices and fresh food as their selling
points. The prices in Tesco Express are as competitive as in Tesco Hymall (hypermarket). Seventy
to eighty percent of the products in Carrefour?s trial express neighborhood outlet are also fresh and
chilled products. Making use of Carrefour?s purchase and logistics system, its operating cost is much
lower. These express outlets may turn out to be a way for supermarkets to survive the fierce
competition from hypermarkets and convenience stores. Such outlets can better cater to consumers?
daily needs due to their convenient location.
Private label products are a new development in China. Each hypermarket, supermarket and
convenience store chain in China has a unique private label offer: Carrefour, Great Value, Metro?s
IKA, Tesco and Lianhua are private label lines from leading players. In terms of imports, more
private label products are coming on the market here. Metro has moved ahead of the pack in this
regard - it imports salmon from Norway by itself, and then packs it and sells in under its private label
brand IKA. Carrefour is expanding the ?O? organics brand which is a Safeway private label product
and sells well in coastal cities.
Several specialty wine retail outlets have opened in Shanghai. These sell a selection of imported
and domestic wines and are not to be confused with state-owned liquor and tobacco stores. The
most notable is Napa Reserve, which features a wide range of wines from that region of California.
(Please see CH8802 Shanghai Retail Wine Show. ) The Chinese wine market is more completely
analyzed in the National Wine Market Report CH9808.
Domestic retailers generally have an advantage over foreign retailers, and China is not an exception
to the rule. Lianhua and the Suguo - Vanguard combination are easily the largest food retailers in
China. The three largest multinational chains - Auchan, Carrefour, and Wal-Mart - have not been in
a position to challenge the local incumbents for sales leadership. If you look at the hypermarket
channel, or imported products however, the situation is different. Most of the Chinese domestic
retailers focus on a clientele that is more representative of the Chinese population than that of the
multinational retailers. They also have store base that is often older, partly franchised, and has large
numbers of smaller properties.
While the domestic retailers are becoming more interested in imported products, importers have
traditionally focused on, and gotten better results from, the multinational hypermarket retailers. The
number of hypermarkets by retailer in selected cities and the total number of stores by retailer in
Shanghai are presented in the appendix.
The table below gives a snapshot of the relative competitive position of some of China's leading
food retailers. The data is for the year ending December 31, 2008.
Leading Food Retailers in China: 2008
C Sales* ompany Ownership Business Line Stores
Lianhua China SOE** Super/Hypermarket/ Convenience 3932 74.0
Wumart China Pvt Supermarket/ Convenience 726 31.0
Suguo (CRV) China SOE*** Supermarket/ Convenience 1802 45.0
Nonggongshang China SOE Super/Hypermarket/ Convenience 3330 39.0
Vanguard (CRV) China SOE Super/Hypermarket/ Convenience 2698 49.1
Xiuyijia (A. Best) China Pvt Department 105 25.0
Wuhan Zhongbai China SOE Super/Hypermarket 626 16.0
RT Mart France Hypermarket 101 49.4
Carrefour France Hypermarket 134 49.7
Wal-Mart U.S. JV Hypermarket 290 41.0
Metro Germany JV Hypermarket 38 18.5
Tesco U.K. JV Hypermarket 61 19.9
Auchan France Hypermarket 37 11.9
Lotus Thailand Hypermarket/Convenience 76 19.1
* Food and non-food sales
** SOE= State-Owned Enterprise
*** Joint venture with China Resources Vanguard Source: China Chain Store & Franchise Association 2009-2010
Auchan was the number one company in the Hypermarket sector in 2009 by sales value. The
company currently has two major brands, RT Mart and Auchan. RT-Mart mainly targets the mid-and
low-end market in second-or third-tier cities, Auchan is mainly designed for the high- and mid-end
market in first tier cities.Auchan has 37 stores in overall China with 5 stores in Shanghai, another
new store will open in Shanghai soon. It stocks about 1000 import product SKUs, about 15% are
from the U.S. Its main clientele are young people and high income locals. Auchan has a centralized
system for import distribution. Its purchasing and distribution department are located in Shanghai.
RT Mart has 102 stores in China at the end of 2008; at the end of 2010 it had 10 outlets in Shanghai
alone. Although overall store numbers lag behind Wal-mart and Carrefour, RT-Mart single store
sales are the highest.
Wal-Mart: Currently Wal-Mart has over 290 stores nationwide, including three independent
operations (Wal-Mart supercenters, Trust Mart stores, and Sam?s Clubs). Wal-Mart set up its
headquarters and opened its first store in Shenzhen in Southern China 13 years ago. It?s ?Everyday
Low-Price? strategy helps Wal-Mart attract traffic, and it continues to aggressively open new stores
to penetrate Mainland China?s second- and third-tier cities. After Wal-Mart?s acquisition of Trust-
Mart three years ago, Wal-Mart now has full management control of all three retail formats. Wal-
Mart is looking to further expand in the coming years.
In order to promote more U.S. products in these three retail formats, a strong buying team and
operational team will be built. Wal-Mart claimed that their buying teams now have the capacity to
purchase U.S. food items directly from the States, instead of contracting through Hong kong brokers.
Last year, for example, Wal-Mart (China) purchased 2,000 cartons of Northwest cherries directly
from the States. Post also sponsored an ?American Food Festival? with Sam?s Clubs in South China
in November of 2009 which generated a total of USD1 million worth of sales.
Compared to the other international retailers Wal-Mart may be more willing to open stores in
secondary cities and in suburbs. In 2005, Wal-Mart made an entrance into Shanghai with the opening
of a large suburban outlet. It has established a second company in Eastern China to manage its
expansion in the Shanghai area.
Sam?s Club: In addition to Wal-Mart supercenters, Sam?s Club (membership warehouse store) is
another Wal Mart retail format. Sam?s Club has gained a favorable reputation by introducing a
greater amount of imported foods to local consumers than other competitors. To date, five Sam?s
Clubs have opened, including stores in Shenzhen, Beijing, in Fuzhou, Guangzhou and Shanghai.
The Shenzhen store is reported to be one of the most profitable Sam?s Club stores in the world. This
coming November and December, ATO/Guangzhou together with several cooperators will work
closely with three Sam?s Clubs in South China to conduct a regional promotion featuring various
snack foods and fresh items. A new Sam?s Clubs opened in Shanghai in Dec 2010 and more in the
coming months in Zhejiang and Dalian.
Trust-Mart: With over 100 stores in Mainland China and 38 in the south, Trust-Mart is one of the
largest retailers in the country. Trust-Mart sold a 35 percent stake in its China business to Wal-Mart.
This Taiwanese company has 17 stores in Guangzhou, four in Shenzhen, three in Dongguan and one
each in Zhongshan and Zhanjiang in Guangdong. It has 10 stores in Fujian province, covering five in
Fuzhou, four in Xiamen and one in Quanzhou. It also has a presence in Changsha, Hunan.
French Carrefour, the World?s 2nd largest retailer, recently acquired a regional supermarket chain
in Hebei province demonstrating its determination to expand into second tier and third tier cities in
China. Its recent decision to centralize purchasing created internal discord. Many store managers
who used to make purchasing decisions by themselves chose to leave. Import product purchasing
has not changed; decisions are still made by buyers based in headquarters.
While Carrefour continues to dominate at the high end, with 19 hypermarkets presently in Shanghai
alone, its single store sales lag behind RT-Mart.
Carrefour China current CEO has a finance background. Since his arrival, Carrefour has paid more
attention to profitability and has become more conservative in terms of new product sourcing and
merchandising. This has impacted the introduction of new imported products. Carrefour?s internal
organizational structure and policy has changed to favor people with a finance background and a
volume sales-oriented strategy.
Thai-Lotus Chain has a target of 100 stores in the next few years. It has quietly expanded and has
21 stores in Shanghai, although turnover for these stores is lower than for Carrefour stores. Imported
products have a relatively small presence in its stores compared with other retailers. And it has
changed its marketing slogan from ?Everyday Low Price? to ?Freshen Your Life?, indicating an
attempt to stand out from its mass positioning. It recently renovated its flagship store located in
Super brand mall in Shanghai, with reduced overall space. And wider aisles. It intends to build
different corners based on countries. A newly hired purchasing team from Japan is going to make
purchasing decisions for imported products. An industry source told Post that another similar format
store will be set up in Shanghai soon.
AEON-Jusco Jusco opened its first North China hypermarket in Qingdao in 1998 with 40,000
square meters of retail space and parking for 1,000 cars. The format links shopping and leisure by
offering a supermarket, restaurants, coffee shops, etc., all under one roof to have become the number
one expatriate and middle class Chinese consumer destination. Sales reached $0.2 billion in 2010
and the also retailer operates 6 outlets in Shandong Province (3 in Qingdao; 1 each in Yantai,
Weifang and Weihai (opened May 2010). In addition, the retailer has increased market share by
expanding into the convenience store market operating 9 convenience stores in Qingdao alone.
Based on Jusco?s development strategy, they plan to open 3 new hypermarkets and 90 convenience
stores over the next two years.
The company established a subsidiary company in Beijing in 2007 focused on Beijing and Tianjin
markets with the first hypermarket located in suburban Beijing targeted at high-end consumers from
surrounding upscale communities who use their cars to shop with the family on weekends. In 2010,
the company opened its second outlet in Beijing in Chaoyang District, as well as entering into an
agreement with Teda Promenades in Tianjin where the company will open its first outlet in the
The German based, cash and carry Metro chain relies on its niche-market strategy of targeting
small and medium sized restaurants, effectively positioning itself as an HRI wholesaler and
distancing itself from its competitors. To this end, Metro has added a training kitchen to its facilities
in Shanghai. Historically it has opened stores more slowly than other international retailers, but it
recently announced plans to open stores at much more aggressive pace. Depending on the opening
dates of 4 new stores, Metro may currently have 42 stores throughout China.
Metro has the widest selection of imported products of any of the key retailers, and 10 percent of
their sales revenue is from imported products. Metro has a membership system similar to that of
Sam?s Club or Costco. Their large section of frozen processed foods, including desserts, frozen
vegetable mixes, and frozen potato products, is easy to use and open to U.S. products. This meat
case carries a large variety of both frozen and chilled beef and pork. Metro?s main competition is the
local wholesale market, not other high-end hypermarkets.
Its import company previously intended to import volume-sales products directly, but now more
focuses on importing its own private label products from Europe. Its import department has been
dismantled, and the staff has been re-allocated to product categories departments. Its import manager
told Post it?s still determined to import directly in the future and plans to set up its own trading
company in Hong Kong. Imported product purchasing decisions are still conducted at the
British Tesco moved its headquarters to Shanghai in 2009 and has 19 stores in metro Shanghai. It
opened a new retailing format in Shanghai in 2008. Called the ?Express?, which has fresh food as
its core offer. Recent interview with its import manager disclosed Tesco ambitious investment plans
in mainland China and may invest about USD7.5 Billion in the next three years to expand its current
presence in China. Import products penetration, including American products in Tesco is rather low,
concentrating on a few condiment and sauces and several SKUs of wine.
China Resources - Vanguard (CRV): As one of China?s leading retail chain operators in China, its
first store was opened in Hong Kong in 1984. It entered the supermarket business in Shenzhen in
1991, Suzhou in 1995, and Beijing in 1998. Acquisition helped CR Vanguard to become the national
number one retailer in terms of number of outlets and total sales. It acquired Suguo supermarket in
2004, then continued to purchase Tianjin Yuetan in 2005 and Jia shijie in 2007. In 2008, CRV
completed the acquisition of Aijia supermarket in Xi?an. This year, CRV entered Wuxi by acquiring
a 100 percent stake in Yongan supermarket. This Hong Kong operator manages hypermarkets,
supercenters, and superstores under the Vanguard brand name.
Currently, CRV has over 3,000 stores (up 500 from 2007) in China. This includes 400 hypermarkets,
2,500 superstores, over 80 community stores, as well as 14 high-end Ole stores that focus on large
percent of imported products. The total sales have reached $10 billion. In Guangdong, there are
around 300 stores, including 44 hypermarkets. Recently, the new format ?Vango 24hours?
convenience stores and Better Life Together (BLT) stores opened in Shenzhen. Generally speaking,
Vanguard targets customers likely to buy local produce; however, in some selected stores, special
imported food sections have been opened to promote imported food items and according to our
contact, consumers are showing greater interest in expanding their selection of imported food items.
CRV also opened two upscale ?Ole? stores in Shanghai.
Century Lianhua is the hypermarket brand of the state owned Balian group. This group?s food
retail side is dominated by supermarkets, but it has substantial number of hypermarkets in East
China. While it is still small, they are focusing on improving their selection of imported products in
both Hangzhou and Shanghai. In Shanghai they are also starting to import directly.
Ito Yokado and Isetan are high-end, Japanese-owned stores that target upper class consumers.
These retailers? emphasis on expansion in to these second-tier markets suggests that there is easier
access for high-end retailers in the second-tier markets. China wide, Ito Yokado has two stores in
Beijing and one store in Chengdu. Isetan?s Chinese stores are in Shanghai and the second-tier cities
of Jinan, Tianjin, Chengdu, and Shenyang. Depending on the market, higher end grocery stores in a
department store may carry a large selection of imported products, or a section of a store that
specializes in other types of merchandise may be dedicated to imported dry goods. There are many
other examples of department stores containing a high end grocery store or supermarket.
Specialty Supermarkets and Boutique Stores
Jenny Lou?s is a major retailer of imported food products for expatriates, upper middle income
Chinese consumers and others who have lived and studies overseas. The company, established in
1995, operates 13 supermarkets in Beijing located in high-income and/or upscale communities ?
often near diplomatic compounds and missions. More than 98 percent of the products offered in the
small supermarkets are from overseas with 60 percent from the United States. In particular,
breakfast cereal, seasonings, dairy products and wine make up the greatest focus of offerings. Jenny
Lou?s states that their business has recovered from the economic crisis of the last few years but
gradually. Sales have returned to average levels prior to the financial crisis and are on the increase.
Beijing Hua Lian High-End Supermarket (BHG) is under the Hua Lian Group targets elite
Chinese and expatriate consumers in Beijing. The retailer operates 5 outlets in Beijing located in
high-income areas or near diplomatic compounds. The most famous is located in the basement of the
Xing Kong Plaza and is often considered to be the most high end department store in Beijing,
offering a wide selection of luxury brands. The store?s sales results were more than $29 million for
2009. The retailer provides a wide selection of imported food products of which more than 40
percent are from the United States. BHG also runs a high end supermarket in Nanjing and based on
current plans will add 3 new supermarkets in Beijing over the next year. In addition BHG is
considering accessing the Shanghai and Guangzhou markets in the very near future.
City Shop sells an extensive range of imported foods. Over 85% of City Shop?s products are
imported. City Shop carries nearly 3,000 American food and non-food products, which make up 1/3
of total product SKUs, while contributing 50% of overall sales. Started as a corner shop by a former
Cochran fellow, City Shop now has 9 retail outlets in Shanghai and one in Beijing. And another
store will open in Beijing soon. It has developed its own system of retail and wholesale services. It
maintains its own farms with internationally recognized organic farming and logistics systems. It
produces 140 different organic vegetables and herbs, and produce is transported daily via
temperature-controlled trucks to City Shop outlets and other wholesale business partners.
Ole: operated by CRV, targets upper-middle income shoppers and white-collar workers. Its 10
Beijing stores are all located in business or shopping centers. There are two stores in Shenzhen, one
in Dongguan with another set to open in Guangzhou. Imported food product sales are approximately
50 percent or more of total food sales. The stores in Shenzhen have been successful in introducing
imported foods such as cheeses, chocolates, coffee, wine, liquor, biscuits, and fresh fruits at higher
prices. Undermining this early success is an unstable supply chain and lack of promotion to support
further demand growth. Ole has opened two stores in Shanghai.
Lianhua, Hualian and Nonggongshang are three large state owned supermarket chains. These, and
other domestic firms, dominate the supermarket sector. Although Lianhua and Hualian were
nominally merged three years ago to form the behemoth Bailian, the largest retailer group in China,
they continue to operate as distinct (and competitive) chains. Bailian appears to be more focused on
rationalizing its diverse portfolio, and developing its shopping mall management component. Both
Lianhua and Hualian have expanded aggressively through acquisitions of other chains, leaving both
companies with the challenge of incorporating them into already weak state owned management
structures. Inspired by foreign-invested companies, the Chinese chains are paying greater attention
to branding, and most now carry a substantial number of house brands.
All three have also opened branded hypermarkets in and beyond Shanghai, and Lianhua is putting a
particularly strong effort into its Century Lianhua hypermarkets. Although Nonggongshang?s
market share has slipped, it is attempting to expand its reach to match Lianhua and Hualian, opening
NGS hypermarkets in distant cities like Nanchang, with mixed results.
The state owned supermarket chains also play another role ? that of the local partner of international
retailers. The international players had to agree to this to enter China. So Lianhua, for example,
owns a large minority position in both Carrefour and Metro.
China Resources Vanguard also has a large number of supermarkets. It acquired with Suguo, a
regional giant headquartered in Nanjing in 2004. The brands continue to operate independently.
Wu-Mart is a major retail chain based in Beijing operating over 700 stores throughout China
including hypermarkets, supermarkets, and convenience stores targeting middle class and low end
consumers. The outlets are mainly located in Beijing and Tianjin, and Zhejiang and Ningxia
Provinces. According to company financial reports, total revenues reached $99 million for the first
half year of 2010 or an increase of 17.7% over the previous period of last year. The high revenues
were achieved thought strong older stand alone outlet sales as well as new outlets which opened in
the second half of 2009. In addition, PE firms TPG and Hony Capital (investment companies) input
$212.9 million to help the retail further expansion and acquisition in China market.
Advantages and Challenges for U.S. Products
Overall, U.S. products enjoy a high image in the China market. Rising incomes and growing
concerns over food safety among Chinese consumers after numerous episodes of food contamination
mean there will be more opportunities for U.S. products, which are largely perceived as safe and
wholesome. On the other hand, price is still one of the barriers for U.S. products to reach more
Chinese consumers; other challenges include labeling regulations, distribution, and limited product