How Brands Can Stay Ahead In China

How Brands Can Stay Ahead In China

Getting ahead in China's new retailing era means developing a “challenger” mindset that allows you to act swiftly.

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How Brands Can Stay Ahead In China

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The world’s largest and most ambitious grocery market is undergoing fast and forceful shifts, requiring consumer goods players to move equally fast and forcefully if they hope to grow and maintain their margins.

Physical retailers in China now find themselves responding to a dizzying array of consumer trends. There is the relentless rise of online purchasing at the expense of offline. Bain & Company estimates that digital sales will expand by 41% annually through 2020, while hypermarket sales will grow by at most 1% per year, and supermarket sales by 4%. There is also the big movement to mobile payments. In 2016, mobile payments by Chinese consumers were more than 50 times greater than those made by US shoppers.

Other big trends are afoot, too. Chinese consumers are showing a passion for health and wellness (among those who can afford it) and, along with increasing urbanization, a seemingly unending need for convenience. We expect convenience store grocery sales to grow by as much as 13% on a compound annual basis through 2025. Another sign of the appetite for convenience: In huge numbers, Chinese consumers are opting to order food delivery or eat out instead of cooking at home. Meituan, the largest food delivery platform, has 300 million registered users, nearly the size of the entire US population.

These trends are fueling rapid growth in some product categories and retail channels, while China’s less-affluent and older consumers are contributing to tepid growth in other categories and channels. The ultimate result is that China’s consumers have given rise to a two-speed environment that is quickly changing the course for all retailers and brands. In addition, it is all happening as China’s multitiered retail distribution model feels the strains of traditional physical retailing’s slowdown.

These big shifts, combined with new competition from small, challenger brands, are causing many fast-moving consumer goods (FMCG) companies to rethink their business models. Some are redefining their organizations. Others are focusing on building newly critical capabilities like targeted marketing. We have identified seven key steps that can guide these moves and help brands navigate the changes.

Brands can get ahead of these shifts by devising a tailored approach to e-commerce. Consumer goods companies will need to use technology aggressively to collect and act on consumer data. E-commerce provides them with a unique opportunity to learn more about their consumers, instead of flying blind, as many did in the old brick-and-mortar world. One proven option is to partner with key players to make the most of their full ecosystems. Taking this approach, Mondelez International partnered with Alibaba. It can now use Alibaba’s wide product suite to locate and engage targeted customers and proactively mine customer behavior data to tailor product offerings and marketing campaigns. This creates a closed loop that spurs purchases and repurchases. Companies should look to invest in digital marketing, digital operations, digital products and digital commerce. However, while digital is the biggest growth area, it is important to design business functions with an omnichannel vision.

They can adapt portfolios for the two-speed environment. That starts by understanding category and format dynamics, then investing to grow in high-speed categories or channels while managing for cost—or exiting—low-speed categories or channels. In instant noodles, Master Kong and Uni-President now target white-collar shoppers with new premium product ranges, while compensating for declining volumes among their traditional blue-collar shoppers by raising prices on mass products.

They can get ahead of the out-of-home consumption trend by adjusting their offline format mix. For example, food and beverage players can invest to build food service divisions that take advantage of China’s boom in meals purchased on-premise. Fonterra’s food service sales are growing by more than 36% per year. In addition to branded products such as beer and carbonated soft drinks, food service divisions can sell ingredients for on-site food preparation, such as bouillon and cream, and branded staples such as noodles.

They can work with convenience store players to ride that channel’s rapid rise. Brands that want to cash in on this growth will invest in a number of important areas. For example, they will offer pack sizes specifically tailored for the channel and sell ready-to-eat meals or hot beverages for on-premise consumption. They’ll devise pricing and promotion strategies to maximize sales of select hero SKUs, relying on data to determine which SKUs to offer and where in the store to display them. They’ll increase basket size by bundling products, and reward retailers by linking trade terms to in-store performance.

They can redefine a holistic route-to-market approach for the changing retail landscape. Brands need to harmonize how they serve and sell to channels. Many opt to access online retailers directly. But that raises the challenge of aligning prices between online retailers and the distributors and wholesalers that populate the traditional distribution network. Compounding the situation, some powerful distributors are opening their own online storefronts. Meanwhile, brands need to develop upgraded solutions for penetrating traditional trade and food service outlets, working with the new generation of B2B digital distributors that give brands more visibility into the flow of products and a way to collect more information from retailers.

They can achieve a step change in reducing costs. Most brands realize that cost reduction is an integral part of the game plan. It enables a brand to become a cost and price leader. It buys time and helps fund the many moves required to adapt to the changing retail landscape. That is why winning brands in China are laying plans to eliminate unnecessary costs and adopting technology to improve productivity—by using image recognition to keep track of products on retailers’ shelves, for example.

They can work with modern retailers to stem the decline of offline sales. The era of massive expansion of physical stores is over, but physical groceries will always be around. To maintain momentum of offline sales, winning brands focus on three key areas: building memory structures to anchor a brand in consumers’ long-term memories; thoughtfully adapting product portfolios; and investing in store execution to ensure that the right products are always available, at the right place on the shelf or in secondary placements.

As the shifts in China retailing intensify, brands that follow these seven steps will have the best odds of outpacing rivals. And there’s a final—and critical—consideration. A huge percentage of grocery industry growth is now generated by small brands. These younger players have an invaluable edge when it comes to agility. Ultimately, getting ahead in the new retailing era means developing a “challenger” mindset that fundamentally changes how you think and allows you to act swiftly. If we’ve learned anything in China, it’s that this is no place for a corporate pace.

Larry Zhu and Bruno Lannes are Bain & Company partners based in Shanghai and Jason Ding is a partner in Beijing. All are members of Bain’s Consumer Products practice.


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