Foreign consumer goods giants face challenges in lower-tier cities

2015-07-22 11:01Global Times Editor: Li Yan

A survey showed that Chinese -companies had taken market share from their foreign competitors for the third year in a row, aided by their quick adaptation of e-commerce and innovate marketing strategies. For most multinationals, tapping into China's unsaturated and rapid-growing markets in lower-tier cities is a solution, but also a challenge.

Walking through the aisles at a Wal-Mart supermarket in Beijing, Wu Xin picked up snacks, drinks, shampoo, toothpaste and other daily necessities during her regular weekend trip to buy groceries.

A glance at her shopping cart revealed that foreign brands no longer had a dominant position. While Kleenex tissue, Crest toothpaste and Extra chewing gum lied in the cart, there were more examples of domestic brands such as Liushen shower gel, Liby laundry detergent and Yili yogurt.

"I prefer quality products. It doesn't matter if they are foreign or local brands," Wu told the Global Times Sunday.

Wu was born in the 1980s, an era that foreign brands started to enter the Chinese market. She had been a big fan of Coco-Cola and Oreo cookies, but has since come to believe they are either too unhealthy or old-fashioned.

After enjoying decades of fast growth in the Chinese market, foreign consumer goods giants are finding it increasingly challenging to attract and keep Chinese consumers.

Local competition

Chinese consumer goods brands gained share over their foreign -competitors for the third year in a row in 2014, and accounted for approximately 70 percent of China's consumer good sales, according to a report released by U.S. consulting firm Bain & Company earlier this month. The results were based on a survey of 40,000 Chinese households.

Last year, local brands gained market share in 18 categories of fast-moving consumer products such as fabric softener, color cosmetics, infant formula, juice and biscuits. Foreign brands added market share in eight categories, including toilet tissue, beer, hair conditioner and chewing gum, the report said.

"Chinese consumer tastes are maturing, and Chinese companies have gotten more competitive, putting pressure on foreign companies," Zhang Bingwu, a Guangzhou-based branding expert in consumer goods, told the Global Times Sunday.

Domestic consumer goods brands such as fabric softener maker -Guangzhou Liby Enterprise Group Co, Shanghai-based cosmetics brand Kans Co and -Guangdong-based juice maker Tian Di No.1 Co have quickly grabbed market share from their foreign rivals, according to Bain's report.

"Relying on China's fast-growing e-commerce channels and targeted marketing investments such as the sponsorship of popular TV shows, some Chinese brands have quickly made gains," Zhang said. "However, their multinational rivals' slow process in decision-making and execution has made them miss some opportunities in rapidly emerging marketing and sales channels."

Slowing growth

After enjoying decades of double-digit growth in China, foreign -consumer goods companies are now facing a "new normal" of slower growth.

French cosmetic maker L'Oreal Group reported sales revenue of 14.3 billion yuan ($2.3 billion) in China in 2014, up 7.7 percent from a year earlier. It was the first time its sales in China failed to achieve double-digit growth in more than a decade.

The sound development of China's beauty market has attracted more and more international and local brands to further cultivate the market, L'Oreal China said in an e-mail reply to the Global Times Tuesday. L'Oreal China said the company welcomes -competition that will eventually benefit the market and consumers.

Other leading consumer goods companies such as Procter & Gamble Co, Unilever PLC and Coca-Cola Co did not release specific sales figures for China, but some mentioned the country's slow growth in their financial reports.

Coca-Cola said it recorded low single-digit growth in China in the first quarter of this year, and also saw a mid single-digit decline in uncarbonated beverage sales.

Unilever said that its growth in 2014 in China was below historical run rates, partly because macroeconomic pressures affected consumer demand.

The growth of China's fast-moving consumer goods market slowed to 4.4 percent in the first quarter of 2015, down from 11.8 percent in 2012, according to Bain.

But some domestic consumer goods companies achieved higher growth despite the weakening -economy. For instance, cosmetic maker Shanghai Jahwa United Co reported its revenue grew 18.52 percent year-on-year in the first quarter of this year.

Turning to the lower tiers

Sales in lower-tier cities grew faster than in China's metropolises, which have already reached the point of saturation in many retail segments. However, foreign consumer goods companies have struggled to boost sales there, experts said.

"Foreign companies do not have an advantage in brand awareness over their local rivals in the lower-tier cities, and they don't have the same -understanding of the highly -fragmented market," Zhang said.

But that is what their local rivals are good at. Shanghai-based skincare brand Pechoin grew by starting in the lower-tier cities and then expanding into larger markets with upgraded products and a premium brand image, Bain said in the report.

Because the Chinese beauty market remains highly competitive, -L'Oreal China aims to explore business -opportunities in China's lower-tier cities and plans to further innovate its products to meet the increasingly -diversified needs of local consumers, L'Oreal China said.

Some foreign companies have turned to pursue growth -opportunities in China's booming e-commerce -market, which provides an efficient way to reach Chinese shoppers in lower-tier cities.

Chinese e-commerce giant -Alibaba Group Holding and -Unilever -announced Sunday that they had formed a strategic partnership that will enable Unilever to reach customers across the country, especially in rural areas.

The two sides will also develop cross-border e-commerce to let Chinese consumers enjoy a wider selection of Unilever products from around the world.

Unilever opened a store on -Alibaba's Tmall in June 2011. Marijn Van Tiggelen, Unilever's North Asia president, said in a statement Sunday that the strengthened cooperation meets Unilever's development needs in China.

Another way to make quick gains in lower-tier cities is investing in a Chinese company that already has a solid foothold in the markets, Zhang said.

Some multinationals have already pursued this strategy. L'Oreal -acquired Chinese facial care firm Magic -Holdings International Ltd in 2014.

In April, Coca-Cola also announced that it plans to acquire Xiamen-based beverage maker China Culiangwang Beverages Holdings for $400.5 -million. The deal is subject to approval from Chinese antitrust authorities.

"With Chinese brand Magic -joining L'Oreal, we now have a further enriched brand portfolio to meet the expectations of Chinese consumers," L'Oreal said.

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