keeping up with china’s shoppers at two speeds · 2020. 6. 4. · keeping up with china’s...

KEEPING UP WITH CHINA’S SHOPPERS AT TWO SPEEDSChina Shopper Report 2017, Vol. 2

Copyright © 2017 Bain & Company, Inc. All rights reserved.

This work is based on secondary market research, analysis of financial information available or provided to Bain & Company and a range of interviews with industry participants. Bain & Company has not independently verified any such information provided or available to Bain and makes no representation or warranty, express or implied, that such information is accurate or complete. Projected market and financial information, analyses and conclusions contained herein are based on the information described above and on Bain & Company’s judgment, and should not be construed as definitive forecasts or guarantees of future performance or results. The information and analysis herein does not constitute advice of any kind, is not intended to be used for investment purposes, and neither Bain & Company nor any of its subsidiaries or their respective officers, directors, shareholders, employees or agents accept any responsibility or liability with respect to the use of or reliance on any information or analysis contained in this document. This work is copyright Bain & Company and may not be published, transmitted, broadcast, copied, reproduced or reprinted in whole or in part without the explicit written permission of Bain & Company.

Keeping Up with China’s Shoppers at Two Speeds | Bain & Company, Inc. | Kantar Worldpanel

Page i

Contents

1. Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 3

2. Full report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 6

a. Keeping up at two speeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 6

b. How digital is changing Chinese shopper behavior . . . . . . . . . . . . . . . pg. 8

c. How digital isn’t changing Chinese shopper behavior . . . . . . . . . . . . . pg. 11

d. Why the focus is still on penetration . . . . . . . . . . . . . . . . . . . . . . . . . pg. 13

e. Implications for brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . pg. 20

3. About the authors and acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . pg. 24


Page 3

Executive summary

In this report, we continue our coverage of the two-speed growth trend that has characterized China’s fast-moving

consumer goods (FMCG) sector for the past two years. We also share our analysis of how, after four years of rapid

growth, digital sales are changing—and not changing—shopper behavior in China.

It’s still a slow road to growth for China’s FMCG market. The sluggishness that began in 2011 continued through

the first half of 2017, forcing brands to innovate new ways to spur household penetration and gain market share.

Although the second quarter of 2017 showed a slight uptick in sales, overall value growth for the first half was a

mere 2.0% over the same period in 2016, largely due to a volume decline of 0.3% and unimpressive average selling

price (ASP) growth of 2.3%. Viewed separately, offline sales did even worse, gaining only 0.4% in value due to a

1.1% drop in volume and ASP growth of only 1.4%.

However, these numbers mask some important nuances. While many categories are losing steam, some are

charging ahead, reflecting a continuation of the two-speed growth environment that we first wrote about in our

2016 China Shopper reports. It is a new reality that now guides many brands as they develop strategies for growing

in China.

Food and beverage categories continued their two-year trend of negative volume growth. But as the majority

of those categories saw growth decline, a few of them—most notably yogurt and packaged water—did exceptionally

well, evidence of Chinese consumers’ continuing passion for health and wellness and their rejection of products

considered less healthy, such as chewing gum and confectionery. Indeed, adding healthy ingredients or

emphasizing lifestyle improvement were the moves that helped some food and beverage brands outpace their

categories. The introduction of such premium products elevated Nongfu in the ready-to-drink tea category and

Uni-President in instant noodles.

In a trend that began in 2014, personal care and home care categories continued to diverge from food and beverage

categories in their growth trajectories. Market value rose by 8.3% in the personal care sector, for example. But

while that gain sounds healthy compared with other sectors’ performance, it represents the first slowdown for

personal care in four years. There’s a solid reason for the stalling of this high-speed sector. South Korea’s decision

in mid-2016 to deploy the Terminal High-Altitude Area Defense (Thaad) system to neutralize missile threats

from North Korea created anti-South Korea sentiment in China, causing repercussions in the cosmetics aisle as

Chinese consumers shunned popular South Korean imports. Sales of South Korean skin care and makeup products

dropped 4.8% in the first half of 2017, and hot brands such as Innisfree experienced double-digit negative value

growth on Tmall and Taobao in the months following the Thaad announcement. Because many of those

imported brands sell at a premium, personal care ASP growth felt the effects, falling from 8.4% last year to 5.7%

this year.

China’s shopper behavior is evolving as online commerce steadily gains acceptance. For example, our study

found that, overall, shoppers are purchasing less frequently, a trend that has been building over the past

several years along with the growth of e-commerce. When shoppers buy online, they tend to place bigger

orders, forgoing trips to the hypermarket or supermarket. Also, we observed that the decline in purchase

frequency is more pronounced in food and beverage categories. As we explained in China Shopper Report 2017,

Vol. 1 (China’s Two-Speed Growth: In and Out of the Home), digital capabilities have given rise to a boom in food

delivery services, rapidly changing meal habits for Chinese consumers. They’re cooking at home much less


Page 4

and purchasing more food and beverages than ever before in restaurants, for in-home delivery or for on-the-go

consumption. As out-of-home meal spending rises, consumers buy less frequently from offline grocery channels

for at-home consumption.

While e-commerce has brought about clear changes, rising digital activity doesn’t seem to be having a big effect

on some other elements of shopper behavior. Consider brand loyalty. Since 2012 we have defined each of

the FMCG categories we track as either “repertoire” or “loyalist.” In repertoire categories, the more frequently

consumers shop, the more brands they try. In loyalist categories, shoppers buy the same brands regardless of

increasing frequency. We found that the categories still break down along the same lines as they did when we first

began researching brand loyalty. Now we’ve determined that a category’s online penetration doesn’t affect where

it lands on the repertoire-loyalist continuum. Similarly, shoppers’ movements between offline and online channels

don’t change loyalty patterns. In categories that exhibit the most loyalist activity, such as milk, diapers and infant

formula, shoppers display the same behavior as they did in 2013, when online commerce was less prevalent. In

fact, they may be staying loyal in part because the online channel makes it so convenient with services like one-

click repurchasing and automatic replenishment. In repertoire categories such as skin care, shampoo and candy,

consumers tend to buy even more brands than they did in 2013. That may be because of the proliferation of new

brands, including digital insurgents, entering the market.

As we first detailed in 2013, shoppers tend to buy from different categories online than they do offline. However, as

China’s consumers place more trust in online platforms’ product quality, payment security, logistics and delivery—

and are presented with extended offerings from diverse suppliers—they are buying from more categories online.

Also, online ASPs continue to be higher than offline ASPs, due to the abundance of premium products purchased

online. Promotions are still popular online, particularly during big shopping festivals such as Alibaba’s 11/11 and

JD’s 6/18, but promotion rates are stabilizing.


Page 5

Another important finding from our survey: Similar to what we learned in 2013, market share continues to be up

for grabs. Across the categories studied, 22% of the top 10 brands in 2013 had dropped from that list by 2016, on

average. In some categories it’s particularly tough to maintain market leadership. In yogurt, for example, the

leader position has rotated among Mengniu, Yili and Bright. In skin care, 8 of the top 10 brands in 2013 had

changed their rank three years later.

What makes a leader? Penetration. As we explained in China Shopper Report 2014, Vol. 2 (Chinese Shoppers:

Three Things Leading Consumer Products Companies Get Right), the way to grow market share is to boost penetration.

Bain & Company and Kantar Worldpanel studies of Chinese shopper behavior validate that penetration is more

important than other measurements like purchase frequency or repurchase rate.

Yet even in the age of online shopping, with its ease of repurchasing, the shopper base continues to be a leaky

bucket. Most buyers of a brand will choose a different brand within two years, requiring consumer goods companies

to continuously recruit and re-recruit shoppers; they can’t expect shoppers to buy more or make more frequent

purchases. Meanwhile, brands need to obsess over another critical component of the shopper base: low-frequency

shoppers. Those who purchase a brand one or two times a year account for the majority of the shopper base for

most brands and contribute most of the revenue, according to our analysis.

For companies hoping to navigate the two-speed growth and shopper behavior that’s evolving along with e-commerce,

the answer is to earn consideration and penetration by investing in three key assets: memory structures, the

product portfolio and in-store execution. But now, they need to view those assets in a digital context. L’Oréal does

this very well with many of its brands in China, as does the online nut purveyor Three Squirrels.


Page 6

Full report

Keeping up at two speeds

The overall slowdown for fast-moving consumer goods (FMCG) in China that began in 2011 continued through

the first half of 2017, with the growth trajectories for food and beverage categories and personal and home care

categories diverging for the third straight year (see Figure 1). FMCG sales rose slightly in the second quarter of

2017, but it wasn’t enough to offset the ongoing sluggishness. Value growth for the first half was a mere 2.0%

over the same period in 2016. That’s the lowest market growth since 2012, due in large part to a 0.3% volume

decline and lackluster 2.3% average selling price (ASP) growth (see Figure 2). As more Chinese consumers

turn to their mobile phones, tablets or laptops to buy, offline sales saw negative volume growth for the fourth

consecutive year and increased by only 0.4% in value, with ASP growth of 1.4%, in the first half of 2017.

As in each of the past five years, we studied 106 FMCG categories purchased for home consumption in China,

conducting a deep analysis of the key 26 categories that span the four largest consumer goods sectors: packaged

food, beverages, personal care and home care.1 Combined, these sectors represent 80% of China’s FMCG

purchases. This report, which updates the findings from China Shopper Report 2017, Vol. 1 (China’s Two-Speed

Growth: In and Out of the Home), includes Kantar Worldpanel shopper behavior data for the first half of 2017. The

new data provides insights into continuing trends that are critical for brands as they set a course for growth in

the world’s largest FMCG market.

Figure 1: Fast-moving consumer goods (FMCG) growth slowed in 2011; by 2014, food and beverage growth rate was diverging from personal and home care

Total FMCG Food and beverage Personal and home care

–5

0

5

10

15

20%

Annual growth of urban shoppers’ spending on FMCG

2011

Q3

2012

Q1

Q2

Q3

Q4

2013

Q1

Q2

Q3

Q4

2014

Q1

Q2

Q3

Q4

2015

Q1

Q2

Q3

Q4

2016

Q1

Q2

Q3

Q4

2017

Q1

Q2

Q4

Sources: Kantar Worldpanel; Bain analysis


Page 7

China has clearly established itself as a two-speed growth environment and not a single high-velocity market. We

first discussed this key finding in our 2016 China Shopper reports, and many brands are using it as a guide for

developing strategies. For example, food and beverages showed negative volume growth for the third straight

year, and home care products also experienced a significant volume decline. By comparison, personal care showed

impressive growth of 8.3% in the first half of 2017 (see Figure 3). Still, that represented the sector’s first drop

in growth in four years. The slowdown can be traced to South Korea’s decision in mid-2016 to deploy the Terminal

High-Altitude Area Defense (Thaad) system to neutralize missile threats from North Korea. In response, many

Chinese shoppers boycotted South Korean brands. Sales of South Korean skin care and makeup products dropped

4.8% in the first half of 2017, with hot brands such as Innisfree suffering double-digit negative value growth on

Tmall and Taobao in the months following the Thaad announcement. Because many of those imported brands

sell at a premium, personal care ASP growth felt the effects, falling from 8.4% last year to 5.7% this year.

The two-speed growth pattern is evident among product categories. For example, while sales growth declined in

most food and beverage categories, some saw robust growth. Yogurt and packaged water achieved particularly

strong growth as Chinese consumers maintain their interest in food and beverages that they consider healthy. On

the flip side, sales dropped in categories that consumers view as unhealthy. Chocolate, chewing gum and candy

all registered double-digit negative volume growth in the first half of 2017. Across categories, one approach to

jump-starting sales is to offer premium products that appeal to health or lifestyle improvement. In ready-to-drink

(RTD) tea, Nongfu’s Tea Pi outpaced its category. The tea is fruit flavored, with packaging festooned with

comic-style illustrations to entice young consumers. Nongfu increased its ASP in RTD tea by 9% from 2015 to

2016. Uni-President achieved similar success in instant noodles, increasing its ASP by 9% over the same period

Figure 2: Declining volume and lower selling prices pushed overall FMCG value growth to a low of 2%

–2

0

2

4

6%

4.13.8

0.1

–0.8

0.6

–0.3

Annual growth of urban FMCG market volume(kg/l growth)

0

2

4

6

8

10

12%

11.8

7.2

5.3

3.63.0

2.0

Annual growth of urban FMCG market value

0

2

4

6

8%7.4

3.2

5.14.4

2.4 2.3

Annual growth of urban FMCG averageselling price

Value Volume Average selling price

Notes: Kantar Worldpanel slightly modified the data collection methodology for the online channel in 2016; it also recalculated the 2014–15 data according to the new methodology Sources: Kantar Worldpanel; National Bureau of Statistics of China; Bain analysis

Growth without e-commerce Inflation2011–12 12–13 13–14 14–15 15–16 H1 16–H1 17


Page 8

by launching such premium stock-keeping units (SKUs) as Soup Daren, which contains high-nutrition stock.

The same emphasis on premiumization (selling products with price increases higher than the rate of inflation)

helped personal care categories such as skin care and shampoo. Meanwhile, external factors played a role in the

performance of some categories. For example, supply issues hurt the milk category as shipments from New Zealand

and Europe declined in the first half of 2017.

How digital is changing Chinese shopper behavior

It’s no secret that e-commerce is winning the hearts of China’s shoppers. As we showed in China Shopper Report

2017, Vol. 1, online penetration is growing in every city tier and in every category. The steadily increasing acceptance

of online shopping is changing some elements of buyer behavior in China. It is influencing purchase frequency,

for example. When shoppers go online, they tend to place bigger orders, minimizing the need for more frequent

purchases. Overall, purchase frequency has declined since 2013 (see Figure 4).

Other factors come into play, too. In the first volume of this year’s report, we chronicled the rapid rise in out-of-

home food and beer consumption, fueled by the booming dine-out and food delivery markets. Meituan, China’s

largest food delivery platform, has 300 million registered users and reports fulfilling more than 18 million orders

a day. As more consumers rely on such services for their meals, there’s a corresponding drop in the frequency of food

and beverage purchases for home consumption in offline grocery channels. While food and beverage categories

saw the biggest drop in purchase frequency across channels, the trend is evident in categories as diverse as hair

conditioner and fabric softener, which shoppers purchase only twice a year on average. In nearly all categories,

order sizes are larger online than offline, which also partially explains the frequency decline. Overall, consumers

purchase from few categories more than once a month, according to our analysis.

Figure 3: Personal care growth slowed for the first time in four years, while a volume decline led to a drop in home care growth

Value Volume Average selling price

–2

0

2

4

6

8%

Personal care

7.0

6.1

2.8

–1.1

2.02.5

Home care

4.3

–0.9

Annual growth of urban FMCG market volume(kg/l growth)

6.16.0

2.62.8

0

2

4

6

8

10

12%

Personal care

11.3


10.5

Home care

11.2

6.1

4.4

Annual growth of urban FMCG market value

8.08.2

9.7

8.3

3.33.5

1.1

0

2

4

6

8

10

12%

Personal care

4.1

1.8

5.2

11.0

8.4

Home care

4.7

2.0

Annual growth of urban FMCG averageselling price

5.7

0.10.1

0.60.6

2011–12 12–13 13–14 14–15 15–16 H1 16–H1 17


Page 9

Also, as we first detailed in 2013, the categories that shoppers buy online tend to differ from those they purchase

offline. That hasn’t changed, but the level of concentration represented by the top 10 categories online and offline

is converging, as China’s consumers grow more comfortable with online platforms’ product quality, payment

security and delivery (see Figure 5). That growing trust, combined with extended offerings from diverse

suppliers, means that shoppers are buying from more categories online. In 2013, only 11% of households made

online purchases in 6 or more of the 26 categories we track. By 2016, that group had more than doubled, to 24%

of consumers. As shoppers buy more categories online, the lineup of categories from which they purchase starts to

look more similar to the lineup of what they purchase offline.

Many in the industry predicted that online would become a discount channel compared with offline. In fact, the

reverse is true. Online ASPs continue to be higher than offline ASPs in many categories (see Figure 6). A big part

of the reason: the abundance of premium products purchased online (see Figure 7). In toothbrushes, offline

market leader Colgate sells for an average RMB 5. Online, electric toothbrushes make up almost all of the top two

brands’ sales, contributing to much higher ASPs. The online leader, Oral-B, carries an average price of RMB 82,

and the second-place brand, Philips, sells for an average price of RMB 191. On the other hand, the ASP for the

same SKU is generally lower online (see Figure 8). For example, in our recent study, a 368-gram container

of Danisa Butter Cookies cost an average RMB 32.7 in a physical store compared with RMB 32.1 online. We are,

however, seeing more convergence in the online and offline brand mix and prices in categories such as biscuits

and shampoo. In milk and other categories, prices for the top five imported brands online are even lower than

those for the top-selling domestic brands offline.

Promotions are still very popular online, but the rate has been stabilizing (see Figure 9). Now, e-commerce

platforms are repositioning shopping festivals as showrooms for brands to deliver key messages and build up

Figure 4: Purchase frequency has decreased since 2013 across most categories, especially in food and beverage

0

3

6

9

12

15

Yogurt

15.0

12.4

Infantformula

10.39.5

Diapers

8.6

7.3

Facialtissue

6.8 6.6

Fabricdetergent

6.3 6.3

Instantnoodles

6.25.8

Juice

5.6 5.5

CSD

5.5 5.5

Personalwash

5.4

4.9

Chocolate

4.5 4.0

Chewinggum

3.9 3.5

Tooth-brushes

3.32.4

Makeup

2.1 2.1

Category purchase frequency, all channels (per household, per year)

Biscuits Milk Skin care Toothpaste Packagedwater

Toilettissue

RTD tea

Beer Candy Shampoo Kitchen

cleanser

Hair

conditionerFabric

softener

20162013

Notes: RTD tea is ready-to-drink tea; CSD is carbonated soft drinks Sources: Kantar Worldpanel; Bain analysis


Page 10

Figure 5: Shoppers buy different categories online and offline, but as they buy more categories online, the level of concentration converges

2013

Skin care

Milk powder

Nutrient supplementsDiapersMakeup

ShampooLiquid milk

Biscuits

Chinese spirits/sake

Other

Fragrance

2016

Skin care

Milk powder

Nutrient supplementsDiapersMakeup Shampoo

Liquid milkBiscuits

Cooking oilChinese spirits/sake

Other

Top 10 categories, total online FMCG spending

74% 67%

0

20

40

60

80

100%

Share oftop 10

categories

Skin care

Yogurt

Cooking oilLiquid milk

Milk powder

Chinese spirits/sake Biscuits

Nutrient supplementsSausage

Seasoning

Other

Skin care

Yogurt

Cooking oilLiquid milk

Milk powderChinese spirits/sake

BiscuitsNutrient supplements Sausage

Seasoning

Other

Top 10 categories, total offline FMCG spending

2013 2016

51% 52%Share oftop 10

categories

0

20

40

60

80

100%

Offline Online

Different top category between offline and online Shared top category

Notes: Total FMCG spending includes 106 categories defined by Kantar Worldpanel; does not include cigarettes (the largest offline category), as online sales are prohibitedSources: Kantar Worldpanel; Bain analysis

Figure 6: Surprisingly, across many categories, online average selling prices continue to be higher than offline prices

–20

0

20

40

60

80

100%

Online and offline average selling price (ASP) difference by category, 2016

96 93

46 45

Beer

37 33 32 28

Shampoo

24 21 20 18

Juice

18 14 14 91

–1 –1 –4 –4 –6

Diapers

–11 –14 –14 –18

8 1958 26424 89 4,554 13338 43 871644 1644 85 1752 160 1395 1,97313 10Offline ASP(RMB/unit*)

11 19112 22629 1014 4,508 11355 53 788821 1569 113 1962 150 1196 1,76515 11Online ASP(RMB/unit*)

CSD Biscuits Candy

Yogurt Makeup Chocolate Milk

Infantformula

Facialtissue

Fabricdetergent

Instantnoodles

Personalwash

Chewinggum

Tooth-brushes

Skin care

Tooth-paste

Packagedwater

Toilettissue

RTD teaKitchencleanser

Hairconditioner

Fabricsoftener

*Units used are liters for skin care, CSD, juice, RTD tea, packaged water, beer, milk, yogurt, shampoo, hair conditioner, personal wash, toothpaste, kitchen cleanser, fabricdetergent and fabric softener; kilograms for infant formula, chocolate, biscuits, instant noodles, candy, chewing gum and makeup; pieces for toothbrushes; “1,000 sheets or rolls” for diapers, facial tissue and toilet tissueNote: ASP difference is calculated by subtracting offline ASP from online ASP, divided by offline ASPSources: Kantar Worldpanel; Bain analysis


Page 11

their image, as opposed to just spurring promotions and sales. Yet offline promotions are on the rise, as retailers

strive to increase traffic to their stores.

How digital isn’t changing Chinese shopper behavior

Online shopping isn’t changing brand loyalty. In previous China Shopper reports, we defined each category as

either “repertoire” or “loyalist.” In repertoire categories, the more frequently consumers shop, the more brands

they try. In loyalist categories, shoppers buy the same brands regardless of increasing frequency. We found that

the categories still show the same repertoire or loyalist characteristics as they did in 2013 (see Figure 10), even with

the shift toward e-commerce. In categories that exhibit the most loyalist activity, such as milk, diapers and infant

formula, shoppers displayed the same behavior in 2016 as they did three years earlier. They may be staying loyal

in part because the online channel makes it so convenient with one-click repurchasing and automatic replenish-

ment. However, in repertoire categories such as skin care, shampoo and candy, consumers tended to buy even

more brands than they did in 2013, likely because of the proliferation of new brands, including digital insurgents,

entering the market.

Some categories such as skin care and infant formula have high online penetration, while others such as beer and

milk have much lower online penetration. Our latest analysis determined that a category’s level of online penetration

doesn’t affect where it lands on the repertoire-loyalist continuum (see Figure 11). Another significant finding:

Repertoire and loyalist characteristics hold even as shoppers move between online and offline channels

(see Figure 12). Because e-commerce offers a seemingly endless array of products, many expected that it

Figure 7: In many categories, shoppers buy more premium brands online, accounting for the channel’s higher average prices

Hair conditioner

Offl

ine

Onl

ine

Biscuits ToothbrushesTop fivebrands

Pantene 77 7.8

L’Oréal Paris 129 7.2

Bee & Flower 19 6.5

Schwarzkopf 162 6.1

Vidal Sassoon 110 5.5

ASP (RMB/l)

Marketshare (%)

Top fivebrands

Oreo 52 11.6

Xufuji 47 4.2

Glico 100 3.5

Daliyuan 29 3.4

Danisa 108 2.5

ASP(RMB/kg)

Marketshare (%)

Top fivebrands

Colgate 5 9.1

Darlie 5 7.5

Smiclean 3 5.3

Sanxiao 3 4.4

Crest 5 4.3

ASP(RMB/piece)

Marketshare (%)

Top fivebrands

Schwarzkopf 143 9.5

Shiseido 124 8.4

L’Oréal Paris 164 8.1

Vidal Sassoon 106 3.9

Pantene 78 3.6

ASP (RMB/l)

Marketshare (%)

Top fivebrands

Nabati 51 4.3

Oreo 48 4.1

Danisa 91 2.7

Aji 31 2.6

Bourbon 169 2.1

ASP(RMB/kg)

Marketshare (%)

Top fivebrands

Oral-B 82 19.8

Philips 191 17.7

Systema 6 7.5

Colgate 4 5.5

Darlie 4 2.7

ASP(RMB/piece)

Marketshare (%)

Notes: ASP is the per-unit price, shown as RMB per liter/kilogram/piece depending on the category; 96% of Oral-B and 100% of Philips sales are from electric toothbrushesSources: Kantar Worldpanel; Bain analysis


Page 12

Figure 8: However, the average price for the same SKU is generally lower online than it is offline

Hair conditioner Biscuits Toothbrushes

01020304050

Promotion price (RMB/SKU)

Offline

40.3

Online

38.4

–5%

0102030

40

Promotion price (RMB/SKU)

Offline

38.8

Online

35.3

–9%

0

5

10

15

Offline

14.3

Online

13.8

–4%Regular price (RMB/SKU)

0102030

40

Regular price (RMB/SKU)

Offline

32.7

Online

32.1

–2%

0

5

10

15


Offline

13.6

Online

12.9

–5%

0369

12


Offline

11.3

Online

10.6

–6%

Pantene Repair & Protect Conditioner, 750 ml

Schwarzkopf Extra Care Conditioner,400 ml

Xufuji Sachima Egg Flavor,470 g

Danisa Butter Cookies,368 g

Darlie Charcoal Clean Toothbrush,dual pack

Colgate Slim Soft Charcoal Toothbrush,dual pack

Note: Limited sample size (<100) for online pricesSources: Kantar Worldpanel; Bain analysis

Figure 9: The online promotion ratio is twice as high as offline, but it is stabilizing

20162014

Notes: Promotion ratio is the value of items on promotion as a percentage of total transaction value, as reported by consumers; data based on 106 categories Sources: Kantar Worldpanel; Bain analysis

0

10

20

30

40%

Online vs. offline promotion ratio

Online

38

Offline

21

• Online, Chinese consumers’ appetite for bargains is not increasing; some "value hunters" are becoming "quality seekers" — Focus on higher quality, more premium products — Availability of niche brands, shopping convenience and delivery becoming more important

• E-commerce platforms like Alibaba and JD are repositioning shopping festivals for entertainment and brand building — Shift from bargain events to big showrooms for delivering brand messages and building brand image

Offline channels used morepromotions to fight for traffic


Page 13

would lead consumers to more repertoire behavior. But the data shows that’s not the case. What’s more critical is

the nature of the category itself.

Online commerce hasn’t made the FMCG market more volatile for brands. Similar to what we found in 2013,

categories remain very competitive, and market share continues to be up for grabs. Across the 26 categories

studied, 22% of the top 10 brands in 2013 had dropped from the list by 2016, and 7 categories had a different

market leader (see Figure 13). In some categories it’s particularly tough to stay on top. For example, the market

leadership position in yogurt has rotated among Mengniu, Yili and Bright. In skin care, 8 of the top 10 brands in

2013 had changed their rank three years later.

Why the focus is still on penetration

As Chinese shopper behavior evolves, one critical fact of life holds true: Market leadership is determined by a

brand’s ability to boost and maintain household penetration (defined as the percentage of households in a market

buying a particular brand in a given year). As we explained in China Shopper Report 2014, Vol. 2 (Chinese Shoppers:

Three Things Leading Consumer Products Companies Get Right), the key to growing market share is to boost

penetration. This is a major insight from the research of the Ehrenberg-Bass Institute for Marketing Science,

summarized by Professor Byron Sharp, director of the Institute, in his book How Brands Grow, based on decades of

observations of buying behavior. Bain & Company and Kantar Worldpanel shopper reports validate this insight. In the era

of digital commerce, we find that penetration remains more important than other measurements like purchase

frequency or repurchase rate. Across all categories studied, the brands that earned market leadership have

significantly higher penetration than competitors (see Figure 14). In milk, Mengniu’s penetration is 5.5 times

Figure 10: Categories show the same repertoire and loyalist characteristics as they did in 2013

0.0

0.2

0.4

0.6

Makeup Hairconditioner

Chocolate Biscuits RTD tea Candy Fabricdetergent

Packagedwater

Facialtissue

Chewinggum

Fabricsoftener

Milk Diapers

Slope of number of brands purchased vs. purchase frequency between heavy shoppers and average shoppers

Skincare

Shampoo Tooth-brushes

Toothpaste Juice Personalwash

CSD Toilettissue

Beer Instantnoodles

Kitchencleanser

Yogurt Infantformula

More “repertoire” More “loyalist”

20162013

Notes: Data is based on average purchases per household, per year; heavy shoppers are the top 20% in each category in terms of frequencySources: Kantar Worldpanel; Bain analysis


Page 14

Figure 11: The level of online penetration doesn’t affect repertoire and loyalist categories

High online penetration, more repertoire categories Low online penetration, more repertoire categories

High online penetration, more loyalist categories Low online penetration, more loyalist categories

0

5

0 10 20 30

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0 10 20 30

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Ave

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Average purchase frequency




0

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0 10 20 30

Skin care

Infant formula

Beer

Milk

2016 online penetration: 31.1%




2016 average shopper 2016 heavy shopper2013 average shopper 2013 heavy shopperNotes: Data is based on average purchases per household, per year; heavy shoppers are the top 20% in each category in terms of frequencySources: Kantar Worldpanel; Bain analysis

Figure 12: Offline and online, shoppers display similar behaviors within repertoire and loyalist categories

Repertoire categories Loyalist categories

0 10 20 30

0 10 20 30

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0 10 20 30

Skin care

Biscuits

Infant formula

Diapers

Notes: Data is based on average purchases per household, per year; heavy shoppers are the top 20% in each category in terms of frequencySources: Kantar Worldpanel; Bain analysis

2016 online heavy shopper 2016 online shopper2016 offline heavy shopper 2016 offline shopper


Page 15

higher than the average of the top 20 brands in the category, while its purchase frequency and repurchase rate

are only 1.2 and 1.3 times higher, respectively. In kitchen cleanser, Liby’s penetration rate is 10.2 times higher than

the top 20 brand average, while its purchase frequency and repurchase rate are 1.3 and 1.5 times higher, respectively.

In addition, shoppers’ purchase frequency of the top brands in a category remains quite low (see Figure 15).

Consider that consumers buy one of the top three beer brands an average of only 3.0 times a year. They buy one

of the top three brands of toothpaste an average of 2.4 times a year. This data highlights shoppers’ low engagement

with brands, even at a time when e-commerce makes products readily available for purchase.

Companies need to obsess over low-frequency shoppers—that is, those who purchase a brand only one or two

times a year. For most brands, these consumers account for the majority of the shopper base and contribute most

of the revenue. In the juice category, for example, shoppers who buy Huiyuan once or twice a year comprise

80% of the brand’s shopper base and account for around 50% of its revenue (see Figure 16). It’s a similar situation

with large foreign brands. In skin care, low-frequency shoppers make up around 75% of Olay’s shopper base and

contribute around 40% of its revenue. The revenue contribution of low-frequency shoppers underscores the

fickleness of consumers. This is especially important for small brands, which depend even more on low-frequency

shoppers (see Figure 17). It means brands can’t count on boosting their revenues by getting shoppers to make

more frequent purchases.

The big challenge is that the shopper base is a leaky bucket—and the holes are getting bigger each year. Chinese

shoppers still love brands, but many will switch brands in a year. Among 12 categories we studied, 55% of the top

five brands’ shopper bases left within 12 months, on average, accounting for 46% of revenues (see Figure 18).

Meanwhile, newcomers represented 48% of the top five brands’ shopper bases, on average, and 43% of revenues

Figure 13: On average, 22% of brands have dropped out of the top 10 since 2013, while seven categories changed leaders

0

25

50%

Percentage of top 10 brands that dropped out, 2016 vs. 2013

Average:22%

50

Makeup

40 40

Fabricsoftener

3330

Choc-olate

30 30

Juice

30 30

Skincare

30

20

Candy

20 20

Facialtissue

20 20

Milk

20 20

CSD

10 10

Instantnoodles

10 10

RTD tea

10 10

Toilettissue

10 10

0

–2 1 –3–2 –4–4 –26 –21 –1 –1 1 –4–3 2–3 0 5–1 –1–1 30 –20Share changeof top threebrands (%)

Packagedwater

Tooth-brushes

Beer Diapers Personalwash

Biscuits Chewinggum

Infantformula

Tooth-paste

Fabricdetergent

Kitchencleanser

Shampoo Yogurt

Haircondi-tioner

Categories with new market leaders in 2016 vs. 2013

Note: Fabric softener includes only the top six brandsSources: Kantar Worldpanel; Bain analysis


Page 16

Figure 14: Penetration continues to be more critical for brand leadership than frequency and repurchase rate

Food and beverage Personal and home care

Blue Moon

Comfort

1.11.12.2

1.41.78.5

Breeze (MindAct Upon Mind) 1.31.3

4.51.31.5

10.2

Vinda1.11.2

4.0

Merries (Huggies)

1.31.22.1

L'Oréal Paris(Pantene)

1.01.01.7

Maybelline1.2 1.6

3.2

Safeguard1.71.9

6.6

Head &Shoulders

1.3 1.63.3

L'Oréal Paris1.01.0 1.6

Colgate1.11.2

3.0

YNBY (Darlie)

1.21.21.6

Indexed penetration rate, repurchase rate and purchase frequency of leading brandvs. average of top 20 brands, 2016

Liby

0 2 4 6 8 10 0 2 4 6 8 10

Tsingtao 0.9 1.04.4

Coca-Cola (Sprite)

1.5 1.74.9

Huiyuan1.2 1.3

2.9

Mengniu1.2 1.3

5.5

Nongfu1.2 1.3

4.2

JDB1.11.3

3.0

Yili (Mengniu)

1.11.24.2

Oreo1.41.4

3.2

Xufuji1.01.1

3.5

Extra1.5 1.6

4.4

Dove1.5 1.7

5.1

Wyeth (Mead Johnson)

1.11.0 2.8

Master KongInstantnoodlesInfantformula

Chocolate

ChewinggumCandy

Biscuits

Yogurt

RTD teaPackagedwater

Milk

Juice

CSD

Beer

Tooth-pasteTooth-brushes

Skin care

Shampoo

Personalwash

Makeup

Hairconditioner

DiapersToilettissueKitchencleanserFacialtissueFabricsoftenerFabricdetergent

2.01.9 7.5

Indexed penetration rate, repurchase rate and purchase frequency of leading brandvs. average of top 20 brands, 2016

Purchase frequencyRepurchase ratePenetration rate (2013 leading brands)Notes: Repurchase rate is the percentage of brand shoppers buying more than once a year; indexed penetration rate is calculated by dividing penetration rate of leading brand byaverage penetration rate of top 20 brands; the same calculation is used for purchase frequency and repurchase rate Sources: Kantar Worldpanel; Bain analysis

Figure 15: Shoppers continue to demonstrate low engagement with brands across categories

0

2

4

6

8

10

Average purchase frequency of top three brands (per household, per year)

7.5

5.0

Yogurt

4.63.4

Beer

3.0 2.9

2.8 2.8

2.6 2.6

CSD

2.5 2.4

Tooth-paste

2.4 2.3

Biscuits

2.3 2.2

2.2 2.1

Chocolate

2.1 2.0

Shampoo

1.9 1.8

1.7 1.6

Hairconditioner

1.4 1.3

Diapers Milk

Facialtissue

Juice

Candy Makeup

Fabricsoftener

Skincare

Instantnoodles

RTD tea Toilettissue

Packagedwater

Tooth-brushes

Personalwash

Chewinggum

Infantformula

Fabricdetergent

Kitchencleanser

20162013

Although Chinese shoppers love brands, they don’t buy them very often



Page 17

Figure 16: In many categories, low-frequency shoppers account for much of the shopper base and sales

Juice category example: Huiyuan

Shopper base distribution Sales value distribution

0

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100%

Share of sales value by purchase frequency, 2016

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Share of shopper base by purchase frequency, 2016

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77%47%


Figure 17: Low-frequency shoppers are even more critical for small brands

0

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60

80%

Revenue contribution by shoppers with no more than two purchases per year (top 10 brands, each brand's 2016 revenue=100%)

Candy

65

53

Chocolate

5349

Juice

48 48

CSD

40 39

Shampoo

3633

Skin care

26 26

Biscuits Kitchen cleanser

Fabric detergent

Chewing gum Beer Milk


Average of top three brandsAverage of remaining seven brands


Page 18

(see Figure 19). More than half of Head & Shoulders’ 2014 shoppers left within a year, for example. Only 24%

of the shampoo brand’s 2014 shopper base stayed for two years, and those “loyal” customers contributed only

34% of its revenue (see Figures 20 and 21).

How to continuously recruit shoppers to keep filling the leaky bucket? Yogurt brand Yili focused on its core products

while launching new premium SKUs to ride the category’s premiumization trend. It emphasized above-the-

line advertising (doubling its investment from 2013 to 2016) to stay on top of shoppers’ consideration lists. By

sponsoring top-rated reality TV shows, the brand targeted parents, who represent the majority of its customers.

It also relied on digital marketing to engage with consumers on multiple touchpoints. For its efforts, Yili boosted

penetration by 9%, which helped it grow sales by more than 40% and market share by 10%. In skin care, Pechoin

made similar gains in its effort to fill the leaky bucket. It increased penetration by 6% from 2013 to 2016, which

delivered 44% sales growth and a 2% boost in market share during that period. Pechoin revamped its brand

to be young and fresh, focusing on Chinese medicine and natural ingredients. It also successfully intro-

duced new SKUs and premium products around its core products, promoting them by sponsoring popular

TV programs.

In short, although the online channel has a much higher penetration rate than it did in 2013, consumers

continue to demonstrate low engagement with brands. The rules for generating growth haven’t changed. Given

the importance of low-frequency shoppers to brands’ revenues, as well as the leaky nature of the shopper base,

marketers need to focus first on increasing brands’ penetration—which means that they need to constantly recruit

new shoppers.

Figure 18: On average, the top five brands lost half of their buyers and revenue across all categories in 2016

Shopper base Revenue base

0

25

50

75%

Average leavers in 2016, as a percentage of 2015 shopper base(top five brands per category)

Average:55%

Skincare

6663

Juice

62 61

Chewinggum

60 60

Candy

58

50

CSD

49 48

Milk

4539

Shampoo Kitchencleanser

Chocolate Beer Biscuits Fabric

detergent

Skincare

Juice Chewinggum

Candy CSD Milk

Shampoo Kitchencleanser

Chocolate Beer Biscuits Fabric

detergent

0

25

50

75%

Average leavers in 2016, as a percentage of 2015 revenue base(top five brands per category)

32 32

56 54

56 5651

36

56

3632

56Average:46%



Page 19

Figure 19: On average, newcomers represented nearly half of the buyers and revenue for the top five brands, across all categories

Shopper base Revenue base

Average newcomers in 2016, as a percentage of 2015 shopper base(top five brands per category)

Average newcomers in 2016, as a percentage of 2015 revenue base(top five brands per category)

Skincare

JuiceChewinggum

Candy CSD

Milk

Shampoo

Kitchencleanser

Chocolate

Beer

Biscuits Fabricdetergent

Skincare

JuiceChewinggum

Candy CSD

Milk

Shampoo

Kitchencleanser

Chocolate

Beer

Biscuits Fabricdetergent

0

25

50

75%

73

58

5347

46 46 46 46 4642 40

37

Average:48%

0

25

50

75%

68

58

4939

39 41 37 41

33 35

44

32

Average:43%


Figure 20: The shopper base for most brands is a leaky bucket; few customers continue buying a brand for two years

0

20

40

60

80

100%

2014

Shopperbase

100%

Leavers (2015)

–54%

Newcomers(2015)

51%

2015

Recurringshoppers

(2014–15)

97%

Leavers (2016)

Newcomers

Recurringshoppers

–53%

Newcomers(2016)

Newcomers(2016)

48%

2016

92%

24%Share of recurringshoppers, 2014

onward

46%

Shopper base structure (2014 shopper base=100%)

Newcomers(2015)

Recurringshoppers

(2014–16)

Recurringshoppers

(2015–16)

Shampoo category example: Head & Shoulders



Page 20

Implications for brands

In our 2014 China Shopper reports, we explained that the path to consideration and penetration requires investment

in three key assets: memory structures, product portfolio and in-store execution. Those assets are more relevant than

ever. But as brands navigate the two-speed growth and shopper behavior that’s evolving along with e-commerce, they

need to view those assets in a digital context (see Figure 22).

• Memory structures: The goal is to build memorable, distinctive and consistent messages and connections

with shoppers as they research, purchase and recommend products. Brands not only need to target wide

enough audiences, but also deliver relevant communications closer to the point of purchase.

• Product portfolio: Brands can optimize their product portfolios like never before, using digital advances and

agile development approaches to continuously test and learn. In addition to focusing on core SKUs, they can

introduce new products specific to each channel and platform, as well as more personalized offerings.

• “In-store” assets: In today’s omnichannel world, brands must ensure perfect execution both online and offline,

with a coordinated approach supported by the abundance of newly available data.

We’ll look at how two companies—one a domestic newcomer, one an established international brand—are using

these assets to succeed in a digital world.

Figure 21: As the shopper base evolves with significant attrition and recruitment, new customers account for a substantial share

0

25

50

75

100

125%

2014

100%

–44%

0.1%

44%

2015

100%

–45%

0.4%

46%

2016

102%

56% 34%

Revenue contribution, leavers vs. newcomers (2014 sales value=100%)

Shopperbase

Leavers(2015)

Leavers(2016)

Newcomers(2015)

Newcomers(2015)

Newcomers(2016)

Share of recurringshoppers, 2014

onward

Change fromrecurring

shoppers (2015)

Change fromrecurring

shoppers (2016)

Recurringshoppers

(2014–15)

Newcomers

Recurringshoppers

Newcomers(2016)

Recurringshoppers

(2014–16)

Recurringshoppers

(2015–16)

Shampoo category example: Head & Shoulders



Page 21

Three Squirrels. Like many brands that started online, this ubiquitous high-end nut seller has benefited from the

growth of e-commerce, building both a memorable brand and a profitable business. Nimble newcomers like

Three Squirrels have a lot to teach other brands.

Founded in 2012, the company created a set of likable squirrel mascots and a new lingo to establish its image:

adoption for purchase, owner for customer and center for owners for customer service department. The squirrel

characters engage with consumers at multiple touchpoints—interacting with them on WeChat, for example—

and even star in Youku videos. In addition to this unique memory structure, the brand pays similar attention to

its product portfolio. It has achieved sustained growth by focusing on its core nut products, which account for

about 70% of its revenue, while introducing new SKUs around its core. Finally, it invests in winning “in-store”

execution online. For e-commerce players, online store execution is just as important as in the offline world.

Three Squirrels relies on effective online promotions to encourage purchases. For example, to activate impulse

purchases, it offers limited-time promotions during such holidays as Chinese New Year and Mid-Autumn Festival,

as well as special occasions like back to school. It also ensures visibility of promotions and hero SKUs to further

increase penetration.

In line with Alibaba founder Jack Ma’s prediction of a “new retail” that combines online and offline channels,

Three Squirrels recently opened physical outlets, mostly in top shopping centers in Tier-3 and Tier-4 cities, with

plans to launch up to 500 locations. The new stores provide a unique customer experience. As shoppers enter,

they are greeted with a story: Three squirrels were in a car accident as they traveled from the forest to the city.

Since their vehicle was broken, they set up a store in the forest to sell their nuts. Designed around this story

line, the stores feature sculptures of the three squirrels and a forest display, with one-third of the area devoted to

Figure 22: To spur consideration and penetration, marketers need to invest in three brand assets in a digital context

Memory structures

“In-store” assets

Produc

t por

tfolio

• Build memorable, distinctive and consistent messages and connections with shoppers as they research, purchase and recommend products• Deliver relevant communications closer to the point of purchase

• Achieve perfect execution at the point of sale (both offline and online) to ensure superior visibility and distinctiveness, with the support of digital operations and data

Source: Bain & Company

• Rationalize product portfolio to stay focused on core SKUs• Use digital advances to improve existing products and introduce new products specific to each channel and platform, applying agile development principles to test and learn with consumers

Brandgrowth

Consideration

Penetration


Page 22

resting space for customers. The stores are equipped with PDA barcode scanning systems to ensure prices are

consistent with online prices in real time. Customers also can place digital orders in the stores, driving traffic to

the online channel. CEO Liaoyuan Zhang has said that Three Squirrels is considering expanding into theme

parks, movies, comics and tourism, following a path pioneered by Walt Disney.

L’Oréal. Rather than being swept away by the rise of digital, L’Oréal is riding the wave of change. More than 100

years old, this venerable leader in the beauty industry is embracing the digital revolution. Three components

support L’Oréal’s digital transformation: digitalized marketing throughout the shopper’s decision process,

digitalized products developed via a test-and-learn approach, and digitalized in-store execution to activate purchases.

Historically, shoppers have followed a well-defined path from awareness to search, to purchase, to recommendation.

However, in today’s digital universe, shoppers can start that journey from any of the four activities. That’s why

L’Oréal fully digitalized its engagement with consumers on multiple touchpoints. Shoppers can learn about the

brand through WeChat advertisements or online video content, try on products virtually through a mobile app,

make purchases by visiting its Tmall store or by following a link on an influencer’s site, and write reviews that

can be shared on social media.

One question brands keep asking themselves is how to maximize sales activation through a mobile or computer

screen. It can be an especially difficult challenge for skin care and makeup products; shoppers want to feel and

test the products before they buy them. L’Oréal’s Makeup Genius mobile app uses augmented-reality technology

to recognize users’ facial characteristics and apply virtual makeup. After they “try” a product, shoppers can place

orders online directly through the app. L’Oréal has also achieved huge success by selling lipstick via live online

shows hosted by celebrities and influencers, which it has found can spur impulse shopping.

The brand succeeds at the tricky art of balancing quality with speed in product development, using technology to

accelerate personalized product development and keep its portfolio fresh. It collects consumer data from various

demographics, and speeds up product development through test-and-learn approaches. Among its winning

innovations: L’Oréal’s high-tech UV patch can recommend when a customer should apply sunscreen and which

product is a best fit.

Shoppers have unique traits and behaviors. Some are value seekers while others are quality seekers. They also

display different levels of interest in the functionality of skin care products. For example, some favor moisturizing

while others would pay for whitening or antiaging products. Thanks to the robust data captured by e-commerce

platforms and the brand itself, L’Oréal has created thousands of profiles of shopper faces, in partnership with

Alibaba. Together, the brand and the platform can activate purchases by offering customized online store displays

and content for different consumer segments.

This is what it takes to win today.

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.


Page 23


Page 24

About the authors and acknowledgments

Bruno Lannes is a partner with Bain’s Shanghai office. You may contact him by email at [email protected].

Jason Ding is a partner with Bain’s Beijing office. You may contact him by email at [email protected].

Marcy Kou is CEO at Kantar Worldpanel Asia. You may contact her by email at [email protected].

Jason Yu is general manager at Kantar Worldpanel China. You may contact him by email at [email protected].

Please direct questions and comments about this report via email to the authors.

Acknowledgments

This report is a joint effort between Bain & Company and Kantar Worldpanel. The authors extend gratitude

to all who contributed to this report, in particular Iris Wang, Miki Yu, Roger Wu and Hannah Long from Bain, and

Rachel Lee, Tina Qin and Cathrine Chang from Kantar Worldpanel.

Shared Ambition, True Results

Bain & Company is the management consulting firm that the world’s business leaders come to when they want results.

Bain advises clients on strategy, operations, technology, organization, private equity and mergers and acquisitions.

We develop practical, customized insights that clients act on and transfer skills that make change stick.

Founded in 1973, Bain has 55 offices in 36 countries, and our deep expertise and client roster cross every industry

and economic sector. Our clients have outperformed the stock market 4 to 1.

What sets us apart

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our True North values mean we do the right thing for our clients, people and communities—always.

Kantar Worldpanel—high definition inspiration™, a CTR service in China

Kantar Worldpanel is the world leader in continuous consumer panels. Our global team of consultants applies

tailored research solutions and advanced analytics to bring you unrivaled sharpness and clarity of insight to both

the big picture and the fine detail. We help our clients understand what people buy, what they use and the attitudes

behind shopper and consumer behavior.

We use the latest data collection technologies best matched to the people and the environment we are measuring.

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and multinational FMCG brand and private label manufacturers, fresh food suppliers, retailers, market analysts

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as diverse as entertainment, communications, petrol, fashion, personal care, beauty, baby and food on-the-go.

It’s what we do with our data that sets us apart. We apply hindsight, insight, foresight and advice to make a real

difference to the way you see your world and inspire the actions you take for a more successful business.

We have more than 60 years’ experience in helping companies shape their strategies and manage their tactical

decisions; we understand shopper and retailer dynamics; we explore opportunities for growth in terms of prod-

ucts, categories, regions and within trade environments. Together with our partner relationships, we are present

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