China Country Profile

China

According to Euromonitor, China is growing more rapidly than any other major economy, although the pace in 2014 was the slowest in more than 20 years.  Real Gross Domestic Product (GDP) was forecast to grow by 7.1% in 2015, down from 7.3% in 2014.  Domestic demand and exports are the main drivers while investment and a cooling housing market are drags.  China’s budget deficit will probably rise 2015.  Much of any future increase in Chinese output will have to come from greater productivity rather than labor.  Beijing appears to be making progress in its bid to rebalance the economy towards domestic consumption.

According to a recent study by the U.S. Federal Reserve, China’s trend rate of growth could drop to around 6.5% by 2030.  With 80% of the working age population already employed, there is limited room for employment growth to make a significant contribution to growth in the medium term.  Thus as a result, much of any increase in Chinese output will have to come from greater productivity – a process that is slow and arduous.  Chinese policy makers appear to be content with the economy’s long-term performance which should facilitate the transition to a lower but more sustainable growth path.  However, their efforts to strike an effective balance between growth and economic reform create a great deal of uncertainty.

In 2014, China’s population was almost 1.4 billion – an increase of more than 385 million since 1980.  Population, however, is growing at a decelerating pace and should reach its peak in less than two decades.  China’s stringent methods of population control have been relaxed as the growth of population slows.  The fertility rate is presently 1.3 births per female (below replacement level).  It is expected to remain at that level throughout the remainder of this decade.  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.

The median age in China is steadily rising.  In 2014, it was 40.8 years – 18.4 years greater than the figure for 1980.  In fact, population ageing is occurring more quickly in China than in most other countries.  In 2014, the number of those over 65 years had reached 158.6 million.  This figure represented 11.7% of total population, up from just 4.7% in 1980.  In 2020, a projected 15.9% of all Chinese will be over 65 years.

It is clear China’s increased wealth has led to an increase in consumption of imported food and agricultural products.  Chinese imports of U.S. food and agricultural products increased from US$13.1 billion in 2009 to US$24.5 billion in 2014.  That represented an increase of 87% and China remains the largest export market for agricultural products.

In 2014, U.S. exports of consumer oriented food products to China decreased 19% to US$2.4 billion.  China now ranks as the 6th largest market for consumer ready food products from the U.S.  Top processed food products exported to China in 2013 included cooked and prepared shellfish; whey protein; concentrated milk; other processed food; ingredients and beverage bases; other prepared/preserved meats; soybean oil; French fries; lactose/syrup; wine; cheese; baking inputs; mixes and dough; and chocolate.

China has attracted a growing level of interest from other countries, however, and has signed or is negotiating bilateral trade pacts with many of its neighbors.  Third country competition comes in two distinct areas: commodity-type products such as frozen meat, poultry, seafood and fresh fruit, and western-style niche products such as canned and prepared foods, ethnic cuisines and ingredients.  Competition in the fresh and frozen meat, fruit and vegetables arena, as well as dairy, comes primarily from Pacific Rim neighbors, including Thailand, New Zealand, Australia, Canada and Chile, as well as South Africa and Brazil.  Competition for western-style prepared foods is much more global, with competitors playing to their strengths in individual products such as olive oil, wine, pasta and pasta sauces. 

Retail Sector:

According to Euromonitor, retail sales in the packaged food market in China had been estimated to reach US$227.9 billion in 2014.  That represents a growth rate of 75% or US$97.7 billion since 2009.  The forecast for growth in this market is outstanding.  By the year 2019, the retail sales in the packaged food market in China is expected to reach nearly US$328 billion, a growth rate of 44% or US$100 billion.  High growth categories in the forecast include baby food, meal replacement, pasta, snack bars, dairy, chilled processed food, soup, frozen processed food, and bakery.  

National Perspective:

USDA’s Agricultural Trade Office, ATO, in Chengdu, hereinafter referred to as “Post”, reports that China has one of the most lucrative, dynamic, and rapidly growing retail markets in the world, which continues to grow at a double-digit pace despite the GDP slowdown and per capita urban household disposable incomes which grew 9% in 2013.  China’s retail growth is underpinned by not only rises to urban household incomes but also by the growing number of urban households themselves.  That said, where and how Chinese shop is undergoing a significant transition.

Important changes include the fact that emerging city market consumers are becoming ever-more important with increasing buying power and access to imported foods.  Traditional wet markets and small, independent store fronts are on the decline, while hypermarkets and supermarkets continue to grow in the aggregate, albeit cautiously and with repositioning, to counter increasing costs and increasing competition.  Ecommerce, convenience stores, and specialty/boutiques are on the rise.  Lastly, mobile and cross-border eCommerce are tidal wave trends not to be ignored.

Post adds that China is the world’s second largest retail market of all merchandise after the U.S.  Accounting for enterprises with annual sales over US$80,000, China’s total retail sales in 2013 from integrated supermarkets was US$155 billion while specialty retail of food, beverage, and tobacco totaled US$44 billion.  Both grew 12% over 2012.  The strongest driver of China’s retail growth is urbanization, coupled by rising disposable incomes.  Despite a relatively stable total population at 1.4 billion, urban populations are steadily increasing 3% annually, which ultimately added almost 20 million urbanites in 2013.  There remains significant room for growth as urban dwellers still represent just 54% of the total population.  

While the traditional lines of market segmentation in retail are becoming increasingly blurred, most entities can still be categorized as hypermarkets, supermarkets, convenience stores, specialty/boutique stores, wet markets, and eCommerce.  In earlier years, most imported products found their greatest success in high-end “lifestyle” supermarkets within first and second-tier cities.  While this segment remains important, eCommerce is the fastest growing and now most important segment to market high-quality and imported food and beverages, especially among the young, affluent consumers throughout China.  Growing opportunities for imported products also exist in fast expanding convenience chains and specialty/boutique stores.  Meanwhile, among brick-and-mortar alternatives, hypermarkets continue to provide the greatest opportunities for national coverage while also providing good reach into China’s emerging middle class in 3rd and 4th tier city markets.

Regional Overview:  North China

Wu-Mart is a major retail chain based in Beijing operating more than 700 stores throughout China including hypermarkets, supermarkets, and convenience stores and targeting middle class as well as lower-end consumers. The retail outlets are mainly located in Beijing, Tianjin, and Zhejiang and Ningxia Provinces.  According to the company’s financial reports total revenues were up more than 10.3% at about US$5 billion in 2013.  Wu-Mart entered into a shared purchasing agreement with Lotus in October 2013, and acquired Lotus’s retail businesses in East and North China.  Wu-Mart operates its own central distribution center in Beijing.

AEON-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 linked shopping and leisure destination by offering supermarket, restaurants, coffee shops, etc., all located under one roof.  Sales reached over US$400 million in 2013 from the operation of 9 outlets in Shandong Province (4 in Qingdao and 1 each in Yantai, Weifang, Weihai, Zibo and Jining).  In addition, the retailer has increased market share by expanding into the convenience store market segment.  The company opened its first convenience store, MINISTOP, in Qingdao in July 2010 and now operates 52 MINSTOP shops in Qingdao. The rate of expansion is much lower than the company’s previous plan.  The high cost of commercial retail space rents is a primary factor impeding the expansion of new shops.

Jenny Lou’s is a retailer of imported food products for expatriates, upper-middle income Chinese consumers and others who have lived or studied abroad.  The company established in 1995 and then split into two companies in 2011 – Jenny Lou’s and Jenny’s Store. Currently, Jenny Lou’s has 11 stores and Jenny’s Store has 8 stores in Beijing mostly located in high-income and/or upscale communities, often near diplomatic compounds and missions.  More than 90% of the products offered in the small supermarkets are imported with about 50% from the U.S.  In particular breakfast cereals, seasonings, dairy products and wine make up the focus of their offerings. In 2013 Jenny Lou’s sales revenue grew about 20%, reaching more than US$90 million.  Jenny Lou’s set up its own trading company, Beijing Guo Rui Wo De Trading, in 2012.  The company sources over 1,000 SKUs in imported products from the U.S. for its own stores, and distributes products to other retailers and distributors as well.

Beijing Hua Lian High-End Supermarket (BHG) is under the Hua Lian Group targeting elite Chinese and expatriate consumers in Beijing.  Over the past ten years the company expanded rapidly in Beijing and now operates 17 high-end stores, up from 5 in 2010. BHG accelerated its expansion of emerging city markets during the past four years opening its first store outside Beijing in Huizhou in Guangzhou Province in June 2011. The company currently operates 8 stores outside Beijing, and BHG is developing distribution centers to service stores in China’s emerging urban markets.  

BHG stores in Beijing are located in high-income areas or near diplomatic compounds with most shopper’s upper-middle class Chinese consumers rather than expatriates.  A wide range and selection of international products is offered with over 25% of the products from the U.S.  BHG sales data show they sold over US$20 million and 4,000 SKU’s of U.S. products in 2013 in Beijing.  Snack foods, fresh and dried fruit and nuts, and soft drinks are the most popular products.  In addition, BHG set up a direct sourcing office in Canada in 2013 to source imported products from Canada and the U.S. including private label and other fast-moving and popular consumer goods.

South China

The South includes five provinces. Guangdong, Hunan and Fujian are the leading retail development and consumption centers, while Guangxi and Hainan have been catching up in recent years.  On average in South China, food accounts for 35% of the total retail figure. The emerging “middle-class” living in urban areas are paying more attention on healthy lifestyles and their spending power has increased.  With increasing disposable incomes, the consumers’ capacity to buy higher value goods and services means imported products have great potential in the future.  Promising U.S. food categories in the South include frozen meat, seafood, fresh fruits, dried fruits, nuts, crackers, juices, wines, fluid milk, other dairy products, baking ingredients, and snacks.  While traditional supermarkets and hypermarkets had to face new challenges from the on-line business channels, convenience stores and specialty stores have gaining ground in South China, especially in Guangdong province.  

Wal-Mart (China), currently with over 400 stores nationwide, they are operating under various formats including supercenters (hyper market format), Sam’s Club (membership retailer), and Trust Mart (smaller store format).  In the past two years, Wal-Mart faced several management challenges such as frequent top management personnel changes and an expansion slow-down.  Although Wal-Mart opened around 30 new stores, this is relatively slow pace when compared with previous 40 plus new store which opened in 2011.  This was due in part to having to close down several stores with lower profit margins due to poor sales performances.  

For example, in Shenzhen, three “smart-choice” (Community store format) outlets and one of the first supercenters opened in China were all closed in 2012.  The Wal-Mart “Everyday Low Price” strategy seems to be challenged by innovation and value-added services.  Demand for quality food and new varieties are growing.  According to industry insiders, there are plans to close down over 100 Wal-Mart outlets that are underperforming by 2015, although Wal-Mart claims the chain will open 30 new outlets and upgrade another 55 outlets this year.  According to some traders who have been in business with Wal-Mart, imported fresh fruit, for example, will be strengthened in Wal-Mart superstores to attract repeat customers.

In addition to Wal-Mart supercenters, Sam’s Club is another Wal-Mart format targeting middle class families and small businesses.  Sam’s Club has an entirely independent and separate purchasing division and operations division from Wal-Mart. Selected brands in larger packages have made Sam’s Club a unique place to find family-size imported foods.  The average per ticket sale in Sam’s Club is much higher (on average around 30% higher) than that of conventional supermarket competitors. Starting from April 2013, Sam’s Club’s online store (www.samsclub.com) started providing chilled and frozen foods delivery service in Shenzhen, Guangzhou, Shanghai, and Beijing.

By mid-2014, there were a total of 4,425 outlets under CR-Vanguard’s (CR-V) brand.  Last year alone, 782 outlets were opened, including 82 hypermarkets with sales floor space of 8,000-15,000 square meters.  The acquisition of Tesco China last year encouraged CR-V to launch its new online business model recently.  Under the umbrella of CRV Corporation, Olé and BLT target upper-middle income shoppers and white-collar workers.  These supermarkets are usually located inside fancy shopping malls.  The stores have been successful at introducing a wide assortment of imported food items such as cheeses, chocolates, coffee, wine, liquor, biscuits, and fresh fruits, albeit at higher prices.

The Japanese retail giant AEON has various retail formats in China, previously known as Jusco.  So far, in China there are six separate regional offices including: Shenzhen, Guangzhou, Qingdao, Beijing and newly opened offices in Suzhou and Wuhan.  Each has separate and independent purchasing divisions.  In March 2013, all stores were renamed AEON as part of the chain’s new strategy.  It is expected that the re-organization of the renamed AEON group will bring a brand new image to its consumers-offering better service and a standardized procedure to its suppliers.

7-Eleven is a 24hour business model that made 7-Eleven a pioneer in Guangdong’s convenience store sector.  It has over 800 outlets concentrated in six cities including Guangzhou, Shenzhen and neighboring cities in the Pearl River Delta like Foshan, Dongguan, Zhongshan and Zhuhai.  The chain targets young and white collar customers.  Recently, 7-Eleven opened the door to franchising.  With its small sales floor (only 200 to 300 square meters), small packaged imported chocolates, candies, and biscuits are often available in store.  It is also noted that some stores have displayed imported drinks and wine for sales.  

Southwest China

Southwest consists of Sichuan, Yunnan, and Guizhou Provinces, the Chongqing Municipality, and the Tibet Autonomous Region.  The region is also home to an above-average consumer of food and beverages as the population choses to spend a large portion of their disposable income in this category.  Consumer preferences for imported foodstuffs are similar as other parts of China.  Imported products, especially those from developed countries, provide the consumer innate assurances of safety and quality as well as the sense of an elevated lifestyle.

Southwest China’s major urban centers (in ranked order of importance) are Chengdu, Chongqing, Kunming, and Guiyang, all of which are considered second-tier cities and offer reasonable access to imported retail food stuffs. These cities also serve as distribution hubs for imported products, in their respective provinces.  In recent years, improved living standards have resulted in imported products beginning to penetrate deeper into Southwest China’s 3rd and 4th tier cities, where a significant number of local retailers also now have devoted imported food sections.  

Watson Group is Hong Kong-based retailer with a strong portfolio in Chengdu, including: ParknShop, Treat, and Great Supermarkets.  Treat & Great have a large share of imported food products (about 70%) and Great is the company’s flagship store in Mainland China.  Watson personal care convenience stores are numerous in Chengdu and carter the mid- to high-end consumers and feature a good selection of imported health products, such as dried fruits and nuts.  CR Vanguard continues to expand operations under its three brands: CR Vanguard Hypermarket, BLT Premium Supermarket, and Ole’ Premium Supermarket.  The latest Ole’ Premium Supermarket just opened in Taiguli, the most luxurious shopping center in Chengdu, comparable to Beijing’s Sanlitun and Shanghai’s Xintiandi neighborhoods.

Best Prospects:

Consumer oriented foods with the highest potential in the Chinese market include nuts, dried fruit, seafood, poultry meat, frozen vegetables (especially sweet corn), baby food, dairy products, baking ingredients, bread bases, cereals, frozen potato products, fresh fruit, and premium ice cream.  Products not present in significant quantities which have good sales potential include processed dried fruit (blueberries and cranberries), Mexican and Indian food, ready to cook and ready to eat foods, natural and organic foods (niche market) and functional foods.

Food Service Sector:

USDA’s Agricultural Trade Office, ATO, in Guangzhou, hereinafter referred to as “Post” reports that China’s economic slowdown has shown its negative impact on the expansion of food service industry.  Food safety scandals continued to be exposed, and in return, the scared consumers reduced their dining-out frequency.  In addition, the government policy of reducing public funds on lavish expenditures deeply impacted high-end hotels and restaurants.  The industry had adopted various strategies to overcome the difficulties. While first-tier cities remain the strongest centers of consumption and spending in the Hotel, Restaurant and Institutional Sector (HRI), the industry will continue to grow substantially in Emerging City Markets.

China’s HRI sector recorded US$426.15 billion of sales revenues in 2013, a 9% increase from previous year.  However, it’s the lowest growth rate in the past 20 some years, and the growth rate was 4.6% lower than previous year.  From the end of 2012, the Chinese Central Government issued relevant policies, such as restrictions on expenditures for official banquets as well as anti-waste and anti-extravagance measures.  High-end restaurants have been negatively impacted by the new measures and they are facing huge losses.  In 2013, high-end hotels and restaurants had US$136.35 billion in sales revenues, marking the first time in the past decade with a negative growth rate (-1.8%).  Many high-value food ingredients, raw materials and alcoholic beverages sales have dropped significantly since then.

In 2013, the Top 100 Catering Companies generated US$31.85 billion in sales revenues, a 5.7% increase from the previous year.  Among all sub-sectors, Quick Service Restaurants (QSR), Hot Pot Restaurants and Formal Chinese Restaurants accounted for 85.9% of total revenues of the Top 100 Catering Companies.  In terms of growth rate, Hot Pot restaurants, Western style restaurants and Group Catering Company recorded the top three positions, while hotels dropped 8%.

Although tourism has increased substantially, most of the HRI market is dependent on Chinese customers.  However, in the years to come, the situation is expected to change. Accession to the World Trade Organization (WTO) benefited Chinese exporters while speeding the opening of the economy to foreign trade, investment, and travel.  Current predictions estimate that by 2020, China will be the most popular tourist destination in the world with over 130 million international visitors expected annually.  This trend is particularly noteworthy given that China’s international tourism industry only began around 30 years ago.  In just more than two decades after China opened its boarders to global visitors, 22.21 million foreign visitors and tourists (excluding Hong Kong, Macau and Taiwan) collectively spent nearly US$30 billion.

Full-service restaurants remain the dominant channel for dining-out option in China. For traditional Chinese meals, spacious and comfortable seating facilitates relaxation and socializing.  Fast food has become more popular due to ever-faster modern lifestyles.  The increasing numbers of urban professionals demanding fast and convenient meal options during the weekdays have contributed most to the development of the fast food industry in China.

For coffee shops, the atmosphere and free WIFI are drawing a growing number of Chinese consumers.  For example, Starbucks has over 1,000 stores in China and is aiming for 1,500 stores by the end of 2015.  Costa Coffee opened its first store in 2008, and is now operating more than 350 stores.  McDonald’s modified its business strategy in China and brought in McCafe in 2010, now operating about 700 McCafe corners in Mainland China. Other coffee chains, including Korean Coffee Bean & Tea Leaf, Coffee Bene and Hong Kong Pacific Coffee have also sped up their plans to expand in China.

Growing internet usage opens additional HRI opportunities by giving restaurants a new way to reach different prospects, such as e-menus, e-ordering, on-line reservations and e-payments.  Group purchases of catering began in 2010 and have become prevalent, largely by allowing consumers to experience high-end restaurants normally beyond their budget. It is likely that more catering operators will attempt to employ discounts for group purchases as a new marketing tactic rather than using a traditional thematic advertisement to attract potential customers.  Food service operators have offered a variety of menu combinations with discounted prices, and consumers may purchase them with their preferred ecommerce platforms.  Currently, there are many group purchase and B-to-C buying websites, such as Dianping.com, Meituan.com, Nuomi.com, etc.

The health and wellness concept emerged against a background of higher living standards and growing disposable income, which further stimulated Chinese consumers’ willingness to pursue healthier food choices.  More and more consumers are aware of the negative impact of excessive sugar, high fat and high calorie intakes.  All these factors have pushed the food service providers to engage in different ways to better cater to their needs.

Best Prospects:

Interviews with HRI food service professionals repeatedly confirm that U.S. food exporters should select top quality products for export to China.  U.S. foods benefit from expectations of high quality, attractive appearance, convenient packaging and food safety. On the other hand, it is difficult for most U.S. food products to compete with Chinese domestic products on price, particularly for those foods in demand by the HRI market. Instead, suppliers should consider targeting niche as well as regional markets with top-quality products that are unique, healthy, and nutritious.

China’s economic development continues and interest in processed food grows as the secondary production of goods, such as meat and fish, may well become attractive to manufacturers. Agricultural sub-sectors may also manage to profit from foreign direct investment.  The secondary stage of processing such goods, for example, sliced meats, prepared chicken, etc., has had a huge impact on HRI sector sales.  Also, ready-to-use and value-added products are increasingly in demand, as well as ready-made, pre-cooked and portion-controlled sauces, soups, pizzas, vegetables, fish fillets, meat and meat products, and frozen dough.

Food Processing Sector:

Over the past three years, The Agricultural Trade Office, ATO, in Beijing, hereinafter referred to as “Post” has targeted China’s fast-growing processed food sector as a market for U.S. food ingredients.  The underlying strategy is simple.  Food manufacturing is a growing industry, as Chinese consumers demand increasing quantities of processed and time-saving foods.  The Chinese industry has transformed over the past decade from one dominated by small-scale producers of generic products, to massive, nationwide brands with an incentive to innovate and a reputation to protect.  While imported products with foreign tastes are growing in popularity, they will continue to be primarily a niche market.  The best means to address the larger, daily-use market is to let Chinese manufacturers adapt U.S. ingredients to Chinese tastes, packaging sizes, production standards, labeling and cultural practices.

The “Food Manufacturing Initiative” sought to achieve this by first identifying the largest players in China’s food manufacturing sector, then providing knowledge of the products available and their potential uses through a combination of seminars at major trade events in China, and reverse missions that included visits to ingredients shows, but also food development programs, to see not just what ingredients are available, but how they can be used in innovative ways.  The objective was not to inspire the Chinese processors to use U.S. ingredients to make Chinese adaptations of western foods, but rather to create entirely different products based on Chinese consumers’ tastes.

The initiative targeted manufacturers of frozen dumplings, bean noodles, instant noodles, dry noodles, ice cream and confectionery.  One early success was the placement of U.S. frozen blueberries into sweet dumplings. Since then, Post has conducted a seminar series on frozen food, instant noodles and applications for dry beans, and trade missions focused on noodles and dry beans.  A measure of this project’s success is acceptance by industry and other partners.  

Buy-in from Chinese industry has also been strong: previous participants in the program now serve as speakers, describing their experience in incorporating U.S. ingredients into their products to other Chinese food manufacturers.  The China Institute for Food Science and Technology has been an unflagging supporter, and state importer The China Chamber of Commerce of Foodstuffs and Native Product, (CFNA), and most recently the Bean Products Manufacturing Association, have all supported the initiative.  Post is now being approached by Chinese manufacturers to help them organize self-funded visits to the U.S. to learn more about U.S. ingredients and applications.

Post adds that because this is a very long-term effort focused at an entire sector, specific sales are difficult to identify.  However, U.S. exports of peas, buckwheat and flax to China, all products targeted by the initiative, hit record levels due to rising demand. U.S. exports of peas alone (used to make fensi, a clear noodle) rose from $10 million in 2012 to over US$24 million by November 2013, as the number of fensi manufacturers doubled recently.  2014 U.S. exports of peas to China totaled US$29.1 million.

Best Prospects:

Post advises that generally speaking, prospects of products are determined by a couple of factors.  A combination of product uniqueness, comparative price advantage, and marketing efforts are the most decisive factors and largely determine if a product would have a good prospect in China.  Based on those assumptions, almonds, walnuts (including the black variety), and meats (pork) and by products, poultry and by products, surimi and seafood wastes, starch, fruits and wheat flour fit into the matrix. 

In general, China is a huge market and demands all kinds of food ingredients.  Products either not produced domestically in China or enjoying a potential price advantage are more than welcome and opportunities can appear at any time.  Products that are declining in production in China while the demand is increasing are also of high potential, as well as those in which price gaps are narrowing between the U.S. and China.



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