China Country Profile

Market Overview:

Focus Economics reported in May 2020 that despite signs of gradual recovery, widespread uncertainties continue to cloud the outlook for the Chinese economy.  The global pandemic is hitting China’s all-important external sector, while, on the domestic front, consumers remain wary amid fears of a second infection wave.  Moreover, diplomatic rifts with the United States threaten to lead to an escalation in trade tensions. FocusEconomics panelists see the economy growing 1.6% in 2020, before accelerating to 7.5% in 2021.

  • The real value of private final consumption rose by 6.3% in 2019.  In 2020, growth of 0.7% is expected.  Consumer spending is limited by COVID-19, particularly hitting the wholesale and retail trade, accommodation, transportation, and entertainment.
  • Unemployment in 2019 was 4% and it will remain the same in 2020.  Enormous pressure is being applied to companies by COVID-19, particularly SMEs with smaller financial reserves.  Larger companies are not likely to lay off workers, but keeping on additional staff could threaten profitability and increase corporate debt.
  • The rebalancing towards services and consumption will continue.  Although the 13th Five-Year Plan sets a growth target of 6.5% for 2016–2020, rates of growth in real Gross Domestic Product (GDP) are expected to bounce back after 2020’s difficult year.

In 2019, China’s population was almost 1.4 billion – an increase of over 135 million since 2000.  Population, however, is growing at a decelerating pace.  China is rapidly urbanizing.  As recently as 1980, less than 20% of China’s population lived in cities but today more than half of all Chinese live in urban areas and up to 70% are expected to be urbanites by 2030.  China is ageing at a rapid pace.  In 2019, the median age was 38.5 years – 8 years greater than the figure for 2000 – and it will be 42.5 years by 2030 (well above the regional average).  In 2019, the number of Chinese over 65 years totaled 166 million.  This figure represented 11.9% of total population.  In 2030, a projected 17.4% of all Chinese (almost 248 million) will be over 65 years.

On January 15th 2020, the U.S. and China reached an historic and enforceable agreement on a Phase One trade deal that requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. The Phase One agreement also includes a commitment by China that it will make substantial additional purchases of U.S. goods and services in the coming years. Importantly, the agreement establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement.  The U.S. has agreed to modify its Section 301 tariff actions in a significant way.

The Agriculture Chapter addresses structural barriers to trade and will support a dramatic expansion of U.S. food, agriculture and seafood product exports, increasing American farm and fishery income, generating more rural economic activity, and promoting job growth.  A multitude of non-tariff barriers to U.S. agriculture and seafood products are addressed, including for meat, poultry, seafood, rice, dairy, infant formula, horticultural products, animal feed and feed additives, pet food, and products of agriculture biotechnology.

Agricultural exports to China rebounded significantly in 2019, increasing 51% to US$13.8 billion.  This lifted them into 3rd place once again after Canada and Mexico. China had been the top U.S. agricultural export market as recently as 2016 with an export value of US$21.4 billion.  Through May of 2020 U.S. agricultural exports to China have grown 17% on a year to date (YTD) basis and total US$5 billion.  In 2019 U.S. consumer oriented foods exported to China increased an impressive 34% to an all-time record US$3.1 billion, a ranking of 5th highest overall.  YTD 2020 U.S. consumer food exports to China have grown 132% (not a typo) to just over US$2 billion.   

China also remains the 5th largest market for the export of U.S. processed foods, totaling nearly US$1.5 billion in 2019, a surprising decrease of 23% from the prior year.  Top processed food products exported to China in 2019 included:

  • Food Preparations
  • Prepared/Preserved Meats
  • Processed/Prepared Dairy Products
  • Prepared/Preserved Seafood
  • Processed Vegetables & Pulses
  • Processed Fruit

There are significant double digit declines in all the top product categories with the exception of food preparations. YTD 2020 U.S. processed food exports to China are steady at US$646 million.

Advantages

  • USDA resources in China, including five U.S. Agricultural Trade Offices and more than 40 USDA Cooperators with local representation.
  • Increased purchasing power allows urban consumers, which now include millions in second tier cities, to afford imported foods.
  • Logistics, cold chain, and distribution infrastructure development in second-tier cities connects more consumers with imports.
  • Urbanization and e-commerce are increasing the number of consumers who have access to imported food and beverage products.
  • Analysts report that food and beverages made in the United States are trusted and deemed high quality by Chinese consumers.
  • Chinese consumers, especially the younger generation, actively seek out international experiences and products.
  • International culture and norms are becoming widely accepted across China (e.g., holidays, cuisine, etc.). Dining out to observe the holiday is becoming more popular.
  • Cross-border e-commerce (CBEC) platforms offer market access, and lower taxes and import duties on a range of U.S. products
  • China’s cold storage capacity and logistics have grown significantly in recent years.
  • Nationwide China’s food retail industry is transforming from single, independent restaurants, bakeries and grocery stores into major chains with outlets throughout the country.  These chains are looking for quality and consistent products and ingredients.

Challenges

  • New exporters frequently lack an understanding of how to enter the market and conduct business within China’s business culture.
  • Tariffs on U.S. products have caused importers to shift to less expensive exporting countries, especially those who enjoy free trade agreements with China.
  • While per capita income is approaching US$10,000 per year, many consumers remain price sensitive, especially in regions outside of China’s major cities.
  • Trade agreements between China and other exporting countries have put U.S. products at a price disadvantage.
  • A lack of market access and other trade barriers (e.g., facility registration) prevent U.S. exporters from taking advantage of the market.
  • Logistics and supply chains can create issues for perishable food products as refrigeration and documentation is inconsistent across sectors and regions.
  • The CBEC platform is still developing and many warehouses lack cold chain capabilities to import fresh products.

While China is moving ahead by leaps and bounds to improve its air, highway, and refrigeration infrastructure, there is still variation in regional food preferences. For example, some regions prefer hot and spicy food versus bland and simple. Chengdu and Sichuan may prefer innovative cuisine while regional towns, such as Xiamen and Tianjin may prefer traditional. Northeasterners love huge servings of meat, especially beef, while Southerners prefer lighter portions of seafood and poultry. Foreign cuisines and Western cooking techniques are fairly well appreciated in first-tier cities, but consumers in second- and third-tier cities are overall not well acquainted. China has a growing number of supermarket chains, which are increasingly connected to e-commerce retail, who are looking for product consistency and quality. Exporters should see China as several overlapping regional, cultural, and consumer markets rather than one single large market.

Retail Sector:

According to Euromonitor, retail sales in the packaged food market in China had been estimated to reach US$280.9 billion in 2019.  That represents a growth rate of 25.7% or US$57.4 billion since 2015.  The forecast for growth in this market is outstanding.  By the year 2024, the retail sales in the packaged food market in China is expected to reach US$380 billion, a growth rate of 27.3% or US$91.7 billion.  High growth products in the forecast include:

  • Baked goods
  • Breakfast cereals
  • Processed Fruit and Vegetables
  • Baby food
  • Savory snacks
  • Sauces, dressings condiments
  • Dairy products
  • Processed meat and seafood

USDA’s Agricultural Trade Office (ATO) in Shenyang hereinafter referred to as “Post” report that as China’s middle class grows, it is expected that its demand for quality and safe agricultural products from the United States will also grow.  While tariffs and trade uncertainty decreased U.S. food and agricultural exports to China in 2018 and 2019, consumers continue to demand U.S. imports.  Instead of one single market, China consists of several overlapping regional, cultural, and consumer markets.   Exporters are urged to consider this, especially when first starting out in the market. 

Euromonitor reports that the Chinese supermarkets channel has become a hotbed for new formats, with the transformation of stores being supported by China’s internet giants. Supermarkets in China are becoming increasingly hi-tech with comprehensive advanced technology being used to improve the consumer’s in-store experience and to create efficiencies to deliver products at a more reasonable cost.  Conversely, the traditional hypermarkets model requires lots of space and a high cost of operation with it also being hard to control the quality of all of the products on sale.

With the rapid growth of O2O fresh food e-commerce, supermarkets are developing store-front warehouse in order to compete.  These store-front warehouses are usually replenished with fresh foods, snacks, beverages and daily personal care products but typically cover only a limited range of SKUs, which is decided based on accrued shopping data.  By having these store-front warehouses supermarkets are able to offer a one-hour delivery service to people living within 3km, thereby giving them a competitive advantage.  This strategy enables supermarkets to be more efficient and better meets the needs of China’s increasingly tech-savvy consumers, especially in high-tier cities.

As a way to differentiate themselves from other retailing channels, supermarkets operators have increasingly looked to offer products that cannot be easily found in hypermarkets or online.  By adopting a more premium approach this is helping supermarkets to stand out in the market, with the younger generation less price sensitive than their parents and grandparents.  As such, imported products and fresh food are becoming a more common feature of modern supermarkets in China.

Super Species was launched by Yonghui Superstores Group towards the end of the review period as its new retail format.  Super Species is focused on an O2O hybrid model of high-end supermarkets with fresh food and foodservice.  After rapid expansion after its initial launch its growth dropped off in 2019.  In July 2019, the company closed its first store in Shanghai, with a company spokesman placing question marks over the potential for any new store openings.  It was not only Super Species which slowed down its expansion plans but also Freshippo which closed one store in Jiangsu in May 2019.

In June 2019, Freshippo opened its first Freshippo Mini supermarket in Shanghai. Regular Freshippo outlets are around 4000sqm; however, Freshippo Mini is only 400sqm.  Comparing with regular Freshippo stores, the new format’s operation costs are much lower, in part thanks to the existing well-built logistics system utilized by Freshippo.  Targeting middle-aged citizens in suburbia or lower-tier cities (who are very price-sensitive), Freshippo Mini is focused on locations within a 1.5-kilometer radius of residential areas based on distribution efficiency with a focus on unpackaged fresh food (which generally retails at a lower price).  According to Yonghui Superstores Group’s 2019 interim report, the company is making a significant investment in this new mini-stores format with the expansion of Freshippo Mini covering 50 cities in 19 provinces.

Ele.me, the on-demand platform owned by Alibaba, reached a strategic partnership with Freshippo, Alibaba’s new retail supermarkets arm, to launch a delivery service for more than 150 Freshippo brick-and-mortar stores in 21 cities across China.  In early 2019, Ele.me also partnered with supermarket giant China Resources Vanguard, backed by Tencent, to offer delivery services to 2,000 of its stores, including its hypermarkets, standard supermarkets, boutique supermarkets, and convenience stores.

Foreign hypermarkets are going through a hard time in China.  Carrefour, Walmart, Tesco, and other foreign hypermarkets successfully entered China in the 90s; however, some of these have since closed their stores and left China or sold their businesses to domestic retailers.  For example, in December 2018, French retailer Auchan’s Chinese business was fully taken over by partner RT-mart. Meanwhile, in June 2019, Carrefour sold 80% of its business in China to Suning Group for CNY4.8 billion.  Compared with the aggressive and bold tactics of Chinese retailers, foreign hypermarkets seem to be more conservative in adjusting their strategies to capture the latest trends within an ever-changing and dynamic Chinese market.  This is partly down to inefficiencies in reporting within multinational corporations, with it often requiring multiple levels to make a decision.

Best Prospects:

Popular U.S. products with a strong presence in the market include tree nuts and dried fruit (prunes, raisins), seafood (especially live seafood, including lobster, crab and geoduck), pork, beef, vegetables (especially sweet corn and baby carrot), infant formula, dairy products (cheese and butter), baking ingredients and bread bases, cereals, fresh fruit (oranges, apples, especially cherries), premium ice cream, and red wine and spirits.

Food Service Sector:

Beijing ATO Post reported in the Pre-Covid 19 environment that China’s Hotel, Restaurant, and Institutional (HRI) sectors recorded US$646 billion in sales revenue in 2018, a 9.5% increase from the previous year.  Regional diversity greatly influences the consumption trends, yet food safety is of the greatest concern.  Selection and purchase of U.S. food products as a preferred source of food can continue to increase with consistent education and communication about U.S. food products and how they effortlessly fit in and enhance traditional Chinese cuisines.

The Chinese food service industry is comprised of 25,884 registered companies (*companies with annual revenue over US$296,200) and many small family-owned foodservice restaurants. The foodservice industry maintained solid dynamic growth, driven by growing household incomes and the increasing popularity of dining out. Chinese consumers are becoming more and more health-conscious, leading to growing demand and higher quality food products

Given rising food costs and a slowing economy, families are dining out less often and workers are shifting to less expensive lunch items.  The HRI sector is looking to cut costs due to fierce competition, and increasing labor and real estate costs.  As a result the HRI sector is looking at ways that food and beverage imports can help cut labor costs, such as by providing standardized food ingredients and pre-prepared meat and seafood portions.

Euromonitor reports that the Chinese consumer foodservice market witnessed steady growth in 2019 driven by ongoing urbanization, which is contributing to rising disposable incomes, smaller households and hectic lifestyles.  The combination of increased purchasing power and busy modern lifestyles is generating growing demand for convenient meal solutions, which is boosting sales across consumer foodservice categories.  The importance of convenience is being underlined by consumer foodservice players’ growing emphasis on the development of ordering and delivery services.  This was a prominent feature across a number of categories at the end of the review period, and a particularly notable contributor to growth in cafés/bars.

The most dynamic players in consumer foodservice, such as Luckin Coffee (Beijing) Co Ltd and Shenzhen Meixixi Food & Beverage Management Co Ltd, are benefiting from the dynamic expansion of specialist coffee and tea shops.  Coffee is becoming an increasingly popular drink amongst urban consumers in China.  Luckin Coffee is tapping into this trend by targeting price-sensitive, tech-savvy young consumers with competitively priced coffee they can order on their smartphones and have delivered.  The popularity of the concept, which Luckin Coffee launched in 2018, led to aggressive outlet expansion in the final year of the review period.

The growing sophistication of demand for coffee is leading to the emergence of boutique specialist coffee shops, with outlets placing an emphasis on factors such as the coffee’s origin, type of bean and degree of roasting.  Shenzhen Meixixi Food & Beverage Management, meanwhile, is seeing growth driven by the increasing popularity of its HEYTEA specialist tea shop brand amongst fashion-conscious female consumers, again underlining the importance of brands resonating with modern consumer lifestyles.

Euromonitor reports that the Chinese consumer foodservice market is forecast to see continued growth over 2019-2024 supported by the rising demand for convenience amongst urban consumers with increasingly hectic lifestyles and growing disposable income.  Indeed, the development of such demand beyond the major urban centers is set to create opportunities for growth in lower tier cities.  Cafés/bars is expected to remain the most dynamic category, as it successfully targets the coffee trend, provides competitive pricing and enhances consumer convenience through app-based ordering and delivery services.

Street stalls/kiosks are also set to see strong growth supported by the increasing incorporation of digital technologies, including the development of strategies such as hidden menus.  Indeed, a focus on digitalization, overlapping with the provision of delivery services, will play an important role in driving growth for the most successful players across consumer foodservice channels during the forecast period.  While creating a social media buzz is potentially a low cost way for independent operators to raise consumer awareness, generally the increasingly central role of digital technologies in consumer foodservice is likely to contribute to the further strengthening of the position of chained players, which have greater resources to invest in digital innovation.

Best Prospects:

Beijing Post reports that products in market with continued good potential include pork fishery products (salmon, geoduck, lobster, Dungeness crab, cod fish), tree nuts (almonds, pistachios, pecans), dried fruit (cranberry, blueberry), fresh fruit (cherry, apple, citrus), chocolate, dairy products (butter, uht milk), sauces, spices, condiments,  potato and wine.

Food-Processing Sector:

 

The ATO Post in Beijing reported in the Pre-Covid 19 environment that China’s food processing industry is maturing, and growth is moderating.  Consumers have becoming increasingly interested in eating more natural and healthier foods, while valuing convenience and attractive packaging.  Food processing still accounts for 60% of the sector, however the fastest growth is now in the beverage sector, where the trend for natural, healthy, and convenient ready-to drink smoothies, yogurts, and juices represents China’s transition from “eating full” to “eating well.”  

China’s food processing industry continued to grow in 2017.  Revenue climbed to US$1.47 trillion, an increase of 6.3% compared with the previous year.  Profit reached US$118 billion, also an increase of 6.3% compared to 2016.   Despite the modest growth in 2017, the food processing industry continues to slow down due to industry maturation, consolidation, and lower fixed asset investments.  In 2018, industry investment and growth was expected to further moderate, given a combination of macroeconomic factors, including global economic uncertainty, U.S.-China trade friction, and economic indicators suggesting a broad economic slowdown in China.  

Food processing industry publications have debated the effects that slower macroeconomic growth would have on Chinese consumers and the food processing industry.  There is no clear consensus on how a slowdown (or even if one is occurring) will affect domestic consumption.  In March 2019, the Chinese government lowered its gross domestic production growth target to “6% to 6.5%,” a decrease from its 2018 target of “around 6.5%”.  Many industry insiders have argued that there is ample evidence of food consumption downgrading, such as reports that instant noodle consumption surged in 2018, after years of flat sales.

Nevertheless, China continues its transition from “eating full” to “eating well.”  China’s fixed assets investment growth rate, an indicator measuring food manufacturing capacity growth, dropped from 37.5% in 2011 to 1.2% in 2017.  This is a proxy measure for new food processing investments, suggesting that processors have the necessary equipment, facilities, and technology in place, and that growth will now come from food processing innovation and consumption upgrading, not processing capacity expansion.

The shift to “eating well” is especially true for affluent middle class consumers, who are choosing snacks, condiments, beverages, and other processed foods perceived to be healthier than traditional options.  The food processing and retail sectors must balance mostly rural and older consumer demand for traditional snacks, instant noodles, and beverages, and the more affluent urban younger consumers demand for new products, imported ingredients, and healthier snacks and beverages.

Best Product Prospects:

Post reports that products present in the market which have good sales potential include:

Lentils and other Specialty Crops: Since gaining market access in 2016, U.S. lentils have expanded from zero to 10,599 metric tons (MT) in three years, accounting for 80% of China’s lentil imports.  Lentils are a good example of products that China used to produce in abundance, but due to increased feed and forage crop acreage, they are no longer produced to the same degree in favor of imports.

Dairy Ingredients: Whey, skim milk powder, cheese, and other dairy ingredients are in high demand, since China is not able to produce them in sufficient quantities and quality. U.S. high protein whey concentrate, which is used to fortify beverages and yogurts, are especially in demand due to lower assessed tariffs.  The competitiveness of most other U.S. dairy ingredients is currently restricted by high tariffs.

Fruit Ingredients: Frozen/dried fruits, such as blueberries, cranberries, and tart cherries have great potential due to the specific attributes of U.S. varieties.  While China can source fresh blueberries from Chile and Peru, U.S. blueberries have a higher sugar content and softer skin which are sought after by food processors, especially for use in beverages and yogurts.

Pork: African Swine Flu has taken a toll on China’s swine and pork production.  To cover an estimated domestic supply gap and ease consumer’s concerns, China is expected to increase pork imports by up to 33%, or 2 million MT, in 2019.  U.S. pork products face Chinese tariffs of up to 62%.  If tariffs are lowered, U.S. producers could significantly increase exports.

Specialty Crops: Traditionally, China produced many specialty grain and legumes, but due to structural changes favoring planting feed and forage crops, China’s strength in specialty crops has reduced significantly. If U.S. products can be granted access, these niche crops, such as garbanzo and millet, may find surprising demand by food processors unable to source better quality imports elsewhere.

 

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