Wouldn't t it be great to be a supermarket retailer in an economy with a 17% annual increase in consumer spending on food between 2004 and 2008? Welcome to China, my beleaguered American friends, where the hypermarket rules.
The USDA FAS has just published a killer 49-page report on China s retail market. While the market intelligence may not be transferrable to the American market, the report gives a plethora of observations about current conditions. Imported fresh fruit is a category that is benefitting from China s expansion, though traders say the quality of Chinese fruits and vegetables is increasing rapidly.
Here are some excerpts from the report:
China - RETAIL FOOD SECTOR REPORT
Spending on Food Surges While Distribution Remains a Challenge
Report Highlights: In the four years ending in 2008, urban Chinese consumers increased their spending on food by an average of 17% per year. This is significantly faster than the impressive increase in the size of China's economy. The excellent quality and safety reputation of American food products has allowed U.S. exporters to benefit from this growth. While the Chinese economy has slowed this year, it is still growing faster than any other major economy. This fact, and the Chinese customers taste for quality products, makes the Chinese market very attractive to many U.S. producers of food products. As Chinese consumers get richer, they are spending more money to diversify their diets.
Consumption of meats has been increasing more rapidly than overall food expenditures and consumption of western style products is also growing. Rapid economic growth and a stronger Chinese yuan has caused the total U.S. dollar sales value of food and beverages to rise by 26.2% to $132 billion in 2008. Sales of most imported products have found their greatest success in hypermarkets and in specialty supermarkets. Some products, such as fresh fruit, frozen vegetables and nuts, have much deeper penetration, and some supermarkets and convenience stores may be becoming more interested in imported 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.
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 and Shanghai.
Other major cities along the eastern seaboard, beyond the reach of the =big three, generally have good logistics infrastructure, but most still rely on one of the =big three as an entry point for imports. Farther inland, there are a number of large cities with good market potential.
Logistics can be problematic, but improvements in the national highway system have made trucking direct from Shanghai or Guangzhou far easier than it was just a few years ago. As a result, high value and temperature sensitive products shipped by truck directly from the importer to a local distributor do surprisingly well.
Currently, many secondary cities have only a single distributor for imports, particularly for high-value or temperature-sensitive products. 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 smaller emerging cities are still relatively small consumer markets compared to Shanghai, Beijing, and Guangzhou, they are starting to grow faster than the major markets and many would be considered large cities in countries other than China.
Consumer Spending Patterns
As Chinese get richer they tend to spend much more money eating out and to diversify their diets. Consumption of meats has been increasing more rapidly than overall food expenditures, and consumption of western style products is also growing rapidly. Strong and continuous economic growth caused urban Chinese to increase their spending on food by almost 17% per year on average between 2004 and 2008 when measured in U.S. dollars. Expenditures on food almost doubled over that time period. While the growth rate has almost certainly been a little lower in 2009, it is probably still impressive.
While 2008 sales data for the major retailers is available, it is of limited use when discussing market segments. This is because retailers in China often cross several market segments. Some domestic players have hypermarkets, supermarkets, convenience stores, and specialty stores. However, we can say that most imported products have found their greatest success in the hypermarkets and in specialty supermarkets. Some products, such as fruits and snacks, have much deeper penetration, and some supermarkets and convenience stores may be becoming more interested in imported products.
Hypermarkets
The hypermarket format is much more concentrated than other grocery channels. While some domestic retailers (including CRV and Lianhua) have a significant presence, this format is dominated by foreign operators including Carrefour, Wal-Mart, Metro, 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.
Multinational chains such as Carrefour and Wal-Mart 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. 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 imported products and better management and organizing skills.
Most are experienced in promoting new products, and 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. For the time being, hypermarkets are still mostly limited in first and second-tier cities because of lower rural incomes.
New Trends in Retail
Direct sourcing of food and agricultural products from farm cooperatives has been adopted by most retailers in Shanghai and is growing elsewhere. This allows retailers to address consumers concerns about food safety, reduce cost, and possibly improve product quality. On the imported product side, Wal-Mart started to directly source and import U.S. cherries this year. Neighborhood Supermarkets were opened in Shanghai by Carrefour and Tesco this year. These outlets offer low prices and fresh food as their selling points.
The prices in Tesco Express are as competitive as in Tesco Hymall (hypermarket). Seventy to eighty percent of the products in Carrefour s trial express neighborhood outlet are also fresh and live food. Making use of Carrefour s purchase and logistics system, its operating cost is much lower. Fresh and live products have become hypermarket s core products and are increasingly important to their sales.
These express outlets may turn out to be a way for supermarket to survive the fierce competition from hypermarkets and convenience stores. Such outlets can better cater to consumers daily needs due to their convenient location. Shanghai Lotus opened a neighborhood hypermarket in 2008 which also has fresh food as its core offer. Private label products are new development in China.
Each hypermarket, supermarket and convenience store chain in China has a unique private label offer: Carrefour, Great Value, IKA, Tesco and Lianhua are private label lines from leading players. In terms of imports, more private label products are coming on the market here. Metro has moved ahead of the pack in this regard - it imports salmon from Norway by itself, and then packs it and sells in under its private label brand IKA. Carrefour s Dia discount stores carry many of the same staple goods as supermarkets at discounts, but do not carry fresh products. Import penetration is also very low.
The USDA FAS has just published a killer 49-page report on China s retail market. While the market intelligence may not be transferrable to the American market, the report gives a plethora of observations about current conditions. Imported fresh fruit is a category that is benefitting from China s expansion, though traders say the quality of Chinese fruits and vegetables is increasing rapidly.
Here are some excerpts from the report:
China - RETAIL FOOD SECTOR REPORT
Spending on Food Surges While Distribution Remains a Challenge
Report Highlights: In the four years ending in 2008, urban Chinese consumers increased their spending on food by an average of 17% per year. This is significantly faster than the impressive increase in the size of China's economy. The excellent quality and safety reputation of American food products has allowed U.S. exporters to benefit from this growth. While the Chinese economy has slowed this year, it is still growing faster than any other major economy. This fact, and the Chinese customers taste for quality products, makes the Chinese market very attractive to many U.S. producers of food products. As Chinese consumers get richer, they are spending more money to diversify their diets.
Consumption of meats has been increasing more rapidly than overall food expenditures and consumption of western style products is also growing. Rapid economic growth and a stronger Chinese yuan has caused the total U.S. dollar sales value of food and beverages to rise by 26.2% to $132 billion in 2008. Sales of most imported products have found their greatest success in hypermarkets and in specialty supermarkets. Some products, such as fresh fruit, frozen vegetables and nuts, have much deeper penetration, and some supermarkets and convenience stores may be becoming more interested in imported 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.
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 and Shanghai.
Other major cities along the eastern seaboard, beyond the reach of the =big three, generally have good logistics infrastructure, but most still rely on one of the =big three as an entry point for imports. Farther inland, there are a number of large cities with good market potential.
Logistics can be problematic, but improvements in the national highway system have made trucking direct from Shanghai or Guangzhou far easier than it was just a few years ago. As a result, high value and temperature sensitive products shipped by truck directly from the importer to a local distributor do surprisingly well.
Currently, many secondary cities have only a single distributor for imports, particularly for high-value or temperature-sensitive products. 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 smaller emerging cities are still relatively small consumer markets compared to Shanghai, Beijing, and Guangzhou, they are starting to grow faster than the major markets and many would be considered large cities in countries other than China.
Consumer Spending Patterns
As Chinese get richer they tend to spend much more money eating out and to diversify their diets. Consumption of meats has been increasing more rapidly than overall food expenditures, and consumption of western style products is also growing rapidly. Strong and continuous economic growth caused urban Chinese to increase their spending on food by almost 17% per year on average between 2004 and 2008 when measured in U.S. dollars. Expenditures on food almost doubled over that time period. While the growth rate has almost certainly been a little lower in 2009, it is probably still impressive.
While 2008 sales data for the major retailers is available, it is of limited use when discussing market segments. This is because retailers in China often cross several market segments. Some domestic players have hypermarkets, supermarkets, convenience stores, and specialty stores. However, we can say that most imported products have found their greatest success in the hypermarkets and in specialty supermarkets. Some products, such as fruits and snacks, have much deeper penetration, and some supermarkets and convenience stores may be becoming more interested in imported products.
Hypermarkets
The hypermarket format is much more concentrated than other grocery channels. While some domestic retailers (including CRV and Lianhua) have a significant presence, this format is dominated by foreign operators including Carrefour, Wal-Mart, Metro, 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.
Multinational chains such as Carrefour and Wal-Mart 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. 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 imported products and better management and organizing skills.
Most are experienced in promoting new products, and 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. For the time being, hypermarkets are still mostly limited in first and second-tier cities because of lower rural incomes.
New Trends in Retail
Direct sourcing of food and agricultural products from farm cooperatives has been adopted by most retailers in Shanghai and is growing elsewhere. This allows retailers to address consumers concerns about food safety, reduce cost, and possibly improve product quality. On the imported product side, Wal-Mart started to directly source and import U.S. cherries this year. Neighborhood Supermarkets were opened in Shanghai by Carrefour and Tesco this year. These outlets offer low prices and fresh food as their selling points.
The prices in Tesco Express are as competitive as in Tesco Hymall (hypermarket). Seventy to eighty percent of the products in Carrefour s trial express neighborhood outlet are also fresh and live food. Making use of Carrefour s purchase and logistics system, its operating cost is much lower. Fresh and live products have become hypermarket s core products and are increasingly important to their sales.
These express outlets may turn out to be a way for supermarket to survive the fierce competition from hypermarkets and convenience stores. Such outlets can better cater to consumers daily needs due to their convenient location. Shanghai Lotus opened a neighborhood hypermarket in 2008 which also has fresh food as its core offer. Private label products are new development in China.
Each hypermarket, supermarket and convenience store chain in China has a unique private label offer: Carrefour, Great Value, IKA, Tesco and Lianhua are private label lines from leading players. In terms of imports, more private label products are coming on the market here. Metro has moved ahead of the pack in this regard - it imports salmon from Norway by itself, and then packs it and sells in under its private label brand IKA. Carrefour s Dia discount stores carry many of the same staple goods as supermarkets at discounts, but do not carry fresh products. Import penetration is also very low.
