Local brands winning the FMCG battle in China

It’s a difficult time to be an FMCG company, especially a foreign one, operating in China, according to a new report from Bain & Company and Kantar Worldpanel.

The China Shopper Report 2016, based on 2015 data, shows that value growth hit a five-year low of 3.5 percent, the average growth in annual FMCG spending per household slowed to 0.8 percent and selling prices also increased less than in prior years.

Meanwhile, non-FMCG spending is growing fast, the tier system has become less relevant for understanding the market, shoppers are shifting from hypermarkets to convenience stores and—perhaps most significantly—local brands continue to gain share at the expense of MNCs, the report authors state.

On the latter point, foreign brands lost share in 16 categories studied, while gaining in only seven.

The report states that Chinese companies “typically can make and execute decisions faster than their foreign counterparts”, “adapt quickly to new trends with innovative products”, and “find and pursue white-space opportunities”, all of which are critical skills as FMCG sales decelerate.

In addition, local companies are investing more in their brands, through both traditional media and digital or social media, according to the authors. They cite as an example Yili, which heavily promoted its sub-brands by sponsoring a “comedy debate talk show”, supporting a reality TV show for fathers and kids, and by using Weibo to initiate conversations and parenting and child development. The brand’s value increased by 32 percent annually from 2012 to 2015, according to BrandZ rankings.

Finally, local companies embraced e-commerce faster than foreign rivals, according to the report, and “diligently” use omnichannel retailing to increase coverage.

Recommendations

To thrive in the FMCG market, which is commonly perceived by consumers as a lower-end market catering to the masses, marketers must focus on premiumisation.

Premiumisation, however, requires marketers to be truly connected with the consumers’ demands and needs. For example, the report cites Shanghai Jahwa, which, with a localised product development process, can quickly respond to what consumers want, evident in its use of knowledge of Chinese herbal beauty therapy to win over consumers. 

At the same time, Chinese consumers have a level of distrust for certain local goods, where food-safety concerns are relevant. Imported goods in those areas, such as infant formula, instant noodles and beer remain preferable to local ones, the report stated.

The report highlights digital capabilities and mindsets within marketing and sales as especially important. "Agility and speed of decisions and execution will become paramount, and brands need to adopt a 'test, learn, adapt' mentality," according to the report. 

The report also recommends that supermarkets remodel and remarket themselves as convenience stores, citing Carrefour and Vanguard, which started to offer Easy Carrefour and Legou Express as options to consumers. The members of the expanding middle class are cash-rich but time-poor, so they prefer accessibility. Convenience has become decisive in how much a business sells, according to the report.

Brands also must continue their ecommerce efforts. Ecommerce recorded annual growth rates of above 35 percent in the past four years, but still shows incredible potential. Online shopping options boost sales, penetration and purchasing frequency. Providing variety along with heavy promotion of online shopping platforms is key, since, according to the report, FMCG categories that thrive in ecommerce demonstrate these features. Of course, ecommerce may not be useful for all kinds of products. Some, like chewing gum and beverages, which are commonly impulse buys or incur expensive delivery costs, are not suitable, the report authors note. 

Finally, brands should consider geographical factors. The report shows that Southwest regions of China have much higher business potential than the more developed and modernised regions along the east coast. The FMCG growth rate is notably higher in provinces like Yunnan, Guizhou and Sichuan. Businesses that have operations across the whole country may find it beneficial to market more heavily in those less developed regions, whose markets are far from saturated.