GUANGZHOU, China (Reuters) - Vegetable seller Xiao Wang shrugged and laughed ruefully, weighing a bundle of scallions at his tiny stall in the backstreets of this booming southern metropolis.
“Everything has gone up by around 20 percent,” he said, puffing on a cigarette alongside a table laid out with eggplant, broccoli and peppers. “And there’s nothing we can do about it.”
With inflation at an 11-year high in China, analysts say the country’s food retailers — from domestic players Lianhua, Wumart and Times Ltd to international behemoths Carrefour and Wal-Mart — are best positioned to weather the storm, at least for now.
The reason is simple: Food demand, unlike demand for most other consumer goods, is relatively inelastic.
In times of high prices, as in times of low, people need to eat. And retailers, unlike producers wrestling with soaring input costs, have more leeway to raise prices before consumers change eating habits.
But, analysts warn, Chinese consumers, much like their foreign counterparts, will shift to cheaper food at a certain tipping point.
Starting from the second half of 2007 and accelerating into 2008, the price of a 335 ml can of Tsingtao beer increased 20 percent to 3.60 yuan ($0.515), and a 125 gram tub of Yili yoghurt leapt 25 percent to 1.75 yuan, according to data from Carrefour and Lianhua.
“Retailers will be a beneficiary to a certain extent until volume starts to fall off because prices get too high,” said Timothy Bush, a Hong Kong-based analyst for Merrill Lynch.
“But there is a threshold where people will substitute or trade down. They’ll buy less pork and more vegetables, for example.”
China’s hypermarket industry is expected to grow 20.5 percent to $47.5 billion in 2008, according to Euromonitor International. And its supermarket industry should expand roughly 16 percent in 2008 to $151.2 billion.
By comparison, the U.S. hypermarket industry is estimated to reach $244.1 billion this year— up 9.5 percent— while its supermarket business is forecast to grow 4.3 percent to $334.9 billion in 2008, Euromonitor says.
Food accounts for a third of the consumer price basket in China, a country of 1.3 billion people.
Merrill Lynch projects China’s food inflation will remain high at 11.7 percent in 2008, and that inflation can add up to 3 percent on food retailers’ revenue growth in the near term.
Experts say international players like Carrefour and Wal-Mart — whose stock is up around 16 percent this year — may have the edge due to beefier balance sheets and their ability to offer customers more options to trade down to cheaper proprietary, no-frills, and private label products.
All is not rosy, however. Margin erosion could loom over the long term when increasing numbers of consumers cut spending as the ripples of the U.S. credit crisis fan out across the world.
Times’ and Wumart’s gross margins in 2007 were 16.4 and 16.3 percent, according to DBS Vickers.
Wal-Mart does not publish its gross margin for China, according to the firm’s China spokesman Dong Yuguo. But experts say it could be lower than smaller competitors given the scale of its operations.
China’s food retailers are not alone. In fact, retailers of all stripes — from clothing to toy hawkers — are feeling the heat. U.S. retailers have cut 75,000 jobs since the beginning of this year, according to recent U.S. Labor Department data.
U.S. consumer food prices normally rise about 2.5 percent a year, but they rose 4 percent in 2007 in the biggest increase in 17 years, according to U.S. Agriculture Department data.
Food prices are rising in other Asian economies amid a sustained rally in global commodity prices, sending everything from wheat to soybeans to all-time highs.
And the growing appetites of the expanding middle classes of China — where per-capita GDP surpassed $2,000 in 2006 — and also India, continue to drive up prices with no sign demand will subside anytime soon.
“If everyone else is raising prices, it’s hard to buck the trend and not to,” said Wal-Mart’s Dong.
“Even different brands within the same product group are rising at different rates, so it’s hard to get a clear picture.”
In China, over 95 percent of Wal-Mart’s goods are locally sourced. That fact, coupled with the introduction of government sanctioned food price controls and tougher labor laws for better contracts and higher wages, clouds the long-term outlook for the chain if inflationary pressures are sustained.
“Right now everything is just a theory. We will not know the answer until first-quarter 2008 results come out,” said Credit Suisse analyst Vincent Chan, adding that truly strong brands— such as Chinese liquor maker Kweichow Moutai — can still sell more the higher prices go.
“It really depends on a case by case, rather than sector by sector, basis.”
Despite the anxieties, modern food retailing in China isn’t going away anytime soon as national distribution channels widen and consumers demand classier shopping experiences.
Traditional wetmarkets — found in every Chinese town and city — still far outnumber western-style supermarkets in China. Some estimates put the ratio at 80 to 20.
Companies like Times Ltd — which fights to compete with larger rivals for choice locations in first-tier cities — are aggressively clawing into third-tier cities, hoping the hypermarket shopping experience will catch on.
“We pass on increases in our gross sale prices to customers to maintain our margins,” said Times’ Chairman, Kenneth Fang.
Meanwhile, some consumers are sticking to old habits, even as prices soar.
“Food price inflation doesn’t have a big impact on my life,” said Liu Jinlan, a 65-year-old retired worker shopping at Wal-Mart in Shanghai. Liu said her monthly spending on food has almost doubled to 1,700 yuan ($240) from less than 1,000 yuan a year ago.
“I still choose top-brand pork. It tastes better than those lower-quality meats. Eels and crabs are also more expensive but I still buy them.”
(Additional reporting by Samuel Shen in Shanghai)
Editing by Edwin Chan and Megan Goldin