From March 14 to 16, the 9th China FMCG Innovation Conference, themed "Supply Chain Revolution," was held in Chengdu. During the conference, over a hundred guest speakers and more than two thousand manufacturer and distributor representatives from across the country explored how distributors and brand owners can seek growth in the current environment.

Among them, Yu Jian, General Manager of Kantar Worldpanel Greater China and a consumer and retail market expert, delivered a keynote speech titled "Seizing New Growth Opportunities in the Consumption Recovery Period" at the main forum, which sparked lively discussions among the manufacturers present.

New Distribution is pleased to report on the highlights of his speech for our readers.

2023 China FMCG Market Shows Moderate Recovery

Kantar Worldpanel studies consumers by observing their daily purchasing behavior in real time. We monitor the daily FMCG purchasing behavior of 62,000 households in China, as well as out-of-home consumption. From a consumer perspective, we gain insights into what they buy, see, and think across different channels, times, and scenarios, helping FMCG companies form a 360-degree understanding of consumers.

There may be a gap between macroeconomic data and our individual perceptions. According to the latest data from the National Bureau of Statistics, China's overall GDP and total retail sales of consumer goods recovered steadily in 2023, and urban residents' disposable income also grew steadily. Spring Festival travel data further shows the vitality of the consumer market. However, on an individual level, we also saw many categories, regions, and channels facing pressure on business growth over the past year.

So, what is the overall consumer market situation?

Let's look at real consumer purchasing data in China.

Based on Kantar Worldpanel's monitoring of over 100 categories, the market is recovering moderately, but growth is not as strong as expected, with annual sales growth of 1.2%.

That was last year's data. What about the Spring Festival? How does January-February this year compare to the same period last year?

In the first two months of this year, in-home consumption was roughly flat compared to the same period last year, while out-of-home consumption grew by 9% year-on-year. The overall market still has many opportunities, but we also see significant differences in performance across categories.

Among major categories, beverages remain a strong growth track, with 8% growth in 2023. Of course, we also saw some categories that benefited from the pandemic in the past three years decline significantly last year. Categories related to social scenarios also showed good recovery. In the first eight weeks of this year, the food category maintained steady growth overall.

Changes in consumers' wallet share reflect shifts in their values and positive emotions. Kantar's monthly monitoring shows that Chinese consumers' positive emotions remained relatively stable in the second half of the year. Consumer research also shows that consumers are no longer only pursuing material success but are more focused on physical and mental balance, and spending more time with family. This will inspire brands on how to communicate with consumers.

Value-for-money further penetrates high-income groups

Out-of-home scenarios accelerate recovery

Value-for-money is what we've talked about most over the past year. Today's consumers do not want to sacrifice quality but hope to buy higher-quality products at cheaper prices. Kantar's research also found that, especially in the fourth quarter of last year, the proportion of high-income households who value cost-effectiveness increased significantly. This change deserves attention.

Looking at different household types, consumption trends have become more differentiated after the pandemic. Mature families and high-income groups have increased their spending on FMCG, while young families spend more time on outdoor/social activities, and their in-home demand has relatively declined.

In 2023, the out-of-home consumption market recovered rapidly, with outdoor scenarios such as travel, shopping, and sports warming up significantly quarter by quarter. People are more eager to go out, immerse themselves in nature, and enjoy a normal life. According to Kantar Worldpanel's monitoring, functional drinks, ready-to-drink tea, juice, coffee, and other ready-to-drink beverages achieved good growth both in-home and out-of-home last year. Ice cream, puffed snacks, biscuits, and other leisure snacks showed significant recovery in out-of-home scenarios.

Health and food safety are the top concerns for Chinese consumers. After three years of nationwide health awareness education, consumers' cognition has been upgraded, and they are more consciously choosing products with reduced salt and sugar. Health needs are increasingly extending to more segmented tracks, leaning towards purity and specialized functions. The rapid growth of probiotic functional products, sugar-free tea, pure juice, and functional drinks all indicate the potential for innovation-driven growth in these tracks.

Compared to in-home, out-of-home consumption scenarios are more diverse, and in each scenario, consumers' preferred purchase channels and categories differ. The three most important scenarios we just discussed—travel, entertainment, and shopping—all harbor strong consumption opportunities. Brands must think about how to seize these new scenario opportunities and provide products that consumers are willing to pay for, thereby continuously stimulating business growth.

2024 China Consumer and Retail Market Outlook

In terms of consumers' wallet share, large formats (especially hypermarkets) have seen their share decline over the past few years, while small supermarkets/convenience stores have shown more resilience. The importance of e-commerce channels has further solidified, rising from 29% in 2022 to 30% in 2023, mainly driven by the growth of interest-based e-commerce. Of course, retail channels vary significantly by city tier, so brands must allocate sales resources according to their specific markets.

For the overall FMCG retail trends this year, we share five outlooks:

First, small formats will be big business

The business opportunities for small formats are not small. Over the past year, and even the past few years, we have clearly seen that Chinese consumers are increasingly unwilling to spend time shopping in large stores, while the convenience and flexibility of small formats have gained more competitive advantages. In terms of sales share, small formats have grown far ahead of the overall market. This is also inseparable from the rapid expansion of regional small-format brands, such as Meiyijia and Hongqi Chain, which is ubiquitous in Chengdu. At the same time, more foreign convenience store chains are accelerating their expansion into lower-tier markets, expanding the supply side. Kantar Worldpanel data shows that small formats (small supermarkets/convenience stores) grew by 6% in upper-tier cities and nearly 10% in lower-tier cities. Brands should accelerate the provision of appropriate product portfolios and develop corresponding sales promotion strategies to better win together with small formats in lower-tier markets.

Second, transformation of traditional supermarkets

The transformation of traditional supermarkets has entered the deep-water zone. In recent years, intensified competition has not driven market concentration. We update the market share of China's top ten retailers every year, hoping to see leading players become stronger, but the reality is contrary to expectations: most leading retailers have seen their market share decline to varying degrees. In 2022, the top ten retailers accounted for 38% of the market share, but in 2023, it was only 35.9%. Suning Group fell out of the top ten this year due to the accelerated closure of Carrefour stores. This also reflects the intensification of retail fragmentation and the strengthening of regional leading brands' competitiveness. Of course, one of the highlights of the modern trade in recent years is membership stores. In 2023, competition in membership stores further intensified, with Sam's Club, Costco, and others accelerating store openings and entering a high-speed development phase. At the same time, local membership stores have also begun expansion, hoping to use Chinese models and more down-to-earth products and services to meet the consumption needs and potential of second- and third-tier cities and below. M Membership Store under Gaoxin Group, based in Jiangsu, continues to deepen its presence in the Yangtze River Delta, leveraging local advantages to provide more user value. In 2024, we will wait and see who will win in the battle of more same-city membership stores.

Third, e-commerce competition focuses on "low price" mindset

Before 2019, e-commerce competition in China was about consumption upgrading, with platforms like Tmall driving that trend. However, entering the second decade of e-commerce competition, returning to the essence and creating value, "more, faster, better, and cheaper" has become the new keyword for e-commerce platform competition. For a considerable period in the future, platforms will invest in competing for the "low price" mindset. Pinduoduo, which has a deeper low-price mindset, and Douyin e-commerce, with strong price competitiveness, pose significant challenges to Taotian Group and JD.com. Our data shows significant changes in consumer penetration among the top five e-commerce platforms in recent years. Douyin's e-commerce business has grown rapidly. In 2024, Douyin is likely to maintain its growth momentum and become the second-largest platform in terms of consumer penetration, second only to Taotian. In addition to live-streaming e-commerce, Douyin has also established a certain scale in shelf-based e-commerce. About 45% of Chinese households have bought FMCG on Douyin in the past year, with an average purchase frequency of nearly 10 times. The mechanism of allocating traffic exposure based on price competitiveness may further strengthen Douyin's "affordable" mindset.

Fourth, community group buying landscape becomes clearer, self-operated O2O business gains momentum

The three years of the pandemic led to explosive growth in instant retail (O2O). Even last year, more than 50% of Chinese consumers chose to purchase FMCG through various instant retail models. But if we analyze the different models in depth—community group buying, retailer self-operated, integrated platform models, and front-warehouse models—the growth drivers differ. In community group buying, after Chengshituan exited, Meituan Select and Duoduo Maicai still maintained good growth. In 2023, retailer self-operated stood out, with some membership store retailers driving this growth. In addition, after experiencing ups and downs, front-warehouse platforms have moved away from the previous land-grabbing phase, focusing on consolidating cost and efficiency advantages through strategic focus. Xiaoxiang Supermarket's "renaming" gradually expanded Meituan Maicai's "fresh food" positioning to a "one-stop" shopping choice for consumers.

Fifth, discount formats accelerate development, with both opportunities and challenges

Hard discount formats have become the "squid" of the retail industry in the past year, showing rapid development. However, according to Kantar Worldpanel's observations, the development of discount stores is still relatively concentrated in upper-tier cities, and there is still huge room for future growth. Our analysis indicates that young singles and young families with children are more inclined to shop at discount stores. The development of the European market can provide some insights for the future. We can see that private label market share in Europe has reached over 40%, and every past economic crisis has driven the rise of private labels. The chart below shows the purchase index of consumers at different income levels in discount store channels in three major European countries. Interestingly, whether in Germany, the UK, or Spain, we can see that high-income families have become the main customer base of discount stores. The past belief that discount stores serve low-income consumers has been broken. We predict that the penetration of private labels in China will continue to increase, and discount stores will attract more middle-class families. Therefore, everyone should prepare their product portfolios and business strategies based on this trend.

Pessimists are always right, but optimists always move forward. In 2024, by doing well in new channels and new scenarios, brands still have the opportunity to break through the involution and achieve growth. We suggest that brands seize the certain demand of consumers who want both health and enjoyment, continue to deepen the health track, gain insights into consumers' evolving needs for specialized functions and physical and mental balance, layout innovation, and build a competitive moat.

Brands need to grasp emotional business opportunities in the rational consumption trend, accurately capture changing interest hotspots, integrate into new lifestyles and consumption scenarios, and convey brand value through ultimate experiences and emotional connections. At the same time, we will provide real-time insights into consumers' channel migration and find increments in the stock. The channel landscape is further differentiating, and the low-price mindset will inevitably be a double-edged sword. New discount formats must attract more customers through stronger product strength and value realization to promote the healthy development of the retail ecosystem.

PS: For those interested in the on-site speech content, please follow the WeChat official account of New Distribution for recent posts. We will compile and publish all guest speeches for our readers.

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