China?s FMCG market recovery well on track in 2021
The latest data from Kantar Worldpanel (a CTR service in China) indicates that the sales value of fast-moving consumer goods (FMCG) in urban China grew by 3.1% year on year in 2021, an increase of 3.7% compared to 2019. The overall market is gradually recovering from the impact of COVID-19. Driven by the e-commerce shopping events in the fourth quarter, the FMCG market grew by 2.1% year-on-year, which is slightly higher than the previous quarter and reveals the resilience of the consumer market.
According to the National Bureau of Statistics, consumption contributed to 65.4% of China’s economic growth in 2021, highlighting the importance of domestic demand. With new COVID cases still being reported from time to time over the past two months, uncertainties continue to be a key theme of FMCG market this year.
However, backed by a series of government initiatives to stabilise growth and promote consumption, and brands’ efforts to grow supply, the FMCG market in China is set to attain a healthy growth in 2022.
In 2021, the food and beverage sector in China increased by 2.3%. The beverage sector returned to growth with the liquid milk and cheese growing well ahead of other categories. Ice cream and pet food continued their growth momentum, attracting more new consumers. The daily personal care sector was up 4.5% in 2021, fueled by stronger consumer demand for products that provide higher quality home life and refined lifestyle, e.g. air fresheners, fragrances, clothing care products, hair care and mouthwash.
Modern trade (including hypermarkets, supermarkets, and convenience stores) saw a downward trend throughout the year with sales decreasing by 1.5%, which was mainly due to the continued downturn in consumer flow in the large format channels. Sales in hypermarkets and large supermarkets dropped by 3.6% and 3.9% respectively for the year. Small supermarkets in the proximity small format channels grew steadily by 6.7%, driven by rising shopping frequencies. This trend indicates that small formats who serve communities and meet high-frequency, immediate needs are still favoured by consumers.
The growth in e-commerce channels slowed down in 2021 due to the traffic peaking and diversion from the new digital formats, but still leads all the retail formats with a growth rate of 15.2%.
According to Jason Yu, managing director at Kantar WorldpanelGreater China, although the risk of the Delta and Omicron variant inChina has had a significant impact on travel and social life, the steady risein income of Chinese shoppers and also innovations in supply chain willcontinue to drive consumption upgrade. Digitalized retailing and sustainableconsumption concepts will help grow more consumption potential.
Source: Kantar Worldpanel China
Compared to the last year, the market share of Sun Art Group increased by 0.3pts to 8.8% in 2021. It is still leading the market despite slightly dropped in the fourth quarter. Yonghui Group continued to grow its market share, mainly benefiting from its expansion in the western region. The overall share of Walmart Group rose steadily compared to the previous year. Sam’s Club of Walmart had an outstanding performance with a year-on-year uplift of 0.3pts in its share.
Among the regional retailers, both Bubugao Group and SPAR Group continued to expand in the national market. Pangdonglai and Rainbow Supermarket also saw strong growth in their core regions.
What’s in store for 2022?
1. The evolution of hypermarkets: experience and efficiency
The Chinese retail market has witnessed an accelerated downward trend of hypermarkets in 2021. The increased market competition, the consumer diversion caused by multi-format development and the changes in consumer lifestyles all led to a gradual decline in customer flow and sales. The latest data from Kantar Worldpanel reports that there are 67.8% of Chinese households who visited hypermarkets, decreasing by 4.9pts over the last year.
The public statistics show that Walmart closed more than 30 hypermarkets in 2021. While Yonghui has been converting more than 50 hypermarkets nationwide into warehouse stores, growing its footfall and sales by offering selected cost-effective products and optimising the shopping experience. The reconfiguration of ‘RT-Mart Store 2.0’ highlights the scenario-based layout and the in-store experience. Key potential customer groups are targetted and provided with differentiated products. Meanwhile, RT-Mart invested in improving the efficiency of its O2O service. It can be seen that hypermarkets will undergo more profound upgrades in 2022, moving from the "big and comprehensive" all-customer-groups development stage to an era of refinement and focus. The customer experience will be upgraded and the profit model would be based on digital empowerment.
2. New Tier-1 cities will become the battleground for membership stores, with supply chain being the key to success
Throughout 2021, the major retailors launched paid membership stores one after another, making it undoubtedly the hottest retail track. Walmart Group accelerated the expansion of Sam's Club and opened five new stores nationwide in the past year. Besides, Freshippo, Metro, Carrefour and other retailers also join the battlefield of membership stores.
The paid membership stores are now mainly located in first-tier cities such as Beijing and Shanghai, where families with middle-to-high income have higher requirement for product differentiation, price performance and value-added services as their consumption levels increase. With the strong product competitiveness (especially for private labels) and high sense of value, membership stores are certainly the growth point of the depressed modern channels. Sam’s Club has been a star performer in the last year attracting 3.5% of Chinese which demonstrates the potential of membership stores in 2022.
It is worth mentioning that the competition of membership stores is heating up in the first-tier cities and the retailers look to differentiate their offer and attract new shoppers. The purchasing power of middle class has reached a significant scale in China’s new first-tier cities and major urban clusters, where the transportation and infrastructure are getting more mature, providing opportunities for the expansion of membership stores. Thus these areas will still be the main battlegrounds for membership stores expanding in the near future.
Additionally, the value of membership is reflected in the differentiation and non-replicability of products and services. Imposing charges for membership can ensure the loyalty of members in a certain period, yet the essence of success is whether the sense of value has been brought to customers. Therefore, the key to success lies in the construction of the core supply and related infrastructure of membership stores.
Besides, the innovation which is adapted to the China market based on the lifestyles of Chinese consumers and regional cultural and culinary habits will also be a topic for the membership retailers to continuously explore.
3. Instant retail (O2O) achieved incremental growth through more occasions and categories
After a rapid growth since the pandemic outbreak in 2020, instant retail (O2O) continued its growth in the past year, driven by penetration and shopping frequency. The food and beverage sector maintained a stable increase, contributing nearly 70% of the total sales, with dairy products becoming the most popular FMCG product on O2O platforms. Furthermore, instant retail has been evolving across all categories. More convenient and efficient delivery services and more effective marketing drove more purchases of paper products and home care products. 63.8% of Chinese urban households purchased FMCG through O2O services in 2021, with the shopping frequency reaching 11 times.
To optimize and to enhance customer experience of O2O has become one of the essential parts of digitalization in the retail industry. More and more retailers are transforming their warehouses of their stores and are partnering with multiple instant retail service platforms, in order to provide consumers more efficient and wider coverage home delivery services. O2O platforms such as JDDJ, Meituan and Tao Xian Da launched one-day, half-day and even hourly delivery services. With personalized choices provided, they offer a greater category coverage to improve consumer experience.
The competition in instant retail will reach the next level, where major platforms are going to work more closely with brands. On one hand, market segments will be selected for more precise operations. On the other hand, the competition will transfer from penetration to basket size of each purchase so that consumer needs of more segmented buying scenarios can be met to meet different occasions, such as dinner for tonight, family gathering etc.
At the same time, e-commerce platforms will also import more online traffic into O2O platforms and focus on the third and fourth tier markets, which will allow a manfacturers to reach more consumer and grow incremental consumption.
4. Community group buy will be more polarized, with a clear trend of market consolidation
Community group-buying (CGB) grew rapidly in the early time of the pandemic, attracting much attention, when major platforms invested heavily to expand their consumer reach. However, CGB experienced a downtrend as the problems with the CGB business model arose. According to the latest report of Kantar Worldpanel, 48.1% of Chinese urban families brought fresh food and FMCG products on CGB platforms in 2021 with country markets reporting a higher penetration of 51.3%. Since the government strengthened the regulation and the model of burning money to attract flows failed, some CGB players gradually withdrew from the market or underwent mergers and acquisitions. A clear fragmentation can be seen in the second half of 2021.
Among the existing players, the internet platforms such as Meituan Youxuan, DuoDuo MaiCai and TaoCaiCai have covered the national market. While players like XingSheng Youxuan have abandoned the national expansion, focusing instead on regional markets due to their advantages in local supply. In order to solve the structural problems of CGB in profitability and operation, key players like Alibaba have also experimented with innovation in their business models.
During 2022, CGB will pay more attention on improving the operational efficiency of the overall CGB ecosystem, providing a better service experience and promoting the community consumption upgrades. Moreover, traditional retail chains also started CGB businesses in order to expand their existing portfolio and reach new consumers.
5. The continued resurgence and consolidation of regional retailers
China's regional retailers enjoyed significant growth through their multi-format development and digital transformation in 2021. Relying on its multi-format development, Jiajiayue of SPAR Group gained 0.4pts of market share expansion in North China. Jiajiayue successively opened its new hypermarkets, supermarkets, convenience stores and discount stores last year, as well as its first warehouse membership store in December, strengthening its ability to meet customer demand. Rainbow Group also continued its expansion in the South China through its digital transformation, achieving a higher degree of integration between online and offline stores. It vigorously developing its private label brands to enhance their differentiation versus the competition.
For the year 2022, digitalization, differentiation and multi-format developing will remain the key words for the development of regional retailers. It is worth noting that the concentration of the retail market in China is still not high as that of developed western countries. The research of Kantar Worldpanel reports that the top 10 retailers in China only account for 38.6% of the overall modern channel, with a slight uplift of 0.3pts over the previous year. The degree of market concentration in western and northern regions lags far behind the national average. The excessive fragmentation of the retail market has little benefit to cost reduction and efficiencies for brick-and-mortar retailers to achieve scale. In 2022, the best players among the regional retail will further expand their market share through cross-regional acquisitions and supply chain partnerships. While the national retailers will expand cautiously, focusing on the areas of strength to restructure and transform their businesses.