This is the ninth consecutive year that we have tracked the shopping behaviors of Chinese consumers. Our continuing research has given us a valuable long-term view across 106 fast-moving consumer goods (FMCG) categories purchased for home consumption in China. As in each of the past eight years, we analyzed the key 26 categories1 that span the four largest consumer goods sectors: packaged food, beverages, personal care and home care. We also looked at another 19 categories2 to form a more comprehensive view of the market. Combined, these sectors represent 80% of all FMCG.
As we endure historic times introduced by the Covid-19 pandemic, this year’s report includes a deep look at the changing consumer behavior resulting from the pandemic in the fi rst months of 2020 and the implications for consumer goods companies and retailers during an uncertain recovery.
Fast-moving consumer goods growth stabilizes, but still be greatly influenced by Covid-19
After years of supercharged value growth in China followed by two straight years of 5.2% growth, China’s overall FMCG growth of 5.5% in 2019 represented stabilization. The crisis that has dealt such a serious blow to economy has altered consumer behavior in China virtually overnight. As the nation endured lockdowns, quarantines and then a tentative recovery, consumers quickly adapted their spending patterns. Total retail sales fell by 19% the first quarter of 2020, for the biggest decline on record. Within FMCG, food and beverage spending fell 7.7%, and non-food and beverage spending fell 4.6%.
Accelerating Category Polarization
Before the Covid-19, the food and beverage sectors are expanding at a vastly different speed from the personal care and home care sectors.
In 2019, beverages grew by 2.9%, an increase from 1.6% in 2018. The improved performance results from growing sales of large pack sizes combined with product innovation. For example, premiumization helped the beer category overcome volume dips, with the popularity of craft beer and imported beer delivering the price gains. Milk benefited from premiumization, too—in both fresh and ambient (which does not require chilling) milk. Innovation enabled carbonated soft drinks to not only raise prices, but further cannibalize sales of ready-to-drink tea. However, a lack of innovation led yogurt to lose volume. Another factor: families with kids viewed ambient yogurt drinks as being less nutritious and healthy.
Packaged foods grew by 1.9%, a drop from 4.5% a year earlier, mostly due to declining growth in average selling prices. Instant noodles and infant formula still led the pack. Instant noodles grew 6%, propelled by large pack sizes and consumers’ unending desire for convenience. And while infant formula remains a strong category, it lost some ground due to the decreasing birth rate, which resulted in slower volume growth. Meanwhile, impulse food categories such as candy and chewing gum continue to decline in value growth. In addition to a general reluctance to eat snacks that are perceived to be unhealthy, consumers are making fewer trips to the offline retail checkout counters where these items typically are purchased.
In line with the two-speed pattern, the personal and home care categories grew at a much faster pace than food and beverages.
Personal care categories achieved 11.8% value growth and 4.2% volume growth, compared with 0.5% in 2018. Consider the situation with hair conditioner, which rebounded in 2019 as volume grew 8.4%, compared with a 0.8% decline the year earlier. Although the sales of hair conditioner dropped dramatically during the pandemic, only to recover quickly, as consumers felt the need to repurchase them. It is a typical V-shaped recovery product.
Personal wash was another successful personal care category. Its sales grew 11.1% in value, compared with 7.7% a year earlier, mainly due to consumers switching from bars to higher-priced shower gel, which gained in penetration and consumption frequency. And the toothbrush category also performed well, growing 30% through premiumization as more people opted for electric toothbrushes to replace their traditional ones.
However, not all personal care categories flourished. For example, the value of diaper sales declined by 1.1%, compared with 9.6% growth in 2018, due to negative growth in both volume and ASP. What was behind the disappointing performance? A slowdown in demand caused by the slowing birth rate. Also, over the past three years, local brands have steadily taken share from foreign brands, leading to price competition.
In the home care sector, fabric softener continues to lead the growth. Fabric softener grew 12.7% in 2019, led primarily by such foreign brand innovations as Downy scent beads. Kitchen cleanser also had a strong year, growing 11.1%, compared with 5.8% the previous year, the result of robust growth in volume and ASP. Facial and toilet tissues significantly increased online penetration in 2019, although discounted stockpiling during online shopping festivals led to lower ASP.
In addition, Products associated with healthier lifestyles grew particularly fast. Increasing hygiene awareness led to 5% volume gains and a 13% ASP jump in compound annual growth for disinfectants from 2017 to 2019. Leading brands like Walch and Dettol have made the most of this trend, promoting mild disinfectants that can be applied to furniture, apparel and skin products. On the other hand, products viewed as unhealthy and fattening lost ground.
A rebound in volume and slowdown in premiumization
In addition to the two-speed dynamic among categories, we saw volume and prices moving in different directions. Overall FMCG volume grew 2.0%, a sizeable leap from 0.7% in 2018. However, ASP growth dropped to 3.4% from 4.5%, which is slightly higher than the inflation rate in China.
This is signaling that FMCG companies could not depend on premiumization as much as they did in previous years. Indeed, only a handful of product categories are enjoying fast price growth, while most are experiencing slower price growth—or even price drops.
When evaluating premiumization, we divide categories into distinct groups. In some categories, companies are effectively delivering premiumization through innovation. For example, carbonated soft drink companies—traditional players and insurgents alike—have introduced new flavors in recent years that consumers have embraced, ranging from grapefruit to rum to salted caramel to coffee. Such innovations have helped deliver 12% ASP growth and 6% volume growth from 2017 to 2019, expanding the carbonated soft drink market by 19%.
Another set of categories includes facial tissues, chocolate, chewing gum and diapers. Average selling prices either slowed down or dropped. One of the reasons behind this pricing trap: companies aggressively used promotions, especially in online channels. In chocolates, for example, online ASP was 17% lower than the average ASP for all channels.
However, there is another reason that so many categories face falling ASP. Mass segments are growing as fast as premium segments, with both outpacing midrange segments. On balance, that results in slower price growth or even price declines. This polarization trend began in 2019 and, as we explain later, accelerated in the early months of the Covid-19 pandemic, when many cautious Chinese consumers shifted to value products.
Channel changes: Online boosted by O2O and livestreaming
Once again, online channels continued to gain fans. E-commerce grew by 35.2% in 2019, gaining share from hypermarkets, which declined by 3.4%, while grocery further declined by 7.2% due to the rise of modern trade and O2O retailing. Among offline channels, convenience stores performed best in 2019, with many now providing such new services as last-mile delivery for e-commerce.
Convenience spurred the shift to online retailing. The pursuit of convenience is evident in the widespread adoption of O2O, which now represents 4.3% of total FMCG value share and is playing an increasing role in sustaining offline channels. This is the promise of New Retail, with physical stores partnering with online retailers to form ecosystems that blur the lines between online and offline. Demand and supply factors keep O2O thriving. Consumers want anytime shopping and short-turnaround delivery. Brands want to make the most of efficient supply chains to serve both offline and online. They also want to build traffic via ecosystems partners and use full-channel data to generate valuable consumer insights and maximize consumer engagement.
As in previous reports, we tracked online penetration by segmenting product categories into four clusters.
- The first cluster consists of categories with relatively high online penetration and low penetration growth. Many of these categories—including diapers, infant formula, skin care, makeup and others—are approaching the natural limits of online penetration growth. With that plateau in plain sight, many are now moving to omnichannel strategies. Among the reasons: the marginal cost of online customer acquisition increases with higher penetration. Also, omnichannel enables them to maximize offline stores, making the most of digitalized solutions and direct-to- consumer touchpoints.
- The second and third clusters, spanning categories such as paper products, fabric detergent, chocolate and biscuits, are steadily growing their online penetration, principally through premiumization that can offset delivery costs.
- The fourth cluster comprises impulse categories such as chewing gum, candy and beverages. For these categories, the high cost of fulfillment limits the potential for major online penetration gains mostly to their premium segments.
Online retailing in 2019 saw the dramatic rise of livestreaming in China. There was an explosion in the number of short, engaging personal videos that serve as a sales channel for everything from lipstick to instant noodles. Livestreaming provides immersive experiences, personalized recommendations and, as the country eventually locked down during the Covid-19 pandemic, an entertaining alternative to physical shopping trips. Virtually nonexistent three years ago, livestreaming sales on Taobao, Kuaishou, Douyin and a host of new platforms more than tripled in 2019, now accounting for 4% of total online retail sales (not only FMCG) and about 1% of total retail sales.
But livestreaming comes with a fundamental challenge: many of the products sell on promotion. For example, products on livestreams hosted by top KOLs like Li Jiaqi and Viya usually sell at a 30% to 60% discount to the Tmall price and sometimes lower than the Double 11 festival prices. While it has introduced a new way to purchase consumer goods and encourages impulse shopping, livestreaming also has influenced the overall rate of FMGC sold on promotion and, as a result, has depressed average selling prices.
Foreign brands start to win in China
For each of the past nine years, we have reported on the intense competition between foreign and domestic brands. 2019 marks a turning point. For the first time, foreign companies outpaced their domestic counterparts. Foreign FMCG companies grew 9.5% in 2019, compared with Chinese company growth of 7%. Some of the gains have been quite dramatic. L’Oreal grew sales by 35% in 2019.
This change has been steadily gaining momentum. Indeed, in each of the past three years, the gap has narrowed to the point that in 2018, foreign multinational corporations’ growth of 7.1% was only slightly less than the 7.5% growth of Chinese companies. Foreign companies that sustain a strong presence in China are fluid enough to reinvent themselves as quickly and as often as needed. Millions of new Chinese consumers enter the market each year, essentially redefining demand. Winning brands are rigorous in tracking the trends and responding. One way is through micro-battles. They zero in on small, achievable initiatives that easily can be scaled.
Covid-19’s impact: Why some categories keep booming
Different categories took distinct paths during Covid-19 and beyond. Health- and hygiene-related categories boomed and continue to boom, while non-necessary and impulse-driven categories suffered during the outbreak and are recovering slowly.
Based on the data analysis of FMCG categories by May 15 in this report, we divided the impact of Covid-19 on categories into four district ways: continuous booming, boom and stabilize, V-shape, and sharp decline and slow recovery.
A first group of categories surged during the pandemic and continued booming in the recovery. This is the growth trajectory of hygiene categories such as personal wash and of other products that were widely used in stay-at-home situations. A second group of categories boomed in the lockdown weeks, but then stabilized. Consumers who stocked up on such categories as frozen food, packaged water and household cleanser did not need to buy more as restrictions lifted. A third group of categories such as beer, skin care and pet food went through a V-shaped recovery. Sales dropped dramatically during the pandemic, only to quickly recover as consumers repurchased the products. A final pattern: categories such as makeup, which is not essential for consumers wearing masks, and impulse categories such as candy declined, but are likely to slowly improve in an L- or U-shaped recovery.
Covid-19 accelerates the change of customer behavior
First-quarter spending in 2020 shows how consumer behavior changed. Top brands and Chinese brands suffered less as consumers showed a preference for trusted and locally relevant brands. While sales for the top 5 brands dropped 6% in the first quarter of 2020 compared with the same period in 2019, all other brands suffered much worse, with 11% losses. Similarly, local brands endured a 4% loss, compared with 14% for foreign brands, as consumers clung to the more familiar in the crisis.
The pandemic hastened the flight to value brands that we identified in 2019. And there was a serious shift to nonpremium goods, which lost only 1% vs. the 12% for premium goods.
Another consequence: an acceleration of the shift to online channels. Quarantined consumers bought online—and many stuck with online purchases even after stores reopened. This was particularly true for grocery sales. Overall, online channels enjoyed a healthy 19% year-over-year growth in the first quarter of 2020, during the Covid-19 pandemic, while offline sales dropped by 13%.
Implications for brands and retailers
What’s next? Company leadership teams need to devote more time to planning for recovery and retooling. They need to explore how to adapt their value proposition, their capabilities and their ways of working to the new realities of the market, developing scenarios of what these new realities are likely to be. After the initial recovery phase, the most resilient and adaptable retailers are likely to rebound faster. They will have gauged how demand has changed, using that knowledge to reshape their appeal to consumers. As brands and retailers brace for whatever lies ahead, retooling will require corporate transformation as well as a renewed commitment to consumer understanding.
Facing an uncertain future, brands can prepare by taking the following proactive steps.
- Closely monitor and re-evaluate market, industry and consumer spending patterns in the postCovid-19 economy to build a product portfolio with the right value propositions and pricing. That means appealing to changing consumer behaviors and emerging consumption occasions by offering and promoting relevant products (e.g., health and hygiene, wellness, home cooking).
- Cover both premium and value segments.
- Review the brand’s innovation pipeline to accelerate new products that are relevant post-Covid-19. For example, Unilever’s new disinfectant brand Botanical Hygiene was launched in February 2020, one month earlier than planned, to meet Covid-19 market demand.
- Win with winning channels, in particular online, O2O and livestreaming.
The post-Covid-19 world requires retailers to stay closer than ever to consumer trends and to focus operations on the areas that will matter the most.
To enhance consumer centricity:
- Win with fresh food offerings; it is more important than ever as consumers strengthen their commitment to health and wellness.
- Fast-forward e-commerce operations at scale and embrace O2O channels to serve consumers’ fragmented emerging needs for anywhere, anytime shopping.
- Thoughtfully curate product assortments, focusing on productive items and new items that consumers prefer after Covid-19.
To improve operations:
- Rapidly evolve store design and product portfolios to facilitate flexible fulfillment.
- Reduce complexity and establish a new cost baseline while protecting key consumer touchpoints.
- Infuse resilience into day-to-day operations by developing the ability to respond in real time to changes in demand and the workforce.
- Make omnichannel profitable to balance the increase in O2O participation in the business
1 These 26 categories are (a) packaged food: biscuits, chocolate, instant noodles, candy, chewing gum and infant formula; (b) beverages: milk, yogurt, juice, beer, ready-to-drink (RTD) tea, carbonated soft drinks (CSD) and packaged water; (c) personal care: skin care, shampoo, personal wash, toothpaste, makeup, hair conditioner, diapers and toothbrushes; and (d) home care: toilet tissue, fabric detergent, facial tissue, kitchen cleanser and fabric softener.
2 These 19 categories are soybean milk, mouthwash, oyster sauce, pet food, kitchen rolls, RTD coffee, hair colorant, quick soup, functional drinks, sesame sauce, hamburger, monosodium glutamate, soft cake, foreign spirits, leather care products, napkins, Chinese spirits, cooking oil and nutrient supplements.
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