China Retail Report

An Expert's View about Retail Sales in China

Posted on: 27 Aug 2012

Consumption of western style products continues to grow as they generally are regarded as good quality, nutritious and safe.

THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT POLICY Voluntary Public - Date: 6/15/2012 GAIN Report Number: 12806 China - Peoples Republic of Post: Shanghai ATO China Retail Report Report Categories: Retail Foods Approved By: Keith Schneller Prepared By: Leanne Wang, May Liu, Tong Wang and ATO-Chengdu, ATO-Shenyang Report Highlights: In response to rising inflation and food safety concerns Chinese 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. 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, dried fruits and nuts, have much deeper penetration, and some supermarkets and convenience stores are becoming more interested in a wider variety of imported products. With increasing household incomes and food safety concerns, more middle class consumers are trading up to buy imported grocery products. 1 Executive Summary In response to rising inflation and food safety concerns Chinese 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, dried fruits and nuts, have much deeper penetration, and some supermarkets and convenience stores are becoming more interested in imported products. With increasing household incomes and food safety concern, more middle class consumers are trading up to buy import grocery products. 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. However Metro, the German Cash & Carry Chain, is an exception. It has implemented a direct import policy and upgraded its Shanghai sourcing department to purchase products for all of Asia – including China, Vietnam, India, Pakistan, Japan and Indonesia. 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. Internet retailing is growing rapidly in China. And many international retailers have entered internet retailing directly or indirectly. Wal-Mart launched an internet retailing site for its Sam‘s Club chain in 2010 More recently, Wal-Mart agreed to increase its stake in the rapidly growing domestic online supermarket to 51%. However, the deal has not yet been approved by Chinese authorities. In addition to the large number of domestic online retailers, the following international retailers currently have online operations: Carrefour Auchan:; Metro: (products are exclusively provided by Metro) Lotus: Sam‘s Club: Specialty supermarket stores include stores targeted at expatriates, upscale and upper-middle Chinese consumers. There are also specialty supermarkets that focus on 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 2 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 few distributors 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 categories. 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 generally growing 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, Chinese 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. a series of food scandals disclosed by local media from steam buns, hot pot seasoning, milk powder, edible oil, frozen dumplings to rice and egg, 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 3 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 1.1 times from year 2005 to 2010 when measured in U.S. dollars. While average annual food purchases for all cities was slightly more than $700 per year, per person food consumption in Shanghai was slightly more than $1,200 per person, and that in Beijing and Guangdong was about $1000 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 markets. . 4 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 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 retail market 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 keep appreciating against the U.S. dollar. This gave an added boost to Chinese expenditures when measured in dollar 5 terms. According to China Ministry of Commerce, China‘s retail sales may grow 15 percent annually through 2015 and top 32 trillion yuan (USD5 trillion) in 2015. Market Segments 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 products. 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, RT-Mart, 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, RT-Mart, 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 Chinese consumers. 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 6 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 China Resources Vanguard high-end retail format Ole, 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 sales. Towards the phenomena of retailers charging various fees to distributors, on Dec/19th 2011, five ministries and committees in China issued the joint plan about regulating big retailers charging fees towards suppliers, the nation-wide regulating period is from Dec 2011 till June 2012. In this plan, only promotion fee is allowed, all other fees such as delivery fee, slotting fee, holiday fee, new store opening fee, sales check and new account opening fee etc are illegal, not allowed to charge. This new regulation caused a lot of argument and confusion, thus till now most retailers which are supposed to already signed their contacts with suppliers have not done so yet, most retailers and suppliers just unanimously followed last year contract. The nature of this regulation is supposed to protect the interest of small and medium sized suppliers and regulate retailers‘ behavior about over-charging suppliers, but just cutting off all the other fees arbitrarily caused huge argument among retailers. For instance, in order to streamline the logistics, most retailers built their own distribution centers, thus suppliers don‘t need to send goods to every store and instead just send to distribution center of retailers. Retailers are responsible for delivering to stores and they charge a delivery fee to suppliers. But according to the new 7 regulation, it‘s illegal to charge such fee now. Even for the allowed promotional fee, there is area unclear. Because retailers usually charge different level of promotional fees based on the store location, right now do they need to charge the same level of promotional fees regardless of stores location? With all above said, retailers don‘t know what words to put on contract and what not. 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 8 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 Suzhou, Hangzhou or Wuhan. 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 9 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 four stores in Shanghai with another two in Hangzhou and Ningbo respectively. In addition, some food importers down-integrated their business and opened their own import products stores. Also people from other businesses either in export or real estate also entered into import food business or opened their independent import products stores in Shanghai. Products assortment, price and consumers shopping experience 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 delivery services. 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 customers. 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 10 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 11 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. Product Distribution 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 (uncertain at the moment, as according to the new regulation, all such fees are illegal), 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 fuss. 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 12 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 13 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 14 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. 15 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 service venues. New Trends in Retail Internet retailing –As a newly emerging channel in retailing, internet retailing has experienced explosive growth in China. Product comparisons and price comparisons are just a click away. Products sold in online shops are usually cheaper than in store-based retailers. And competitive price is an important factor which draws Chinese consumers, who are mostly price-sensitive., owing to its early entry into internet retailing, now is the No.1 player in China. 360, starting as a consumer electronics and appliance specialist, now has evolved into an online shopping mall, covering a wide range of consumer products including food products. To exploit the lucrative internet retailing channel, many store-based retailers have gone online. Wal-mart became a minority shareholder in the rapidly growing domestic online supermarket in 2011. The latest news is that Walmart just increased its shareholding in Yihaodian to 51pct and thus became a majority shareholder, but such deal is not approved officially by Chinese authority yet. Carrefour, Metro and Lotus etc all entered into internet retailing directly or indirectly. 16 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 goes ahead of others and moves seriously towards directly import by upgrading its Shanghai sourcing department to its Asia sourcing center, and be responsible for sourcing products not only for China market but also for India, Pakistan, Japan, Vietnam and Indonesia etc. 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. Import private label is expected to see more dynamic growth, thanks to the focus on private label lines by retailers in their pursuit of higher profit margins. 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. The Chinese wine market is more completely analyzed in the National Wine Market Report CH12805. Retailer Profiles Domestic retailers generally have an advantage over foreign retailers, and China is not an exception to the rule. China Resource Vanguard and Lianhua are the largest food retailers in China. While the sales volume of the three largest multinational chains – RT-Mart, Carrefour, and Wal-Mart –are quickly catching up. If you look at sales per store, foreign retailers are definitely way ahead than domestic retailers. 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. 17 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, 2010. Leading Food Retailers in China: 2010 C Sales* ompany Ownership Business Line Stores ¥ billion Chinese Lianhua China SOE** Super/Hypermarket/ Convenience 5239 70.0 Wumart China Pvt Supermarket/ Convenience 2578 38.0 Suguo (CRV) China SOE*** Supermarket/ Convenience 1905 37.0 Nonggongshang China SOE Super/Hypermarket/ Convenience 3204 29.0 Vanguard (CRV) China SOE Super/Hypermarket/ Convenience 3155 72.0 Multinational RT Mart France Hypermarket 143 50.0 Carrefour France Hypermarket 182 42.0 Wal-Mart U.S. JV Hypermarket 219 40.0 Metro Germany JV Hypermarket 48 12.0 Tesco U.K. JV Hypermarket 109 16.0 Auchan France Hypermarket 41 13.5 Lotus Thailand Hypermarket/Convenience 74 13.6 * Food and non-food sales ** SOE= State-Owned Enterprise *** Joint venture with China Resources Vanguard Source: China Chain Store & Franchise Association 2010-2011 Hypermarkets RT-Mart was the number one company in the Hypermarket sector in 2010 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 41 stores in overall China with 6 stores in Shanghai. 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 and Auchan listed in HongKong stock market in June 2011, the combined total sales volume of RT-mart and Auchan surpass Walmart and Trustmart 18 combined, and makes it the largest scale hypermarket operator in China. In 2011, RT-Mart opened 42 new outlets and Auchan opened 6 new outlets. RT Mart has 185 stores in China at the end of 2010; with 14 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 370 stores nationwide, including several different operation systems: Wal-Mart supercenter, Sam‘s Club, Trust Mart, Smart Choice, and Neighborhood Market. Insiders informed ATO Guangzhou that more than 500 discounted compact markets, a brand new format, will soon be available in many cities. Wal-Mart is looking to further expand into the third tier and fourth tier cities in the coming years. In 2011, Wal-Mart opened 54 new stores, including 49 supercenters, in China. These new stores are located in Guangdong‘s Huizhou, Longgang, and Zhaoqing; Hunan‘s Hengyang; and Fujian‘s Fuzhou, Xiamen, Nanan and Ningde. Additionally, Wal-Mart opened an e-commerce head office in Shanghai and bought a minority stake in the Chinese e-commerce company Yihaodian (Number One Store). Yihaodian boasts nearly one million registered users and sells everything from groceries to diapers to electronic products. It is also said that Wal-Mart was part of a consortium that invested in Chinese online electronic retailer ―360buy.‖ Wal-Mart‘s Sam‘s Club membership warehouse has gained a favorable reputation by introducing more import foods to local consumers than other competitors have done. To date, five Sam‘s Club stores have opened in China, including one each in Shenzhen, Beijing, Shanghai, Fuzhou, and Guangzhou. The Shenzhen store is reported to be one of the most profitable Sam‘s Club stores in the world. Due to promising sales projections, another Sam‘s Club will open in Longguan, a district of Shenzhen, by 2012. However, the Dalian project, originally planned to open in 2011, was postponed. Wal-Mart now expects completion by mid 2012. In the year of 2009-2010, ATO Guangzhou, in coordination with several cooperators, worked closely with the three Sam‘s Club stores in South China to conduct a regional promotion featuring various U.S. snack foods and fresh items. Sales from the promotion totaled over $ 1 million. Despite Wal-Mart‘s apparent growth in 2011, the retailer did see some setbacks. A pork mislabeling pork and the resignation of several top managers somewhat downgraded the Wal-Mart image. The Trust Mart acquisition has moved more slowly than anticipated. Taiwanese based Trust Mart used to be one of the largest retailers in China, with over 100 stores across the country, 38 of which were in South China (17 in Guangzhou, 4 in Shenzhen, 3 in Dongguan, 1 in Zhongshan, 1 in Zhanjiang, 4 in Fuzhou, 4 in Xiamen, 1 in Quanzhou, and 1 in Changsha). In 2007, Wal-Mart took the initial step to acquire a 35 percent share of Trust Mart and claimed to take further steps over the next two years to finalize the purchase. However, the acquisition was repeatedly postponed due to challenges with the merger and consolidation process. Many conflicts arose, including disagreements with an independent shopping mall land owner and concerns from local government offices regarding benefits allocation and income tax payment issues. As a result, Wal-Mart divided the nationwide Trust Mart stores into three different lots, and plans to finish consolidating the final lot in early 2012. New management has been assigned to strengthen the operation and the consolidation of Trust Mart. Once the consolidation is 19 complete, senior management‘s next challenge will be to enhance the sales performance of the newly renamed Trust Mart stores in order to catch up with the performance level seen by Wal-Mart supercenters. French Carrefour, the World‘s 2nd largest retailer, now has 203 stores in China. It closed 6 under- performing stores and opened 20 new outlets in 2011. Carrefour is used to be the No.1 foreign retailer in China, but now its sales is surpassed by RT-Mart, its old operating model of charging high slotting fee towards suppliers to make money now becomes its biggest trouble. Such model is not only questioned by so many suppliers and resulted in some big suppliers like KangShiFu(the largest instant noodle brand and manufacturer in China) dropping out from Carrefour but also partly led to the new regulation jointly drafted by five China ministries and committees and made charging slotting fee illegal in China starting from Jan, 2012. In addition, during Chinese Spring Festival period in 2011, several Carrefour stores were fined RMB500, 000 each for price tag fraud. The same price tag fraud issue was also found in Wal-Mart. It‘s a tough period for Carrefour, how to regain its past glory in China market is still questionable. Thai-Lotus Chain has 72 stores in China now. It opened 5 new outlets in 2011. This Thai-based retailer has kept trying new models and operation team in recent years. In May, 2011; it opened a new concept store in Shanghai and supposed to attract nearby white-collar workers to the store, but failed and sold out in September. In Dec, 2011, it opened another new concept store in Shanghai called ―Lotus Life Station‖, intending to combine convenience store, coffee shop, fresh products store and hypermarket all in one, and planned to open 1000 stores in China in the near future. AEON-Jusco AEON-Jusco has been a well-known retailer and brand name in South China for many years. The retailer has 19 general merchandise stores in the Pearl River Delta region. These stores feature food, fashion, house wares, and electronic appliances. In the north, AEON also has presence in Qingdao and Beijing. Jusco supermarkets enjoy a good reputation in promoting import food items, mainly from Japan and Korea. ATO Guangzhou conducted several in-stores promotions, such as the ―American Food Festival,‖ with AEON-Jusco in recent years. In 2011, 19 Jusco stores launched U.S. food promotions simultaneously to promote U.S. cherries, apples, seafood, snacks, nuts, drinks, and other grocery items. It is estimated that a total of 200 plus SKUs were included. A total 40 percent of sales growth was reported after the promotion. Last year, AEON group also introduced the new ―AEON Supermarket‖ format both in Guangzhou and Shenzhen. With a sales floor of 32,000 square feet, the new AEON Supermarket will focus on high-end food products, accordingly the retailer created a national AEON buying team. In the near future, AEON 20 plans to consolidate the merchandise sourcing in both the north and south, which may encourage more import food items. 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. Metro now has 54 stores in China with 5 alone in Shanghai. 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 department has upgraded to Asia sourcing center, which is responsible for not only China market but other Asian markets. At the moment, Metro has 16 stores in Vietnam, 10 in India, 10 in Pakistan, 9 in Japan and a new one in Indonesia will open soon. It‗s determined to import directly for all these markets and kicked out certain local distributors which makes its U.S. products range is limited. It looks for new U.S. products suppliers to import directly. For more information, please contact with ATO Shanghai. British Tesco moved its headquarters to Shanghai in 2009 and has 21 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. Till the end of 2011, Tesco has 103 outlets in China. Import products penetration, including American products in Tesco is rather low, concentrating on a few condiment and sauces, snacks and several SKUs of wine. China Resources Vanguard China Resources Vanguard, as a Hong Kong operated state-owned enterprise, is one of China‘s leading retailers. In recent years, the retailer has been growing fast and has established a dominant market presence as the nation‘s top retailer both in the number of its stores and the amount of its sales. The retailer‘s total annual sales surpassed $10 billion in 2010. In 2011, 400 new stores opened, bringing the nationwide total above 3, 700 outlets. CR-Vanguard‘s brands include Vanguard, Ole, Vango, Suguo, Better Life Together, Fun 2, Vivo, Voila wine shops, and the Pacific Coffee Company cafes. CR-Vanguard‘s expansion includes both acquisition and new construction. The most recent acquisition was that of local retail chain Hong Ke Rong, which had 21 outlets, valued at $580 million. The acquisition helped CR-Vanguard expand its distribution network in Jiangxi. Another purchase, that of Guangzhou Home City, has extended CR-Vanguard‘s business into many new communities. 21 CR-Vanguard opened its first store in Hong Kong in 1984. The retailer entered the supermarket business in Shenzhen in 1991, Suzhou in 1995, and Beijing in 1998. It acquired Suguo supermarket in 2004, then continued to purchase Tianjin‘s Yuetan in 2005 and Jia Shijie in 2007. In 2008, CR-Vanguard completed the acquisition of Aijia supermarket in Xi‘an. Then last year, CR-Vanguard 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 in Guangdong, CR-Vanguard has over 430 hypermarkets and supermarkets. Generally speaking, CR-Vanguard used to target customers who are more likely to buy locally produced items; however, years‘ of persistent marketing efforts have recently convinced CR-Vanguard that consumers are increasingly interested in high-end import foods and fresh fruits. Accordingly, the retailer has opened special import food sections in some select stores. Ole, for example, targets upper-middle income shoppers and white-collar workers. Its 7 Beijing stores are all located in business or shopping centers. There are 2 stores in Shenzhen and 1 in Guangzhou that opened last year. Import food product sales are approximately 50 percent of Ole‘s total food sales. The stores in Shenzhen have been successful at introducing import foods such as cheeses, chocolates, coffee, wine, liquor, biscuits, and fresh fruits. Undermining this early success is an unstable supply chain and lack of promotion to support demand growth. Ole is reportedly planning to open stores in the east region the near future. However, many insiders observe that another new format named, ―Better Life Together,‖ which was introduced by CR-Vanguard in recent years, will probably grow faster than Ole in the near future. 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. Department Stores 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 22 Jenny Lou’s is a major retailer of imported food products for expatriates, upper middle income Chinese consumers and others who have lived and studied overseas. The company established in 1995 operates 10 supermarkets in Beijing located in high-income and/or upscale communities – often near diplomatic compounds and missions. More than 90 percent of the products offered in the small supermarkets are from overseas with 50 percent from the United States. In particular, breakfast cereal, seasonings, dairy products and wine make up the greatest focus of offerings. In 2011, the Jenny Lou‘s was split into two companies – Jenny Lou‘s and Jenny‘s store. According to industry sources, some retail operators would like to acquire these companies to access the high end retail market given their strong consumer base, brand reputation and ideal locations. Beijing Hua Lian High-End Supermarket (BHG) is under the Hua Lian Group targeting elite Chinese and expatriate consumers in Beijing. In the past six years, the company expanded rapidly in Beijing. Now BHG operates 15 high-end stores in town, up from 5 stores in 2010. All the stores are located in high-income areas or near diplomatic compounds, but most of the shoppers are upper middle level Chinese consumers rather than expatriates. BHG offers a wide range and selection of international products with over 40% products from United States. BHG sales data shows they sold well over $13 and $20 million U.S. products in 2011, with over 3,700 SKUs. Snack foods, fresh and dried fruit and nuts, and soft drinks are the most popular products in stores. BHG has accelerated its expansion into emerging city markets and opened its first store in Huizhou, Guangzhou Province in June 2011. According to its plan, BHG will open stores in Tianjin, Yichuan, Erdos, Suzhou, Chengdu and Zhengzhou in 2012. BHG‘s expansion is bringing branded products marketing to these emerging markets as well as developing distribution networks for imported food. 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 cor
Posted: 27 August 2012

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