When it comes to the best smartphones, Apple comes to mind; who is the 'Apple' in infant formula? Most would think of Wyeth. Like Apple's stellar performance in China's smartphone market, Wyeth plays a leading role in the formula market. In 2015, Wyeth became the top-selling infant formula brand in China, with annual sales exceeding 11 billion RMB, surpassing all domestic and foreign brands.

Apple phones are beautiful and user-friendly, typically sold through official websites, flagship stores, and authorized resellers, following a high-end strategy, but that doesn't stop many domestic fans from adoring them. Its products are so popular that after dominating first- and second-tier cities and capturing core users in 2012, its influence gradually descended, slowly penetrating downward. Now, in third- and fourth-tier cities, it's quite common to see a table full of Apple phones at a gathering.

Starting two or three years ago, some domestic phone manufacturers noticed Apple's neglect of third- and fourth-tier cities. On one hand, they made their phones look like Apple's, such as OPPO and Vivo; on the other hand, through TV advertising blitzes and seamless offline store and franchise store interception, they managed to climb the rankings and become the runner-up in domestic phone sales.

Times have changed. Xiaomi, which was extremely popular as an internet phone brand in 2013 and 2014, has been pushed out of the top five by down-to-earth manufacturers like OPPO. Whether in the phone industry or the formula industry, those who fail to anticipate the market early risk being eliminated.

Just as Apple phones are segmented into high, middle, and low tiers, Wyeth also has the premium Qifu, followed by Bozhen and S-26 Gold series. If we consider Wyeth as the 'Apple' of formula, the future market landscape becomes clear: today's phone market pattern will repeat in the formula industry tomorrow.

Wyeth Nutrition (focused on infant formula) saw this business secret early and took the lead in channel sinking. Starting in 2014, based in first- and second-tier cities, it expanded channels down to counties and county-level cities. By 2016, it had entered nearly 1,000 target markets. It seems to combine the 'heavenly' Apple approach with the 'earthly' OPPO approach, aiming to capture everything.

With last year's sales of 11 billion RMB, how can such a large volume grow further? Wyeth carefully analyzed the development opportunities, environment, and current situation in third- and fourth-tier cities and found that overall, the formula market has huge growth potential. Three data points are worth noting:

  1. The average annual growth rate in third- and fourth-tier cities from 2014 to 2019 is 13.2%, while first- and second-tier cities are only around 6% (source: National Bureau of Statistics).
  2. According to Nielsen data, by 2019, third- and fourth-tier cities will account for about 40% of China's total formula market share.
  3. With the relaxation of the two-child policy, the benefits are more concentrated in third-tier cities and below. Economic development, improved living standards, and consumption upgrades are key reasons for channel expansion and demand growth for high-quality products.

The current state of the formula market in third- and fourth-tier cities is:

  1. Major local brands have been deeply cultivating these cities for years, establishing a solid foundation.
  2. The market is still fragmented, filled with numerous regional small brands.
  3. Regional small brands invest more in channels, giving channel partners more incentive to cooperate with them.

Analysis shows that opportunities for foreign brands like Wyeth Nutrition exist in the following three areas:

  1. Market reshuffling in third- and fourth-tier cities: large brands will capture about 20% more market space. New regulations like the registration system will further increase market concentration, eliminating many small brands and giving large brands more room to grow.
  2. Like Apple phones, reputable and competitive imported brands will see more opportunities. The rise of new channels like cross-border e-commerce and online shopping has initially educated consumers in third- and fourth-tier cities. Compared to local brands, consumers in these cities increasingly prefer imported products, but offline purchase channels are relatively limited.
  3. Allying with channel partners to deeply cultivate third- and fourth-tier markets is the future trend.

As an industry leader, Wyeth has already taken action in three areas:

  1. As one of the key strategic moves to deepen channels, Wyeth Nutrition launched the Go Deep deep-distribution program to seize the opportunity in counties and county-level cities.
  2. Industry dynamics such as the two-child policy, e-commerce, and formula registration system make third- and fourth-tier cities (counties and county-level cities) the new channel breakthrough point. In July 2016, it will deepen its downward strategy, launch the deep-distribution program, ally with channel partners, and increase market share in county-level cities and counties. Wyeth Nutrition is taking the lead, once again guiding foreign formula brands in channel expansion.
  3. As an industry leader, Wyeth Nutrition has strong capabilities in market share, new products, channel layout, brand reputation, and scientific innovation, enabling it to lead business partners in seizing opportunities, responding to market changes and challenges, and achieving win-win outcomes.

In the coming years, just as Apple has been accepted by more people in third- and fourth-tier cities, these cities are the new channel breakthrough for foreign formula brands. Wyeth Nutrition's early move may lead the trend of channel transformation for foreign formula brands.

Of course, risks and rewards coexist. Cooperating with major brands is a new breakthrough for channel partners in third- and fourth-tier cities. Securing resources from big brands can help seize market opportunities. The advantages are:

  1. Brand effect of major brands. In third- and fourth-tier cities, word-of-mouth spreads more effectively. Once a brand takes the lead, it can quickly open up the market.
  2. Stable profits. Compared to channel brands, profits from major brands may be slightly lower, but the overall cooperation model is more standardized and stable, making the business more secure.
  3. Major brands have strong R&D capabilities, continuously introducing new products and exploring new market opportunities.

There are, of course, disadvantages. If you're smart, you can leave a comment to discuss and clarify the future. Thank you!

Source: Consumer Daily Exposure (ID: expo315)

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