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Online and New Retail concepts in China driving FMCG market growth

Online and New Retail concepts in China are driving FMCG growth according to a report by Bain & Company and Kantar Worldpanel.

As reported yesterday on Inside Retail Hong Kong, The Chinese FMCG market remained robust last year despite talk of economic slowdown.

According to the latest China Shopper Report produced by the two companies, e-commerce channel growth in China slowed slightly to 30.6 per cent between 2017 and last year (compared with 35.1 per cent annual growth between 2014 and last year), as penetration in tier-1 cities leveled off at around 80 per cent last year. In lower-tier cities, however, growth is expected to continue for at least three or four more years and will serve as the engine of future online expansion.

While last year didn’t necessarily represent a turning point, the research revealed renewed hope for offline retailers. Previously, offline stores in most formats had been steadily losing share with the rapid rise of online channels. Now there are new and interesting opportunities for offline retailers to regain their momentum, in many cases with smaller and more flexible formats. For example, the share of traditional trade (grocery) food and beverage sales intended for out-of-home consumption has risen by 14 per cent per year since 2016, reaching nearly 80 per cent last year, based on the 10 food and beverage categories analysed in the research. It is similar with convenience stores: their sales for out-of-home consumption grew 17 per cent per year in the last two years, and represent 88 per cent of total convenience store sales, for these same 10 categories.

Large store formats also show potential for growth, but it will require them to take on new roles, the report found Last year, hypermarkets started to reignite some of their momentum by serving as a logistics base for 30-minute delivery of goods ordered online via the leading delivery platforms. Another opportunity: big chains can reinvent themselves by upping their game in fresh food.

Insurgent brands punch above their weight

In addition to examining these ongoing trends, Bain & Company looked at two other developments: the dramatic impact of fast-growing small brands on larger brands, and the emergence of the uniquely Chinese phenomenon of New Retail – futuristic supermarkets devoted in equal measure to in-store dining, online ordering and delivery.

Last year’s China Shopper Report revealed that China’s insurgent brands are taking a disproportionate share of FMCG growth. As that trend continues, a fundamental question faces many companies: Can big brands get bigger and continue to be successful?

“The new reality is that many incumbent brands watch small brands doing an impressive job of serving specific consumer needs, responding in everything from R&D to digital marketing with agility and flexibility,” said Kantar Worldpanel Greater China GM Jason Yu.

“Whether to focus on growing big brands or building a portfolio of different brands to serve different segments nags at every FMCG executive. It’s a decision that sometimes calls for a major strategic transformation; billion-dollar brands are vastly different animals than $25 million brands and require significantly different management approaches.”

The other big emerging trend involves New Retail. In any of its forms, New Retail blurs the line between online and offline sales, with potentially major implications for how FMCG products are sold. For example, New Retail’s biggest manifestation continues to be the growth of the food service channel, which is fueled by increasingly faster delivery. Now largely limited to Tier-1 and Tier-2 cities, and with penetration levels comparable to regional supermarkets, New Retail stores will become more broadly relevant in the future.

According to the report, the acceleration of New Retail in multiple ways presents opportunities for retailers to transition from today’s mass-oriented offline approach to tomorrow’s seamless, multichannel world of shopping. Physical stores have a future, but offline retailers need to refine their moves to play in this new environment.

The report recommends physical stores:

  • Redesign store portfolios in the New Retail format;
  • Make the store experience more attractive by leveraging new technologies like augmented reality; and
  • Digitalise operations to deliver a seamless experience to consumers, whether they buy online or offline, and start to monetise consumer data for better cooperation with brands.

The three key implications for brands mentioned in last year’s China Shopper Report remain:

  • Take advantage of the channel dynamics, grow with the winning channels and anticipate retailers’ consolidation;
  • Develop high-value and personalised products to make the most of the premiumisation trend; and
  • Become data-driven, consumer-centric organisations by collaborating with platforms but also by developing your own set of consumer data.

This year, a fourth important implication arose, based on the success of insurgent brands: Develop a portfolio of brands to grow overall share in a category, taking advantage of the fragmentation of consumer needs and shoppers’ thirst for innovations.

“As the China consumer continues to become more sophisticated and the channels available to them become more advanced, it is essential that companies who want to win in this new era fully understand what it takes to win in this market,” said Bain & Company partner and report co-author Derek Deng.

“By understanding and incorporating the new retail model and focusing on a consumer-centric mentality, companies will be able to win in this new battleground which is emerging.”

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