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2018 China Shopper Report

Martin Guo

Editor-in-Chief, Kantar China Insights

Shoppers 28.06.2018 / 18:42

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For the first time since Kantar Worldpanel and Bain & Company, Inc started tracking China’s shopping behaviours six years ago, the rate of total value growth increased over the previous year, from 3.6% in 2016 to 4.3% in 2017.

This is the seventh consecutive year that we’ve tracked the shopping behaviours of Chinese consumers. As in each of the past six years, we conducted a deep analysis of the key 26 categories (note 1) that span the four largest consumer goods sectors: packaged food, beverages, personal care and home care. We also looked at another 24 categories (note 2) to form a more comprehensive view of the market. Combined, these sectors represent 80% of all FMCG.

For the first time since we started tracking China’s shopping behaviours six years ago, the rate of total value growth increased over the previous year, from 3.6% in 2016 to 4.3% in 2017. In many ways, the “two-speed” phenomenon that we described in last year’s report still exists, but higher speeds are now more prevalent, driven by premiumization. Our latest findings show that high-speed categories are steadily gaining more ground while many low-speed categories remain sluggish. This 4.3% growth is mostly the result of a 4% increase in average selling prices, which more than compensated for nearly stagnant overall volume growth.  

FMCG Sales Change Yoy 

Note: Kantar excluded cigarettes from total FMCG and slightly updated all category data in 2017, leading to minor changes when refreshed with previous years’ data
Sources: Kantar Worldpanel; Bain & Company 

The dominating theme of this year is that value growth of FMCG has rebounded as China’s expanding middle class continues to seek out upgraded consumer goods that serve to improve health and elevate their lifestyle. From silicone-free shampoo to not-from-concentrate juice that’s more natural and nutritious, Chinese consumers are spending more on premium goods—and they are doing it across the board. Out of 50 categories, 38 categories premiumized (average prices rose higher than the rate of inflation) while only 12 commoditized (average prices rose less than inflation).  

The main driving force propelling the upgrading of consumption in China is the fact that Disposable household income per capita has grown at a compound annual rate of 8.2% over the past six years.

The macroeconomic underpinning of the two-speed phenomenon is easily understood in a chart developed by Gavekal Dragonomics. Assuming a normal distribution of income, as average income per capita increases by 25% (which happened in the last three years), then the share of the population with income greater than US$15,000 increases from 2.3% to 15.9%. That’s nearly a sevenfold increase, which fuels the fast growth of premium categories and segments that are expanding at high speed. Likewise, the low-speed categories and sectors feel the opposite effects from the reduced share of lower-income earners.  

Macroeconomic Explanation 

Part 1: A deeper look at premiumization by category

The 5 fastest-growing categories in the last two years across the 50 categories we observed were mouthwash, kitchen rolls, pet food, makeup and soybean milk.

Top 10 Vs Bottom 10

In the food and beverage sectors, the value growth of the packaged food categories outpaced that of beverages; packaged food’s annual growth rose from 1.3% in 2016 to 3% in 2017. By contrast, the beverage categories’ rate of growth rose from 2.3% to just 2.6%.

Packaged Food Vs Beverage 

A similar divergence took place in personal care and home care. Personal care categories registered a strong growth rate of 9.5% in 2017, largely due to average selling prices that gained 7.9%. But in home care, flat volume and low price growth combined to deliver shrinking value growth, which rose by 2.1% compared with 3.5% a year earlier.

Personal Care Vs Home Care

Because premiumization is fuelling China’s FMCG rebound, we decided to look at the specifics across the four major product sectors: food, beverages, personal care and home care.

Brands primarily boost premiumization in one of two ways. They raise prices on SKUs—this was the case with products such as toothbrushes and hair conditioner in 2017. The other approach brands take is to introduce more premium SKUs and increase the sales volume of existing premium SKUs like facial tissue and yogurt. Premium SKUs are defined as those selling at 1.2 times the category average price.  

Price Growth Of Premium SKUs

Making food healthier. As we reported last year, food brands are catering to consumers’ changing needs by upgrading their products for better taste or enjoyment. These companies continue to be rewarded for their efforts. Consider instant noodles, where leading players such as Master Kong and Uni-President are targeting middleclass consumers by continuing to introduce new premium product variations that have more ingredients and nutrition elements but fewer food additives.

The same story is playing out in biscuits, which rebounded in 2017 with 4% value growth; the category’s 4.7% average selling price growth offset a negative 0.6% volume decline. Some of that premiumization was the result of new product innovations, such as Mondelez’s Oreo Relaunch program. The company has introduced a cross- category product called Milka-Oreo Chocolate. It also invented the Oreo music box, which uses Oreo biscuits to actually play songs. Consumers can personalize the packaging of their music box by choosing the pattern and colour, as well as the text they want to print on the package.

Also, the category owes some of its recovery to marketing innovations intended to engage younger consumers, such as the use of the cartoon character Peppa Pig to sell biscuits. Another reason for premiumization in biscuits: the rise in online sales of imported products such as Nabati.

Companies are hoping to translate this success to sluggish categories such as candy, where UHA Cororo, a Japanese brand, has introduced an innovative jelly candy that is injected with juice and has enjoyed rapid growth in the last two years.

Food categories addressing specific occasions were able to grow with premiumization. For example, gifting is an occasion for purchasing premium goods. Lindt and other top chocolate brands enjoyed double-digit growth as premium chocolate is considered one of the best options for gifting.  

High-velocity growth for major and niche brands alike in personal care. Personal care categories performed well in 2017, achieving 9.5% value growth based on a 7.9% increase in average prices and 1.5% volume growth.

Big luxury brands such as YSL and Lancôme were a major force behind the success of beauty categories (makeup and skin care). For example, YSL tripled its sales in 2017, primarily due to its popular lipstick products. At the same time, Chinese brands such as Pechoin and Chando are growing swiftly, too.  

The rising concerns with health and appearance mean that more people in China are attending to their oral hygiene. Electric toothbrushes and mouthwash both registered strong gains—another example of premiumization.

But the diaper category shows a different pattern. China’s two-child policy has delivered a steady rise in the number of births—more than 17 million babies were born in China in 2017. That has contributed to 12.3% volume growth in diapers. However, nearly half of that volume is sold on promotion, resulting in a 5% decline in average selling price for the diaper category. Although foreign brands still dominate in diapers, there are a few domestic companies gaining presence. Local brands such as Lelch grew by more than 120% in 2017, and Care Daily emerged as one of the top-selling brands within a year of its launch.  

Non-necessities win in home care. Value growth declined in home care, from 3.5% to 2.1%, the result of 2.1% average selling price growth and stagnant volume growth. Yet, categories that serve specific needs beyond daily necessities, such as facial tissue and fabric softener, outpaced other categories.

Part 2: Geographical analysis

Similar to the results of our 2016 survey, FMCG value growth in China does not vary much by city tiers. Across all tiers, the growth rate is converging toward 4%–5%. Instead, variations take place at the province level. The southwest and central provinces continue to outperform the coastal provinces as industries shift inland, spurring a mass migration. Hence, more consumers in these provinces become premium buyers.  

Premiumization Trend Spread Geographically

Note: Because of limited sample size, data calculations for Jilin, Shanxi, Jiangxi and Guizhou provinces are based on regional performance

Part 3: Channel analysis

In 2017, China’s shoppers continued showing their preference for shopping online over making trips to the hypermarket. While online sales maintained strong momentum, sales at big-box retailers slowed or even declined.

E-commerce sales grew by more than 28% last year and now represent about 10% of the market -- twice as much as two years ago. Online penetration growth is shifting from higher-tier to lower-tier cities. At 73%, Tier-1 cities still have the highest online penetration. Yet lower-tier cities are catching up. For example, online penetration in Tier-3 and Tier-4 cities is expanding at 18% and 17% annually, respectively, putting them between two and three years behind Tier-1 cities. Meanwhile, Tier-5 cities are experiencing a 21% annual increase in online penetration.

Online Penetration By City -tier

As we saw in previous years, categories continued to form three clusters based on their digital penetration.

The first cluster consists of eight categories that have a high online penetration and a strong upward momentum: skin care, shampoo, infant formula, diapers, biscuits, makeup, toilet tissue and facial tissue.

On the opposite end are the second cluster of categories with low online penetration, meaning no significant growth in the past five years. This is the case with such impulse categories as chewing gum and beverage categories in which the last-mile delivery costs are high compared with the average selling price.

A third cluster sitting in the middle includes most personal care, home care and packaged food categories. Many of these categories are strongly promoted by top brands and e-tailers.

Relative Online Penetration Change 

Notes: Penetration is number of shoppers who bought this category in the past year, over the total shopper population base; relative online penetration is online penetration divided by overall penetration of the category.

In stark contrast to the boom in online penetration, China’s hypermarkets are dealing with declines in everything from shopping frequency to volume per household to penetration. Instead of traveling to hypermarkets, China’s consumers prefer the convenience of online channels or the newly popular online-to-offline (O2O) delivery services. This trend is leading to innovative variations that integrate online and offline shopping. For example, to offset declining traffic, Walmart has collaborated with JD.com to integrate online and offline shopping. So have Sun Art and Alibaba.  

Super- and minimarket retail channels benefit from O2O delivery services because of their stores’ proximity to local neighbourhoods as pickup locations. Those channels grew by 4.8% in 2017.

In last year’s reports, we discussed how convenience channels were gaining in popularity, largely because of their convenience. However, high rents for urban locations have slowed their expansion. Moreover, as we are seeing with traditional trade, competition from O2O delivery services has hurt convenience stores’ sales of food and beverages for at-home consumption. After five years of solid growth, sales for at-home consumption rose only 1.9%. By comparison, food and beverage for out-of-home consumption registered a healthy 6.8% growth rate. As with traditional trade, it is a part of their business that has more room for growth.  

Part 4: Continuing battle between local and foreign brands

As we have consistently seen in each year’s research, local players gained share over foreign competitors. Local brands grew by 7.7% in 2017, capturing 98% of market growth, while foreign brands increased by 0.4%. Local brands won share over foreign brands in 21 categories while foreign brands gained share in only 4 categories. Ready-To-Drink tea (RTD tea) was the only category in which there was no change.  

Global Vs Local Brands 

Notes: Share percentage is brand value divided by total category value; only the top brands of each category are captured.  

There are many reasons for the success of local brands. They have a better understanding of local demand and are faster at making and executing decisions. This allows them to adapt quickly to new trends. Also, they benefit from a higher historical penetration in the lower-tier cities, where premiumization has started to take off.

While local brands remain strong, some multinationals are taking steps to improve their performance. Among their approaches: focusing more on faster innovations and serving younger consumers shopping online.

Part 5: Summary

How brands can win

Take advantage of channel dynamics and anticipate future retail consolidation. Brands can invest to capture the steady growth of online sales. Also, in food and beverage categories, they can follow consumers into alternative channels, such as restaurants and tea and coffee shops, which are expanding with O2O delivery platforms. In addition, brands can invest to make the most of the dramatic changes in offline channels, as retailers adjust to “New Retail” — transforming themselves with new technologies such as augmented reality—to recreate an attractive shopping experience, and using their stores as delivery platforms.

Develop high-value and personalized products to make the most of the premiumization trend. As China’s consumers become more sophisticated, they place more value on premium products that better meet consumer needs. And multinationals should continue to push imports from their other markets.

Become data-driven, consumer-centric companies. For example, they can generate proprietary consumer data to enable product innovation, pricing and promotion strategies. They can build the new capabilities and culture required to deliver this new consumer-centric operating model.

How retailers can win

Prepare for “New Retail.” As illustrated by the recent alliance between Sun Art and Alibaba, traditional retailers should prepare themselves for New Retail. For example, they can use data analytics to link shopper profiles with shopping behaviours as a way of increasing store traffic, improving churn management and offering more targeted promotions to boost margins.

Another important step involves integrating inventory and supply chain management with e-commerce retailers or solution platforms. Retailers could improve the cost and efficiency of capabilities such as warehouse management, inventory planning and last-mile delivery.

Redesign store portfolio and formats to better capture customers’ needs. Retailers could optimize their shelf space and create more occasion- or experience-based space (e.g., in-store dining) to improve customer stickiness and make the most of the growing popularity of out-of-home sales.

Make the store experience attractive again. Finally, stores should invest in digitalization, with such innovations as augmented reality, digital price tags, “magic mirrors” and sampling machines to create better in-store experiences and a higher level of interaction and engagement with shoppers.

Source: 凯度消费者指数

Editor's notes

Note 1: These 26 categories are a) packaged food: biscuits, chocolate, instant noodles, candy, chewing gum and infant formula; b) beverages: milk, yogurt, juice, beer, ready-to-drink (RTD) tea, carbonated soft drinks (CSD) and packaged water; c) personal care: skin care, shampoo, personal wash, toothpaste, makeup, hair conditioner, diapers and toothbrushes; and d) home care: toilet tissue, fabric detergent, facial tissue, kitchen cleanser and fabric softener.

Note 2: These 24 categories are pet food, oyster sauce, cereals, MSG (monosodium glutamate), Asian traditional drinks, functional drinks, kitchen rolls, wet tissue, napkins, leather care products, batteries, fragrance, hair removal, hair styling, ice cream, nutrient solid drinks, frozen food, flavour powder, foreign spirits, soybean milk, mouthwash, Chinese spirits, cooking oil and nutrient supplements.

* Authors of the full report: Marcy Kou, CEO at Kantar Worldpanel Asia; Jason Yu, Managing Director at Kantar Worldpanel Greater China; Bruno Lannes, a partner with Bain’s Shanghai office; Jason Ding, a partner with Bain’s Beijing office;

* To download the full report, please click here;

* To reach the author, or to know more information, data and analysis of China's FMCG market, please contact us ;

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