China: Opportunities still abound in a slowing baby market

With the slowdown of the market, brands are facing new challenges and opportunities.

China’s rapidly growing baby market has been a focus for manufacturers and investors in the last five years. Thanks to the one-child policy, growing disposable income, and concern over safety, Chinese consumers are getting stronger and more selective in their product choice. Consequently the market has been one of the most premium markets in Asia. Meanwhile, the second child permit, growing appreciation of breastfeeding and tighter government regulation are gradually changing the market structure and competitive dynamics.

Kantar Worldpanel, the global market leader in consumer panels, reported China’s baby products market reached RMB 34 billion in the top 27 cities in China in the 12 months up to August 8th, 2014. However the total baby market experienced noticeable slowdown, only growing at 2.6% in value compared to 10.8% in the previous year. With the slowdown of the market in line with the general weakness in FMCG, marketers are facing new challenges and opportunities in the coming years.

Infant milk formula price reduction amidst safety scares.

As the largest baby category in terms of sales, poor sales of infant milk formula is the major cause of the overall market slowdown. Price reduction as well as the botulism crisis in August 2013 was responsible for the weakness in sales growth.

In 2013, the double digit growth of the lucrative infant milk formula market was primarily driven by price increase and consumers trading up, despite the stable demand in volume. However in August 2013, as the Chinese government charged major players, including five major foreign companies as well as Guangzhou-based Biostime for price-fixing and anti-competitive behaviour, market prices started to drop. In Q4 2013, the price growth in infant milk market dropped to 5.7%, noticeably lower than the previous quarters, with most players vowing to reduce their prices following the government investigation. The move obviously benefited ordinary consumers despite many still flocking to buy more trusted international brands.

Yet, the announcement of the New Zealand government on the 3rd of August 2013 to recall products shipped to major dairy producers in the fear of botulism-causing bacteria posed a heavy blow to the dairy industry. The worldwide recall shook the confidence of many Chinese consumers as some well-known brands were affected. According to Kantar WorldpanelBaby, the infant milk market started to experience further sales slowdown starting from Q1, 2014, as price inflation started to turn negative.

Despite market stagnation, opportunities still exist for players if they can seize the right consumer needs. The demand for premium products (priced over RMB300/KG) is still growing and consumers are more selective with regard to the source of milk. Kantar Worldpanel indicated that the premiumization trend continued despite the quality scare, and consumers are still willing to pay more as a vote of confidence for the brands they trust. It is worth noting that following the crisis, some key affected players started to launch new products explicitly mentioning the milk source from Ireland, Denmark and Netherlands (rather than New Zealand). Opportunities still abound for premium infant milk players who can smartly market the product source to build trust and confidence among mothers in China, regardless of their international or local origins.

Must sit in the thriving e-commerce channel

E-commerce, as a substitute for traditional brick-and-mortar stores, is booming in China for general FMCG goods, but even more so for baby products. Chinese mothers are more willing than their counterparts in other markets to purchase baby products using PCs and smart phones. According to Kantar Worldpanel, over 50% of families purchased baby products through the e-commerce channel in the last 12 months to August 8th, 2014 across the 27 top cities.

Although physical distribution channels, such as hypermarkets and baby stores, are still the biggest seller of baby products, share of E-commerce (20.7%) channel in the infant milk market has already overtaken hypermarkets (18.9%).

Similarly, the online channel in other baby markets, such as diapers, baby shampoo, baby lotion, etc., has also grown by more than 35% in the latest year. Meanwhile, more and more consumers are buying across most baby product categories. And there is large room for these categories to develop in E-commerce, as only up to 24% of E-commerce consumers bought these categories in last year.

Emerging category opportunities

Babies are by definition the most vulnerable consumers out of any age group, due to their rapidly developing bodies and susceptibility to sickness. There is still enormous space for wider baby product portfolio development in China. Kantar Worldpanel observes that nascent baby categories, such as baby shampoo, shower gel, lotion or cream, still shows huge potential to develop. Those categories mostly reported less than 30% penetration, suggesting gaps in consumer education.

Baby stores and the Internet are both important in educating parents about the benefits offered by those new categories. Baby stores remain the largest channel for baby products with services in professional consultancy and product trial. Mothers, especially those post-80s, are used to browsing the internet and visiting special baby forums for product information. A pre-born survey4 conducted by Kantar Worldpanel suggested that store visits and the internet are two of the most trusted information sources for acquiring baby product knowledge.

From the perspective of in-store sales activation, baby manufacturers are also expected to grow their business by offering related categories in the same shopping occasions and product sampling to generate consumer awareness and interest in future purchases.

Note:

1. Kantar Worldpanel owns the only Baby Panel in mainland China, collecting and analysing the purchase behaviour of 2000 families with babies from 0 to 3 years in China’s Key and A cities to help you understand the current status and trend of baby product market

2. Kantar Worldpanel Baby Panel Covers 27 Key and A cities in China: Beijing, Shanghai, Guangzhou, Chengdu, Changchun, Changsha, Dalian, Fuzhou, Guiyang, Harbin, Hangzhou, Hefei, Jinan, Kunming, Nanchang, Nanjing, Nanning, Qingdao, Shenzhen, Shenyang, Shijiazhuang, Taiyuan, Tianjin, Wuhan, Xi’an, Zhengzhou, Chongqing.

3. Kantar WorldPanel Baby reported categories used by 0-36 Months babies include：Infant Milk Powder, Infant Nutrition Food, Diaper, Wiper, Shampoo, Personal Wash, Body Care, Body Chill and Dental Care.

4. Kantar Worldpanel also conducts a Pre-Born survey to understand families’ behaviour before the baby is delivered, so both sets of information can be linked and analysed using a single-approach (what do consumers think & buy before delivering the baby vs. what do they buy after the baby is born) in order to provide to any manufacturer in the Baby industry a unique understanding of how consumers behave before and after the baby is born