Catering to China’s growing middle classes

Published on
March 14, 2012

China’s middle classes are increasingly being catered to by retail chains opening stores tailored in layout and prices to the country’s wealthy.

Based in a marble-lined Beijing residential compound below a Starbucks and a fitness club, City Shop emphasizes its imported food lines. A City Shop outlet in Beijing’s business district charges RMB 266 for a kilogram of Norwegian salmon, over 50 percent more expensive than the price at nearby Sanyuanli wet market, a popular outlet for local chefs and consumers.

Such prices are also high by contrast to prices paid by punters at the Jinkelong supermarket chain, a Beijing government-owned chain. The best selling product in a Jinkelong outlet in the Tuanjiehu residential neighborhood, carp farmed in Beijing’s rural suburb of Miyun, sells for RMB 21.80 per kilogram.

City Shop’s salmon prices are comparable to those in BHG chain stores owned by the Beijing Hualian Group, a semi-state group with retail and real estate businesses around China. Its Beijing outlets charge RMB 276 for a kilogram of salmon (skin off) and RMB 256 (skin on), and RMB 65.80 per kilogram for tilapia fillets. The chain’s outlet in Sanlitun, a shopping and entertainment district, charges RMB 37.80 for 400-gram wrapped frozen packs of sole fillets sourced from Vietnam and marketed under the Fresh Life brand. BHG also charges RMB 39.80 per kilogram of golden pomfret and RMB 38.00 per kilogram of river bass, both Chinese-sourced.

Just as worries over food safety have given imported food a ready market in China, higher margins and a growing base of middle-class customers means chains like City Shop and BHG are likely to continue to grow. Yang Qingsong, vice secretary-general at the China Chain Store & Franchise Association believes these stores benefit by having “a more targeted type of customer who is not sensitive to the price.” He believes customers are drawn to more reliable food safety and “a better shopping environment.”

Price-conscious Beijingers can also get a taste of foreign foods by heading to big-box retailers like Carrefour and Metro, which locate in cheaper, suburban real estate. Kenneth Arrild, master butcher at the Beijing operations of Austrian-owned Horber Meats, which imports meat into China, says Beijing’s lowest retail prices for imported seafood are to be found at big box foreign retailers like Metro, which sells Norwegian salmon at RMB 90 for a 6-to-7 kilogram fish.

Markets are also cheaper: “Fish sold for RMB 50 per kilogram at Sanyuanli costs RMB 180 at Jenny Lou’s, even though the structure and scale is the same,” said Arrild, who points to the convenience factor of chains like BHG and Jenny Lou’s, a high-end Beijing chain which retails salmon at RMB 26.80 per 100 gram.

Even as Internet shopping channels like Yihaodian zone in on up-market customers, other big-store retailers are clearly gearing their stores for the high-end shopper: Frozen Chinese oysters sell for RMB 3.20 per piece at a giant new Ito Yokado supermarket.

More spacious and smartly decorated than local Walmart and Carrefour outlets, the Japanese-owned Ito Yokado store — which also sells yellow croaker for RMB 59.60 per kilogram, frozen salmon for RMB 115 a kilogram and ping yu for RMB 93.60 a kilogram — provides a space for customers to buy coffee and eat meals purchased at food counters in the store. 

Defining “middle class” in China, where the monthly minimum wage stands at RMB 1,300 in key cities like Shanghai and Guangzhou, is difficult given grey income and tax evasion. Zhou Xiaohong, a professor at Nanjing University, says 20 percent fit the middle-class bracket. A CSSA research paper predicts that 40 percent of mainland Chinese will be middle class by 2020. Such predictions don’t pass muster with others who point to pressure and competition for housing, education and health for wiping out middle-class ambition.

Promoting consumption appears central to the economic blueprint of the man tapped to be China’s next premier, Li Keqiang. He wrote in Qiushi, the Communist Party’s monthly journal, that subsidized housing and medical care will be needed to enlarge the nation’s class of “middle income earners.”

Rising housing prices and inflation have both cooled after government monetary policy in 2011 cut off credit for real estate developers and tightened the criteria for multiple-home purchases. Much will depend on government policy in 2012. A hard landing would wipe out the wealth built up in real estate speculation, for instance.

It does appear certain that China will continue to shift expectations for future growth from fixed asset investment (in infrastructure and real estate) to consumption. In 2010, China got 47 percent of its GDP from consumption, compared to 88 percent and 79 percent in United States and Japan, respectively, suggesting room for more “middle-class” supermarket sales.

A Nielsen survey of 3,500 people found that Chinese consumers topped its global rankings in the fourth quarter for discretionary spending on out-of-home entertainment, technology and stock market investing. The Chinese surveyed expect inflation to continue to stabilize in 2012, with 30 percent of the survey’s respondents expecting overall prices to remain the same or decrease in 2012m compared to 17 percent in the same period a year earlier.

Part of a quarterly survey of 56 economies around the world, the survey, however, showed Chinese in both rural and upper-tier cities in the wealthy east coast are wary of wages not rising fast enough to cover health and housing costs. A separate study of China’s consumers by management consultancy McKinsey, released this month, shows private consumption contribution to the Chinese GDP growth will rise from the current 26 percent to 43 percent by 2020. Fixed asset investment component’s contribution to the Chinese GDP growth will drop from the current 53 percent to 38 percent by 2020.

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