As incomes continue to rise in the world’s most populous market of 1.4 billion consumers, China will overtake the US as the world’s largest retail market in 2019. This comes only eleven years after the country established itself as the world’s biggest food market in 2008.
Retailers will serve more, but smaller, households
Driven by changes in society and the economy, China is offering a fast-growing pool of addressable households. While these households benefit from growing incomes, they are also getting older and smaller, and keep developing new shopping behaviours.
The attractive growth of China’s addressable population is fueled by
- Continued urbanisation that brings more consumers within the physical reach of modern retailers and suppliers;
- Rising incomes which are set to double in real terms by 2028, making branded items more affordable to a larger number of people; and
- Expanding internet penetration (rising from 23% to 60% in the past ten years), allowing the growing online ecosystems to target a growing number of connected consumers .
As China continues to age, the average household size will sink below 3.0 in 2019. Urban property markets have followed the trend towards smaller sizes, with most flats now designed around the concept of a one-child family. This will cement the three-person household norm in the long term, despite the recent abolition of China's one-child policy. Ageing will also drive the need for a more comprehensive pension system at the expense of taxpayers, making the demand for quality, affordable to the mass market, CPG a long-term characteristic of the Chinese grocery sector.
CPG must partner with domestic ecommerce platforms
Triggering a major shift in China’s industry landscape, shrinking household sizes will encourage consumers to routinely opt for small, frequent grocery shopping trips in their residential areas, as well as online orders, at the expense of weekly stock-up purchase missions at hypermarkets.
As part of such residential shopping patterns, consumers will also continue to frequent independent grocers both in urban and rural space. In a development that differentiates the future China from emerging grocery markets in the past, these independent stores will not be victims of retail modernisation, but an important part of it. This is supported by online giants such as Alibaba and Amazon, who seek to integrate independent stores into their ecosystems as online order pick-up points and generators of shopper data and insight.
Western CPG brands have an opportunity in China to serve high demand for international goods across most categories, often driven by quality perceptions in sensitive product categories, such as baby food. They must consider what local service partners to engage with to gain local market expertise and achieve optimal presence on China’s scarce shelf space, but also online. Factors like inventory location, trademarks and other licenses, and category-specific regulations will dictate the best go to market strategy for brands selling on platforms with strong experiential and discovery elements, like Tmall and JD in China.
Mobile adoption is driving growth of online ecosystems
Of the 60% of China’s population who use the internet, 95% own a smartphone. This level of mobile penetration is a key driver behind digital transformation, enabling ubiquitous connectivity that allows for the generation of unprecedented amounts of consumer data. These help retailers and platforms to optimise their business models, growing their relevance for suppliers.
The dominance of mobile has also supported the spread of mobile payment, which has expanded to a point where young urban consumers have begun to abandon cash, as well as mobile-driven shopper engagement. Retailers’ data-driven investment in automation (most recently including unmanned convenience stores) as well as last-mile innovation will further accelerate the rise of an O2O environment.
As online captures around 20% of Chinese retail, CPG must be part of the rising omnichannel environment and support the transformation process. They can do this by providing innovation and consumer insight, as well as continuously optimising product portfolios. Failing to do this, they will be locked out of Chinese ecommerce, one of the world’s largest growth opportunities.
Politics will challenge retail/CPG on data protection and supply chains
In late 2017, Beijing announced tighter political control over the economy, impacting both corporate governance and data protection. The launch of a citizen scoring system in 2020 will force retailers and brands to share consumer data with authorities. CPG need to prepare for controversy as they could be seen as supporting what might be labelled as a surveillance state in their Western home markets.
In logistics, environmental regulation with road traffic restrictions in polluted cities will force creative solutions in last-mile fulfilment. CPG must find creative solutions at a time when China’s on-demand retailers need brands to turn into on-demand suppliers, and fast fulfilment will be a key battleground in retailer competition.
Nestlé is testing a voice assistant in China in co-operation with JD.com dubbed Nestle XiaoAI. In addition to Nestlé products, Nestle XiaoAI allows the entire JD.com product range to be ordered, gives recipe suggestions, shares dietary tips and can also play music. Photo: Nestle
Recommendations for suppliers:
- CPG not trading in China must enter the market now to capture growth opportunities as the spread of online grocery, O2O business models, automation and new fulfilment methods gathers momentum.
- CPG should focus their resources on the channels of the future, which include ecommerce platforms and residential small box. Both create challenges around brand visibility, which suppliers should tackle via partnerships (sharing category knowledge and shopper insight for greater visibility on platforms), innovation and shopper engagement (helping to win scarce physical shelf space).
- With the digital space controlled by domestic players Alibaba and JD.com, CPG must partner with these now rather than relying on unlikely foreign direct investment from familiar Western hypermarket operators.
- CPG should see independent and rural stores as important routes to a consumer whose purchasing power will double over the next decade. Shelf space is rare and must be targeted with solutions that help store operators provide value and differentiate.
- CPG will need to innovate all the time to keep engaged a shopper who gets enthusiastic about new products and technologies, but gets bored easily and moves on fast.
- In an environment subject to growing government control, CPG must treat government relationships, compliance and transparency as a high priority. Foreign brands can position themselves as transparent quality product providers of outstanding compliance, benefiting from damaged trust in local suppliers in quality-sensitive categories, such as baby food.
- As Beijing prepares the rollout of a citizen scoring system, international brands and retailers will be required to share consumer data with the authorities and should communicate carefully in the event of controversy in their Western home markets.
- CPG and retailers not operating in China should follow the market closely, as it features digital-first formats, logistics and technological innovation that are likely to be deployed in markets around the world.