China FMCG: Still Volatile — but with Signs of Hope
China’s fast-moving consumer goods (FMCG) sector showed resilience with 3.6% year-over-year growth for the first three quarters of 2022. For the first time since 2020, it exceeds the country’s gross domestic product growth in the second and third quarters, according to joint research released today by Kantar Worldpanel Greater China and Bain & Company.The 11th annual China Shopper Report Vol. 2 analyzed 26 key categories spanning the four largest consumer goods sectors: packaged food, beverages, personal care, and home care.
“The big hero this year was volume which rose 5.9% compared to the same period last year. Pandemic-fueled stockpiling behaviors are a likely cause, with volume rising across all sectors,” said Bruno Lannes, a partner at Bain & Company based in Shanghai. “Overall, China’s FMCG market demonstrated some buoyancy in rough waters, signaling there is hope for the months and years ahead.”
Packaged food and home care continue to lead growthAcross the four sectors, packaged food and home care led growth during the first three quarters due to Covid-led stockpiling and heightened health and hygiene concerns. Packaged food alone averaged 7.4% value growth in the first three quarters of 2022, with 4.6% in volume and 2.6% in average selling price (ASP). Home care saw similar pandemic-related gains as packaged food, with a value increase of 6% this year driven largely by a 5.4% volume increase and 0.6% increase in ASP.
Beverages also did well. Its 4.1% value increase in the first three quarters was shaped by a volume increase—mainly in the third quarter—of 7.2%, despite an ASP decline of 3%. Pent-up demand following pandemic confinement was part of the equation, but so was the summer heatwave. In contrast, personal care reversed the trend, dropping 1.9% in value with a slight increase of 0.7% in volume and 2.5% decline in ASP. Cosmetics categories drove this plunge, and Covid provided the push.
E-commerce stagnates, O2O soars
This year, the unpredictable nature of China’s pandemic restrictions introduced new channel dynamics. E-commerce trod at a similar pace as the overall FMCG market during the first three quarters of the year, while smaller offline store formats and online-to-offline (O2O) commerce rode on Covid’s tailwinds. In the third quarter, O2O saw 17% value growth compared to last year as consumers sought to stock up and fulfill instant needs while avoiding fulfilment issues from online-only orders. Frozen food, toilet paper, and facial tissue were among the categories that saw huge growth in O2O penetration.
Interestingly, convenience stores and grocery stores gained traction, growing 9% relative to non-existent growth last year. This represents a reversal of trend from the last report and suggests a change in consumer preferences. Pandemic-related disruption to transportation, along with concerns about virus exposure in large crowds, had consumers gravitating to the predictability, convenience, and safety of shopping at nearby locations.
Average selling price continues deflationary trend
Despite cost inflation at 2% in the first three quarters, ASP continued its downward trend for the third consecutive year and is at its steepest since 2020, declining by 2.1% in the first three quarters vs. last year. Reactions to the decline differed by sector.
Only a few categories showed real ASP growth above inflation level, and these were largely in food and beverage and home care due to pandemic-related consumer behavior changes. Faced with rising input costs, FMCG brands understandably pushed for price increase to manage margins. However, how consumers reacted to the price increases in food and non-food sectors differed significantly.
“While seeking more ‘value-for-money’ products seems to be a common trend, food and beverage saw a volume increase with consumers stocking up on larger pack size items. Personal care and home care, on the other hand, saw a shift toward less expensive products and channels.” said Jason Yu, Managing Director of Kantar Worldpanel in Greater China.
Category and pricing patterns suggest consumers have learnt to cope with CovidWhile the four distinct category patterns - which we identified in 2020 as Covid erupted - largely still hold true, there were less divergence across these categories during the first two quarters and they converged back much faster, suggesting that consumers have learnt how to cope with Covid.
Four major pricing patterns, premiumization, trade up to mid-range, larger pack stock up and flight to value - identified in Volume 1 – continued to prevail. For example, consumers, particular those from Tier 1 cities, continued to premiumize, with carbonated soft drinks, beer, and fabric detergent due to continual innovation and the introduction of new formats and flavors.In the trade up to mid-range cohort, toothpaste, personal wash, and infant formula were strong players.
Interestingly, consumers veered towards larger pack stock-up during this year’s Covid outbreaks compared to previous years. And in the flight to value group, consumers’ growing preference for ‘value-for-money’ options rose with inflation. In skincare there was a notable shift towards more affordable products through domestic substitution. These latter two pricing patterns were consistent with the downward ASP trend in lower-tier cities.
The research identified recommendations brands should consider as they enter a volatile 2023.
Three ways for FMCG to position for success in 2023
Identify growth opportunities: As market dynamics shift and competition intensifies, brands must find new growth engines. By thoroughly assessing market and consumer trends, they can expand into new geographies, enter or create new market segments, sell into new channels, and interact with consumers via new touchpoints—all potential avenues to growth.
Improve efficiency: Rising input cost and unexpected supply chain disruptions will force brands to manage cost more carefully or even reset their cost base to deliver sustainable financial returns. To sustain consumer demand and preserve brand relevance, brands should adopt a test-and-learn approach: continuously optimize marketing effectiveness, while dynamically adjusting pricing, assortment, packs, and promotion to maximize revenue potential.
Plan for uncertainty: Facing enduring pandemic and geopolitical tension, brands must better anticipate changes and build flexibility and resilience. Scenario planning can help them develop non-regret moves and contingency plans for different events based on signposts and triggers.
Three ways for retailers to position for success in 2023
Transform business model with balanced score card: As the retail industry faces continued deflationary pressures, retailers need to shift focus from gross merchandise value (GMV) and topline growth to sustainable operations and profit margin. Critical levers include optimizing store footprint and SKU assortment.
Improve shopper loyalty with distinct shopper experiences: In a challenged retail market, retailers need to focus on core consumer segments and improve shopper loyalty via differentiated services and consumer engagement across multiple channels. Doubling down on creating a frictionless O2O shopping experience could help pave the path to success.
Build differentiation with exclusive assortment: As consumers are pulling back on spend, and capital markets are investing less into the retail markets, retailers need to establish a differentiated portfolio. Private label or exclusive products could help draw traffic and attract new consumers.
“2023 is likely to remain volatile, resuming some of the trends we have witnessed in 2022 while seeing improvement in others. However, we do see a gradual relaxation of Covid curbs taking place in China, bringing back some consumer confidence,” said Derek Deng, a partner at Bain & Company based in Shanghai. “There are other fundamental reasons to be optimistic as well. China’s FMCG industry has demonstrated remarkable resilience in the first three quarters, as both brands and consumers have honed their adaptability to changing circumstances. If FMCG companies can keep their fingers on the pulse of consumer needs and remain nimble, they can chart a path towards healthy performance.”