How Brands Can Attract Shoppers in Slower-Growth China

How Brands Can Attract Shoppers in Slower-Growth China

As the dynamic growth of China’s economy slows, consumer goods companies and the retailers who sell their products find themselves adjusting to a new reality.

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How Brands Can Attract Shoppers in Slower-Growth China

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As the dynamic growth of China’s economy slows, consumer goods companies and the retailers who sell their products find themselves adjusting to a new reality. To understand the dimensions of this changed environment and identify ways brands can best adapt, Bain & Company, in partnership with Kantar Worlpanel, tracked the shopping behaviors of 40,000 Chinese households across 106 product categories, conducting deep-dive analysis on the 26 most important categories. In this, the first of two articles, we look at shifting shopper behavior and the implications for fast-moving consumer goods (FMCG) brands. In the second installment, we will report on ways the decelerating economy is being felt by retailers.

Consumer goods companies need to pay attention to five big trends highlighted in our research.

China’s consumers now spend less on necessities. China’s FMCG market growth has dropped steadily, from 11.8% in 2012 to 7.4% in 2013 to 5.4% in 2014, with sales growth declining in every major category except personal care. Total FMCG volume remained flat in 2014 compared with 2013, the result of slowing growth across most sectors and a decline in volume for the packaged food and beverage sectors. On the positive side, price levels recovered in 2014 after a drop in the previous year, mainly due to higher average selling prices in the beverage and personal care sectors.

Growth in spending per household remains much lower than the disposable income growth rate, which means that consumers are spending less of their disposable income on consumer goods. A possible explanation for this trend is that Chinese shoppers spend more in other consumer categories such as travel and leisure, cars, smartphones, and environment-related products such as air purifiers and water purifiers, all of which achieved double-digit growth. What can FMCG players do? Facing slower growth, take a hard look at your cost structure and operating model. Saving costs and speeding up decision-making and execution will allow additional investments in brands and route-to-market capabilities.

The action continues to shift to smaller cities. China’s higher-tier cities remain a critical market for FMCG players. However, that’s not where the growth is strongest. In Tier-1 and Tier-2 cities, the value of the overall urban retail market only rose by 2% in 2014, compared with nearly 8% in lower-tier cities. Following a similar slow-growth pattern set by Tier-1 cities in recent years, Tier-2 cities witnessed a substantial deceleration—from 7.4% growth in 2013 to 2.3% in 2014. As higher-tier cities mature, target shoppers in faster-growth, lower-tier cities who are still developing their aspirations for quality products.

Smaller channels and online sales are gaining ground. Traffic eroded and growth slowed dramatically for hypermarkets in 2014, but remained stable for smaller-format supermarkets, mini-marts and convenience stores. Just as smaller stores spread across the country, China has emerged as the world’s largest digital retail market. Online sales now represent 3.3% of all FMCG products sold, with the promising channel’s sales growing by 34% in 2014.

In the physical world, take advantage of the opportunity by adapting product offerings to smaller store formats. Also, invest to understand how to use China’s booming e-commerce market to reach and recruit new customers. Some companies will even consider a full digital transformation, in which their entire operating model is redefined around new digital capabilities in marketing, e-commerce, logistics and customer relationship management (CRM).

Average prices rise for some product categories, drop for others. We found huge variations in average pricing among categories, driven by price increase or mix. Among the 26 categories analyzed in our study, average prices rose by 5.4%, more than twice the rate of inflation. However, consider that the average selling price of yogurt jumped nearly 17% while facial tissue suffered a 1.8% annual drop in average price from 2012 to 2014. Product categories related to health, improving the quality of a consumer’s life or ones in which consumers had the option to trade up to more premium SKUs saw average prices rise faster than China’s inflation rate. By comparison, we identified 10 categories where the opposite pricing dynamic occurred. For example the average selling price of carbonated soft drinks rose only 2.1% annually and chocolate decreased by 0.4%. We found that, as a rule, products in low-price-growth categories are bought on promotion more frequently than products in other categories.

Clearly understand your category dynamics. If your category lends itself to higher prices, consider creating an appropriate product portfolio or investing in innovation to allow a more premium mix. In categories where price increases aren’t matching inflation, make efficient use of targeted promotions to add value and encourage new shoppers.

Local brands score big. For the third year in a row, domestic brands gained share on an aggregate basis over their foreign competitors in 18 of the selected 26 categories. Domestic companies grew by 10% in 2014, on an aggregate basis, while foreign brands grew by a mere 3%. Local brands contributed the lion’s share of market growth in 2014—as much as 87%, winning share over foreign companies again in 18 of the 26 categories, with the biggest gains occurring in skin care, fabric softener, color cosmetics, infant formula, juice and biscuits. Foreign brands gained share in only eight categories, including toilet tissue, beer, hair conditioner and chewing gum. These foreign companies lost share in all city tiers but particularly in China’s biggest cities. Chinese companies are becoming more competitive over time, and are able to leverage their stronger presence in lower-tier cities, which are achieving higher market growth.

Domestic and foreign brands alike can learn from what appeals to China’s shoppers. For example, Fabric softener maker Guangzhou Liby made its gains through increased and targeted marketing investments, such as its sponsorship of the popular TV program I Am a Singer. In the juice category, Tian Di No. 1 won because its product portfolio serves Chinese consumers’ growing demand for nutritious and healthy beverages. In the hair conditioner category, L’Oréal gained market share by expanding distribution in lower-tier cities, deploying in-store hair care advisors and launching new products such as Mythic Oil and Extraordinary Oil. Both Budweiser and Heineken took share from local beer brands, the result of Consumers’ desire to trade up. These and other leaders have learned that gaining ground in China’s New Normal means drawing heavily on shopper insights and understanding the category rules. China still holds vast potential for domestic and foreign brands – it just takes a greater determination to win.

Written by Bain & Company partners Bruno Lannes, Weiwen Han and Jason Ding. Lannes and Han are based in Shanghai and Ding is based in Beijing. All are members of the firm’s Consumer Products and Retail practices.


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