China's HRI Sector a Hidden Opportunity

SHANGHAI - Sep 19/02 - MFB -- While China's recent entry into the World Trade Organization (WTO) and the ongoing debate over whether the country will accept U.S. biotech soybeans has dominated agricultural trade news, the real news - and opportunities - may be hidden elsewhere in the country of 1.3 billion people, according to Scott Sindelar, director of the Agricultural Trade Office (ATO) in Shanghai.

"Traditionally, China had been a market for bulk commodities. Obviously it's still a very important market for U.S. soybeans, but we've seen tremendous growth in consumer-oriented foods," said Sindelar, citing urbanization of the Chinese population and an ever-growing middle class with more disposable income.

In comments to Michigan Farm Bureau members and others on a Sept. 1-15 China trade study tour, Sindelar said ATO's analysis of import trends for the processing, retail, and hotel, restaurant and institution (HRI) sectors suggest U.S. producers may need to take another look at the Chinese marketplace.

"We need to be focused in our approach. We need to understand what we have to offer and how we can get it into specific segments of the market," Sindelar advised. "Our enthusiasm for the Chinese market needs to be balanced with a realistic look at the opportunities."

Calling the growth potential in the processing sector "tremendous," Sindelar said China currently processes only 25% of its agricultural production, compared to 80% for most countries. "Exports in the food processing sector have grown an average of 14% annually, based on output value since 1981 - that's a 20-year track record of double-digit growth," he said. "China's gross value in the food processing sector in 2000 was $80 billion, while the U.S. value was $458 billion, so there's just tremendous potential here in China."

The "Retail Revolution" has also seen phenomenal growth in China, according to Sindelar, adding that the traditional "wet markets" (farm markets) are quickly falling out of favor for "hypermarkets" including Wal-Mart, Sam's Club and Metro, which are notorious for large volumes and low costs. On the other end of the spectrum, Chinese convenience stores, which are actually small supermarkets, are becoming prevalent, with stores such as City Mart located on nearly every block in Shanghi.

"We see the retail market growing at both ends," Sindelar said. "We're going to have these huge hypermarkets and small-scale convenience markets. The middle area is going to have a hard time competing as what we call supermarkets, stores such as Giant, Safeway, and Kroger. They're going to have a very hard time competing in China."

Turning to the HRI sector, Sindelar says sales growth has almost doubled since 1998, with 15% annual growth in each of the last 10 years. "This is where we really see just tremendous potential," he said. "Consumers in Shanghi and other urban consumers are starting to face the same lifestyle pressures as U.S. consumers - two-income families, not a lot of time, and a need for convenience. The opportunities in this sector will run the gamut from very basic institutional type foods to very high quality, five-star type restaurants."

Case in point is the growth in U.S. red meat exports to China. Calling red meat one of the "rising stars" in consumer-oriented food exports to China, Sindelar said 2001 was a record year for U.S. beef exports to China.

"For 2002, just six months into the year, we're already up 40% on a record last year. That's simply tremendous," he said. "We're seeing some real growth in this sector, which means higher valued products, (hence) better returns for our farmers and our businesses."

According to ATO figures, American agriculture has been leading the way in the battle for consumer-oriented food sales to China, capturing 33% of the market share last year. However, competition from Australia and Canada is escalating.

"We're not the only ones trying to increase imports to China," Sindelar warned. "In fact, the biggest competition is from China's own domestic agriculture."

Sindelar said the liberalization of China as it moves away from a centrally organized and command economy under a communist system to a more market-oriented society is leading to significant changes throughout the country. High on the list, he said, is the urbanization of the general population, which is still pegged as 69% "rural."

"The urban middle class of China is now estimated at more than 350 million people," Sindelar said. "Analysts believe that more than 200 million of these consumers can purchase U.S. food products on a regular basis - 200 million people; that's more than the U.S. population!"

Continued growth in China's Gross Domestic Product, which has averaged 7% to 8% for several years, is also expected to continue. And while that growth is concentrated primarily in urban areas along the eastern China coast, it will allow more urban consumers to purchase high-value, high-quality food products.

"The Chinese diet is shifting as incomes rise," Sindelar said. "People are moving away from the traditional grain-oriented diets and shifting to more meat, more fruit, and more vegetables. There's also a growing recognition for brands now, particularly U.S. brands, which is reflected in higher volumes and values of U.S. exports to China."

Despite all the good news, Sindelar warned that a stable transition within China from a rural to an urban society must be backed by substantial foreign investment. "We estimate that, on each day, there is $12.5 million of foreign investment just in Shanghi alone," explained Sindelar.

China's entrance into the WTO could help maintain the investment momentum, due in large part to China's desire to be recognized as an internationally integrated economy that provides improved rule of law, along with credit and banking reforms.

"It's going to take a while for the real benefits of WTO to accrue to us. The risk to us is that they move into other trade-distorting practices, much like we saw with soybeans and poultry," Sindelar said. "WTO won't be the end of the challenges we face in this market, but it does provide a starting point for some ground rules and a process to resolve them."

The subscriber version of the article is available by Clicking here