China in transition: FMCG goes premium

China’s growth might be slowing, but with incomes still on the rise and concerns about product safety ever-present, consumers are trading up less conspicuously and fuelling the forces of premiumisation outside the luxury sector.

Used to describe the demand for better and more expensive variants of products, consumers have adopted premiumisation behaviour as they look for quality and experience above price, especially across the FMCG and household goods sectors.

Nielsen’s latest retail and consumer confidence data cites premiumisation as a leading factor behind the growth of major FMCG products. The research found that in 2012, sales of premium products contributed up to 55 per cent of overall sales growth for products such as toothpaste and biscuits, and nearly 50 per cent of skin moisturiser and milk sales.

While the appetite for ostentatious luxury is not as pronounced as it once was, MEC China chief strategy officer Thomas Nolsoee says the ongoing expansion of the middle class and rise in living standards has led to purchasing patterns synonymous with success. In addition, economic reforms are redistributing wealth to the lower tier cities which has led to high consumer confidence.  

Research shows that trading up is a nationwide phenomenon. In many categories the fastest growth for premium products is coming from lower-tier cities where there historically has been less choice of brands. “Premium products aren’t just for the wealthy,” says Nielsen BASES vice-president Lynn Xu. “In fact, average income consumers show greater interest in premium products.” 

Nevertheless, according to a McKinsey forecast, over the next 10 years, China’s upper middle class will grow from 12 per cent of the total urban population to more than 50 per cent. That is expected to more than double China’s consumption rate.

In a Hong Kong Trade Development Council survey, in which 1,600 middle-class consumers in eight Chinese cities were interviewed, 76 per cent indicated they give first priority to quality when making a purchase. That compares with 24 per cent who listed price as their top concern.

Health and natural ingredients are factors that are changing consumers approach to the FMCG category. A higher awareness of what is healthy has led to changing eating and drinking habits. “For multinational FMCGs the big opportunity is the growing Chinese middle class, which is seeking a modern lifestyle and the young families seeking food safety and guidance,” Nolsoee says. Wyeth Nutrition, for example, has built on the trend to launch Illuma, a super-premium milk powder.

However, local companies are also using health benefits within the beverage market to achieve premiumisation. Coca-Cola and Pepsi are struggling more with local herbal tea producers than each other. According to a report in Chinese language paper Want Daily, Jiaduobao, a maker of herbal tea drinks, recently outperformed Coca-Cola in China for the first time as the local brand enjoyed an 11 per cent share of the beverage market, compared to Coke’s 10 per cent.

Meanwhile, Ogilvy Shanghai planning and strategy head Edward Bell says formerly thrifty consumers are affirming their progress in life by “buying what they want instead of what they need”.

While this plays into the hands of multinational premium brands, Bell says it can affect local brands, which were traditionally favoured on price. To address the issue, local companies need to be aware of  consumer sentiments and realign their marketing strategies (see box, above). 

Bell says premium brands’ strong display qualities also help people demonstrate their status without spending a fortune on luxury goods. “In a public way, it allows people to say: ‘This is who I am and I am able to afford and appreciate these products’,” says Bell. “Whether it is diapers for their children or  foreign dairy products, consumers are part of a social group who are buying things that appeal to them in a socially emotive  way,” says Bell. He adds that brands could do much more in terms of communications to connect with that sentiment.

The fast-fashion sector has also benefited. As part of international apparel brands’ premiumisation activities, China Market Research Group business analyst Kevin Der Arslanian says companies like Zara are using improved e-commerce sites where they can set up their online stores and control their brand image. “As a result, they are able to keep their high-end reputation, but reach a wider audience,” he says.

Online commerce platforms have been a major factor in providing greater accessibility to premium products. Ellen Hou, strategic planning director at McCann Worldgroup China, says consumers use overseas shopping e-commerce platform HaiTao to purchase products only available outside of China. 

Meanwhile, local brands that used to be associated with ‘low cost’, have latched on to the premiumisation trend. Hou says BaiQueLing, a low-price skincare brand recently relaunched with modern, chic and premium packaging. “The company transformed its old-fashioned image and became a new icon of China chic,” says Hou, who adds that HaiTao moved further up the premiumisation ladder when China’s First Lady offered the brand’s products as diplomatic gifts.  

Educated young women have played a significant role in driving consumption of premium goods in the health and beauty categories. Thanks in part to its French-sounding name and blue-and-white packaging, South Korean cosmetics brand Laneige, has also attracted legions of fans in China. Estimated to be worth US$34 billion this year, other South Korean cosmetics manufacturers such as LG Household & Healthcare and Able C&C are using similar design and packaging strategies to give global firms like L’Oréal and P&G a run for their money. 

Still, says Hou, L’Oréal’s strategy of maintaining its aspirational brand image while remaining accessible and affordable makes it a premiumisation market leader. As spending power continues to increase, the category can only become more competitive.

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ANALYSIS MNCs not the only brands catering to upmarket tastes

Most multinationals in China operate in the premium market to varying degrees and are in a good position to take advantage of the trend for trading up. However, they face a challenge in that they do not have the same wide distribution channels as their local rivals.

On the other hand, Thomas Nolsoee, chief strategy officer at MEC China, expects local FMCG brands, which have historically focused on distribution rather than building premium positioning, “to be forced to get into the branding game”, whether via product development or acquisitions. Skincare companies like Meifubao are developing products around propositions such as herbal, nature and ‘hi-tech with oriental wisdom’.

Meanwhile, with concerns still surrounding local food safety standards, the recent merger between meat processor Shuanghui and Smithfield Foods, the largest pork producer in the US, is seen as a move to buy back trust.

Local firms are also aiming for more upmarket positioning, and charging higher prices, in convenience stores, says Nolsoee.