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China's supermarkets present export
opportunity
By Fred Gale and
Thomas Reardon
The lightning-fast
emergence of supermarkets over the past decade may
be the final piece of the China market puzzle.
Rising incomes and an expanding urban middle class
are setting the stage for China's development as a
market for imported foods.
Until recently,
many exporters eyeing the Chinese market fled in
frustration after encountering a fragmented market
made up of thousands of mom-and-pop shops;
old-style, open-air markets; and labyrinthine,
antiquated wholesale and logistics systems. The
old marketing system, controlled by various
provincial and city marketing bureaus, consisted
of small, fragmented wholesale and retail segments
selling local produce; multiple layers of small
brokers, wholesalers, distributors and
government-licensed importers; and government-run
retail outlets.
The good news for food
suppliers is that "supermarketization" is
transforming China's food sector into a modern
retail system. Modern supermarkets, convenience
stores, hypermarkets and warehouse clubs - retail
formats nearly non-existent in China in the early
1990s - have now captured an estimated 30% of the
urban food market and are growing at rates of
30-40% annually.
Chinese supermarkets
skyrocketed from just one outlet in 1990 to
approximately 60,000 stores, with an estimated $71
billion in sales, by 2003, according to the
Chinese Chain Store and Franchise Association.
Growth in the industry that took several decades
in the United States and Europe has occurred in a
single decade in China. Supermarket sales in
Shanghai alone during 2003 were estimated at $5
billion, equivalent to half of Shanghai's retail
food sales.
Supplier
benefits
The new supermarket sector is
a boon to exporters for two reasons:
The way they sell to
consumers: Supermarkets, engaged in fierce
competition with other types of outlets for the
Chinese consumer's dollar, are eager to carry new
products to meet consumer demand for quality and
product diversity. Some advertise exotic products
to get customers in the door.
The way they buy from suppliers: Supermarket
chains employ centralized, high-volume
distribution systems that give exporters a larger
target with fewer distribution layers to navigate.
Procurement modernization is increasing the
advantage of suppliers that can deliver quality
products in a timely and price-competitive
fashion. These factors should give foreign food
suppliers a better chance to compete in the
Chinese marketplace.
Sources of
supermarket sector momentum
The sector
includes a number of different store formats:
small chain convenience stores selling primarily
canned goods and beverages and/or snack and
convenience foods; standard supermarkets;
hypermarkets that sell a full range of consumer
goods, from clothing and electronics to bicycles;
and large warehouse clubs. The large formats
account for the lion's share (95%) of sales in the
modern retail sector; convenience stores garner
only 5%. These market shares are expected to
continue for the foreseeable future.
Supermarkets began developing in the early
1990s in Shanghai and several other major cities,
where they were encouraged by local
governments.The largest Chinese supermarket chains
started out as government-operated department
stores and marketing bureaus in Shanghai.
Multinational chains from Europe, Japan, Hong Kong
and the United States provided a second major
impetus in the development of the sector in the
mid- to late 1990s in the most prosperous coastal
cities, including Shanghai, Guangzhou and
Shenzhen. Supermarket development took off in
other large cities such as Beijing in the late
1990s.
Although
about 80% of China's supermarkets are in the
eastern region, all major chains have aggressive
expansion plans targeting medium and small cities,
central and western provinces, and rural areas.
And while multinational companies at present have
about 40% of the sector's sales, domestic
companies such as Lianhua and Hualian have
developed quickly.
Local governments are
actively encouraging the transition to
supermarkets by shutting down wet markets
(traditional street markets) and in some cases
converting them into supermarkets. In 2004,
China's Ministry of Commerce announced a five-year
plan to develop a rural retail network of chain
supermarkets and express stores in small towns,
pushing the supermarket format into China's vast
rural hinterland.
Supermarkets displace
traditional markets
Supermarkets enjoyed
initial success with packaged foods and processed
food staples like rice, flour and cooking oil.
Supermarkets and convenience stores have also
played a key role in boosting consumption of milk
products, other beverages, snacks and convenience
foods. Chinese consumers have traditionally bought
most of their fresh foods - vegetables, fruits,
and meats - from wet markets. Vendors in wet
markets sell generic produce grown on local farms
or purchased from wholesale markets. Before the
supermarket explosion, they usually purchased
canned and packaged foods from small mom-and-pop
stores, roadside kiosks or the food product
sections of government department stores.
Supermarkets are rapidly gaining a
competitive edge over these traditional retailers.
They offer a cleaner, more comfortable and
convenient shopping environment. Quality is
generally better and more standardized. In the
case of packaged foods, shoppers do not have to
haggle over prices, and they can trust product
measures and units. Supermarkets offer a wider
array of products than do traditional shops.
Refrigerated, frozen and ready-to-eat foods are
available; almost 90% of urban Chinese households
now have home refrigerators. However, many
shoppers continue to purchase fresh produce from
wet markets while making weekend trips to the
supermarket for other items. They prefer the
freshness, low prices and personal interaction at
wet markets for fresh fruits and vegetables.
Nevertheless, supermarkets are quickly
taking over the fresh produce segment of the
market as well, by matching wet market prices and
offering superior quality and sanitation. An
important measure of their initial success is that
Chinese supermarkets now sell roughly $4 billion
worth of fruits and vegetables to Chinese
consumers - about twice China's exports in that
category to the rest of the world. That is, the
internal "supermarket market" is already large and
dynamic, rivaling exports from China, and a
dynamic market for imports to China.
Imports arrive
Imported foods,
until recently a rarity in China, are now widely
available in Chinese supermarkets. Washington
apples, California oranges and wines, lychees from
Thailand, butter from New Zealand and cheeses from
France are commonly found on supermarket shelves.
Supermarkets feature many international food
brands, such as Kellogg's cereals, Hormel sausages
and hot dogs, Lay's potato chips, Nestle and
Danone milk products, McCormick jellies and Skippy
peanut butter, many of which are manufactured
locally, albeit sometimes with imported
ingredients.
China's growing middle class
(estimated at 200-300 million persons, out of a
population of 1.3 billion) has the purchasing
power to afford imported foods, but this crucial
market segment has been kept largely out of the
reach of food exporters by the combination of
China's antiquated marketing system and high trade
barriers. But China cut tariffs, import licensing
requirements and state trading monopolies as a
result of its entry into the WTO (World Trade
Organization) in 2001. Lower trade barriers are a
first step to opening the Chinese market at its
borders and ports, but a competitive, efficient
domestic marketing system is necessary to get
imported products from entry points to the Chinese
consumer. That's where supermarkets come in.
Supermarkets are bringing world-class
procurement systems into China, giving potential
exporters a bigger target to aim for and knitting
together market segments fragmented by geography
and other factors. Supermarket chains are
establishing large, centralized distribution
centers that draw products from throughout China,
and from elsewhere in Asia, Oceania, the Americas
and Europe. Multinational logistics firms are now
operating in China, whose WTO commitments mandate
that the country open its market to foreign
companies engaged in wholesaling and distribution
in 2004.
The integration of China into
multinational retail chains may open more avenues
to its market. The world's largest food retail
chains - such as Wal-Mart, Carrefour, Metro and
Tesco - are now buying from and selling to China.
Wal-Mart's procurements from China are already so
huge that the amount exceeds the gross national
product of many countries, and Wal-Mart's sales in
China are increasing as well.
The largest
Chinese food retailer, Lianhua, has started to
open stores in Europe with the intent of
developing into a retailer that can buy and sell
in both domestic and foreign markets. Suppliers
able to establish themselves in the procurement
system of a multinational chain may have easier
access to the China market.
(Reprinted
with permission from AgExporter magazine, a
publication of the Foreign Agricultural Service of
the US Department of Agriculture.)
Fred Gale (fgale@ers.usda.gov)
is a senior economist in the Market and Trade
Economics Division of the USDA's Economic Research
Service. Thomas Reardon (reardon@msu.edu)
is a professor at Michigan State
University. |
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