China: Opportunities in a decelerating economy

Spending in FMCG in 2015 grew by 3.5% year on year, as the Chinese economy grows at its slowest pace in 25 years.

Kantar Worldpanel, the global market leader in consumer panels, reports the spending in fast moving consumer goods (FMCG) in 2015 grew by 3.5% year on year, as China economy grows at its slowest pace in 25 years.

Modern trade (including hypermarkets, supermarkets, and convenience stores) continued to experience sluggish growth in line with the overall market, only growing by 3.3% from 2014. Within this figure there were significant differences by geography and format. Key cities and provincial capitals were adding only 1.4% in value year on year, but county level cities and counties grew 4.4%. Hypermarkets declined in key cities and provincial capitals by 1.5%, but managed to grow at 4.1% at national level as a result of more store openings in the lower tier cities. Kantar Worldpanel expects to see continued development in the Hypermarket format in lower tier cities in the coming years. Smaller formats fared much better, with convenience stores enjoying healthy growth of 13.1% nationally.

International retailers struggle to “tip the scales”

The gap between international and domestic retailers has further widened as international retailers continue to lose market share, down 1.1 percentage points to 13.4% in 2015. International retailers struggled to keep up with the rapidly changing trading environment where growth in their stronghold (key cities and provincial capitals) was sluggish, while they experienced stronger competition from local players in lower tier cities as well as competition from the e-commerce giants.

What is in store for 2016?

Growth will continue to accelerate for convenience formats: Convenience stores have become one of the fastest growing sectors in China’s retail market. Competition has already been extremely intense in the South while there is still plenty of room to strike double-digit growth in the North and West. Convenience stores are also trying to innovate to create a differentiated shopping experience and typically offer the last mile delivery for e-commerce. The recent ambitious franchise agreement between Lawson and Zhongbai clearly paves the way for even more rapid expansion in the inland provinces.

Cautious expansion and tailored adaptation in lower tier cities: As modern trade has exhibited lacklustre growth in higher tier cities, all retailers are seeking growth opportunities in the lower tier cities where there will be intense competition for share of wallet. New store openings are still the fastest way to grow. For example, RT-mart’s outstanding performance was largely contributed by penetration increase in lower cities where the retailer opened 31 new stores with more than 85% of them based in lower tier cities. With the absolute growth in lower tier cities also experiencing a slowdown, it is critical for retailers to be more shopper centric and develop their ‘right to win’ through optimizing merchandise and in-store execution based on local needs.

Size matters in China, so more mergers and alliances are expected: As competition intensifies and the total market continues to decelerate, retailers have to build scale to optimize their cost base and strengthen their negotiation power. In 2015, Yonghui’s acquisition of a stake in Lianhua supermarket allowed it to expand into the affluent East China region, while Hongqi’s takeover of Huhui supermarket enabled the group to reach share of 1.5% of the West market. Further regional market consolidation is expected in 2016 as China’s retail landscape is still fragmented, with top 10 retail group only accounting for less than one third of the modern trade sales.

Real Omni-channel experience is yet to emerge: E-commerce continues to surge in China’s FMCG market, with annual growth of 37%, as the likes of JD.com and Tmall invested heavily in festive promotion and shopper conversion. More and more brick-and-mortar retailers have started to introduce their own e-commerce platform on the back of the boom of cross-border e-commerce and mobile commerce to win their shoppers back. However most of them are yet to create a differentiated shopping experience between the online and offline world, as the current Omni-channel shopping experience is not strong enough to standout against the competition.