FMCG in China is set to recover steadily in 2023
The latest Kantar Worldpanel report indicated a 4% drop in FMCG sales in Q4 2022 as COVID infections spread rapidly across China since the beginning of December, resulting in a sharp drop in household purchases and reduction in spend on non-essentials. Lockdown and zero-COVID policies put enormous pressure on consumer spend per capita consumption in China in 2022 which only grew by 1.8% growth year on year according to National Bureau of Statistics. Kantar Worldpanel reported a 1.4% growth year on year for FMCG on the back of sporadic COVID outbreaks, yet the growth was still higher than the level in 2020 when the pandemic first hit the country, indicating a high level of resilience.
In Q4 massive infections nationwide once again lead to higher demand for convenience food categories. Both instant noodles and frozen food saw sales jump by more than 20%. Thanks to the new optimized COVID prevention policy, the peak of infections reached its peak by the end of December 2022 and the market started to show signs of a quick rebound. Throughout December, high demand for healthy and immunity propositions also created huge demand for nutrition supplements. In additional, increased usage and development of new usage habits also drove the growth of the tissue category by 12% in Q4.
Modern trade faced challenges while proximity channel continued to fly
The performance of different modern trade formats became even more divided in 2022. Footfalls of offline stores, especially hypermarkets, were severely impacted by reduced mobility. In Q4, sales of hypermarket and supermarket fell by 10.9% and 11.7% year-on-year, respectively. Meanwhile, the performance of proximity channels remained robust, with those small formats closer to consumer movements and communities kept winning a higher share of wallets. Small supermarkets in China reported a stellar growth of 11.3% in Q4 as consumers had to stay at home and chose to shop nearby for daily staples for convenience. Consumers also started to buy products which improved their quality of life, creating new opportunities for growth for those proximity stores.
The overall weakness of offline stores also created more intense competition amongst the leading players. Retail concentration in 2022 further reduced, as most key players lost market share, even more significantly for Sun Art group, Yonghui and Vanguard group in Q4. At the same time, strong performance of Sam’s Club helped Walmart Group gained 0.3 share point nationwide, and Walmart overtook Yonghui to become the second largest retailer in the latest quarter. Sam's Club gained 0.9 and 0.7 share points in the East and South regions respectively in Q4, with a noticeable increase in both shoppers, and shopping frequency. This indicated an increased attraction of the Sam’s Club offering on the back of its distinctive value proposition and supply chain strength. Jiajiayue, a leading member of the SPAR group, also consolidated its position in its home regions and expanded steadily in nearby provinces. Sunning Group (a holding group for Carrefour in China) and Bubugao Group, however, saw sharp share losses, as both of them accelerated the closure of loss-making stores and retrenched from their past expansions.
What’s in store in 2023?
1. FMCG market is set to recover despite challenges ahead
With the optimization of COVID prevention policies introduced since Dec 2022, local governments pledged a number of measures to create more incentives to spend and new consumption occasions. Kantar Worldpanel’s weekly purchase barometer report also confirmed a fast recovery of consumers’ FMCG purchases in major cities across China since infections passed peak levels at the end of December 2022. With a strong desire to get back to normal life and recovery of mobility between cities and provinces during the Lunar New Year time, the out-of-home market and brick-and-mortar stores saw a quick pick up of traffic.
Yet uncertainties over the second or third wave of infection as well as global economic turmoil and geopolitical tension remained potential hurdles to a full economic recovery. Early Kantar Worldpanel analysis also indicated that Chinese shoppers were more price-sensitive and more value driven no matter if they shop offline or online. Consumer confidence in China is also yet to be fully restored. Yet with the strong determination of the central government to get back to growth, it is believed that the market will steadily recover in Q2, providing there is no major COVID disruption and consumers disposable income does not decrease. There are plenty of promising growth opportunities for brands offering health, convenience, pleasure and indulgence, especially in lower tier cities and towns.
2. Heated competition amongst membership stores calls for a new route to growth
In 2022, the race amongst existing and emerging players in the membership store model remains heated, as competitors such as Metro, Hema and other local retailers joined the game while Sam’s Club and Costco increased their footprint. Over the past year, Sam’s Club opened 6 new stores across China while Hema X also launched its 6th store in Shanghai. Metro, now part of Wumart Group in China, also announced an ambitious plan to transform all their stores to membership stores in 2021 and has opened 24 new stores in less than 2 years. Growth of the sector also lured more me-too players to join the market and made competition more intense. Sam’s Club continued to maintain its advantage with its distinctive private label offerings as well as global supply chain strengths. It also expanded its offer to non-food categories with the same distinctive value and quality excellence. Hema X differentiated itself over store design and customer experience. In China, more and more membership stores moved into more densely populated urban districts instead of suburban areas to attract more local residents. Those stores will have to compete more effectively with existing players in those neighborhoods with its solution to consumers’ daily needs rather than ‘stock-up’ shopping. Local retailers in China also made moves into this sector but there was a lack of differentiation from the hypermarket format to build a real value proposition and save themselves from market share losses.
3. Brick and mortar stores strengthen their delivery experience, while discount stores emerge
Over the past three years, Chinese consumers preferred to shop locally and the habit is here to stay. According to Kantar Worldpanel, small format stores are the only ones that grew within modern trade with number of convenience stores also expanded rapidly. In additional, consumers developed the preference to shop on their mobile. The latest Sun-Art trading report revealed online sales contributed to 35% of its sales, with its ‘1-hour delivery’ service reporting outstanding performance. Yonghui also invested heavily in the development of its digital capabilities to cover all its stores nationwide – its online business reported 21% growth year on year and contributed substantially to the turnaround of its profit performance. Acceleration of digital transformation while building excellent omni-channel experiences remains the strategic priorities for all offline retailers.
In the context of slow economic growth, less pantry loading and lower consumer willingness to spend, Chinese retailers also started to launch discount formats despite some unsuccessful experimentations in the past. Wumart opened its first discount store "Meitao" in August 2022 and Hema also announced an ambitious plan to open its ‘outlet’ stores as its new growth engine, with fewer private label SKUs at deep discount. Whether hard discount format will eventually become the winning format to compete directly with mainstream retailers remains to be seen. Those emerging players will have to build extremely high levels of operational efficiency and brand power to win the minds and wallets of Chinese shoppers.
4. Evolving O2O model shaping the growth of online retail
O2O (shop online + deliver from offline stores) was increasingly the mainstream way of shopping for many Chinese shoppers in 2022. Over the past year, 56% of China urban households purchased FMCG through O2O and became a routine habit for many. Although consumers purchased less products as they came out of the lockdown, they tended to increase shopping frequency, with average consumers placing 15 orders yearly, similar to the average number of visits to large supermarkets.
A few local Community group buy (CGB) players saw their business retrenched since the beginning of 2022 as they failed to sustain their business model profitably. However, a few digital giant-based competitors maintained steady growth. For example, Meituan further upgraded their offer to cover more categories. Despite the market turbulence throughout the year, Community Group Buy maintained its foothold as a viable business model, with its buyer base growing by 23% year on year, despite lower ticket price. Retailers based on the warehouse O2O model experienced reshuffling, yet their key customers expanded their basket choice to spend more on fresh foods at premium price. Dingdong Maicai, a leading player in the sector turned around its financial performance with more drive on its own label products and pre-made dishes. It also promoted the concept of "clean label" to reduce the additives in products, catering to consumers' pursuit of a healthy lifestyle.
Key O2O aggregators continued to strengthen their offer in 2022, by increasing the width and depth of categories to meet the everyday consumer needs. Their local delivery capability was also an advantage over mainstream eCommerce platforms. In 2023, O2O aggregators will further improve their delivery efficiency and category coverage to compete with other digital commerce models and build the modern local retail ecosystem with offline retailers.
5. Interest commerce competing directly with online supermarkets
According to Kantar Worldpanel, eCommerce reported a noticeable slowdown in 2022, yet the overall shopping frequency remained stable.
Source: Kantar Worldpanel China
‘Interest Commerce’, grew on the back of short-form video content and KOL grew remarkably. 33% of the Chinese consumers bought FMCG products through Douyin in 2022, with the number of buyers almost doubling compared to 2021, with more prominent growth in the South and West regions. Douyin also launched a formidable movement into the battleground of online supermarkets, signifying its next chapter of development. Moving from interest in content to a direct search-based shopping model on the back of product supplies, Douyin now started to compete head on with the like of Tmall and JD, and this also created new growth possibilities for eCommerce. Yet a full conversion from interest to commerce, to cover consumer needs across all occasions, will have to be supported by the richness of product offers and strong delivery capability.
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