2016 China Shopper Report Vol.1

DEALING WITH TWO-SPEED CHINAChina Shopper Report 2016, Vol. 1 Copyright © 2016 Bain & Company, Inc. All rights reserved.This report is the first of two volumes. In this volume, we focus on how China’s fast-moving consumer goods (FMCG) market is effectively operating on two speeds across multiple dimensions:• distinctly different growth trajectories among categories;• contrasting penetration and premiumization dynamics among categories;• expansion in online and convenience-store retail channels at the expense of hypermarkets and traditional trade; and• continuing growth of local brands at the expense of foreign brands. Page iPage i .p1 3Tp31wo-saadprT igpptpphg ipjprwcsgimnpuibzpptpp9gi3glpfwledsgiaeContents1. Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .pg . 12. Full report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .pg . 3a . Two-speed growth trajectories among product categories . . . . . . . . . . .pg . 3b . Two-speed penetration and premiumization among categories . . . . . . .pg . 9c . Two-speed growth in retail channels . . . . . . . . . . . . . . . . . . . . . . . . .pg . 13d . Two-speed growth for local and foreign brands . . . . . . . . . . . . . . . . .pg . 173. How companies and brands can win . . . . . . . . . . . . . . . . . . . . . . . . . . .pg . 194. About the authors and acknowledgments . . . . . . . . . . . . . . . . . . . . . . . .pg . 20 Page iiPage i .p1 3Tp31wo-saadprT igpptpphg ipjprwcsgimnpuibzpptpp9gi3glpfwledsgiae Page 1Page i .p1 3Tp31wo-saadprT igpptpphg ipjprwcsgimnpuibzpptpp9gi3glpfwledsgiaeExecutive summaryThe Chinese government’s official “new normal” policy is redefining the country’s economy as it manages GDP growth at 6.5% to 7%, shifts focus from manufacturing to services and consumption, and pushes for innovation-led growth over investment-led growth.In our fifth year of tracking the shopping behavior of Chinese consumers, we detail the distinct effects that these and other major economic shifts are having on brands. Our continuing research has given us a valuable long-term view of purchase activity across 106 FMCG categories in China. As in each of the past four years, we conducted a deep analysis of the 26 categories1 that span the four largest consumer goods sectors: packaged food, beverages, personal care and home care. Combined, these sectors represent 80% of all FMCG purchases. To further test our conclusions, this year we examined the three additional categories of functional drinks, pet food and sanitary protection. Among our findings:• Annual growth in FMCG value continued to slow across all sectors we studied, recently hitting a five-year low. • A combined decline in volume and deceleration in price growth led to slower growth in value. The average growth in annual FMCG spending per household slowed significantly to 0.8% in 2015, but different categories show contrasting trends. Overall, value growth of FMCG sales dropped to 3.5% in 2015, but that figure disguises an important distinction. In many ways, China now operates at two speeds: slow and fast. This situation plays out in product categories, retail channels and the continuing battle between multinational and domestic brands.Let’s first look at product categories. With many manufacturing jobs moving to Bangladesh, Vietnam and other lower-cost countries, brands in categories that traditionally cater to blue-collar workers, such as instant noodles and value beer, are suffering. For example, in 2015 the volume of instant noodles declined by 12.5%; beer by 3.6%. This slow growth is intensified by a decline in the worker population, which peaked in 2012, resulting in more low-income retirees.By contrast, fast-growth categories include many that are more dependent on white-collar workers and the growing middle class. With the rise of the service sector and its higher-paying jobs, brands in premium categories such as yogurt and pet food—and premium SKUs in most categories—remain robust:• Value in pet food rose by 11.7% and in yogurt by 20.6%.• These consumers also boosted their spending in such non-FMCG areas as travel and entertainment.China’s two-speed scenario is evident in household penetration, with penetration rates for brands in most categories leveling off or dropping, while others are rising. Most brands are turning to a proven approach for squeezing growth when penetration plateaus: investing to offer premium products. Eighteen categories show flat or declining penetration and growing premiumization since 2012.Retail channels in China feel the two-speed scenario, too. In a continuing trend, super and mini markets decelerated from 9.5% to 4% in 2015. Hypermarkets had declining sales, while convenience stores grew by 13.2% across China.1 These 26 categories are a) packaged food: biscuits, chocolate, instant noodles, candy, c