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Specialized supermarkets and gourmet shops: the entry point for food in China

Gema Boiza. Journalist. @GemaBoiza

China's middle-class boom, accelerated urbanization and modernization of distribution channels (to the disadvantage of traditional and open air markets) are three of the main factors which have created a situation in China that is ripe with opportunities for Spain's agri-food industry.

In recent years, Spanish companies have found that the fastest way to success is via supermarkets specializing in imported products and gourmet shops. Those companies, and other European producers, see China as the new El Dorado.

And they're on to something: retail sales of food products in China expanded at an average pace of 9% between 2008 and 2012, according to Euromonitor International.

However, all that glitters is not gold. Despite the potential that was visible in 2004 and 2005, when the Chinese government liberalized the distribution sector and allowed for the entry of foreign investors, European companies still face countless challenges in their quest to profitably send and sell their products there.

And despite the distribution sector boom, even today it's still in a medium/low phase of development, especially in inland China. Companies' possible distribution strategies in China include undertaking it themselves, using third parties and creating joint ventures (Chinese-Spanish company).

According to the report Retail distribution of imported foods in China, by ICEX - Spain Trade and Investment, given the characteristics of the food sector in China and Europe, where the bulk of companies are SMEs, the most common method of distribution is via third parties, which is less costly and requires less involvement, although it's not risk-free.

Close cooperation with a trusted distributor is vital, as is adaptation of the product to the Chinese market, which is very different from other markets and where each part of the country has unique characteristics.

A priori, ICEX's report reveals that the most interesting formats for Spanish products are supermarkets that sell imported products and gourmet shops, which are more focused on a target public interested in such items.

Large hypermarkets still require very high entry fees which aren't always offset by sales.

Nevertheless, modern formats—both super- and hyper—, account for almost 65% of retail sales in China, 10 percentage points more than in 2007.

Even so, traditional formats continue to account for a very high percentage of the market because the sector is extremely fragmented, with the result that mergers and acquisitions can be expected to intensify in the coming years, as ICEX points out.

However, there are no signs of changes in the prices Spanish producers will have to pay to continue selling their foods in China. Price formation for a product, from when it leaves the factory in Spain until it reaches the final customer, varies as a function of the transportation company, taxes, etc., and, in particular, of the length of the channel required to deliver the product to the end user, and the margins applied by each intermediary.

How much does it cost to export to China?

According to ICEX's report, starting with the ex-works price (i.e. the cost of a product plus the desired margin on its sale), the main costs include domestic and international transport which, "contrary to popular belief, is one of the lowest costs", as well as duties and value added tax (either general, 17%, or reduced, 13%).

The product may also be subject to other types of taxes, such as a consumption tax, which generally applies to luxury products. The tax on alcohol is between 5% and 20%. On top of that, producers have to pay a fee to intermediaries.

This late arrival is the main reason that Chinese consumers aren't familiar with our gastronomy and national products. The competition is fierce and varies according to the product. France (perceived as offering high-quality products, such as wine) and Italy (which has an extensive network of restaurants that help raise awareness about it products) are Spain's main rivals in this regard.

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01/08/2017