China's FMCG sector settles into low growth reality

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China’s fast moving consumer goods (FMCG) sector observed a moderate recovery in 2023 and in the first quarter of 2024, according to the 27th China Shopper Report [2024 Vol. 1] released today by Kantar Worldpanel and Bain & Company.

China’s FMCG market grew 2.4% in 2023, lagging GDP growth (5.2%) and total retail market growth (7.2%, excluding catering), due in part to recovering out-of-home consumption post pandemic. Volume continued to be the main driver of growth, with an increase of 2.4%, while average selling prices (ASP) remained relatively stable throughout the year.

In the first quarter of this year, China’s FMCG sector saw value growth of approximately 2.0%, a half percentage point higher than in Q1 2023, supported by a 3.5% increase in volume. While the volume increase illustrates a continued strong desire for consumption, the market experienced a deflation of 1.5% in ASP, down from the stable pricing trend observed in 2023.

“We continue to see positive signs of recovery such as healthy GDP figures and retail sales growth. Social mobility has also reached an all-time high, and so it is only a matter of time before these positive numbers trickle down to FMCG growth,” said Bruno Lannes, a partner at Bain & Company based in Shanghai. “Some interesting trends we see this time is that Tier 2 cities are leading FMCG growth. Additionally, though average selling prices face deflationary challenges, we still observed premiumization in some categories.”

Geographically, FMCG growth in 2023 was led by Tier 2 cities. These cities have received a population influx of 8 million or more in the past four years and have become must-win markets for most FMCG brands.

Packaged food and beverage led growth in first quarter of 2024; growth in home care decelerated while personal care continued to decline

In the first quarter of 2024, packaged food and beverage witnessed stable value growth of 2.7% and 4.3%, respectively, compared to the same period last year. Most categories within packaged food experienced volume growth due to recovering social mobility and activities. Beverage growth was driven by both volume and ASP particularly in the near-water drinks such as juice, ready-to-drink tea, and packaged water.

Most home care categories saw strong volume demand driven by leading players’ efforts to promote diverse use occasions, increased social activities, and established focus on hygiene and health post-COVID. However, in contrast with the price premiumization of 2023, tracked categories displayed a price deflation in Q1 2024, driven by brands’ price cuts and promotion of larger, bulk-sized products.

Similarly, personal care witnessed robust volume growth, but ASP declined 7.5% as consumers remained cost-conscious, and most personal care categories faced competition from domestic brands offering more value-for-money products.

Offline channels regained momentum while E-commerce saw moderate growth

Offline channels overall grew by 2.4%, slightly higher than the overall FMCG and e-commerce channels, due to recovering offline traffic. Within offline channels, grocery and super/mini formats continued to gain share, growing at 11% and 7% respectively in Q1 2024 compared to the same quarter last year. Hypermarket segment continued to shrink at 6%. However, within the hypermarket, club warehouses saw notable growth of 22%, representing 9% share of total hypermarket channel. Specialist stores declined by 4% vs. a 4% growth in 2023, and the growth for convenience stores fell flat.

E-commerce growth maintained a low single-digit growth of around 2.0%. Notably, Douyin surpassed JD to become the second-largest e-commerce platform in China, delivering substantial growth of 46% and achieving an 18% market share in Q1 2024, six percentage points higher than Q1 2023. Pinduoduo saw increased traffic driven by its value-for-money proposition, resulting in a 6% growth and a 15% market share, one percentage point higher in Q1 2024 compared to the same period last year. JD experienced a 5% growth as a result of its low-price strategy, reversing from a 1% decline last year. Still leading the pack, Taobao/Tmall continued to decline, with their market share landing at 32%, three percentage points lower than in Q1 2023.

Insurgents: Competitive strengths that navigated through cycles

The Chinese FMCG market has witnessed an influx of insurgent brands, supported by venture capital, and leveraging online traffic. However, in recent years, as traffic has peaked and costs have risen, many insurgent brands are starting to see red.

Bain selected representative insurgent brands with “disruptor potential” every three years since 2018 and continued to track their performance over time. The development trajectories of these insurgent brands revealed four success factors in the areas of brand power, product ecosystem, channel prioritization, and organizational capability.

“We selected 46 and 69 brands to form the Class of 2018 and Class of 2021, respectively. This year, we reviewed their performance during 2021-2023, and categorized them into three groups: “Stand-out” (40%), “Hold-out” (20%), and “Fade-out” (40%) brands. We are pleased to see that a significant portion of the insurgents are performing well, with some even rising to become leaders in their categories. This year, we conducted the same analysis to select 61 insurgent brands to form the Class of 2024,” said Jason Yu, Managing Director of Kantar Worldpanel in Greater China.

However, the requirements in each of the four areas evolve over time, as the markets become more competitive and new technologies emerge. For example, in channel prioritization, there’s an increasing need for insurgent brands to capture emerging channels and develop “connected commerce” capabilities to follow consumers across their multiple touchpoints. For example, Yongpu (??) transitioned from being an “online influencer brand’” to establishing an omnichannel presence by expanding its offline distribution networks.Passional Lover (??) achieved accelerated growth on Douyin with a tailored product portfolio, content creation, and operational excellence. 

“With fierce competition, both brands and retailers should follow the true needs of consumers and monitor evolving demands and seize growth opportunities in new segments, geographies, occasions, channels, and touchpoints. They also need to manage costs in the persistent deflationary environment. In addition, brands need to build an integrated route to market and  rejuvenate out-of-home opportunities, strategically reinvest in social settings and food service-related channels with unique value propositions,” said Derek Deng, a partner at Bain & Company based in Shanghai.

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