Can organic vegetables grow in China’s depleted soils? Won’t environmental pollution offset any gains from eating healthy? Aren’t vegetables here, produced by China’s 500 - 600 million farmers, already dirt-cheap? These are just some of the questions I had about a year ago, when a Chinese entrepreneur pitched me on an idea that seemed so ridiculous that I had to remind myself of one of the traditional entrepreneurial litmus tests: If you’ve got an idea so crazy that everybody thinks you’ve lost your marbles, on the contrary you just might be onto something.

In a nutshell, this fellow had agricultural and academic connections to be parlayed into a network of greenhouses. They would be rented to foreigners who wanted to grow their own food. An integrated coffee shop and walking tour would allow people to hang around and watch their vegetables grow precariously from the ceilings. It was to be located in Shanghai’s picturesque and rural Fengxian district.

Although I knew something about the locavore and LOHAS (Lifestyle of Health and Sustainability) concepts, I still wondered if there were really enough green-thumb foreigners in the city to rent his greenhouses and farm their own produce.

“No problem!” he said, “We have people who do the actual farm work.” And what’s more, fresh ten kilogram baskets of the organically grown fruits and vegetables would be delivered to customers’ doors weekly. Ah, a garden without the work! Now he might be onto something.

I passed on the opportunity to invest but recommended the entrepreneur instead focus his marketing on the emerging middle/upper class of Chinese consumers who would be more than eager to eat up healthy vegetables at inflated prices. It turns out I was at least partly right. Before I get to that, let’s review a little Olympic context for organic foods in China.

In the wake of a poisonous dumpling scandal which rocked China-Japan relations in early 2008, China’s pre-Olympic food preparations suffered one indignity after another: The US planned to boycott the Olympic Village food altogether, Australia had to be banned from bringing its own food into the Village (including, it seems, copious quantities of Vegemite - Australia’s favorite spread), and the Olympic Village cafeteria itself would offer only 30 percent of the menu from China’s famous local cuisines. Then perhaps the ultimate loss of face for Chinese gourmands: Usain Bolt’s pre-world-record-setting meal? Chicken nuggets.

I mention the Olympics for its effect of kicking China’s organic foods production up a notch. In order to reassure Olympians - and the world - that China’s food chain was safe, no expense was spared. From RFID-encoded shipments to pigs having Mozart played on their final walk to the abattoir, safety was the number one priority. Number two was health.

In the run up to the Olympics, China has embraced organic foods extremely rapidly. Despite the fact that China has been a producer of organic foods for decades, just two years ago it was hard to find locally-available organic foods in even the foreign-owned hypermarts. Now, fresh, locally-grown organics are not only found in major grocery stores and served in top restaurants, they are even joining the ranks of DIY products.

Vegetable gardens put the commune back in China

Last week in the Shanghai Daily, a pair of organic food stories caught my eye, but this one about the People’s LOHAS Commune in Qingpu District was especially relevant given my experience with the farm/coffee shop/vegetable gallery I was told about last year:

The 33-hectare commune includes 27 hectares of farm land, and a 7-hectare eco-lagoon. The farm is divided into four parts - an orchard, a flower garden, an organic Chinese medicine farm and a vegetable farm.

For only 3,000 yuan (US$441) a year, you can have 3 hectares of land to grow any plant you like, even expensive ginseng.

In Supertrends of Future China, we discuss the growing trend in China of consumers seeking high-quality alternatives and upgrading their lifestyle, adopting activities such as LOHAS originally found in more affluent countries. We believe the trend is just getting started in China, although a number of incumbent businesses such as popular Shanghai eateries Element Fresh and Jujube Tree are already benefitting from the growing segment of health-conscious consumers. The Commune’s proprietor, Xie Lun, seems to share our optimism:

“The People’s LOHAS Commune welcomes everyone who loves nature as long as they observe two simple rules,” Xie says. “The first is no spitting and the second is that other people’s produce must not be taken without their permission. ”

So far more than 400 people, most white-collar workers, have applied to be members of the commune even though it will not officially open until next year.

Although China’s organic food industry is clearly only for affluent locals and foreign residents at this time, this is indeed a trend to watch and get positioned for. China’s own version of Whole Foods of Trader Joe’s may not be far behind.

Categories: Aspiring, China Supertrends, Consuming, Greening
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Shanghai residents and visitors both may recall some of the lively pedestrian malls in the city, the most famous being Nanjing East Road going all the way to the scenic Bund. Shanghai’s Wujiang Road is also famous in the city for serving such delicacies as Shengjian (friend dumplings, most unhealthy but oh so delicious) and fermented tofu (usually served fried) known locally as ’stinky tofu.’ One half of Wujiang Road has undergone a facelift that is indicative of the changing consumer landscape in China.

Retail in China can be a mixed bag: French-retailer Carrefour may be having problems, but China’s Lianhua is doing well, and foreign firms such as Staples and UPS are expanding, even as Bertlesmann China closes its retail outlets.

There are clearly winners and losers, but retail consumption overall is the most important driver of growth in the Chinese economy. The picture is bright, according to a report by AT Kearney that ranks China as the fourth most attractive retail market (h/t to China Law Blog).

Here is my article from the June 30 edition of the Shanghai Star Business Journal, with some before and after pictures for your enjoyment.

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As world energy prices begin to affect transportation costs, the appreciating yuan results in a decreased demand for Chinese exports, and a tighter monetary policy starts to reign in inflation, the question now is how China will avoid a dramatic economic slowdown. If Shanghai’s Wujiang Road area is any indication, retail may be the answer to China’s excess supply, with China’s newly-affluent middle-class consumers increasingly demanding more.

People who have been living in Shanghai for longer than three years will have distinctive memories of the old Wujiang Road, the bustling restaurant street running parallel to Nanjing West Road near the subway station and intersection of Shimen No. 1 Road.

The area directly behind the station used to have Chinese eateries and snack stands, push-cart vendors and colorful events such as a weekly English corner. Now, in much the same way the Huangpu River separates Puxi from Pudong, old from new, Wujiang Road stands divided: East of Shimen No. 1 Road, the street remains much as it has always been, while the western half has recently taken on a new look: Redesigned by Singapore’s Frasers Property and rebranded as InPoint, part of the Jing’An Four Seasons mixed-use residential and retail development, western Wujiang Road is home to a newly-renovated shopping arcade.

The loss of yet another part of Shanghai’s historic past aside, it is hard to deny the new layout and selection is vastly improved.

Where once were about twenty small restaurants and shops now stands a mall with space for more than ninety. Hole-in-the-wall bubble-tea stands have been replaced by four coffee chains including the ubiquitous Starbucks. What once was a Chinese snack vendor selling meihuagao (a rare and delicious baked rice cake with red bean paste inside and topped with dried fruit) is now an Iceason. If you don’t like their ice cream, you can go to one of three other frozen dessert shops, such as a DQ and Cold Stone Creamery, or try Honeymoon Dessert, one of the many Hong Kong and Taiwanese-style snack shops.

Much like the Wujiang Road of old, there are sit-down restaurants galore, but now with a corporate-branded flavor. And that’s not even mentioning the shops: Retailers Levi’s, Tissot, and ONLY, and other sellers of everything from stuffed animals and puzzles to jewelry and baubles.

All this stands in stark contrast to the eastern side of Wujiang Road, with its low-priced stinky tofu vendors, fried dumpling shops, and outdoor crawfish restaurants.

In fact, the transformation of Wujiang Road is not unique, and is merely symbolic of how retail is quickly maturing in China. Shanghai has dozens of revitalized or new shopping areas taking shape, and it seems there is now an international-style mall on every major street to replace what once was a local- or state-owned retailer.

Nationwide, China is home to four of the world’s fifteen largest shopping malls, but many of them, including the world’s biggest in Dongguan, Guangdong Province, are having trouble filling up the space. This begs the retail supply question: If you build it, will they come?

Retail spending has been growing rapidly in China. In 2008, urban retail spending is up 22.3 percent in May year on year, with an average rate of 21.1 percent this year so far compared to the same period last year, according to China’s National Bureau of Statistics. This growth seems likely to exceed 2007’s 17 percent overall increase in retail spending, but this is partly expected due to the increased inflation rate compared to 2007. However, by taking inflation out of the calculation, real retail spending has still grown 13 percent in the first quarter of 2008, according to the World Bank’s most recent China Quarterly Update.

Another important indicator is that in 2007, China’s consumption growth - the portion of GDP growth that covers all the goods and services consumed by households - exceeded the growth due to trade or investment to become the top driver of China’s economy, albeit by a slim margin.

Of course, retail spending is only a part of total consumption, but it is a growing part in China as disposable incomes go up. In 2007, average urban salaries increased 18.7 percent, according to NBS figures, nearly four times the 4.8 percent pace of inflation in 2007, and minimum wage levels were increased in many of China’s largest cities. This excess income will drive new retail spending.

Short-term economic statistics aside, where will the long-term support for retail growth come from? There are three major population segments that will keep retail spending high in China’s cities: The white-collar youth, newly-urbanized migrant populations, and the nouveau riche who are spending on big ticket items in the automotive, housing, and luxury markets.

One study by MasterCard estimates that China will have more than 117 million young people with a yearly income greater than US$60,000 by 2016. A recent survey by website zhaopin.com of 6000 urban Shanghainese white-collar workers found that 80 percent had credit cards, and more than half of them already considered themselves in hock to their cards as monthly “card slaves.” The spending power of more than one hundred million high-income consumers who are comfortable with credit card debt, many of whom will live at home until marriage, will be of growing significance to retail sales.

Second, the urbanization trend in China shows no sign of slowing down. The McKinsey Global Institute estimates China will almost double its urban population to 926 million by 2025, with 219 cities of more than a million inhabitants. Each of these cities will have their own Wujiang Road-style pedestrian malls to stimulate consumers’ taste buds and empty their wallets.

Finally, China’s most affluent people, those who can afford their own cars and homes, are literally driving new trends to support their high-end consumption habits. Cars and homes create much related-goods spending, allowing auto-accessories stores such as Japan’s Autobacs, and home-furnishers such as Ikea, to prosper.

As well, the World Luxury Association reported that in 2007 China became the world’s second largest market for luxury goods such as watches, bags, and jewelry, and will top world leader Japan by 2015.

One only needs to look in a three block radius of the new Wujiang Road to see a healthy microcosm of China’s retail environment: Eastern Wujiang Road for the traditionally-minded, the new InPoint shopping street for young consumers, and Nanjing West Road’s high-end fashion and luxury retailers for the affluent. Some may miss the old meihuagao vendor, but China’s economy is not looking back.

Categories: China Supertrends, Consuming, Consumption, Primary Growth Drivers
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