Kantar Worldpanel and Bain & Company released the full version of 'How to Master the Two-Speed Shopper in China—2016 China Shopper Report, Series II' on November 24. A long report, a classic to collect. Table of Contents 1. Executive Summary . . . . . . . . . . . 1 2. Report Body . . . . . . . . . 3 a. China's Consumer Market Continues to 'Move at Two Speeds' . . . 3 b. Different Trajectories for Different Retail Formats . . . .. 5 c. The Irresistible Force of E-commerce . . . . . . . . 8 d. The Singles' Day Phenomenon . . . . . . . . 13 3. Implications for Retailers . . . . . . . 18 4. Author Biographies and Acknowledgments . . . . . . . 20 Executive Summary As we noted in the first series of China Shopper Reports, China's economic slowdown and the government's emphasis on services have had a significant impact on FMCG manufacturers. Categories once favored by blue-collar workers, such as instant noodles and cheap beer, have seen extremely slow sales growth or even declines, while products favored by the rising middle class, such as yogurt and pet food, have grown rapidly. As of the first half of 2016, this trend has not changed significantly: categories that were sluggish last year continue to decline, while previously strong categories, especially personal care products, continue to grow at a high rate. The 'two-speed' situation is also unfolding in retail formats. Online retail has been booming for over a decade, while most offline retail channels, except convenience stores, have seen near-zero or even negative growth. Although convenience stores currently account for a relatively small share of China's total retail market, their importance will grow in the coming years. Online retail continues to lead China's retail growth and remains the most watched hotspot, and it is beginning to cannibalize offline retail. In 2015, online FMCG sales rose by 36.5%, driven primarily by a 69% increase in volume, which offset a decline in average selling price. The diversification of online product categories, significant growth in imported products, and a large number of consumers attracted by promotions have jointly driven the rapid growth of online retail. Online retail's share of FMCG distribution is increasing, and it is undergoing significant changes. The e-commerce channel is consolidating at a relatively steady pace, with the top ten e-commerce players' share of FMCG sales increasing from 55% in 2014 to 64% in 2015, with the top four accounting for 55% of total online consumer spending. Taobao, Tmall, and JD.com remain dominant. Taobao's market share has declined, while JD.com, after acquiring Yihaodian, is expected to rival Tmall. The annual Singles' Day promotion on November 11 is a highlight of online retail. In 2016, Alibaba alone achieved $17.8 billion in sales on Singles' Day. Our research on Singles' Day 2015 provides new insights into this innovative and uniquely Chinese online promotional approach. Overall, the sales increment from Singles' Day promotions is mainly driven by three major growth engines: • Existing online shoppers in each category buy more during the Singles' Day promotion (e.g., laundry detergent, tissue, and infant formula) • Online shoppers who delay their purchases until the Singles' Day promotion period • Online shoppers attracted by the promotion to start buying new categories. For example, for biscuits, fabric softener, and shampoo, most of the sales increase came from first-time purchases by online shoppers, so online promotions can serve as a door-opener for acquiring new customers in these categories. More importantly, our data shows that the online sales growth during Singles' Day largely comes at the expense of offline channel sales. In the coming years, online retailers will need to adjust based on these findings and shopper preferences. For example, in addition to buying promotional products, consumers continue to increase their purchases of premium brands and imported goods. This phenomenon is also evident during Singles' Day. Meanwhile, brick-and-mortar retailers are beginning to face the new reality. As more consumers shift online, offline channels are increasingly playing a supplementary role to online retail. Consumers used to make bulk purchases in hypermarkets and visit convenience stores for top-ups when needed. Now they are more likely to buy online via laptops or mobile phones rather than going to hypermarkets. Convenience stores remain the preferred choice for supplementary purchases. The convenience store format has benefited from accelerated urbanization. Our annual FMCG shopper survey shows that convenience store sales grew by 13% compared to the same period last year. Convenience stores are a grab-and-go shopping venue and are gradually evolving into one-stop channels offering services from ticketing to paying utility bills. The current impressive growth is mainly driven by the efficiency of new store expansion, with the biggest challenge being how to maintain stable profit growth under high property prices. In contrast, the difficulties of traditional and large retail formats are well known. Our survey results show that the traditional trade channel contracted by 10.4%, hypermarkets saw negative growth of 0.2%, and supermarkets/small supermarkets slowed to 4% growth. These formats face many key decisions in the new environment, such as slowing store expansion, addressing declining foot traffic, and focusing on operational efficiency to maintain profit margins. Successfully implementing online-to-offline (O2O) strategies is a common goal for both physical and online retailers.
Report Body China's Consumer Market Continues to 'Move at Two Speeds' China's FMCG retail market is moving at two distinctly different speeds. Online retailers are fully seizing the broad opportunities brought by channel development. In 2015, online retail sales grew by as much as 36.5%, while physical channels performed poorly. Although traditional trade and large retail formats are still trying to reverse their sluggish sales performance, offline FMCG retail sales only achieved 2.6% year-on-year growth in 2015, slowing to 1.5% in the first half of 2016, with volume showing negative growth. Convenience stores are the only bright spot offline, but they also face the challenge of balancing rapid growth with maintaining profits. Since the end of 2014, packaged food and beverages, and household and personal care categories in the FMCG industry have shown different growth trends (see Figure 1). In the first half of this year, FMCG retail sales in urban areas grew by 3% compared to the same period in 2015, volume declined by 0.2%, and average selling price rose by 3.3% (see Figure 2). We have conducted 12 regular studies on the shopping behavior of 40,000 Chinese households, gaining deep insights into consumer and retail trends in the Chinese market. We equipped each sample household with a barcode scanner to collect actual purchase records in real time, rather than relying solely on their verbal descriptions. This unique research method gives us a clear picture of consumer purchasing behavior across 26 FMCG categories. By comparing the performance of different categories, we can see the current state of two-speed growth. Despite China's economic downturn, personal care products, such as shampoo and toothpaste, rebounded in the first half of 2016, with growth reaching 9%. This is mainly due to an increase in average selling price above the inflation rate, which we call 'premiumization.' Household care products, such as kitchen cleaners, have maintained relatively high volume growth, with volume growing 2.9% in the first half of 2016, compared to 2.3% in the same period in 2015 (see Figure 3). However, their average selling price only rose by 0.8%, below the inflation rate, a phenomenon we call 'popularization.' Figure 1: Since the end of 2014, the growth trajectories of packaged food and beverages and personal and household care categories in the FMCG industry have diverged. Figure 2: With volume declining and price growth slow, the overall FMCG growth rate is around 3%. Figure 3: Personal and household care products saw a slight rebound in the first quarter of 2016. Many packaged food and beverage categories are facing declining performance (see Figure 4). Beverage sales growth slowed from 5.6% in 2015 to 3.2% in the first half of 2016, and volume has been negative for three consecutive years. The average selling price of beverages only grew by 3.3% in the first half of 2016, compared to 6.2% in 2015. These trends are partly influenced by the Chinese government's 'new normal' policy, which emphasizes services and promotes the transformation and upgrading of traditional manufacturing. Manufacturing is gradually shifting to low-wage countries such as Vietnam and Bangladesh, and categories traditionally favored by blue-collar workers have seen significant sales declines. This group of consumers is also more cautious in spending. Although most beverage products saw negative growth in the first half of 2016, packaged water was an exception. This is mainly because the price of packaged water has become more acceptable to the public, and there is growing concern about health. This is a demand from all consumers, not just the wealthy. With the rapid growth of China's service industry, the middle class is more willing to pay for health care and other premium consumer goods. This is the main reason why personal care and yogurt categories have shown relatively strong growth. In contrast, gum and candy categories experienced double-digit negative growth in the first half of 2016. Figure 4: Price growth for packaged food and beverages continues to slow, with volume declining in 2016. E-commerce and convenience stores grow strongly, supermarkets face slowing growth, and hypermarkets even see declining sales. Different Trajectories for Different Retail Formats In the retail landscape, the two-speed growth of FMCG is equally evident. E-commerce and convenience stores are growing strongly; supermarkets are facing slowing growth, and hypermarkets are even seeing declining sales (see Figure 5). Traditional grocery stores, hypermarkets, and supermarkets/small supermarkets remain sluggish. Figure 5: E-commerce and convenience store channels maintain strong growth momentum, supermarket channel growth slows, and hypermarket sales decline. Traditional grocery stores and hypermarkets have growth rates of -10.4% and -0.2%, respectively, while supermarkets/small supermarkets slowed to 4%. Small retailers such as convenience stores, emerging retail formats like Carrefour Easy, and specialty stores like Watsons drove FMCG growth in 2015 (see Figure 6). Although the large supermarket channel is generally weak, RT-Mart and Yonghui still achieved growth of 12% and 14% in 2015, respectively (see Figure 7), but their growth mainly came from store expansion. Same-store sales growth for all large supermarkets continued to decline, foot traffic decreased, and average purchase volume stagnated. Figure 6: In 2015, small retailers and emerging retail formats were important sources of FMCG growth. Figure 7: Among leading retailers, RT-Mart and Yonghui Superstores had the strongest sales growth in 2015. The sluggishness of traditional hypermarkets and supermarkets/small supermarkets contrasts sharply with the steady growth of convenience stores, which achieved over 13% growth in 2015, nearly double the growth rate in 2014. Although the convenience store channel is still relatively small, and a significant portion of growth comes from new store expansion, it is a segment worth watching in China's overall retail landscape. As China urbanizes, more convenient and faster shopping methods complement online shopping to some extent. In addition, convenience stores are emerging as one-stop service platforms, offering services such as bill payment, ticketing, and other innovative services like online purchase pickup. JD.com, Tmall, and other e-commerce platforms are currently cooperating with convenience stores to use them as pickup points for O2O integration, achieving a win-win situation. Pickup services not only leverage the extensive store network of convenience stores, reducing the 'last mile' delivery burden for e-commerce like Tmall, but also bring additional foot traffic to convenience stores. However, convenience stores also face significant challenges: they need to develop strategies to balance network expansion while maintaining profits amid rising urban rental costs. 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 Bianli (Quan Shi) convenience store chain plans to double its expansion in China over the next five years. The top ten convenience store chains fall into two types (see Figure 8). One type is national premium brands, such as FamilyMart and 7-Eleven, and the other is regional mass brands, such as Meiyijia and Tianfu. These two types of convenience stores adopt different expansion and retail strategies. 7-Eleven and FamilyMart use a 'high-threshold' model, requiring higher franchise fees and deposits, and strictly enforce uniform standards in store decoration, stocking, pricing, display, and promotions. Their stores are concentrated in first- and second-tier cities, targeting white-collar consumers near urban centers, commercial hubs, or subway stations, with a focus on food and beverages, including increasingly popular ready-to-eat products. Meanwhile, regional mass brands like Meiyijia and Tianfu Figure 8: Convenience store retailers fall into two types, focusing on different segments and products. adopt a relatively lightweight franchise model. The investment required for franchisees to open stores is significantly lower than for national brands, and the stores are relatively smaller and concentrated in residential areas. They are characterized by a greater focus on personal and household 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 national coverage in first-tier cities, while others mainly have advantages locally or in specific regions (see Figure 9). Among them, Meiyijia and FamilyMart are growing the fastest, with annual growth rates between 15% and 20%. They continue to expand new stores and gain market share from competitors like C-Store and Haode. Due to intense competition and rising cost pressures in first-tier cities, C-Store and Haode both closed some stores in 2015 (see Figure 10). Figure 9: Among the top ten convenience store retailers, except for FamilyMart and 7-Eleven, which have layouts in national first-tier cities, most are regional. Figure 10: Meiyijia and FamilyMart have expanded new stores in recent years, while Haode and C-Store have reduced store numbers. The Irresistible Force of E-commerce China's convenience stores are developing rapidly, but the growth of e-commerce channels is even more astonishing. Online FMCG sales grew by as much as 36.5% in 2015, and the online retail market is also consolidating. The top ten e-commerce players' share of FMCG sales increased from 55% in 2014 to 64% in 2015, with the top four accounting for 55% of online consumer spending. Taobao, Tmall, and JD.com still firmly control China's e-commerce market, and after JD.com's acquisition of Yihaodian, it is expected to rival Tmall. At the same time, many smaller e-commerce companies have achieved remarkable success, such as the beauty platform Jumei, which grew at a rate of 6 times per year from 2013 to 2015, while its competitor Lefeng.com achieved an average annual growth rate of 245% during the same period (see Figure 11). Figure 11: The top four e-commerce players in the online retail market continue to consolidate, but the remaining six also maintain rapid growth. The sources of online FMCG sales growth are worth noting. Our research shows that online retail is slowly cannibalizing offline retail. In 2013, 60% of online retail growth was organic, while in 2015, the organic growth rate was 53%, with 47% of growth coming from offline channel switching (see Figure 12). Figure 12: Online growth cannibalizes offline retail, but 53% of growth still comes from organic growth. The strong growth of online FMCG is mainly driven by a significant increase in volume. Data shows that online volume grew by 69% in 2015, meaning online shoppers bought more products, visited shopping sites more frequently, and purchased more categories online (see Figure 13). Volume growth even offset the decline in average selling price (which fell by 7% and 19% in 2014 and 2015, respectively). Figure 13: Average selling price declines, and online channel growth is mainly driven by volume. The decline in average selling price is an inevitable result of the diversification of online product categories. As we noted in 'Winning Over Chinese Shoppers in the New Normal—2015 China Shopper Report Series II,' categories that first achieved high online penetration (infant formula, baby diapers, skincare, and cosmetics) had higher average selling prices per kilogram or per item. As consumers increasingly buy lower-priced categories online, such as yogurt, biscuits, milk, and shampoo, the average selling price of online shopping is pulled down. Categories like yogurt and fabric softener achieved an average annual growth rate of 57% from 2013 to 2015, compared to only 15% for categories with higher average selling prices, such as baby diapers, infant formula, and skincare (see Figure 14). Figure 14: The diversification of online product categories leads to a decline in average selling price. 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 (see Figure 15). Approximately two-thirds of online retail sales are imported and promotional products, which is twice the share of imported and promotional products offline. For Chinese retailers, promotions are becoming increasingly important. Our research found that in 2015, 40% of online FMCG sales were made during promotions, while offline promotional sales accounted for only 19% (see Figure 16). Figure 15: Imported goods remain an important source of online FMCG sales. Figure 16: The share of FMCG sales during promotions steadily increases. Chinese consumers are also increasingly turning to imported products online. The Singles' Day Phenomenon Every November, the 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 Singles' Day, a 24% increase over 2015. Mobile purchases accounted for an incredible 82% of sales. Users from 235 countries participated in the shopping festival, with overseas purchases up 60% compared to 2015. We conducted an in-depth analysis of the sales performance of the Singles' Day online promotion and found several important trends. Singles' Day helps categories with low online penetration, such as toothbrushes and shampoo, attract more consumers (see Figure 17). As shown in the figure, toothbrush sales increased by 163% during Singles' Day, while shampoo sales increased by 103%. Categories with relatively high online penetration saw more moderate growth, with infant formula sales increasing by only 19% during Singles' Day. Figure 17: Categories with low online penetration see more prominent sales growth during the Singles' Day promotion. A notable phenomenon of the Singles' Day promotion is the short-term conversion of some offline purchases to online. Three types of shoppers drove the increase in total consumer spending: • Existing online shoppers bought more during the Singles' Day promotion, especially in categories like laundry detergent, tissue, and infant formula; • Online shoppers who delayed their purchases until the Singles' Day promotion period; • Online shoppers attracted by the promotion to start buying new categories, such as fabric softener, shampoo, and biscuits online. We compared total sales expenditure for the four weeks before Singles' Day, the 48 weeks before Singles' Day, and the four weeks including Singles' Day, and found that existing online shoppers who bought more contributed only 28% of the growth, while the remaining 76% of growth came from so-called 'new' online shoppers (see Figure 18). Figure 18: Online promotions benefit categories with low online penetration, mainly because Singles' Day attracts more consumers to buy online. 'New' online shoppers fall into two types. Approximately 38% of consumers had never shopped online in the past 12 months; these shoppers were converted by the Singles' Day event, increasing the category's online penetration and bringing actual online retail growth. In contrast, about 62% of consumers had made online purchases in 2015 but had not made online purchases in the four weeks before Singles' Day. They may have waited to buy during the Singles' Day promotion, or they may only buy categories that do not require frequent repurchase. A notable phenomenon of the Singles' Day promotion is the short-term conversion of some offline purchases to online (see Figure 19). This phenomenon is most pronounced in categories with high online penetration, such as baby diapers, where the online sales share reached 55% during Singles' Day 2015, before falling back to the normal range of 45%. Figure 19: During the Singles' Day promotion, consumers shift from offline to online purchases. From our analysis, we also gained some insights. For categories like biscuits, fabric softener, and shampoo mentioned earlier, the vast majority of sales expenditure growth came from consumers who bought the category online for the first time. Therefore, online promotions can help these categories acquire new consumers. Singles' Day is not just about discounts; it also raises the average selling price of categories such as sanitary care products and toothbrushes (see Figure 20). Regardless of the category, it is uncommon for promotions to show a premiumization trend. We believe this is because more imported goods are promoted and sold during Singles' Day. For example, imported sanitary care products and toothbrushes saw double-digit growth in sales share during Singles' Day. Meanwhile, Vinda, the leading brand in toilet paper and tissue, used the Singles' Day event to promote its premium products, further catering to the premiumization trend of Singles' Day. China's Singles' Day online shopping festival attracts the attention of FMCG companies and e-commerce players worldwide and is an excellent opportunity to drive online retail and understand the online market. Figure 20: Some categories also show a premiumization trend during the Singles' Day promotion, partly due to increased spending on imported goods. Implications for Retailers In last year's report, we mentioned that to succeed in China, large retailers need to do the following simultaneously: • Insist on focusing on local or regional markets; • Reduce store footprint and close underperforming stores; • Adjust store formats and introduce small formats similar to convenience stores; • Implement O2O strategies so consumers can buy online and pick up in store, solving the last-mile delivery issue. The need for business adjustment among large retailers has 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 growth of online shopping will further exacerbate the decline of large retailers. 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 has limited profit margins. 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 achieve higher profits by putting pressure on 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. Regarding O2O, Alibaba Group Chairman Jack Ma recently made a thought-provoking prediction in a letter to shareholders: 'Today, e-commerce itself is becoming an outdated concept,' he wrote. 'In the coming years, we will see new retail forms that integrate online, offline, logistics, data, and the entire industry chain. When e-commerce becomes 'traditional commerce,' pure e-commerce companies will also face huge challenges.' Indeed, the future is full of opportunities. Only through more efficient cooperation between major retailers and e-commerce platforms can we create a prosperous and developing new retail industry for Chinese consumers. Bruno Lannes is a Bain & Company global partner and chairman of the Greater China Consumer Products and Retail practice, based in Shanghai. Wei Yu is a Bain & Company global partner, based in Shanghai. Jie Ding is a Bain & Company global partner, based in Beijing. Yafang Guo is CEO of Kantar Worldpanel Asia Pacific. Jian Yu is General Manager of Kantar Worldpanel China. Acknowledgments This report was jointly produced by Bain & Company and Kantar Worldpanel. The authors especially thank Weiwei Xing, Shan Jiang, Yue Chen from Bain & Company, and Rong Li, Yi Qin, and Huijun Zhang from Kantar Worldpanel for their contributions to this report. Source: Kantar China Special thanks to the FMCG Elite Club editor Feiyu for organizing and presenting this report. -END- The best learning platform for FMCG distributors 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 eighteen 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]