China's FMCG Strong Fundamentals Are Still in Place

The massive decline in China’s fast moving consumer goods (FMCG) spending brought on by the Covid-19 pandemic in the first half of 2020 ended with an equally dramatic rebound in the second half of 2020. That spending resurgence continued unabated into the first quarter of 2021 but the third quarter brought with it an abrupt slowdown, with overall growth dropping to negative .8% compared with the same period last year. These are among the findings of new research released today in Kantar Worldpanel’s 10^th annual China Shopper Report Vol II, done in collaboration with Bain & Company. As in each of the past nine years, Kantar Worldpanel and Bain analyzed the key 26 categories that span the four largest consumer goods sectors: packaged food, beverages, personal care and home care.

Despite the stalled third-quarter growth, strong fundamentals of consumption are still in place. China’s middle class continues to expand its ranks and repatriation which is contributing to a steady growth. Following years of 5% growth up until 2019 and flat growth in 2020, FMCG volume gained 3.3% and value rose 3.6% in the first nine months of 2021 for a modest post-Covid-19 recovery, even if average selling prices (ASP) remained depressed, gaining only 0.3%. 

Channel shifts have also been shaping China’s shopper behavior and this transition accelerated in the first three quarters of 2021, with penetration increasing in online channels at the expense of most offline channels. E-commerce value grew 24% in the first 3 quarters of 2021 while all offline channels except convenience stores lost value (the grocery channel by 13%). However, within online channels, the share of growth has been steadily changing over the past three years. A game that was once mostly limited to two main players is rapidly expanding to include a host of new competitors.

“We have seen that COVID-19 has deeply changed the way that Chinese consumer shop, with live-streaming becoming an important marketing and sales channel on eCommerce platforms with top KOLs contributing to sizable sales, and more brands starting self live-streaming due to the unsustainable economic model by KOL-led live streaming,” explained Derek Deng, a partner at Bain & Company based in Shanghai. “The sales (GMV) contribution percentage of top KOLs is growing, apparently seeing the consolidation trend in the KOL matrix. Community Group-buy also emerged in 2016 and has accelerated dramatically during Covid, however, the market started to cool down and consolidate in Q3 2021, with new business models created by Alibaba to try to improve overall operational efficiency and service quality.” 

As in previous years, we identified categories that grew very fast and those that grew slowly or declined in 2021. In general, categories associated with improved quality of life, such as cheese, air refresher, mouthwash and ready-to-drink coffee, grew at high speeds while categories popular during the lockdown months, such as instant noodles, biscuits, disinfectants and hand wash, experienced negative growth.

“Since 2018, we have tracked 46 insurgent brands to see what determines success or failure. Of these 46, only 17 have continued to do well, while the others faded away or plateaued,” explained Bruno Lannes, a partner at Bain & Company based in Shanghai. “In this dynamic market, change is the only constant and quality growth is critical today for both insurgents and incumbents.”  

Of the insurgent brands that were tracked, their successes and failures came down to four critical dimensions, and an insurgent needed to excel across the majority of the four to become a standout. The capabilities that underpinned success were:

• Brand Power: Earn share of mind with the target consumer group, and scale that group
• Product Ecosystem: Build superhero SKUs and extend from the core to establish a winning portfolio and a pipeline of innovations
• Channel Capability: Develop a consumer-centric, omni-channel presence and extensive geographic reach, empowered by digital tools, to go deeper and wider
• Organization Capability: Build agile iterative capabilities (empowered by data and insights) to constantly review and improve product development, channel expansion and business model

 “Both incumbents and insurgent brands will always co-exist in China’s FMCG market and contribute in their own ways. The best companies will learn from each other and thrive together.  This cross-fertilization will eventually bring more possibilities and excitement to Chinese consumers,” said Jason Yu, managing director at Kantar Worldpanel Greater China. 

Interestingly, in the 2021 class of insurgent brands, which were identified using the same methodology as in 2018, more than 12 brands are owned by large local or foreign companies. This is a positive sign that these insurgent brands can be seeded and nurtured by larger corporations moving forward.