Article

Growth in a slower-growth China

For retailers and consumer products companies, capturing one's share of a slower-growth China starts by understanding that competitive position and industry stability dictate how to plot your moves.

By Bruno Lannes, Kevin Chong and Mike Booker

Published on September 30, 2009
min read


Throughout the global crisis, China defied recessionary pressures and continued to grow. Although the pace cooled from double-digit rates, many forecasters now predict that China may be the first major economy to recover. Even if it does rebound in the last half of 2009, spurred by the government's $586 billion stimulus package, the storm is far from over. Consumer products makers and retailers are confronting a more complex and brutally competitive landscape. Fast Moving Consumer Goods (FMCG) companies and the retailers who sell their products have long known that the country's vast regional differences made it difficult to rely on a one-size-fits-all approach to expansion in China. Now those differences are even more apparent. Export-dependent coastal cities like Ningbo and Shenzhen struggle with consolidation in the once-booming retail sector while those same retailers implement ambitious expansion plans to serve the fast-growing middle class in central and western China. The new environment calls for companies to become far more strategic as they readjust expansion plans, looking at each market's subtleties and potential for profitable growth. For many players, China's less impacted regions are the best bet for growth—this includes many of the over 1,500 Tier 2 and 3 cities as well as cities in central and western China, where middle-class consumers have more discretionary money to spend. As competition has intensified in the biggest cities, these cities-120 of them with populations over one million-provide a lucrative new arena for well-established multinationals selling household necessities like detergent and toothpaste. But there are a couple of complicating factors for growth in these cities. Some categories like beer are dominated by formidable domestic competitors. And domestic companies may have a competitive edge over foreigners—their established supplier and distributor networks can feed expansion while multinationals face heavy investments to catch up. Knowing where you can head in tomorrow's China starts with knowing where you stand today. Companies that succeed in the post-downturn climate will be those that understand the opportunities created or limited by their competitive position-especially against domestic players—and the implications of how their category is faring. Here's how both retailers and consumer products companies have used their market position to dictate expansion plans. Leader in a growing category Household necessities and affordable indulgences have held up well across China and are likely to continue growing, post-downturn. Leaders like Procter & Gamble, Kraft and L'Oreal have taken advantage of the economic turbulence to grab market share from weaker competitors through aggressive marketing, pursuing untapped customer segments, increasing profits through efficiencies and, when possible, acquiring struggling companies. Take Snow, China's number-one selling beer. The Chinese brewery has acquired smaller rivals, expanding into areas that both build on its local leadership and penetrate competitors' territory. In the spring, Snow acquired four beer makers, including Shandong-based Amber Breweries, giving it a foothold in the province where arch-rival Tsingtao dominates. Snow's moves have boosted beer sales volumes by 20% while revenues have grown 25% in the first half of 2009 Challenger in a growing category In relatively unscathed categories like beer, snack foods and home-care products, challengers to the market leaders are best served by staying the course in their pursuit of new growth. They should continue doing what's proven successful in brand building, consumer promotions, penetrating channels and reducing costs. Companies in this position include Tsingtao, Snow's rival, oral-care product maker Darlie and Kangshifu (KSF), a leader in beverages, instant noodles and biscuits. In Biscuits, KSF's strategy is to ratchet up efforts to gain on top-selling Kraft, while at the same time fending off encroaching foreign competitors. Among its moves: teaming with celebrity endorsers, offering value packs and bundled products, and beefing up distribution in rural areas. The company's biscuit business saw strong revenue growth of 14.5% in the first half of 2009. Operating profit margins have more than doubled from less than 4% in the first half of 2008 to more than 9% in the first half of 2009. Leader in a hard-hit category In severely impacted product categories like consumer electronics and high-end luxury goods, market leaders looking for growth know they must hold onto existing customers as they grab market share. Companies like Suning, Haier, and Pernod Ricard are building on their strengths while they exploit competitors' weaknesses. They invest in branding and distribution, focus on value offerings that get shoppers in the door, run targeted promotions and discounts, and constantly look for ways to reduce costs. Despite plunging sales in its biggest markets, Suning Appliances, a leading electronics retailer, increased profits 48% in 2008 and 15% in the first half of 2009 because the rest of its stores held up. At the downturn began, the company mapped out a strategy to aggressively expand into less impacted rural areas, improve its product mix, renovate stores and use increased services as a lure for new customers. By displaying high-profit consumer electronics items near store entrances, computer sales alone increased 30%. Challenger in a hard-hit category Weak players in hard-hit categories like consumer electronics, premium liquor and home improvement face the fewest options in the post-downturn economy. The list includes consumer electronics competitors BenQ and Electrolux, imported spirits maker Brown-Forman and UK-based home improvement giant B&Q. For these and other companies, plotting a future means downsizing to reduce costs, repositioning to capture consumer trends and promoting heavily to attract customers. B&Q opened its largest store in Shanghai amid great promise in 2001, but now is paying a heavy price for expanding too rapidly in China. To recover, B&Q is taking some dramatic steps that include closing almost a third of its Chinese stores and downsizing others; cashing in on new market trends and increasing sales with hefty discounts. B&Q is pegging its future on a new approach to expansion—more modern, user-friendly stores geared to female customers, who often make home improvement purchases. For retailers and consumer products companies, capturing one's share of a slower-growth China starts by understanding that competitive position and industry stability dictate how to plot your moves. And as growth accelerates, particularly in the North and West, and in smaller cities throughout China, it requires carefully seeking out the pockets of opportunity that have replaced a booming free-for-all. Bruno Lannes is a Bain & Company partner in Shanghai and head of the Consumer Products and Retail practices in Greater China. Kevin Chong is a manager in Bain & Company's Shanghai office. Mike Booker, a partner based in Singapore, leads Bain & Company's Asia-Pacific Consumer Products and Retail practices.

Throughout the global crisis, China defied recessionary pressures and continued to grow. Although the pace cooled from double-digit rates, many forecasters now predict that China may be the first major economy to recover. Even if it does rebound in the last half of 2009, spurred by the government's $586 billion stimulus package, the storm is far from over. Consumer products makers and retailers are confronting a more complex and brutally competitive landscape.

Fast Moving Consumer Goods (FMCG) companies and the retailers who sell their products have long known that the country's vast regional differences made it difficult to rely on a one-size-fits-all approach to expansion in China. Now those differences are even more apparent. Export-dependent coastal cities like Ningbo and Shenzhen struggle with consolidation in the once-booming retail sector while those same retailers implement ambitious expansion plans to serve the fast-growing middle class in central and western China. The new environment calls for companies to become far more strategic as they readjust expansion plans, looking at each market's subtleties and potential for profitable growth.

For many players, China's less impacted regions are the best bet for growth—this includes many of the over 1,500 Tier 2 and 3 cities as well as cities in central and western China, where middle-class consumers have more discretionary money to spend. As competition has intensified in the biggest cities, these cities-120 of them with populations over one million-provide a lucrative new arena for well-established multinationals selling household necessities like detergent and toothpaste. But there are a couple of complicating factors for growth in these cities. Some categories like beer are dominated by formidable domestic competitors. And domestic companies may have a competitive edge over foreigners—their established supplier and distributor networks can feed expansion while multinationals face heavy investments to catch up.

Knowing where you can head in tomorrow's China starts with knowing where you stand today. Companies that succeed in the post-downturn climate will be those that understand the opportunities created or limited by their competitive position-especially against domestic players—and the implications of how their category is faring.

Here's how both retailers and consumer products companies have used their market position to dictate expansion plans.

Leader in a growing category

Household necessities and affordable indulgences have held up well across China and are likely to continue growing, post-downturn. Leaders like Procter & Gamble, Kraft and L'Oreal have taken advantage of the economic turbulence to grab market share from weaker competitors through aggressive marketing, pursuing untapped customer segments, increasing profits through efficiencies and, when possible, acquiring struggling companies.

Take Snow, China's number-one selling beer. The Chinese brewery has acquired smaller rivals, expanding into areas that both build on its local leadership and penetrate competitors' territory. In the spring, Snow acquired four beer makers, including Shandong-based Amber Breweries, giving it a foothold in the province where arch-rival Tsingtao dominates. Snow's moves have boosted beer sales volumes by 20% while revenues have grown 25% in the first half of 2009

Challenger in a growing category

In relatively unscathed categories like beer, snack foods and home-care products, challengers to the market leaders are best served by staying the course in their pursuit of new growth. They should continue doing what's proven successful in brand building, consumer promotions, penetrating channels and reducing costs. Companies in this position include Tsingtao, Snow's rival, oral-care product maker Darlie and Kangshifu (KSF), a leader in beverages, instant noodles and biscuits.

In Biscuits, KSF's strategy is to ratchet up efforts to gain on top-selling Kraft, while at the same time fending off encroaching foreign competitors. Among its moves: teaming with celebrity endorsers, offering value packs and bundled products, and beefing up distribution in rural areas. The company's biscuit business saw strong revenue growth of 14.5% in the first half of 2009. Operating profit margins have more than doubled from less than 4% in the first half of 2008 to more than 9% in the first half of 2009.

Leader in a hard-hit category

In severely impacted product categories like consumer electronics and high-end luxury goods, market leaders looking for growth know they must hold onto existing customers as they grab market share. Companies like Suning, Haier, and Pernod Ricard are building on their strengths while they exploit competitors' weaknesses. They invest in branding and distribution, focus on value offerings that get shoppers in the door, run targeted promotions and discounts, and constantly look for ways to reduce costs.

Despite plunging sales in its biggest markets, Suning Appliances, a leading electronics retailer, increased profits 48% in 2008 and 15% in the first half of 2009 because the rest of its stores held up. At the downturn began, the company mapped out a strategy to aggressively expand into less impacted rural areas, improve its product mix, renovate stores and use increased services as a lure for new customers. By displaying high-profit consumer electronics items near store entrances, computer sales alone increased 30%.

Challenger in a hard-hit category

Weak players in hard-hit categories like consumer electronics, premium liquor and home improvement face the fewest options in the post-downturn economy. The list includes consumer electronics competitors BenQ and Electrolux, imported spirits maker Brown-Forman and UK-based home improvement giant B&Q. For these and other companies, plotting a future means downsizing to reduce costs, repositioning to capture consumer trends and promoting heavily to attract customers.

B&Q opened its largest store in Shanghai amid great promise in 2001, but now is paying a heavy price for expanding too rapidly in China. To recover, B&Q is taking some dramatic steps that include closing almost a third of its Chinese stores and downsizing others; cashing in on new market trends and increasing sales with hefty discounts. B&Q is pegging its future on a new approach to expansion—more modern, user-friendly stores geared to female customers, who often make home improvement purchases.

For retailers and consumer products companies, capturing one's share of a slower-growth China starts by understanding that competitive position and industry stability dictate how to plot your moves. And as growth accelerates, particularly in the North and West, and in smaller cities throughout China, it requires carefully seeking out the pockets of opportunity that have replaced a booming free-for-all.

Bruno Lannes is a Bain & Company partner in Shanghai and head of the Consumer Products and Retail practices in Greater China. Kevin Chong is a manager in Bain & Company's Shanghai office. Mike Booker, a partner based in Singapore, leads Bain & Company's Asia-Pacific Consumer Products and Retail practices.