Introduction:

Against the backdrop of declining volumes and slow price growth, the overall FMCG sales growth rate has fallen from 11.8% year-on-year in 2012 to 3.1% in the first half of 2016*. However, category performance shows a 'two-speed' pattern: categories once favored by blue-collar workers, such as instant noodles and cheap beer, are growing very slowly or even declining due to a reduction in the number of manufacturing workers in China; while products favored by the rising middle class, such as yogurt and pet food, are growing rapidly.

Among the top ten convenience store chains, only FamilyMart and 7-Eleven have achieved nationwide coverage in first-tier cities, while other chains mainly have advantages locally or in specific regions. Among them, Meiyijia and FamilyMart are growing the fastest, with annual growth rates between 15% and 20%. They are continuously expanding new stores and gaining market share from competitors such as C-Store and Buddy. Due to intense competition and rising cost pressures in first-tier cities, both C-Store and Buddy closed some stores in 2015.

01

2016 China Shopper Report

The transformation and upgrading of China's economy has significantly affected the consumption patterns of Chinese shoppers. Mass-market categories targeting blue-collar workers are struggling, while high-end categories such as yogurt and pet food, as well as high-end SKUs in most categories, continue to grow. According to Kantar Worldpanel China, sales in China's FMCG market grew only 3.5% in 2015, a five-year low. But this figure masks an important characteristic: despite the overall sluggish economic environment, some categories and SKUs are maintaining relatively fast growth, highlighting the divergent growth trajectories of China's FMCG and other consumer industries. Today, Kantar Worldpanel and Bain & Company jointly released the fifth annual China Shopper Report: How to Master the Two-Speed Chinese Shopper. Over the past four years, Kantar Worldpanel and Bain & Company have conducted in-depth analysis of 26 categories across four major sectors: personal care, home care, beverages, and packaged food (accounting for about 80% of total FMCG sales). The report details the impact of China's two-speed growth on FMCG categories, retail channels, and the ongoing battle between multinational and local brands. "China's economy is constantly changing and developing to adapt to slower GDP growth, with the economic focus shifting from manufacturing to services, and efforts to promote innovation-led growth replacing investment-led growth," said Mr. Yu Jian, General Manager of Kantar Worldpanel China. "Our tracking of Chinese consumers' shopping behavior reveals that these shifts and other major economic changes have had a significant impact on Chinese shoppers' consumption patterns." Product Categories The rise of the domestic service industry and the emergence of higher-paying positions have driven growth in high-end categories such as yogurt and pet food, as well as high-end SKUs in most categories. Mr. Bruno Lannes, Chairman of Bain & Company's Greater China Consumer Products and Retail Practice and co-author of the report, said: "FMCG companies have built extensive distribution networks to introduce their products to Chinese consumers. Currently, most categories have reached the distribution scale they need in China, and brands are facing new challenges, needing to increase sales rates at each distribution point to achieve growth." He explained: "Since it is difficult to drive consumers to increase purchase frequency, and many categories have low purchase frequency, brands typically invest in launching high-end products. This approach has proven successful in achieving sales growth when penetration is stagnant or declining." Meanwhile, as a large number of manufacturing jobs have shifted to overseas countries with lower labor costs, brands in categories traditionally dominated by 'blue-collar' consumers, such as instant noodles and economy beer, are also struggling. In 2015, instant noodle sales fell 12.5%, and beer sales fell 3.6%. China's overall worker population peaked in 2012 and has since declined, with an increase in low-income retirees, exacerbating the slowdown. Click image to enlarge Retail Channels According to our research on Chinese shoppers' behavior, the national retail market landscape is constantly changing. Small store formats will continue to grow strongly. Notably, convenience store sales grew 13.2% last year, and penetration in cities of all levels increased by 8.5%, attracting cash-rich but time-poor urban consumers. Meanwhile, online shopping will continue to dominate China's modern retail environment. Over the past four years, China's e-commerce market has grown at an annual rate of about 37%, generating nearly 4 trillion yuan in revenue, making China the world's largest e-commerce market. Based on e-commerce penetration growth trajectories since 2012, we divide categories into three groups. Benefiting from high e-commerce penetration, baby products and cosmetics continue to dominate the e-commerce market. Because of the wider selection online, consumers tend to buy online, including imported brands they perceive as safer and of higher quality; Categories such as gum, beverages, and fabric softeners have low e-commerce penetration and have not grown much over the past four years. This is because gum is an impulse purchase category, the last-mile delivery cost for beverages is usually high, and Chinese households do not frequently buy fabric softeners; Home care products, some personal care products, and packaged food fall into the third category: medium e-commerce penetration but rapid growth. E-commerce retailers and brands are heavily promoting these categories to increase penetration. For example, the annual 'Tmall Wash & Care Festival' in July promotes categories such as shampoo, conditioner, and personal cleansing products, with P&G and Unilever as major participating brands. Click image to enlarge Conversely, hypermarkets (over 6,000 square meters), which reshaped China's retail environment over the past decade, experienced negative growth for the first time in 2015, with sales in urban FMCG markets falling 0.2%, traffic declining 4.6%, and average annual household purchases declining 4.7%. Supermarkets/small supermarkets (100-6,000 square meters) also saw sluggish growth, slowing from 9.5% last year to 4% this year. Foreign and Local Brands The two-speed development of China's consumer market is especially evident in the ongoing battle between Chinese and foreign brands. In 2015, local companies continued to gain significant share from foreign competitors. Among the brands surveyed by Kantar Worldpanel and Bain & Company, local companies grew 7.8%, contributing 109% of market growth. These companies saw the most growth in skincare, baby diapers, conditioner, toothpaste, and shampoo categories. Foreign companies saw the most growth in fabric softeners, baby formula, instant noodles, and beer, as foreign brands invested heavily in marketing activities, and consumers turned to foreign brands due to food safety concerns about local products. However, in 2015, the overall growth rate of foreign brands turned to -1.4%. Last year, the regional growth landscape also changed significantly. In the past, city tier was one of the main factors influencing sales growth. Now, growth rates across all city tiers are converging toward the 3-5% range, so brands cannot assume that lower-tier cities will continue to grow rapidly. Succeeding in China's Two-Speed FMCG Market Even in such a two-speed environment, we find that shoppers still exhibit predictable purchasing behavior patterns, and brands can surpass competitors by recognizing these patterns. According to the report, companies and brands can take four steps to achieve success in the market:

  • Examine their cost structure and operating model, improve flexibility and the speed of decision-making and execution, and actively embrace the digital disruption in their categories;
  • First cultivate the digital capabilities and mindset of the market and sales teams, then gradually extend to all functions;
  • Pay attention to the major changes in retail and the decline in distributor economics caused by overall market slowdown and online competition, and adjust route-to-market models accordingly. Focus on winning channels while selectively investing in others;
  • The key to building a leading brand remains penetration, which must effectively combine in-store promotion and online digital marketing activities

02

The E-commerce Tsunami: The Last Highland for Physical Retail

The 2016 China Shopper Report points out that convenience stores will be the growth driver for offline FMCG retail in the future. Kantar Worldpanel and Bain & Company have jointly released the China Shopper Report for the fifth consecutive year. The latest 2016 report, Volume 2, points out that against the backdrop of declining volumes and slow price growth, the overall FMCG sales growth rate has fallen from 11.8% year-on-year in 2012 to 3.1% in the first half of 2016*. However, category performance shows a 'two-speed' pattern: categories once favored by blue-collar workers, such as instant noodles and cheap beer, are growing very slowly or even declining due to a reduction in the number of manufacturing workers in China; while products favored by the rising middle class, such as yogurt and pet food, are growing rapidly. In terms of retail channels, the 'two-speed' phenomenon is equally prominent. E-commerce and convenience stores are growing strongly; supermarkets are facing slowing growth, while hypermarket sales have even begun to decline, and traditional grocery stores, hypermarkets, and supermarkets/small supermarkets remain sluggish. E-commerce is unstoppable After more than a decade of rapid growth, e-commerce continues to maintain high growth: online FMCG sales grew 36.5% in 2015. "The two-speed situation has had a significant impact on China's retail industry. Our survey results found that the diversification of online purchase categories, the significant growth of imported products, and the large number of consumers attracted by promotional activities have jointly driven rapid online sales growth," said Mr. Yu Jian, General Manager of Kantar Worldpanel China. The strong growth in online FMCG sales is mainly driven by a substantial increase in volume. Data shows that online sales volume grew 69% in 2015, meaning online shoppers bought more products, visited shopping sites more frequently, and purchased more categories online. Volume growth even offset the decline in average selling price (average online selling prices fell 7% and 19% in 2014 and 2015, respectively). The decline in average selling price is an inevitable result of the diversification of online purchase categories. Categories that first achieved high penetration online (baby formula, baby diapers, skincare, and cosmetics) had higher average selling prices per kilogram or per unit. As consumers increasingly buy lower-priced categories online, such as yogurt, biscuits, milk, and shampoo, the average online selling price is pulled down. For example, categories like yogurt and fabric softeners grew at an average annual rate of 57% from 2013 to 2015, compared to only 15% for higher-priced categories like baby diapers, baby formula, and skincare. As Chinese consumers buy more categories online, they are also increasingly turning to imported products online. Data shows that imported FMCG products are four times more likely to be purchased online than offline. But against the backdrop of the overall 'pie' growing at only 3.1%, it is inevitable that online growth increasingly comes from cannibalizing offline retail. In 2013, 40% of online retail growth came from consumers shifting spending that would have occurred offline to e-commerce platforms. By 2015, this proportion had risen to 47%. Convenience stores stand out Under the impact of e-commerce, traditional hypermarkets and supermarkets/small supermarkets are sluggish. However, convenience stores have become a robust source of growth. Convenience stores achieved over 13% growth in 2015, nearly double the growth rate in 2014. Although the convenience store channel is still relatively small, and a considerable portion of growth comes from new store expansion, it is a segment worth continuous attention in China's overall retail landscape and is becoming a major source of offline retail growth. As China urbanizes, more convenient and faster shopping methods complement online shopping to some extent. The top ten convenience store chains fall into two types. One is national high-end brands, such as FamilyMart and 7-Eleven; the other is regional mass-market brands, such as Meiyijia and Tianfu. These two types of convenience stores adopt different expansion and retail strategies. 7-Eleven and FamilyMart adopt a 'high-threshold' model, requiring higher franchise fees and deposits, and strictly implementing unified standards in store decoration, stocking, product pricing, display, and promotional activities. Their stores are concentrated in first- and second-tier cities, targeting white-collar consumers near urban centers, commercial districts, or subway stations, focusing on food and beverage sales, including increasingly popular ready-to-eat products. Meanwhile, regional mass-market brands like Meiyijia and Tianfu adopt a relatively lighter franchise model. The investment required for franchisees to open stores is significantly lower than for national brands, and stores are relatively smaller and concentrated in residential areas. They focus more on personal and home care products. The two types of convenience stores have many differences, but both have achieved success. Among the top ten convenience store chains, only FamilyMart and 7-Eleven have achieved nationwide coverage in first-tier cities, while other chains mainly have advantages locally or in specific regions. Among them, Meiyijia and FamilyMart are growing the fastest, with annual growth rates between 15% and 20%. They are continuously expanding new stores and gaining market share from competitors such as C-Store and Buddy. Due to intense competition and rising cost pressures in first-tier cities, both C-Store and Buddy closed some stores in 2015. However, convenience stores also face significant challenges: with rising urban rent costs, they need to develop strategies that balance network expansion while maintaining profitability. Convenience stores will be a major source of offline retail growth, and this channel will continue to grow and develop with investment. For example, Beijing's Quanshi Convenience Store plans to achieve rapid expansion in China over the next five years. The Double 11 Phenomenon Every November, the entire retail world turns its attention to China and its most popular promotional holiday: November 11, Singles' Day. This is by far the largest online promotional event in China and the world. In 2016, Alibaba alone achieved $17.8 billion in sales on Double 11, up 24% from 2015. Mobile purchases accounted for an incredible 82% of sales. Users from 235 countries participated in the shopping festival, with overseas purchases up 60% from 2015. We conducted an in-depth analysis of the sales performance of the 2015 Double 11 online promotion and found a clear phenomenon: Double 11 promotions convert some offline purchases to online in the short term. Double 11 activities help categories with low online penetration, such as toothbrushes and shampoo, attract more consumers. Categories with relatively high online penetration saw more moderate growth, with baby formula sales growing only 19% during Double 11. Three types of shoppers drove the increase in total consumer spending:

  • Existing online shoppers bought more during the Double 11 promotion, especially in categories like laundry detergent, facial tissue, and baby formula;
  • Online shoppers who delayed purchases until the Double 11 promotion;
  • Online shoppers attracted by online promotions to start buying new categories, such as fabric softeners, shampoo, and biscuits online. Implications for Retailers In last year's report, we mentioned that to succeed in China, large retailers need to do the following simultaneously: • Focus on local or regional markets; • Reduce store footprint and close underperforming stores; • Adjust store formats and introduce small formats similar to convenience stores; • Implement an O2O strategy, allowing consumers to order online and pick up in-store, solving last-mile delivery Business adjustments for large retailers have become increasingly urgent. Currently, large retailers continue to see declining performance, with new revenue mainly coming from store expansion rather than same-store growth (in fact, same-store growth is continuously declining), and the continued development of online shopping will further exacerbate the decline in large retailers' performance. As more and more consumers prefer to buy FMCG and other products online, retailers need to reduce store size to cope with this trend. In addition, the experience of international retailers in other countries tells us that online retail profits are limited. Consumers do not fully bear the cost of in-store pickup or delivery. For large retailers, cutting costs and simplifying processes becomes increasingly important. Generally, retailers can gain higher profits by pressuring suppliers. But in China, suppliers are usually more powerful than retailers. This requires retailers to strictly control various costs. Some retailers have already begun to adopt this strategy. Source: Kantar -END- The best FMCG distributor learning platform in China Focusing on providing professional, practical, and actionable tutorials for companies and distributors Committed to helping Chinese FMCG distributors grow rapidly The most professional and practical knowledge base in the FMCG industry Reply with the red number below to get the corresponding content Reply with number 1 to view the complete knowledge base | 001 Excellent article selection | 002 Distributor market operations | 003 Terminal visit management | 004 Sales supervisor skills | 005 Sales improvement techniques | 006 Channel expansion | 007 Managing distributors | 008 Distributor development | 009 Distributor internal operations management | 010 Team management | 011 Efficient distribution techniques | 012 Sales manager's 18 skills | 013 KA operation methods and strategies | 014 First lesson for new salespeople | 015 Internet, brands | 016 Distributor B2B transformation | [Long press QR code to follow]