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China has overtaken the United States as the world's biggest food and grocery retail market, according to the latest research published by the British grocery trade consultancy firm IGD. Within 4 years, China's market will be 36% larger than that of the US. Which US-listed companies can benefit?

According to IGD, the Chinese grocery sector was worth $963bn at the end of 2011, surpassing the US's $836bn. In the next four years, the Chinese market's annual growth rate is expected to be 10.9%, more than double the US's 4.2%. The Chinese market is projected to worth $1.48 trillion compared to a US value of $913bn in 2015.

How can US investors benefit from China's rapid grocery market expansion? At first glance, three of the world's largest grocery retailers, Wal-Mart (WMT), Carrefour (OTCPK:CRRFY) and Tesco (TESO) are active in China and can be good investment targets; at least their accounts are more transparent and reliable than their Chinese counterparts.

However, they face some common headwinds:1) Chinese government has phased out since December 2010 the "super-national treatment" foreign retailers had enjoyed; 2) they are not familiar with Chinese consumption habits; 3) they have to make huge investments to build up logistic networks; 4) fierce competition from local retailers who have cheaper product prices, more efficient logistics and, especially, are much more ambitious.

That is no wonder Carrefour and Tesco has recently closed some shops. In principle, the multinationals should provide differentiated products and service, better shopping experience, and especially better quality products to win customers. Yet, we hear frequently of customer complaints against Wal-Mart on poor product quality. All three multinationals have to show marked operation improvements before they can win investors.

A unique characteristic of the Chinese grocery market is the rapid urbanization. IGD projects that there will be over 200 Chinese cities with a population over 1 million people by 2025.The urbanization goes so fast that some new neighborhoods are not yet served by supermarkets. Residents have to rely on internet or phone to order groceries.

That explains why Wal-Mart announced in February to increase its holding of China's Yihaodian.com (No.1 Shop) to a controlling stake. This is already Wal-Mart's third attempt in China's online market. Yet it has not solved the problems of logistics (which is far more complicated than setting up networks for physical stores), the integration of the two company cultures, as well as the potential conflicts of interest between physical stores and online businesses.

The exploding Chinese grocery market also benefits existing online retailers like Dangdang (DANG), as it sells non-food products like health and beauty, pet care and basic clothing. According to Dangdang's Q4 11 results, general merchandise revenue was $77m, up 210% y/y, and accounted for 39% of total revenue compared to 22% a year ago. Without exact breakdown, I estimate the non-food groceries account for 20% of all general merchandise revenue. Judging from the around 180% y/y growth for general merchandise revenue, as well as the 10% y/y growth for China's grocery market, a 200%y/y growth rate for non-food grocery is highly possible for the next 5-10 years.

As all the three multinationals have yet shown significant improvement in their Chinese operations, while online shopping has become ever popular, Dangdang is best positioned to benefit from the exploding Chinese grocery market.

2011

2015 Forecasts

Rank

Country

$ bn

Rank

Country

$ bn

1

China

963

1

China

1457

2

US

836

2

US

913

3

Japan

403

3

India

611

4

India

387

4

Russia

463

5

Brazil

336

5

Brazil

455

6

Russia

314

6

Japan

417

7

France

296

7

France

327

8

Germany

228

8

UK

257

9

UK

226

9

Germany

235

10

Italy

179

10

Indonesia

233

11

Indonesia

158

11

Italy

184

12

Spain

133

12

Mexico

146

13

Mexico

117

13

Spain

140

14

Canada

109

14

Canada

130

15

Australia

100

15

Turkey

117

Source: IGD.com.

Source: China Now World's Biggest Grocery Market - Who Benefits?