CHINA FMCG NAVIGATING THROUGH TURBULENT TIMES SINCE 2H 2021
The Chinese FMCG market showed signs of recovery after navigating through extremely turbulent times, resulting in a performance which rebounded strongly in the earliest months of 2021 compared with the devastating same period the year earlier. Personal and home care total spending made the biggest gains. Then, FMCG sales across most categories sharply retreated for the second and third quarters, only to rebound slightly in the fourth quarter. Overall China’s FMCG market rebounded slightly in the fourth quarter of 2021, growing at 2.1% over the same quarter in 2020, with overall value growing by 3.1% in 2021, maintaining a trend that started during the pandemic in which FMCG growth lags GDP growth.
These are among the findings of new research released today in the 11th annual China Shopper Report Vol I, by Kantar Worldpanel and Bain & Company’s. As in each of the past ten years, Kantar Worldpanel and Bain & Company analyzed the key 26 categories that span the four largest consumer goods sectors: packaged food, beverages, personal care and home care. We also looked at another 17 categories to form a more comprehensive view of the market.
“Through this research, Chinese consumers are showing us new ways of thinking in a volatile environment, as they return to shopping with different behaviors, and brands should take notice of.” explained Bruno Lannes, a partner at Bain & Company based in Shanghai. “While there are signs of recovery in the market, brands must work even harder to connect with their consumers, highlight their value proposition as consumers have become more cautious and price sensitive.”
The report recaps FMCG performance in 2021, during which many consumers exhibited distinct post-pandemic consumption behavior, and then report on the critical changes in that behavior during the first four months of 2022, with implications for consumer goods companies and retailers. With Covid restrictions eased, consumers made more frequent trips to stores in 2021 which contributed to a 4.1% gain in volume growth for the year. However, consumers also took advantage of heavy promotions, such as those offered during Double 11 and Double 12 shopping festivals in the fourth quarter. That was a factor in the .9% drop in average selling prices. The wide swing in performance throughout the year is best illustrated in the 10.6% value growth in the first quarter and –1% value growth in the third quarter
Until the Covid-19 pandemic, FMCG companies enjoyed a steady five-year run of premiumization, with those companies still increasing prices, but now consumers are adapting their behavior to compensate. They are becoming cautious again, but in different ways across different categories. Among the four major sectors, beverage categories enjoyed the best performance in 2021, with 5.9% growth compared with a 4.1% loss in 2020, while packaged foods went in the other direction, losing 1.2% in value growth based on a 2% drop in volume and 0.8% increase in average selling price (ASP). The tentative end to Covid concerns in 2021 led consumers to curtail their practice of stocking up on instant noodles, for example, and that category saw volume drop by 9% in 2021.
Note: Kantar Worldpanel excluded cigarettes from total FMCG data in 2017 and updated the consumer universe in 2021; skin care and makeup covers ages 15 to 64; infant formula and baby diapers covers Tier 1 to Tier 5; all changes may lead to some inconsistencies with previous years‘ data; all average selling prices are calculated based on RMB per Kg/L except diapers and toothbrushes per piece, skin care and makeup per pack, and toilet and facial tissue per 100 sheets/rolls
Source: Kantar Worldpanel; Bain analysis
Personal care and home care categories continued to grow in 2021 by 4% and 6%, respectively. Volume was up for both—personal care volume grew 3.6% and home care volume rose 7.5%. However, those gains were offset by ASP. Prices rose only 0.4% for personal care, and they dropped by 1.4% for home care categories. In makeup and personal wash, companies reacted to fierce competition by selling more on promotions, and local insurgents gained share with value products. There were some bright spots, though. For example, the personal care breakout category of 2021 was shampoo, which rose more than 10% in value.
“The two-speed growth phenomenon we identified in 2016 is still being seen with quality-of-life improvements all growing remarkably, while other categories have begun to lose market share and so the analysis of the market has been fascinating,” said Derek Deng, a partner in Bain & Company’s Shanghai office. “Consumers have adapted to this new environment and so brands need to as well, while ensuring that they understand what their customers want, need and demand both in turbulent and non-turbulent times.”
The research shows that E-commerce was the only channel to maintain solid growth in 2021, although that growth slowed to 15% from the 30% range of previous years, and e-commerce platforms became increasingly fragmented, with more consumers shifting to options like Pinduoduo and interest-e-commerce platforms (Douyin and Kuaishou).
“The winners in FMCG market are those respond actively to these changes by reevaluating their e-commerce channel strategy across platforms, striving for portfolio differentiation and specialized operations capabilities to reach different consumer segments and satisfy different needs”, said Jason Yu, Managing Director of Kantar Worldpanel Greater China. “They are also able to leverage the rise of online-to-offline (O2O) commerce to drive more incremental value.”
Insurgent brands also continued to gain share from larger brands in most categories in 2021, however top brands started to regain lost share in a few categories, such as hair conditioner, packaged water, makeup, and infant formula. Similar to previous years, local brands on aggregate gained share against foreign brands in these 26 categories in 2021 while local brands focused on volume growth while foreign brands relied on premiumization to grow.
Implications for brands and retailers
Uncertainty introduced in 2020 by the outbreak of Covid was a dress rehearsal for volatility in the years to come. We believe this year businesses may need to accept that volatility is the new normal. Companies should proactively practice scenario planning and be ready for various potential outcomes instead of counting on succeeding with a single plan. For consumer goods brands specifically, that means closely watching the following:
Product/brand portfolio: Assess varying opportunities by price segment and city tier, customizing portfolio strategy to capture them with different product propositions, instead of focusing on only one segment.
Supply chain optimization: Simultaneously manage the pressure on cost structure and the development of resilient supply chains to ensure business continuity under all scenarios.
Integrated online and offline route-to-market: Diversify into insurgent channels (such as PDD, livestreaming, and community group-buying platforms) in the short term and build direct-to-consumer capabilities to integrate online and offline channels in the long term.
Brands should also be optimistic about the future and expect a much better 2023, as the fundamentals of the Chinese economy remain strong with a growing middle class, continuous urbanization, and inflation under control. Brands should use the year 2022 to prepare for a strong rebound in 2023, so retailers need to:
Build resilient supply chains so that they can ensure business continuity
Redefine the retailing value proposition to shoppers in an increasingly digitalized and omnichannel environment
Focus on categories where there is a higher chance to win vs. online
Double-down on O2O, prioritizing small to midsize stores and convenient locations
Provide consistent experience in offline stores, online self-owned app, community buying and other horizontal O2O platforms
Reduce complexity in operations, look for alternative sourcing options and establish a new cost baseline in order to cope with the increasing input and energy costs.
Turbulence and uncertainty are likely to remain concerns for a large part of 2022, with consumers responding by becoming increasingly more price sensitive in many categories, but challenging times always create opportunities. Looking farther out into 2023, there is reason for optimism with the long-term fundamentals in place for a return to healthy growth. Inflation remains relatively lower in China compared with Western markets, and the energy crisis is under control, with strong indications that the government is still striving to maintain GDP growth and is committed to balancing Covid clearance and economic development. Just as they have prepared for the challenging times, the best FMCG companies will prepare for a likely rebound.
Click “Read More” for complete China Shopper Report2022, Vol I.
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