The changing FMCG market in China

The eighth annual China shopper report from Kantar Worldpanel China and Bain & Company reveals that FMCG growth remains robust, growing at a rate of 5.2%, slightly faster than the previous year’s 4.7%. The report entitled Premium Products, Small Brands and Now New Retail explains that premiumization again plays a significant role in the sector’s recovery – average selling prices (ASP) rose by 4.6% as consumers continued to demonstrate a willingness to trade up.

“Amid the FMCG market’s recovery, we continue to see premiumisation playing an important role, as Chinese consumers favour goods that promise to improve their health and lifestyle,” said Bruno Lannes, partner in Bain’s Greater China Consumer Products Practice and co-author of the report. “While penetration and purchase frequency may be reaching their limits in some categories, there appears to be ample room for average selling prices to rise. Data on shopper behaviour over the past two years shows that brands can still encourage trading up, giving a much-needed boost to categories in which volume is either flat or slumping.”

The report gives the first indication that there is a growth limit for e-commerce. Overall, the channel’s growth slowed slightly to 30.6% between 2017 and 2018 (compared with 35.1% annual growth between 2014 and 2018). Growth for Tier 1 cities has plateaued but is expected to continue for at least three or four more years in the lower-tier cities.

This year’s report revealed renewed hope for offline retailers to regain their momentum, in many cases with smaller and more flexible formats. This is due to the increase in out-of-home consumption which has risen by 14% per year since 2016. For convenience stores it represents 88% of their total sales, having grown 17% per year in last two years.

Two developments considered in the report this year are the dramatic impact of fast-growing small brands on larger brands, and the emergence of the uniquely Chinese phenomenon of New Retail — futuristic supermarkets devoted in equal measure to in-store dining, online ordering and delivery.

Insurgent effects
Last year’s China Shopper Report revealed that China’s insurgent brands are taking a disproportionate share of FMCG growth. As that trend continues, a fundamental question faces many companies: Can big brands get bigger and continue to be successful?

“The new reality is that many incumbent brands watch small brands doing an impressive job of serving specific consumer needs, responding in everything from R&D to digital marketing with agility and flexibility,” said Jason Yu, General Manager of Kantar Worldpanel Greater China. “Whether to focus on growing big brands or building a portfolio of different brands to serve different segments nags at every FMCG executive. It’s a decision that sometimes calls for a major strategic transformation; billion-dollar brands are vastly different animals than $25 million brands and require significantly different management approaches.”

New Retail
The other big, emerging trend involves New Retail. This blurs the line between online and offline sales, with potentially major implications for how FMCG products are sold. Food delivery services are one of the biggest parts of New Retail at the moment although currently limited to Tier 1 and Tier 2 cities, with penetration levels comparable to regional supermarkets.

The acceleration of New Retail in multiple ways presents opportunities for retailers to transition to tomorrow’s seamless, multichannel world of shopping. Physical stores have a future, but offline retailers need to refine their moves to play in this new environment. Specifically, they’ll need to:

• Redesign store portfolios in the New Retail format
• Leverage new technologies like augmented reality
• Digitalize operations to deliver a seamless on and offline experience as well as to monetise consumer data for better cooperation with brands

In conclusion, this year’s report confirms that the three key implications for brands identified last year still hold true, but there is one addition:

1. Take advantage of channel dynamics: grow with the winning channels and anticipate retailers’ consolidation.
2. Develop high-value and personalized products.
3. Become data-driven, consumer-centric organizations by collaborating with platforms but also by developing your own set of consumer data.
4. Develop a portfolio of brands to satisfy the fragmentation of consumer needs and shoppers’ thirst for innovations.

Get in touch with our experts to find out more.