International

Markets
Bureau

MARKET ANALYSIS REPORT | APRIL 2010

Packaged Food
In China
 Packaged Food
In China

EXECUTIVE SUMMARY INSIDE THIS ISSUE

PROFILE OF CHINA 4
The packaged food industry in China had retail sales
of US$111 billion (RMB 758 billion) in 2008, and sales are PACKAGED FOOD 5
expected to reach US$168 billion (RMB 1.14 trillion) by MARKET
2014. With a shrinking average household size and
g r o wi n g i n c o m e l e v e l s , C h i n e s e c o n s u m e rs a r e RETAIL DISTRIBUTION 10
increasingly demanding packaged foods, which offer
convenience and easy accessibility, as distribution LOGISTICS AND 14
HANDLING
channels expand across China. In terms of retail value
growth, baby food products grew the most, experiencing PRODUCT INNOVATION 17
overall growth of 185% over the 2003-08 period, with a
compound annual growth rate (CAGR) of 20.6%. Next, CHALLENGES 17
were oils and fats (154.8% total, 20.6% CAGR), dairy
products (120.5% total, 17.1% CAGR), and ready-meals OPPORTUNITIES 18
(77.4% total, 17.1% CAGR).
KEY CONTACTS 18
Retailers
KEY RESOURCES 19
Hypermarkets, a combined supermarket and department
store, experienced remarkable growth over the past decade
and are the fastest growing channel in the retail sector.

“
Over the 2003-08 period, supermarkets/hypermarkets have
grown as the main distribution format for packaged food in
China—from 42.8% of sales in 2003 to 50.8% in 2008. Rising income levels have decreased
Foreign retailers have performed far stronger in the
hypermarket channel than any other retail channel. the price-sensitivity of the average
Carrefour is the dominant player in the hypermarket

”
Chinese consumer.
industry, with a total of 156 stores in China, as of the end of
2009. Wal-Mart, Tesco, Metro Cash & Carry, and Lotus
are the other m aj or hyper m ark ets . International
hypermarket retailers in China are more receptive to
introducing imported products than convenience store and
supermarket retailers. Hypermarkets usually have a small
group of preferred distributors that they deal with, and
exporters looking to get their products onto the shelves in
hypermarkets should focus on these select few distributors.

Although imported products are rarely found in

supermarkets, there exist opportunities for Canadian
exporters to perform well in some key food categories:
breakfast cereals, sauces and seasonings. These products
tend to do well in supermarkets where there is a significant
expatriate community nearby.

CONTINUED NEXT PAGE...

PAGE 2
EXECUTIVE SUMMARY (CONT’D)

Logistics and Infrastructure

China‘s transportation and logistics infrastructure is still underdeveloped and inefficient, but massive
rebuilding has taken place in recent years to increase efficiency. From 1990 to 2000, the total length of
highways in China increased by 36%, and vast improvements were made to existing highways. The
length of China‘s railway track system, already the longest in Asia, increased by 19%. Efficiencies were
also found through the introduction of double tracking, electrification, and higher speed trains.
Connections to networks in Southeast Asia, Central Asia, and Russia are being constructed, which are
opening the door to additional trade prospects.

Health and Wellness

The health and wellness trend is prevalent across much of China, and this
trend will continue to grow. Low-sugar, low-fat, and low-salt packaged food
products are gaining in popularity, and smaller package sizes are
increasingly being demanded by Chinese consumers.

Recent food scares such as the melamine contamination scandal have

increased awareness of food safety in China. Concern about food safety
provides an opportunity for Canadian exporters who can help meet the
demand for safe foods.

Opportunities for Canadian Suppliers

Rising income levels have decreased the price-sensitivity of the average

Chinese consumer. This shift in spending behaviour offers Canadian
producers an opportunity to compete with other producers in terms of product
quality rather than price.

Recent growth in the oils and fats, baby food, soups, and dairy products
sectors may provide an opportunity for Canadian producers to increase their
market share in the Chinese packaged food industry. Some products
included in these high-growth sectors include cooking oil, butter, margarine,
baby food, milk formula, canned soup, instant soup, milk, cheese, and yogurt.





PAGE 3
PROFILE OF CHINA

China has a population of 1.3 billion people (2008 estimate) and a population density of
141.7 people per square kilometre.

China‘s population is aging, with a median age of 37.6 years (2008 estimate), which has steadily
increased from the median age of 25.2 years in 1990. The aging of China‘s population can be attributed
to falling birth rates and increasing life expectancy.

When using the standard measure of Gross Domestic Product, China has the world‘s third largest
economy (US$4.2 trillion, 2008), behind the United States (U.S.) and Japan. China has been enjoying
relatively high real GDP growth rates since the late 1970‘s, as the Chinese government reduced their
central planning role and allowed for a more market-oriented economy. China‘s real GDP has
experienced a compound annual growth rate (CAGR) of 10.8% from 2003 to 2008. In comparison, the
CAGR (2003-08) for the European Union (E.U.), Japan, U.S., and Canada were 2.3%, 1.7%, 2.5%, and
2.4% respectively.

China‘s most densely populated province-level subdivisions are in the east1: Shanghai (2,622 persons per
square kilometre), Tianjin (981 persons per square kilometre), and Beijing (940 persons per square
kilometre). The least densely populated areas are in the west: Xinjiang (12 persons per square kilometre),
Qinghai (7 persons per square kilometre), and Tibet (2 persons per square kilometre). The province-level
subdivisions with the largest populations are Guangdong (113 million), Henan (98.7 million), Shangdong
(91.8 million), and Sichuan (87.3 million). The smallest are Qinghai (5.4 million) and Tibet (2.7 million).

In recent years, China has become a major importer of agri-food products. Table 1 provides data on bulk 2
agri-food products imported by China in 2008. It shows that, in 2008, the majority of China‘s bulk
agri-food imports were soybeans, making up nearly US$22 billion of the US$34.5 billion value of bulk
agri-food imports.

Table 1. China imports (bulk products), 2008

Million US$ % share
HS Code Description 2008 2008

Bulk Products 34,490 100

120100 Soybeans, whether or not Broken 21,816 63.25
520100 Cotton, Not Carded Or Combed 3,494 10.13
400122 Technically Specified Natural Rubber (Tsnr) 3,145 9.12
510111 Wool, Not Carded Or Combed, Greasy, Shorn 1,535 4.45
Low Erucic Acid Rape/Colza Seeds W/Not
120510 Broken 754 2.19
240120 Tobacco, Partly Or Wholly Stemmed/Stripped 699 2.03
400121 Natural Rubber In Smoked Sheets 647 1.88
100300 Barley 484 1.41
Natural Rubber Latex, Whether Or Not
400110 Prevulcanized 420 1.22
120740 Sesame Seeds, Whether Or Not Broken 249 0.72
Source: World Trade Atlas

1
As of 2004. Not including Macau (17,310 persons per square kilometre) and Hong Kong (6,352 persons per square kilometre).
2
United States Department of Agriculture (USDA) classification: BICO – Bulk, Intermediate, Consumer-Oriented

PAGE 4
 

PACKAGED FOOD MARKET


Market Overview

In China, food expenditure makes up a sizable portion of total consumer expenditure. In 2008, expenditure on food
and non-alcoholic beverages totaled US$506 billion (RMB 3.52 trillion), which accounted for 33% of total consumer
expenditures in China. By comparison, in 2008, spending on food and beverages accounted for 9% of total spending
in Canada, 7% in the United States, and 13% in the E.U. Figure 1 shows consumer expenditure by category, in 2008,
for China.

Figure 1. Consumer Expenditure by Category, 2008

Consumer Expenditure by Category, 2008

Food and non-alcoholic
beverages
Clothing and Footwear

19% Household Goods and

Services
33% Health Goods and Medical
Services
3%
Transport

6% Communications

3%
Leisure and Recreation

11% Education
9%
3% Miscellaneous Goods and
8% 5%
Services
Other

Source: Euromonitor International


The Chinese packaged food industry has shown strong growth in recent years, as the demographic
composition of the Chinese consumer market has changed. In 2008, retail sales in the packaged food industry
reached US$111 billion (RMB 758 billion), a 10.6% increase over 2007, with a compound annual growth rate (CAGR,
2003-08) of 11.5%.

The strong real GDP growth rates experienced by China (10.8% CAGR, 2003-08) have led to rapid growth of the
Chinese middle class. The middle class in China is commonly defined as comprising households with an annual
income between US$7,500 and US$70,000 (RMB 60,000 and RMB 500,000 3). Households in China making less than
US$7,500 (RMB 60,000) annually still make up an overwhelming majority, comprising 79.7% of the population in
2008. However, this demographic has remained relatively stagnant in recent years, having gone up only .5% from
2005 to 2008. By contrast, in 2008, the number of middle-class households increased to 3.1% of the population, up
from 1.1% in 2005. This represents approximately 41 million people in 2008. This growing group will spur demand for
goods such as packaged food. The consumption bundle of the average Chinese household is also becoming more
diverse, which provides an opportunity for imported goods to gain market share in the retail food industry.

China‘s population is becoming increasingly urbanized. In 1990, 27.4% of China‘s population were living in urban
areas; by 2005, this had increased to 40.4%. This trend is projected to continue, and, by 2015, it is expected that
about half (49.2%) of China‘s population will be living in an urban centre. As a consequence of this urbanization, there
will be an increase in the demand for packaged foods.

3
Using 2005-08 average exchange rate of 7.7 RMB/US$

PAGE 5
The size of households and number of children per household have both declined in recent years. In
1990, there were, on average, 4.1 occupants per household and 1.4 children per household. By
2008, these numbers declined to 3.4 occupants per household and 0.7 children per household.
These declining numbers seem to have changed consumption patterns, increasing, for example,
purchases of packaged food. Packaged food offers a quick and easy meal solution for smaller
households, as these households are less likely to prepare large quantities of traditional foods. With
China‘s one-child policy in effect since 1979, the number of children per household is expected to continue its decline,
or at the very least remain stable. The Chinese government is not expected to lift the one-child policy for at least
another decade when the number of citizens of child-bearing age is expected to decline, according to China‘s top
population official (Fitzpatrick, 2009).

Market Data

Retail sales data on the packaged food industry was obtained using Euromonitor International, a leading independent
provider of business intelligence on industries, countries, and consumers. Sales have been spread evenly across all
sectors in the packaged food industry. In Figures 2 and 3, the percentage of total packaged food sales for each sector
in the packaged food industry is shown for 2003 and 2008. In 2003, bakery and dairy products were the market lead-
ers, each occupying a 15% share of retail sales in the packaged food industry. Confectionery and dried processed
food were next to follow, with both having a 9% market share. Next to follow were noodles and sweet savoury snacks,
each with an 8% market share. In 2008, the composition of packaged food sales remained consistent with the 2003
numbers. The market leaders in 2008 were dairy products (18% market share) and bakery products (13% market
share).

Figure 2. Sales of Packaged Food by Sector, 2003

2003 - Sales of Packaged Food - Value

Confectionery
9% Bakery products
14%
Dairy products
37% Sweet and savoury snacks
14%
Noodles
Dried processed food
10% 8%
8% Other

Source: Euromonitor International

Figure 3. Sales of Packaged Food by Sector, 2008

Confectionery
2008 - Sales of Packaged Food - Value

Bakery products

Dairy products
7%
13% Sw eet and savoury
37% snacks
Noodles
18%

Dried processed food

10% 8% 7%

Other

Source: Euromonitor International

PAGE 6
In terms of volume growth, oils and fats led the way with overall growth of 111.6% over the 2003-08
period and had a compound annual growth rate (CAGR) of 16.2%. Next to follow were soup (80.2%
total, 12.5% CAGR), dried processed food (65.7% total, 10.6% CAGR), and ready meals (61.2% to-
tal, 10% CAGR).

Baby food products led value growth with 185% over the 2003-08 period and had a CAGR of 20.6%.
Next to follow were oils and fats (154.8% total, 20.6% CAGR), dairy products (120.5% total, 17.1% CAGR), and ready-
meals (77.4% total, 17.1% CAGR). Due to price inflation, caution must be used when observing growth in terms of
retail value. During the 2003-08 period, inflation in China was modest, averaging 3.2%.

Consumption Trends

Overall:
Consumption of pleasure-oriented food and drinks are a growing trend in China. Pleasure-oriented food and drinks
are products belonging to one of four product groups: carbohydrates, cookies, ice cream, and wine. Table 2 provides
consumption data for this category in China.

Table 2. Consumption of pleasure-orientated food and drinks by volume in China, million litres, 2000-09
Market 2000 2006 2009 CAGR CAGR

Carbohydrates 6,362.7 11,097.8 14,190.2 9.7% 8.5%

Cookies 849.0 1,150.6 1,230.3 5.2% 2.3%
Ice Cream 799.3 1,831.7 2,624.4 14.8% 12.7%
Wine 270.4 411.0 477.1 7.2% 5.1%
Source: Datamonitor

Table 3 shows the top 15 flavours in new food and drink launches in China. The preference for sweet food and drinks
is evident, as chocolate, milk, and strawberry flavoured foods are the leaders for new food launches, while orange,
strawberry, and lemon flavours are the leaders amongst the new drink launches. These tastes are relatively consis-
tent with Western tastes; however, it is also evident that exotic flavours native to China are also popular.

Table 3. China: Top 15 flavors in new food and drinks launches (% of total launches), 2005-06
Rank Food % of total Rank Drinks % of total
product product
launches launches
1 Chocolate 7.8% 1 Orange 12.3%
2 Milk 4.8% 2 Strawberry 9.5%
3 Strawberry 4.7% 3 Lemon 8.6%
4 Chicken 4.3% 4 Apple 6.8%
5 Beef 4.0% 5 Peach 6.4%
6 Orange 3.4% 6 Milk 4.8%
7 Sesame 3.0% 7 Honey 4.2%
8 Original 2.9% 8 Coffee 4.0%
9 Tomato 2.5% 9 Original 3.7%
10 Peanut 2.3% 10 Aloe 3.5%
11 Lemon 2.1% 11 Chocolate 3.3%
12 Mint 2.1% 12 Grape 3.1%
13 Spicy 2.1% 13 Pineapple 2.4%
14 Salt 2.0% 14 Tea 2.4%
15 Apple 1.9% 15 Barley 2.2%
Note: % will add up to more than 100% as products may contain more than 1 flavour
Source: Datamonitor




 PAGE 7
Although ethnic cuisines in China are not very popular, Indian take -out food has
experienced success. One of the reasons for its popularity is the use of rice in many of the
dishes. Nevertheless, the most popular take-out food in China remains traditional Chinese
cuisine. This is commonly sold from small food stalls and eaten in the street.
Japanese food is also popular in some regions, which can be attributed to the fact that
many Japanese dishes have roots in Chinese cuisine.

Pizza is also quite popular in China, as this Western-style food is associated with openness and style
among those who eat it.

EASTERN CHINA

In 2008, sales of packaged food reached US$28.7 billion (RMB 198 billion) in eastern China. High-quality
and healthy concepts were the two main driving forces behind value growth of packaged food in eastern
China. For example, high-quality brands Tiki-Tartlet and Tuc from Shanghai Danone Biscuits Foods Co
Ltd experienced strong sales in mid to high-end bakery products. Christie and Manhattan added nutrients
to bakery products such as carotenoids in whole wheat bread, which were sold at higher prices. High-end
baby food and dairy products also gained market share.

The rising costs of milk, sugar, and packaging have cut into profit margins and manufacturers have
responded by introducing more value-added products. For example, Inner Mongolia Yili Industrial Group
Ltd introduced a premium milk product range that includes both regular and organic milk. Inner
Mongolia Mengiu Milk Industry (Group) Co Ltd followed with their own premium milk range including
organic milk, low-fat milk, high-quality protein milk, and calcium-rich milk products. Bright Dairy & Food Co
Ltd also launched a premium milk product line, the U+ series, which is marketed as a high-quality liquid
milk product.

Outlook:

According to research conducted by Euromonitor International, the health and wellness trend is expected
to persist over the next five years. With strong consumer education on health and wellness in this region,
manufacturers may want to increase the variety of healthy food products. Manufacturers of bakery
products in particular will focus on providing value-added, nutritious products as prices rise for raw
materials such as butter, flour, and flavourings. Given China‘s shrinking households, packaged food that
is available in small packages should become more popular, as they offer convenience.

CENTRAL CHINA

In 2008, sales of packaged food topped US$16.4 billion (RMB 113 billion) in Central China. As income
levels grow for residents of Central China, so too does the import of trends from other areas in China.
One example is the health and wellness trend, which first emerged in cities along the eastern and
southern coastline of China. In 2008, fibre and calcium were commonly used as selling points for
packaged food products. Xylitol, a substitute for sugar in gum, was popular mainly due to its low calorie
content. Milk and yogurt products saw the emergence of probiotics as an additive that aids digestion.










PAGE 8
Outlook:

As there tends to be a lag in Central China‘s adoption of trends, there remains room for
growth in the healthy food market. The bakery products sector is projected to grow sub-
stantially over the next five years, led by breakfast cereals and biscuits. Breakfast cereals
are gaining popularity as a breakfast choice in central China, and this will help drive sales
growth. Biscuits containing beans, fibre, and whole grains are being introduced and have mass appeal, as
consumers become more health-conscious. Also, salty biscuits are gaining popularity and demand for
these types of biscuits is expected to grow.

NORTHERN AND NORTHEASTERN (NNE) CHINA

The health and wellness trend did not bypass NNE China. For example, low-sugar dessert mixes grew in
popularity, as did low-fat salad dressings. The eating habits of residents living in NNE China differ some-
what from those in other areas of China. For example, the jiao zi is the dumpling of choice rather than the
wonton. In sweet and savoury snacks, salty and spicy flavours are preferred. When it comes to fruit,
canned/preserved fruit are preferred to fresh, which is more expensive due to its inaccessibility in the
north. In sauces, dressings, and condiments, consumers in NNE China prefer saltier flavours compared to
those living in Southern China.

Outlook:

The health and wellness trend is expected to continue its growth in NNE China over the next few years. In
particular, consumers will demand more functional and fortified foods. Low-sugar and low-calorie foods
may also be successful, with women being the key demographic for these particular foods.

NORTHWESTERN CHINA

In northwestern China, low income levels limit household consumption choices, and purchases of health
and wellness products are adversely affected by this constraint. In addition, sales of functional and
fortified foods are sluggish. However, in 2008, the baby food sector saw strong growth. This can be
attributed to higher birth rates in the region, which stem from the belief that the year 2008, on the Chinese
calendar, would bring prosperity.

Dairy products and bread containing natural fibres are performing well as consumers slowly begin to
adopt a healthier diet. In oils and fats, only vegetable and seed oil play a significant role, due to the eating
and cooking habits of residents in this region.

Over the past few years, sales of high-calcium/iron/zinc foods grew. There was also a growing interest in
fortified and/or functional food, such as pre/probiotic yogurt.

Outlook:

The interest in fortified/functional food is expected to continue to grow over the next few years, along with
low-sugar, low-fat, and low-salt packaged foods.

SOUTHERN CHINA

Consumers are becoming more interested in packaging labels such as manufacturing dates and quality
standard marks. In recent years, residents from other areas of China, mainly Sichuan and Hunan
provinces, have moved to southern China, and this is affecting the types of foods that are in demand. For
example, companies selling sweet and savoury snacks are focusing more on crispy and spicy
flavours, as opposed to light flavours.





PAGE 9
 Canned ready-meals are consumed mostly by non-locals in southern China, as they are an
affordable choice for this group, which tends to earn lower wages. Packaged food sales in
southern China are being transformed by non-local residents. For example, noodles,
which are not traditionally eaten by southern Chinese locals, are becoming a major
component in the composition of packaged food sales. Southern China has seen incredible
growth in the consumption of instant noodles recently, where approximately 80% of instant
noodles in the region are being consumed by non-local consumers.

Outlook:

Western-style foods such as tuna fish and pasta are expected to gain acceptance in South China over the
next few years. This is partly due to the spill-over effect from the 2008 Olympic Games, which tweaked
the interest of locals in Western-style foods. The increasingly competitive environment in the food ser-
vices industry is leading to the need for more manufacturing of bulk-pack foods.

Demand for convenience foods is also expected to increase in South China. For example, instant noodles
packaged in cups/bowls are increasingly chosen over those packaged in a pouch.

SOUTHWESTERN CHINA

Southwestern China has experienced a surge in per-capita disposable income in recent years. This has
influenced the types of packaged food demanded by the local population. Sales of high-quality rice,
whole-wheat bread, premium canned food, and high-grade sauces have all seen appreciable increases
over the 2003-08 period.

Consumers in Southwest China prefer strong flavours and spicy foods. Because of these preferences,
Sichuan-flavoured instant noodles are popular and have enjoyed superb sales over the 2003-08 period.

The health and wellness trend, which has influenced much of China, is being experienced in Southwest
China as well. Biscuits with added vitamins and calcium are gaining in popularity. Sugar-free products,
such as Chuandao Egg Shaqima Chinese biscuits, gained market share. Xylitol, a sugar substitute, has
largely replaced sugar in chewing gum, and functional ingredients such as herb extracts were also added
to gum.

Outlook:

With income levels in Southwestern China rising, consumer interest in leading brands should be relatively
high.


RETAIL
 DISTRIBUTION



OVERVIEW

The remarkable growth experienced by the Chinese economy has forced retailers in China to seek newer,
more efficient approaches to distributing food products in order to keep up with growing consumer
demand. Table 4 highlights some of these changes as the distribution of sales in the packaged food
industry has seen a shift in composition towards supermarkets/hypermarkets and away from smaller
grocers.





PAGE 10
Table 4 Sales of Packaged Food by Distribution Format: % Analysis 2003-2008
% retail value rsp 
2003 2004 2005 2006 2007 2008



Store-based retailing 99.8 99.8 99.8 99.7 99.7 99.7

Grocery retailers 98.8 99 99.1 99.1 99.2 98.8

Supermarkets/hypermarkets 42.3 45.1 46.7 48.4 49.6 50.8

Discounters - 0.1 0.1 0.1 0.1 0.2

Small grocery retailers 36.7 35.6 35 33.6 32.7 31.9

Convenience stores 9.8 11.1 12.5 13.4 14.1 14.6

Independent small grocers 26.6 24.2 22.2 19.9 18.3 17

Forecourt retailers 0.2 0.3 0.2 0.3 0.2 0.3

Other grocery retailers 19.9 18.3 17.4 17 16.7 15.9

Non-grocery retailers 1 0.8 0.6 0.6 0.5 0.9

Health and beauty retailers 1 0.8 0.6 0.6 0.5 0.5

Other non-grocery retailers - - - - - 0.4

Non-store retailing 0.2 0.2 0.2 0.3 0.3 0.3

Vending 0.2 0.2 0.2 0.2 0.2 0.2

Homeshopping - - - - - -

Internet retailing - - 0 0 0 0

Direct selling - - 0 0 0 0.1

Total 100 100 100 100 100 100

Source: Euromonitor International

Hypermarkets

A hypermarket is a combined supermarket and department store. Hypermarkets have experienced

remarkable growth over the past decade and are the fastest growing channel in the retail sector. Sales of
packaged food in the hypermarket/supermarket retail format accounted for 50.8% of total packaged food
sales in 2008. Foreign retailers have performed far stronger in this channel than any other. Carrefour is
the dominant player in the hypermarket industry, with a total of 156 stores in China, as of the end of 2009.
Wal-Mart, Tesco, Metro Cash & Carry, and Lotus are other major hypermarkets.

Entry Strategy: International hypermarket retailers in China are more familiar with imported products and
are more open to the idea of introducing and promoting new products in their stores. Hypermarkets
usually have a small group of preferred distributors, and exporters looking to get their products onto the
shelves should focus on these select few distributors.

Supermarkets

Sales of packaged food in supermarkets/hypermarkets accounted for 50.8% of total packaged food sales
in 2008. Supermarkets have experienced a meteoric rise in the Chinese retail market, beginning with just
one outlet in 1990 and rising to approximately 70,000 stores by 2006 (USDA estimate). The amount of
growth seen in the Chinese supermarket industry over the course of one decade has taken several
decades to occur in the United States and Europe. By 2009, supermarket sales in China reached US$535
billion, representing growth of more than 10% per year from 2004-2009 (Euromonitor, 2009).

PAGE 11
Although losing market share to hypermarkets and convenience stores, supermarkets
remain the most common retail channel in urban China. State-owned domestic retailers
have a dominant presence in this channel. The major players are Shanghai -based
companies Lianhua and Hualian. Supermarkets have the weakest penetration of imported
products of all the modern retail channels, which results from inadequate distribution and a
hugely price-sensitive consumer base.

Entry Strategy: Although imported products are rarely found in supermarkets, there exist opportunities for
Canadian exporters to perform well in some key food categories: breakfast cereals, sauces,
seasonings, wine, and confectionery. These products tend to do well in supermarkets where there is a
significant expatriate community nearby. Supermarkets commonly deal with distributors or local
manufacturers to obtain their products and rarely deal directly with importers. The supermarket retailers
that offer the best possibilities for exporters are the smaller, privately held chains, which tend to have
better integrated distribution systems and are more likely to be receptive to imported products that offer
high margins. For both state-owned and privately-owned supermarkets, the best way to introduce a new
product is to contact the company officers.

Specialty Supermarket Stores

Sales of packaged food in specialty supermarket stores accounted for 17% of total packaged food sales in
2008. Specialty supermarket stores cater to high-end consumers in China who demand a better
shopping environment and higher food quality. These specialty supermarket stores are mainly centred in
first-tier cities such as Shanghai but they are also expanding into second-tier cities such as Wuhan. The
majority of items carried in these stores are imported products. CityShop in Shanghai is a fairly
representative specialty supermarket in China. CityShop carries nearly 10,000 products, with 80% of
these being imports from all over the world.

Entry Strategy: These stores offer a wide range of high-end specialty products, which are often imported
goods. Some of these companies include import/distribution operations, which can help in product -
labeling and registration. Otherwise, a good distributor is needed to address these issues. Distributors
that focus on HRI (hotel, restaurant, and institutional) should be considered in addition to more
retail-focused distributors because HRI-focused distributors are familiar with which import products tend to
do well in China.

Convenience Stores

Sales of packaged food in convenience stores accounted for 14.6% of total packaged food sales in 2008.
This is the least developed channel, but has ample potential for growth. State-owned domestic retailers
also dominate this channel. The leading players are Quik, Kedi, and Alldays, which are all owned by local
groups. International convenience retailers such as 7-Eleven, Family Mart (Japan Ito Yokado), Sincere
(Hong Kong), C-Store (Taiwan), and Lawson‘s (Sino-Japan JV) are all developing strongly. There is
relatively low import penetration, as imported products are less familiar to convenience store managers
than they are to their counterparts in hypermarkets. Another cause for the low import penetration is that
convenience stores require small package sizes, typically single-serve products.

Entry Strategy: A strategy for success in this sector would be for Canadian exporters to identify an
importer/repacker who imports in bulk, then packages the products in China with Chinese labels and in the
appropriate package size.




PAGE 12
Key Retailers

China—Top 5 Retailers
Top 5 MGD retailers , 2009

Company Number of Sales Area Average Grocery Market

Stores (sq.m) Sales Area Banner Sales Share (%)
(sq.m) (USD mn)
China Resources Enterprise 4,028 4,678,890 1,162 9,562 1.1
Lianhua 5,423 3,813,500 703 8,593 1
Auchan 164 1,564,000 9,537 4,810 0.6
Carrefour 546 1,313,316 2,405 3,816 0.4
Wal-Mart 279 4,138,072 14,832 3,802 0.4
Sub Total 10,440 15,507,778 30,583 3.5
Other 827,134 96.5
Total 857,717 100
Source: Planet Retail, 2010.

China Resources Enterprise Ltd Lianhua Supermarket Holdings Co., Ltd.

Room 3908 1666 Sichuan Rd North
China Resources Building China
26 Harbour Rd, Wanchai +86 (0) 21 63 93 77 00
Hong Kong +86 (0) 21 63 93 63 18
China www.lhok.com.cn
+852 (0) 28 27 10 28 LHSCO2@public6.sta.net.cn
+852 (0) 25 98 84 53
www.cre.com.hk
creltd@cre.com.hk

Auchan China Carrefour (China) Holding Ltd.

1750 Chan Yan Lu 25/F, Shanghai Stock Exchange Building,
Shanghai 528 Pudong Nan Road
200090 Pudong District, Shanghai
China 200120
+86 21 65 43 22 11 China
+86 21 55 80 45 11 +86 (0)21 38 78 45 00
www.auchan.com.cn +86 (0)21 68 81 58 77
www.carrefour.com.cn

Wal-Mart Business Information (Shenzhen) Co., Ltd.

Xinnanbin Building, 50 Honghu Second Street, Wenjin Road North
Luohu District, Shenzhen, Guangdong Province
518020
China
(86-755) 2562 3288
(86-755) 2560 7079
www.wal-martchina.com
prchina@wal-mart.com

PAGE 13
 

LOGISTICS AND HANDLING


As China moves toward a more open economy by reducing tariffs, non-tariff barriers, and
other border measures, the Chinese market will remain relatively difficult to penetrate
unless the cost of transportation and logistics is reduced. The Chinese Academy of Social Sciences
estimates that transportation and logistics account for 20% of the retail prices of goods in China, which is
approximately five times the transportation share of food costs in the United States.

China‘s transportation infrastructure has undergone massive rebuilding in order to increase efficiency and
help reduce the costs associated with transportation and logistics. From 1990 to 2000, the total length of
highways in China increased by 36%, and vast improvements were made to existing highways. The
length of China‘s railway track system increased by 19%, adding to what was already the longest track in
Asia. Efficiencies were also made by introducing double tracking, electrification, and higher speed trains.
Connections to networks in Southeast Asia, Central Asia, and Russia are being constructed, and are
opening the door to additional trade prospects.

Since 1978, China has undertaken a series of logistical reforms, which have allowed enterprises under all
forms of ownership (state, collective, and private) to carry out their own logistical activities. This transition
to logistical autonomy has led many companies to shift away from handling logistics in-house, to using
external logistics providers. This trend was identified in a 2004 report, ―Logistics Outsourcing by Manufac-
turers in China: A Survey of the Industry.‖ In 2002 Nankai University conducted a survey of 1,010 firms,
representative of the whole manufacturing sector in China. This survey was used to identify key trends
and features of the logistical requirements of the firms. The survey found that 60% of food manufacturing
firms outsourced at least one logistics activity. The mean value of assets for outsourcing companies was
US$226.3 million, compared to US$95.1 million for non-outsourcing companies. Table 5 takes a look at
current and prospective outsourcing functions of firms in the next few years. Presently, the most com-
monly outsourced functions are freight forwarding (61%), transportation (44%), and warehousing (38%).
Within the next few years, the most commonly outsourced functions are expected to be logistics informa-
tion systems (58.7%) and logistics system design (50%). Figure 4 (on the following page) illustrates the
imported goods distribution chain in China.

Table 5. Current and Prospective Logistics Functions Outsourced

1 2
Services Outsourced Current users (%) Prospective users (%)

Freight forward 61.0 42.0

Transportation 44.0 29.3

Warehousing 38.0 34.7

Distribution 26.0 25.3

Logistics information systems 14.0 58.7

Value-added services 11.0 13.3

Logistics system design 11.0 50.0

1 Valid responses = 100; 2 valid responses = 150 (multiple responses were permitted)

Source: Hong, J., A. Chin and B. Liu (2004).





PAGE 14
Figure 4. Imported Goods Distribution Chain

The sophistication of distribution systems varies across China, but the cities of Shanghai, Guangzhou, and
Beijing have the best infrastructure and the largest number of experienced distributors. Although there are
other major cities with good logistics, mainly cities along the eastern seaboard, they still rely on the ‗big
three‘ as an entry-point for imports. Many cities rely on a single distributor for imports, particularly those
that are of high value or temperature-sensitive. More typically, products go through many distribution
channels before reaching their final destination. Distribution channels for HRI (hotel, restaurant, and
institutional) tend to be better developed and may be the best place to start for exporters seeking to enter
new markets. It is useful to look at transit times for freight in order to assess transportation costs. Table 6
gives transit time and frequency for exporting Canadian freight to Chinese ports.

Table 6. Representative Container Services from Canada to China, 2009

Chinese Canadian Points of Origin
Destination
Vancouver Montreal Halifax
Transit Time Frequency Transit Time Frequency Transit Time Frequency
(Days) (Days (Days) (Days (Days) (Days
between between between
Departures) Departures) Departures)
Beijing 17-30 1-7 - - - -
Chongqing 28-40 2-9 - - - -
Guangzhou 17-26 2-11 - - - -
Harbin 21-33 1-11 - - - -

Hong Kong 13-16 2-11 21-24 2-11 37-46 5-15

Macau 22-25 2-11 - - - -
Nanjing 22-32 2-11 30-40 2-9 44-55 2-15
Ningbo 11-22 1-9 19-30 1-9 39-47 5-15
Shanghai 15-26 2-9 23-34 2-9 34-43 5-21
Shekou 13-17 2-10 21-31 2-11 35-47 5-44

Sorce: ZIM integrated shipping services. **This is only one source, exporters should consult a freight forwarder for specific up-
to-date information

PAGE 15
Figure 5. Major Chinese ports, by volume of freight traffic, 2000 (million tons)

Source: China National Bureau of Statistics, China Statistical Abstract 2001.

Figure 5 shows the volume of freight traffic at various major Chinese ports. The overwhelming majority of
freight traffic is concentrated in Hong Kong (1,280 million tons), followed by Shanghai (204 million tons).
Table 7 (below) gives freight traffic information for different modes of transportation, and a significant in-
crease in traffic across all modes is seen between 1990 and 2000.

Table 7 - Increase in China freight traffic, 1990-2000

Mode 1990 2000 Change
-------------------Million Tons----------------- Percent

Highways 7,240 10,388 43.5

Rail 1,506 1,744 15.8

Waterways 801 1,224 52.8

Pipelines & other 159 189 18.9

Total 9,706 13,545 39.6

Source: China National Bureau of Statistics, China Statistical Abstract 2001.

PAGE 16
 
PRODUCT
 INNOVATION


The rapidly expanding Chinese economy has been favourable for new product launches in
the packaged food industry. According to Datamonitor (a market research company), over
the past five years the packaged food industry in China has seen over 7,000 new product launches. Lead-
ing the way in product launches were cookies (sweet biscuits) with 666 new reports 4, which comprise
8.7% of total product launches in the packaged food industry. Next were other savoury snacks (477 new
reports), sugar confectionery (419 new reports), nuts and seeds (366 new reports), and milk (354 new re-
ports).

The sectors in the packaged food industry that have seen the least new product launches over the past
five years were mainly frozen foods. Some examples include frozen vegetables (10 new reports), frozen
potato products (6 new reports), frozen desserts (4 new reports), impulse ice cream (3 new reports), and
frozen pizza (3 new reports).

Datamonitor provides various innovation ratings for products in the packaged food industry. Ratings are
based on ingredient formulation, merchandising, new market, packaging, positioning, and technology.
The measure of innovation used for this report was the ingredient formulation measure of innovation. This
m eas ure of innovation is bas ed on a f irs t - ever us e of an ingredient or com bination of
ingredients in a product. When using this measure, yogurt products led the way with 5 new reports over
the past five years. Next to follow were milk (4 new reports), other savoury snacks (3 new reports), dried
soup (2 new reports), functional drinks (2 new reports), and sugar confectionery (2 new reports).

CHALLENGES

China‘s relatively poor transportation and logistics infrastructure remain a major concern for potential
exporters to the Chinese market. The penetration of food imports into the inland regions of China remains
quite low, especially for temperature-sensitive products, which require a high standard of logistical sup-
port.

The rising costs of raw materials, such as the prices for crude oil, sugar, plastic, and paper, have
negatively influenced the extremely price-sensitive Chinese consumer.

Despite the recent strengthening of intellectual property rights (IPR) laws by the Chinese government, IPR
infringements of imported food products remain a major issue. Infringements such as inaccurate labeling
and product counterfeiting are quite common in China.

4
Report - an individual entry for a new product launch (including all its Stock Keeping Unit variants) in the database.

PAGE 17
 

OPPORTUNITIES


Recent food scares, such as the melamine contamination scandal, have increased
awareness of food safety in China. Canada‘s longstanding, strict food safety standards can provide Chi-
nese consumers with the assurance of food safety. As Chinese producers reform their food safety prac-
tices, an opportunity exists for Canadian exporters to meet the demand for safe foods.

As per capita income increases across much of China, spending patterns are changing and consumers
are becoming less price-sensitive. This shift in spending behaviour gives Canadian exporters an opportu-
nity to compete in terms of quality, rather than price. As transportation and logistics costs remain high,
competing in price with other producers in the Chinese packaged food market may be difficult.

As a result of China‘s accession into the World Trade Organization (WTO) in 2001, the Chinese
government has undertaken a series of reforms that essentially opens the Chinese market to foreign
investment and allows companies to run their own operations. This is one of the world‘s largest markets
and, while fiercely competitive, it is now more easily accessible to Canadian exporters.

Strong growth in the oils and fats, baby food, soups, and dairy products sectors may provide an
opportunity for Canadian producers to capture a larger market share in the Chinese packaged food
industry. Some products included in these high-growth sectors include cooking oil, butter, margarine,
baby food, milk formula, canned soup, instant soup, milk, cheese, and yogurt.

KEY CONTACTS

Angela Ierullo Grace Kim

Senior Market Development Officer - China First Secretary
Agriculture and Agri-Food Canada Trade Commissioner
1341 Baseline Rd. Agriculture and Agri-Food Canada
Ottawa, Ontario, K1A 0C5 Embassy of Canada
Tel: 613-773-0155 19 Dongzhimenwai Dajie, Chaoyang
Fax: 613-773-0200 Beijing, PRC 100600
Email: angela.ierullo@agr.gc.ca Tel: (86-10) 5139-4128
Email: grace.kim@international.gc.ca

PAGE 18
 

KEY RESOURCES

Agriculture & Agri-Food Canada. (2005, October). ―Opportunities in the Food Markets of China.‖

China. National Bureau of Statistics. (2001). China Statistical Abstract 2001. China Statistics Press.

Datamonitor. (2009, September). Product Launch Analytics.

Datamonitor. (2006, December). ―New Consumer Insight: Targeting Profitable Consumer Trends in the Brazil, Russia, India & China
Region.‖

Euromonitor International—Archive. (2007, July 25). ―China‘s middle class reaches 80 million.‖ Retrieved from:
[http:/www.euromonitor.com/Chinas_middle_class_reaches_80_million].

Euromonitor International. (2009). ―Packaged Food – China.‖

Euromonitor International. (2009). ―Packaged Food: Euromonitor from trade sources/national statistics‖.

Fitzpatrick, Laura. (2009, July 27). ―A Brief History of China‘s one-child policy,‖ in Times Magazine. Retrieved 2009, October 1 from:
[http://www.time.com/time/world/article/0,8599,1912861,00.html].

Gale, Fred and Thomas Reardon. (2005, June 24). ―China‘s supermarkets present export opportunity,‖ in Asia Times. Retrieved on
2009, October 1 from: [http://www.atimes.com/atimes/China/GF24Ad02.html].

Gilmour, Brad and Fred Gale. (2002, April). ―Transportation and Distribution: Will Bottlenecks Be Eliminated?‖ in China’s Food and
Agriculture: Issues for the 21st Century. United States Department of Agriculture, Economic Research Service. Pg. 24-26.

Hong, J., A. Chin and B. Liu. (2004, January). ―Logistics Outsourcing by Manufacturers in China: A Survey of the Industry,‖ in
Transportation Journal. 43(1): pg. 17-25.

Innventia Group. (2008, June 30). ―The Food Packaging Market in China,‖ in The Edge. (3). Retrieved from:
[www.innventia.com/upload/Edge/Pdf/China%202012.pdf].

Just-Food. (2008, October 28). ―Retail Expansion to Underpin Packaged Food Growth in China.‖ Retrieved 2009, October 1 from:
[http://www.just-food.com/article.aspx?id=104233].

Library of Congress – Federal Research Division. (2006, August). ―Country Profile: China.‖

Mintel International Group Inc. (2009, September). Global New Products Database (GNPD).

New Zealand Trade and Enterprise. (2007, August). ―Market Profile for Food and Beverage Retail in the China Market.‖

United Nations—Population Division of the Department of Economic and Social Affairs. (2008). ―World Urbanization Prospects: The
2007 Revision.‖ Retrieved 2009, October 1 from:
[http://www.un.org/esa/population/publications/wup2007/2007WUP_Highlights_web.pdf].

United States Department of Agriculture—Foreign Agricultural Service. (2008, November). ―China, Peoples Republic of; Retail Food
Sector; All China Retail Annual Report.‖ GAIN report # CH8816. 46 pp.

United States Department of Agriculture—Foreign Agricultural Service: Agricultural Trade Office (ATO) Shanghai. (2009).
[http://www.usdachina.org/en_index_sh.asp?functionID=110704].

Woetzer, Jonathan and Jimmy Hexter. (2008, August 4). ―Getting More from China Sourcing,‖ in World Trade Magazine. Retrieved
from: [http://www.worldtrademag.com/Articles/Article_Rotation/BNP_GUID_9-5-2006_A_10000000000000393998].

World Trade Atlas. (2009).

Yan, Hao. (2006, October). ―China‘s Growing Middle Class in an Increasingly Stratified Society.‖ East Asia Institute Background Brief
No. 307. Retrieved from: [www.eai.nus.edu.sg/BB307.pdf]. 18 pp.

ZIM Integrated Shipping Services. (2009). Retrieved from: [www.zim.co.il].

PAGE 19
The Government of Canada has prepared this report based on primary and
secondary sources of information. Although every effort has been made to
ensure that the information is accurate, Agriculture and Agri-Food Canada
assumes no liability for any actions taken based on the information
contained herein.

Packaged Food In China

© Her Majesty the Queen in Right of Canada, 2010
ISSN 1920-6593 Market Analysis Report
AAFC No. 11197E

Photo Credits
All Photographs reproduced in this publication are used by permission of
the rights holders.
All images, unless otherwise noted, are copyright
Her Majesty the Queen in Right of Canada.

For additional copies of this publication or to request an alternate format,

please contact:
Agriculture and Agri-Food Canada
1341 Baseline Road, Tower 5, 4th floor
Ottawa, ON
Canada K1A 0C5
E-mail: infoservice@agr.gc.ca

Aussi disponible en français sous le titre :

Les aliments emballés en Chine