Foreign FMCG players losing share in fast changing Chinese market

The Chinese FMCG market is under pressure as consumers shift their spending habits towards higher value durable goods and health, causing growth rates for the market to hit lows of around 3% at the start of 2016. Local competition is also heating up in the segment, with foreign brands losing market share on the back of nimble, digitally advanced, local competitors.

China has set itself on a growth trajectory away from investment towards consumer spending and innovation. One of the biggest players in consumer spending is fast-moving consumer goods (FMCG). In the 5th annual report from Bain & Company and Kantar Worldpanel, titled ‘Dealing with Two-Speed China’, the makeup of the FMCG market is considered, as well as exploring in how far changes in consumer behaviour are affecting FMCG companies – globally and locally.

Falling FMCG growth in China
The analysis shows that there has been a slowing trend in the growth of the FMCG market in China. In 2011 both major categories, food and beverages and personal and home care, grew at around 15%. The intervening years have shown growth steadily drop, to his around 3% at the start of this year. Overall, volume declined 0.9% and average selling price rose only 4.4% in 2015. That figure is more than twice the rate of inflation, but a drop from the 5.4% average selling price increase in 2014.

A number of factors are implicated in the slowdown of growth. FMCG spending grew by only 0.8% in 2015, which is much lower than the growth rate in disposable income (8.2%). One major factor is a shift in priorities for households, resulting in a slowdown in average spending per household on FMCG products. Chinese shoppers, who can afford, it are shifting their spending toward non-FMCG products. According to the report, as the Chinese economy matures, FMCG spending, as a percentage of total household spending, will decline to approach levels seen in more developed markets, while spending on entertainment, health and travel are all projected to increase.

Changing behaviour
The research also found that shoppers are changing their habits regarding where they buy their FMCG. Some channels, particularly e-commerce and convenience stores, are rapidly expanding their presence, as cash-rich time-poor consumers seek to improve shopping efficiency. The Chinese e-commerce market is now the biggest in the world, taking a 4.3% market share and with robust CAGR of 36.5% over the 2014-15 period. Convenience stores too are seeing foot falls increase, taking a market share of 4.8% and enjoying a growth rate of 13.2% over 2014-15.

While there are gains in some segments, others, such as the grocery store and hypermarkets, are seeing decreased attention from Chinese shoppers. Grocery stores saw -10.4% growth over 2014-15, falling in market share from 9% to 7.8%, while hypermarkets saw an average annual -0.2% growth rate over the past two years, as traffic fell by 4.6% and volume per household sank by 4.7%.

Local competition
The research also found that the global expansion of FMCG into the Chinese market has hit a wall, as local competitors are better able to service the local market demand and meet changing expectations. The market growth of foreign companies to local companies was split 21% to 79% respectively between 2012 and 2013, between 2013 and 2014 it stood at 13% and 87% respectively. Between 2014 and 2014 however, the foreign company share of growth fell -9%, meaning local competitors were up to 109%. The CAGR for the period stood at -1.4% for foreigners and 7.8% for local players.

According to the analysis, the loss of market share to local companies can be attributed to their lack of presence within the fastest growing markets, lower tier cities; their lack of nimbleness in a fast paced market; their global offering not in demand with the local population; as well as their lagging behind in digital propositions and e-commerce in particular.

While overall competitor growth was relatively slow for 2014-15 in general, and not every category is showing decline. Global companies were able to sell more fabric softener, up 5.3% making up for declines the year previous. Infant formula too made up losses from the previous year, up 3.2%. Beer manage two years of growth, up by 2.1% in 2014-15.

Skin care, diapers, toothpaste, hair conditioner and shampoo all saw significant declines, of more than 3% between 2014 and 15. Changes in consumer sentiment towards foreign brands is partly reflected by the strength of local companies’ investment in their brands, through both traditional media and digital or social media.

Online opportunities
The research suggests that the growth of online shopping provides a host of opportunities for FMCG companies. Particularly lower tier cities currently have low levels of e-commerce penetration, and, as their incomes increase and their populations comes online, tapping into these markets’ online spend may pay significant dividends.

Whereas the pace of growth for overall retail spending in China is evening out among city tiers, big differences are apparent in online shopper behaviour, according to the consultancy. In Tier-1 cities, 8.4% of all FMCG purchases were made online. However, the smaller the city, the lower the portion of e-commerce purchasing is. Shoppers in Tier-5 cities only made 2.7% of their FMCG purchases online, indicating high growth potential for brands. The consultancy’s research found that “average selling prices in lower-tier cities are actually above those in higher-tier cities, as consumers focus their online spending on a few more expensive categories. For example, skin care accounted for 65% of all online purchases in Tier-5 cities, but only 34% in Tier-1 cities.”