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While the growth in overall spending on fast-moving consumer goods in China has fallen over the past five years, the decline has been unevenly spread. Growth has accelerated for some categories and brands, while sales have dropped off for others. Bruno Lannes, a partner with Bain's Consumer Products practice, discusses three trends within the new "two-speed" scenario and how brands can win in this environment.
Read the Bain Report: Dealing with Two-Speed China
Read the transcript below.
BRUNO LANNES: We have been doing this research with Kantar Worldpanel now for the last five years, and we have been able to establish a few trends about consumer spending in China. And one of the most interesting trends has been, of course, the decline in percentages spent over the last few years, from around 15% five years ago to barely more than 3% right now.
But what we found across three lenses that we looked at is that this decline has been unevenly spread. The first lens we looked at was category. We found that some categories were declining by double digits, while at the same time some categories were actually growing by double digits. The main driver of that difference is China's economic transformation. We saw blue collar workers impacted by industrial-sector restructuring spending a lot more cautiously on very basic categories, like beer or instant noodles, which have been declining by double digits for the last couple of years.
The shift towards the service economy that the Chinese government is pushing is driving higher income and higher spending [among] people working in the service sector. So this urban upper middle class is actually spending more on leisure and pleasure, and that's why we see beauty categories, for example, doing very well; pet food doing very well; health-and-wellness categories doing very well.
The second lens we looked at was channel. In the same way we see categories moving in different [directions], we see channels moving in different directions as well. Channels like big box retailers, hypermarkets, and supermarkets are declining rapidly, losing traffic and having to shut down stores, while at the same time, smaller formats like convenience stores and, of course, online channels, [have been] growing by double digits over the last couple of years.
For the third lens, we compared the growth of multinational brands versus the growth of local brands. What we found is that local brands have been gaining share steadily for the last five years. And in fact, looking at last year, local brands have had nearly double-digit growth—9% to 10%—while multinational brands on an aggregate basis have been declining. So here again, we see this two-speed China taking place in the battle between multinationals and local brands.
So what are the takeaways for the brands? Number one, of course, they need to adapt to those new trends, and they need, first of all, to go with the winning channels. They need to find growth where it is—in e-commerce channels and convenience stores—and adapt their offers to that. But I think more importantly, they [need to] look at their operating model and their cost structure, because the trend is definitely a declining one, and they need to adapt their cost base for that.