China Shopper Report, jointly published by Kantar Worldpanel and Bain & Company, has pointed out that the overall FMCG sales on-year growth slid to 3.1% in the first half of 2016 from 11.8% in full year of 2012. A “two-speed” scenario is obvious across all categories: sales of products that are traditionally favoured by blue-collar workers—such as instant noodles and value beer—are growing at a snail’s pace, or even declining, because the number of low-end labour-intensive jobs is dwindling in China. On the contrary, products typically purchased by members of the rising middle class—such as yogurt and pet food—are breaking records.
In the newly published Vol. 2 of China Shopper Report 2016 which focuses on retail channels, the “two-speed” scenario is playing out as well. Online and convenience stores are enjoying strong momentum, while supermarket growth continuously slowed and hypermarket sales even declined.
E-commerce’s unstoppable momentum
After more than 10 years of high-speed growth, e-commerce is still full of energy: in 2015, the online sales of FMCG goods jumped by 36.5% from a year ago.
“China’s two-speed scenario is having a major impact on the country’s retail industry, and our findings show that this massive explosion of online sales growth is being fuelled by increasing diversification in the categories purchased online, as well as huge gains in imported products and consumers taking advantage of promotions,” said Jason Yu, general manager of Kantar Worldpanel China.
The boost in total online FMCG spending is primarily the result of massive volume growth: it rose by 69% in 2015. We learned that digital shoppers are buying more products, making more visits to online sites and purchasing across a broader number of categories. This boost in volume has more than offset the decline in average selling prices, which dropped by 7% in 2014 and 19% in 2015.
Why are prices dropping so steadily? It is the natural consequence of the diversification of online categories. The first categories to achieve significant online penetration—infant formula, diapers, skin care and makeup—have the highest average selling price in both yuan per kilogram and yuan per pack. Now, as consumers continue to buy more categories like yogurt, biscuits, milk and shampoo, which are sold at much lower average prices, the average price online declines. The categories that include yogurt and fabric softener achieved record growth at an aggregated annual rate of 57% from 2013 to 2015, compared with the slower growth of more expensive goods such as the top three categories of diapers, infant formula and skin care, which grew by 15% annually.
As China’s shoppers expand the range of categories they buy online, they are also continuing to turn to digital platforms for imported goods. In fact, imported FMCG items are four times more likely to be purchased online than in physical stores.
However, as the “big cake” is expanding by only 3.1% year-on-year, inevitably, online growth increasingly comes at the expense of offline channels. In 2013, 40% of online sales growth comes from switching from offline channels. In 2015, the proportion jumped to 47%.
Convenience store stands out
Confronting the sweeping offensive of e-commerce, traditional hypermarkets and super/minimarkets were unable to work out their responses. It contrasts with the robustness of convenience stores, which registered more than 13% growth in 2015 — nearly twice the 2014 rate. The scale of China’s convenience channel is still relatively small, and much of the growth represents new store openings. Yet this remains an exciting channel to watch. As China becomes more urbanized, shoppers are looking for quick and convenient ways to replace their existing stores and for a place to complement planned online purchases, which represent an ever-increasing share of their regular purchases.
Among the top 10 convenience stores, we have identified two distinct types of players. Those include national premium banners such as FamilyMart and 7-Eleven as well as regional mass banners such as Meiyijia and Tianfu. These two types employ clearly different strategies and go-to-market approaches. For example, 7-Eleven and FamilyMart use a “high touch” model that requires a relatively large initial franchise fee and deposit and maintains strict operational guidelines around store decoration, product fulfilment, product pricing, display and promotional activities. These leaders focus on Tier-1 and Tier-2 cities, targeting urban, white-collar shoppers in commercial centres or subway stations and emphasize food and beverage, including the increasingly popular ready-to-eat meals. Meanwhile, regionally popular convenience banners such as Meiyijia and Tianfu employ a comparatively lighter touch in everything from their franchising model to operations. The investment required of franchisees to open a store are significantly lower significantly lower than the national brands; the stores are smaller and often located in residential communities; and they feature more personal and home care products than their national counterparts. Despite these many differences, both approaches seem to succeed.
Of China’s top 10 convenience retailers, only FamilyMart and 7-Eleven have a national footprint across Tier-1 cities, with the others still maintaining a regional focus (see Figure 9). Among the leading banners, Meiyijia and FamilyMart are experiencing the fastest growth: 15% to 20% annually. Both are opening new stores and gaining shares steadily at the expense of competitors such as Quik and Haode, which closed some stores in 2015 due to heavy competition in Tier-1 cities and increasing cost pressure.
The big challenge for convenience stores, however, is one of fundamental economics: They need to devise strategies for expanding reach and maintaining profits amid high urban real estate costs. Again, this is a format that represents the lion’s share of growth in offline sales, and it will only get more interesting as companies invest in the next phase of growth. For example, AM/PM, which quickly expanded in Beijing, plans to multiply that expansion across China in the next five years.
The double-eleven jolt
Every November, the retailing world turns its eyes toward China and the most popular retailing promotion ever conceived: 11/11 Singles’ Day. It is, by far, the biggest online sales event anywhere. Alibaba’s site alone generated US$17.8 billion in sales on the one-day shopping festival in 2016, a 24% increase over 2015. An incredible 82% of those sales were made from mobile devices. Users from 235 countries participated in this shopping festival and international transactions rose by 60% compared with 2015.
As part of our research, we conducted a deep dive into 2015 sales performance on 11/11, identifying significant trends. One distinct effect of the 11/11 promotion is that it temporarily shifts sales to online platforms from offline channels.
For example, in 2015 online promotions held for 11/11 helped categories with relatively low online penetration, such as toothbrushes and shampoo, attract more shoppers. Toothbrush sales jumped by 163%, and shampoo sales rose by 103% during 11/11 promotions. Meanwhile, higher-penetrated online categories registered less robust growth. Infant formula sales grew by only 19%, for example.
Three segments of shoppers contributed to the total spending increase, and each is significant:
• existing online shoppers of a particular category who used the occasion to purchase more, particularly in categories such as laundry detergent, facial tissue and infant formula;
• shoppers who waited to make their purchases during the 11/11 period; and
• new shoppers who were attracted to an online category because of the promotion, using the occasion to buy categories such as fabric softener, shampoo and biscuits.
Implications for retailers
Last year, we reported that to win in China, large-format grocery retailers need to do several things in parallel:
• adhere to a local or regional focus;
• prune the store portfolio and close underperforming stores;
• adapt store formats and introduce smaller formats, similar to convenience stores; and
• implement O2O strategies, using stores for “pick and pack” and last-mile delivery.
Today, these priorities are even more true and urgent. The performance of large-format retailers has deteriorated even further, and growth is mostly the result of new openings, not increased same-store sales, which have continued to decline. The increase in online penetration over the coming years will exacerbate this downward trend for large-format retailers. Retailers will need to reduce store capacity as more consumers move to online retailers for their FMCG (and other) purchases.
In addition, lessons from international retailers in other markets tell us that the online grocery business is not a profitable one. Among other reasons, this is because consumers do not pay the full cost for pick and pack and delivery services. For large-format retailers, these factors increase the importance of reducing costs and streamlining operations. An obvious first step is to increase pressure on suppliers to extract better margins. Suppliers maintain a strong bargaining position against retailers in China. However, retailers need to take a systematic look at store operations. They should examine all cost categories carefully. Some retailers in China have started on this path.
Source: Kantar Worldpanel