China's FMCG Market Shows Two-Speed Growth: How to Navigate? (With Charts)

The 2017 China Shopper Report provides a comprehensive analysis of the increasingly polarized consumer goods market. Bain & Company and Kantar Worldpanel have tracked the actual shopping behavior of Chinese consumers for the sixth consecutive year. This continuous tracking research has helped us build a long-term understanding of 106 FMCG categories purchased by Chinese households. The two-speed growth phenomenon we identified last year in China's FMCG market persists this year. Part 1: Category Comparison China's FMCG market has seen slowing sales growth for five consecutive years, but since Q3 2014, food and beverage brands and personal and household care brands have shown distinctly different growth patterns: consumers have significantly increased spending on personal and household care products, such as cosmetics and tissues, while cutting spending on food and beverages. Annual growth rate of total urban shopper spending on FMCG in China (%) ▌Overall Slow-Growing Food and Beverages Let's first look at the slow-growing categories. Sales growth for packaged food remains nearly stagnant—only 0.5% growth. Among packaged foods, sweet snacks have suffered the heaviest blow, with sales growth declining 6%, 9%, and 15% for candy, chocolate, and gum, respectively. Besides consumers' increasing preference for healthier alternatives, other factors also contribute to the poor performance of these categories. For example, candy and chocolate have traditionally been top gifts during festivals. However, as more Chinese people now choose to travel during holidays, they have fewer opportunities to give gifts to family and friends at gatherings. But this does not mean all food and beverage companies are helpless. Some food and beverage categories are reversing the downward trend thanks to innovation. Take instant noodles, for example: over the past two years, this category experienced an average annual sales decline of 10%. This year, leading brands such as Master Kong and Uni-President have launched higher-end product lines, such as instant noodles with better ingredients and more innovative packaging, to meet the higher quality demands of white-collar consumers. At the same time, these brands have adjusted unit prices for their low-end product lines originally targeting blue-collar consumers, helping them cope with rising raw material costs and maintain sales growth. The instant noodle category is one to watch closely in the future. Other factors also play a role. Infant formula has seen a recovery, turning from a 3% decline last year to 6% growth this year. The main reason for this reversal is: the Chinese government's full implementation of the two-child policy in early 2016 is beginning to show significant results. ▌Personal and Household Care Products See Recovery in Both Volume and Price Personal care and household care products saw sales growth of 10.5% and 3.5% respectively in 2016. These categories benefit from key trends among Chinese consumers, such as increasing attention to health and wellness. It is evident that Chinese consumers continue to show a preference for healthy products or a better quality of life, mainly driven by rising average incomes. We observed a significant premiumization trend across all personal care categories. For example, in the beauty category (cosmetics and skincare), luxury brands like Armani and YSL performed very well in the Chinese market this year. In the toothbrush category, the premiumization trend is reflected in the growing popularity of electric toothbrushes produced by companies like Philips, driven by increased awareness of oral health. Meanwhile, with the new round of consumption upgrade, more Chinese households are distinguishing the usage scenarios of paper products, using facial tissues instead of the multi-purpose toilet paper in common scenarios (such as facial use, household use), leading to increased sales of facial tissues. At the same time, facial tissues are also experiencing premiumization as more consumers upgrade from two-ply to three-ply products. ▌Penetration Growth Reaches a Plateau Most categories have entered a penetration plateau and are beginning to see penetration decline. The average penetration rate for 26 categories fell from 83% in 2015 to 81%. Only 7 categories achieved penetration growth, including yogurt, cosmetics, shampoo, conditioner, facial tissues, bottled water, and baby diapers—all related to health and personal hygiene. Penetration saturation also poses new challenges for distribution in urban China. Up to now, most brands have grown by opening stores or distribution points. Now, the era of large-scale expansion is over; brands must achieve growth targets by increasing penetration, improving repeat purchase rates, and premiumization (striving for average price increases above inflation). As penetration plateaus or declines due to widespread distribution saturation, many brands are compensating by adopting two premiumization methods: increasing the share of premium products or raising prices of such products. Premiumization is indeed working; we can see how some juice brands achieve consistent volume growth despite overall category sales and volume decline. Leading companies like Wei Chuan and Nongfu Spring have launched new juice series—Daily Body Management juice and NFC (Not From Concentrate) juice, respectively. Both companies achieved over 20% growth in 2015-2016. Part 2: Region and Channel ▌Sunrise in the West, Rain in the East Provinces in the southwest and central China remain the growth engines for brands. Six of these provinces saw FMCG sales growth exceeding 7% in 2016: Sichuan, Shaanxi, Shanxi, Guangxi, Hunan, and Hubei. Growth drivers include: increasing number of households, accelerating economic growth, and industrial relocation. ▌Online and Convenience Stores Lead Channels Our sixth annual survey of Chinese shoppers' household behavior reveals the ongoing transformation of the retail industry. Online and convenience store channels maintain strong growth, while large retailers lose momentum. Unsurprisingly, e-commerce leads the pack, achieving over 52% growth. Online channels now account for 7% of total FMCG sales. Convenience stores, meeting the needs of busy urban consumers, achieved 7.4% growth, and they also introduced new traffic-driving measures, such as buy-online-pick-up-in-store. Hypermarkets, which had been growing steadily, saw sales decline by 2%, while the once-booming supermarket/small supermarket format grew by 2%, only slightly above inflation. Although the share of hypermarkets and supermarkets/small supermarkets is slowly shrinking, they still account for half of the FMCG market. However, not all categories are succumbing to e-commerce. Last year, we divided categories into three groups based on their e-commerce penetration. The first group (high penetration, high growth) consists of skincare products, shampoo, baby diapers, and biscuits. These categories have high e-commerce penetration and a clear upward trend. In contrast, the second group (low penetration, low growth) consists of beverages, fabric softeners, and gum. These categories have low e-commerce penetration, but for different reasons: beverages due to high transportation costs; gum because most purchases are impulse buys; fabric softeners because they are not widely used in China. The third group falls in between, including most personal and household care products and packaged food. Top brands and retail e-commerce players have great interest in these categories and are making every effort to drive their e-commerce development. Part 3: Local vs. Foreign Brands Local Chinese brands continue to grow faster than foreign brands. In 2016, local brands achieved 8.4% growth, contributing 93% of the total FMCG market growth. In contrast, foreign brands grew only 1.5%. Among the 26 categories we studied, local brands increased market share in 18 categories, lost share in 4, and tied in the remaining 4. Foreign brands lost the most share in cosmetics, conditioners, shampoos, and toothbrushes; they gained share in gum, fabric softeners, instant noodles, and beer. Compared to international brands, domestic companies have many advantages, and they use these to gain a competitive edge. Many local companies operate only in the domestic market, are often family-owned, and have flexible organizational structures that allow them to quickly adjust strategies in response to changing consumer needs. This quick response capability allows them to evolve from imitators to innovators. We can see examples of local companies turning the tables and forcing foreign companies to play catch-up, such as foreign brands imitating local brand Seeyoung's silicone-free shampoo and other innovative products. A key reason for domestic brands' success is their focus on the "good enough" market segment, offering high cost-performance products that meet consumers' equal emphasis on price and quality. With this strategy, Nongfu Spring launched mid-range NFC (Not From Concentrate) beverages, filling the gap between high-end cold-pressed juices and concentrated juices, and thus achieved success. Similarly, local brands are faster than foreign companies in adapting to e-commerce and social media. However, it is important to note that when comparing market share of foreign and local brands, we selected the top 20 brands in each category, and the above figures represent the overall market share of domestic and foreign brands. That is, not all foreign brands are in decline. In fact, many foreign brands have successfully increased their market share in certain categories. Part 4: In-Home vs. Out-of-Home Food and Beverage Consumption Chinese people's preferred eating habits are undergoing significant changes. Currently, while personal and household care categories maintain normal growth, the growth of in-home consumption of food and beverages is gradually slowing. In recent years, as the gap widens, we decided to delve deeper into how food and beverages are consumed. This year, Kantar Worldpanel introduced out-of-home consumption data to capture food and beverage purchases resulting from out-of-home consumption. With this data, we can, for the first time, understand a major trend at all levels: a significant portion of spending on many food and beverage categories is for out-of-home consumption, including not only restaurants, bars, cinemas, bakeries, but also food consumed on the go purchased from convenience stores. Now, many Chinese consumers no longer cook at home; they prefer ordering takeout or dining out. This shift provides a new perspective on FMCG value growth. These trends present exciting new opportunities for brands and retailers. Convenience stores and grocery stores have great potential for food and beverage sales, especially in the out-of-home consumption segment. For brands, introducing packaging sizes suitable for on-the-go consumption can boost sales in convenience store channels. Convenience stores can redesign their stores to expand the range of products for out-of-home consumption—in short, both retailers and brands can leverage market changes to drive their growth. For example: the low-growth beer category can unlock significant potential through convenience store channels. You might think that the main out-of-home channel for beer is restaurants, but in reality, most beer sold in convenience stores and grocery stores is also for out-of-home consumption. This provides a basis for designing packaging sizes suitable for out-of-home consumption. In contrast, beer sold in supermarkets and hypermarkets is mostly for in-home consumption, so it is more suitable to use bulk packaging to boost sales and better meet the needs of consumers drinking at home. Finally, more Chinese people are no longer cooking at home but choosing to dine out or order takeout. According to our research, from 2013 to 2016, the volume of food consumed for home cooking grew about 3% annually, while the takeout market and dining-out market grew at about 44% and 10% annually, respectively. Some forward-thinking brands that acted early have already benefited from this trend. For example, Unilever and Fonterra's food service divisions achieved double-digit growth by selling food ingredients to restaurants. Private equity investors have unsurprisingly targeted O2O delivery platforms like Ele.me and Meituan as investment targets—since 2013, the O2O takeout market has grown at an annual rate of 40%-50%, and will continue to develop as Chinese consumers demand more convenience and quality food and beverages. Implications for Brands and Retailers Winning Strategies for FMCG Companies and Brands 1. Re-examine product portfolios to adapt to two-speed growth and major retail changes. Companies need to reassess their business portfolios, evaluating their mix of high- and low-growth product categories and channels. If a company's products are all in low-growth categories or stuck in low-growth channels, it is inevitable that they must transform. 2. Adjust product range to capture new consumer needs. In this report, we have observed that health and premium products will continue to see strong demand, and out-of-home consumption—including dining out and takeout—also has great potential. Companies can invest in product R&D, supply chain (such as cold chain), product design (such as providing packaging for takeaway food and beverages), and target appropriate consumer segments (such as B2B food service) to capture the new trends in Chinese consumer needs. 3. Continue to develop digital capabilities and broaden business functions according to an omnichannel vision. Over the past six years, the purchasing behavior research in the China Shopper Report has shown strong and sustained growth in e-commerce. As lower-tier cities begin to catch up with first- and second-tier cities in e-commerce penetration and online spending, the era of large-scale physical store expansion has come to an end. Companies that previously had advantages in offline channels in lower-tier cities will face pressure from competitors penetrating their territory through online channels. These companies now need to focus on building their digital capabilities and activating e-commerce channels to defend their traditional territories. Companies also need to design their business functions according to an omnichannel vision to meet the needs of future Chinese consumers who are increasingly mature and omnichannel-accepting, and win their favor. Winning Strategies for Retailers 1. Adjust customer strategy to achieve high growth in digital and O2O businesses. To avoid losing market share to online channels and experiencing penetration decline, traditional offline retailers need to keep up with the trend by deepening their connection with e-commerce. There are various ways to link with e-commerce: partnering with O2O delivery platforms, accepting mobile payments/digital loyalty cards/QR code coupons in stores, using social media for marketing, etc. The ultimate goal is to create a highly digitalized, seamless omnichannel shopping experience. 2. Reshape store portfolios. Retailers can reduce the average size of existing large stores. When introducing new, small, convenience-store-like formats, allocate space to sell pre-prepared food, ready-to-eat food, and takeout food. 3. Redesign stores to prepare for the huge potential of out-of-home consumption. Convenience stores and traditional grocery stores can redesign their store displays (e.g., expanding shelf space for heated pre-prepared food, increasing cold storage space for beer and juice) to leverage their central urban locations and meet consumers' growing demand for food and beverages on the go.

• Report authors: Bruno Lannes, Global Partner at Bain & Company and Chairman of Consumer Products and Retail Practice in Greater China; Ding Jie, Global Partner at Bain & Company; Guo Yafang, CEO of Kantar Worldpanel Asia Pacific; Yu Jian, General Manager of Kantar Worldpanel Greater China;
• To contact the authors or learn more about Chinese consumers, data, and analysis, please call: +86-21-22870046 Source: Kantar (ID: KantarGroup) -END-