FMCG opportunity in lower tier cities
By keeping a rapid growth, the slowdown for both China’s economy and FMCG (Fast Moving Consumer Goods) in 2012 doesn’t thwart lower tier cities to shine brighter. More and more manufactures and retailers plan and grasp lower tier cities market development strategy when they have to face the impact from new retail business pattern, the rising of rent cost and the passing of fast economy growth in China.
By covering 40,000 households in china, the insights from the global market leader in consumer knowledge, Kantar Worldpanel, shows that lower tier cities1* market is unique no matter in category expansion, sale channel development and the manufactures growth path. Medium, small and localization are the key word for this unique market.
Emerging category is favoured by high income young families
To indentify the lower tier cities growth pattern, Kantar Worldpanel China Consumer Panels divides the FMCG categories into three layers by penetration2*: Staple (penetration over 80%, e.g. edible oil and rice), the Developing (penetration between 40% to 80%, such as shampoo and chocolate) and Emerging (penetration less than 40%, e.g. coffee and facial mask.)
In terms of value, the demand growth of all three layers for consumers who live in lower tier cities is faster than up tier cities. Emerging category’s average penetration growth rate in low tier reaches 10% which surpasses the up tier consumers’ raise of 6% and the gap is also higher than Developing and Staple category. To further analyze the reason behind, new category trial is the key to lower tier cities market growth, which is reflected in the extending number of category bought in emerging layer. Of 44 emerging categories, number of categories each household bought raised from 9 to 9.6 in the past year. This implies a core opportunity of category penetration especially for each emerging category.
What type of family leads the emerging category development? Firstly, the family income is a critical driver. Lower city tier household average monthly income has increased by 88% in the past three years. “The gap of household disposable income between lower tier and up tier lessens gradually. And lower city tier consumers have been actively pursuing better life quality by buying high quality products and brands”3*. Secondly, as the core consumption group, young families4* with kid increase their value contribution to the emerging category from 40.6% to 42.9%, driving the growth of emerging layer in lower tier city. Significant penetration growth is observed for these young family favored emerging categories such as functional drink, cosmetic, mints and wet tissue etc. Meanwhile, the rapid growth of emerging category also benefits from the expansion of modern retailer, fast development of e-commerce and ‘category experts’ like cosmetic specialist store.
More shopping baskets and more categories
The latest KWP data shows that consumers tend to have larger basket but reduced frequency in the recent year. This behavior is driven by large package in up tier cities and enriched number of categories in lower tier cities, which reflects the distinct competition environment in lower tier cities. The behavior of larger basket and reduced frequency benefits modern trade5* in one-stop shopping nature. However, in lower tier cities the trend prevails among traditional trade like groceries more than among modern trade. Grocery‘s frequency drops by 3.4%, trip spend increases by 18.4%， which is higher than the growth rate of modern trade. It is pity that the modern trades missed the opportunity to catch the trend, yet in average a household goes shopping in hypermarket 18 times a year in lower tier city, which is still much lower than their up city tier opponent with 27 trips in hypermarket. Attracting more consumers to purchase in hypermarket will directly encourage category trial. Thus, the win-win cooperation exists between hypermarket and emerging category manufactures by driving the purchase frequency to hypermarket.
The modern trade’ growth slowdown- a disadvantage for key manufactures
It is needed to reconsider the reason why modern trade fails to fully grasp the opportunity in lower tier cities market. In the recent year, modern trade’s value growth in lower tier cities is only 16%, while the growth rate of specialist store and department store is over 20%. Till the third quarter in 2012, the top retailers6* grown by 5% in lower tier cities while medium and small sized retailers enjoyed more than 15% growth. This is caused by top retailers’ new shops expansion progress slows down comparing to last year and they are more focus on enhancing the sales performance of those newly opened stores. This market strategy also shows the weakness of low growth dynamic of individual shop.
In the past, key manufactures7* benefits from retailers’ fast expansion towards lower tier cities and they successfully raise their market share in modern trade up to 28%, which is higher than 21% market share in traditional trade. Recently, also affected by the modern trade’ growth slowing down in lower tier cities, most of key manufactures’ development pace is hindered as well. Medium and small manufacturers gain more benefits from the steady growth of traditional trades such as grocery, free market and cosmetic shops etc. It’s worth concerning that even in the modern trade the share of key manufactures is shrinking and occupied by medium and small brands. To adjust sales strategy in lower tier cities by learning consumer behaviors and market requirements is urgent. Therefore, key manufactures need to avoid fully copy modern trade strategies in up tier cities but to consider developing product packages and flavors that fits the needs of lower tier consumers.
Medium and small brands’ counterattack
The key FMCG manufactures have been aiming to the lower tier cities market long ago. In the recent year, most of key manufactures are successful in recruiting more consumers and have the value growth of 12.2%. If comparing to the 15.9% increase rate of total FMCG market, obviously there is room for the key players to drive. It is also found that for those categories with highly centralized brand share are not so influenced. For instance, instant noodles key players like Masterkong and Uni-President’ share increases from 62% to 69% in lower tier cities. And CSD brands like Coca-Cola, PesiCo and Wahaha, take 90% market share and is still growing. On the contrary, categories with fragmentized brand share are facing more fierce market competition. Such as skincare, the growth rate of key manufactures is far lower than medium and small brands like Pehchaolin and Inoherb. The market share of shower gel key players drops from 37.4% to 36.7%. Are the key manufactures well prepared to respond the counterattack of medium and small brands with more and more strengthened learning/ imitating ability?
Facing the changing market competition environment in lower tier cities, medium and small brands have done better gaining the initiative. To catch up, the key manufactures have to make proper adjustment to the market strategies:
- To strengthen the long term partnership with key retailers, and help them to understand lower tier cities consumer behaviors and accelerate to transition period for the newly opened shops.
- To keep close monitor the rise of medium and small retailers, and enlarge the retailers list as required.
- The key manufactures should give up the wait and see attitude for traditional trade in the lower tier cities. How to strengthen the brands execution and distribution really into the lower tier is an inevitable subject in the competition with medium and small brands.
Kantar Worldpanel will keep close watch to the lower tier cities FMCG market development and will provide more market insights from professional and unique perspective.
Notes to editor:
- The lower tier cities refer to county-lever cities and counties; the up tier cities refer to municipality, capitals and prefecture-level cities.
- Penetration means the ratio of household ever purchased certain product during a period of time.Emerging category: annual penetration is less than 40%; Developing category: annual penetration is between 40% to 80%; and Staple annual: penetration is more than 80%.
- Data source comes from CNRS
- The higher income household refers to the family monthly income is more than RMB5,000. The age of young families’ member is between18 to 35 or includes kids under 14.
- The modern trade includes supermarket and hypermarket. Traditional trade means grocery, free market, and wholesale market, etc.
- The key retailers include Vanguard, Wal-Mart，Zhongbai，RT-Mart，Beijing Hualian，Lotte Mart，NGS group，Yonghui，Liqun，Yinzuo Shopping city，Auchan，Renrenle，TESCO，Parkson，Lianhua Group，Hongqi，Carrefour，Wumart，Lotus， E-mart，A Best，Dia。
- The key manufactures are the top 24FMCG manufactures: Coca-Cola, PesiCo, Kraft, COFCO, MasterKong, Uni-President, Mars, Nestle, Bright dairy, Yili, Mengniu, Wahaha, WangWang, Unilever, P&G, Amway, Avon, Jahwa, Colgate, Kao, Johnson and Johnson, Reckitt Benckiser, L’Oreal, and Liby.