US Insights

These 46 Insurgent Brands are Shaking up China’s FMCG Market

Martin Guo

Editor-in-Chief, Kantar China Insights

Brands 12.03.2018 / 10:00

Meet the fast-rising brands to understand how they broke into the landscape.

Kantar Worldpanel recently jointly launched the Vol II of China Shopper Report 2018 – “Local insurgents shake up China’s ‘two-speed’ market’”. The report pointed out that China’s dynamic fast-moving consumer goods market is a revolving door, with many brands coming and going. Still, an army of dynamic young brands is capturing a disproportionate share of the growth in China’s FMCG market, threatening to radically change the rules for incumbents.

As we have reported for six years, local Chinese FMCG brands, in aggregate, have been gaining market share from foreign brands across most product categories.

With 7.7% value growth in 2017, local brands represented 98% of market share growth. Now it is the local insurgent brands that are making headlines by earning more than their share of that local growth. These brands have a clear vision and an entrepreneurial mission to fulfil unmet needs for Chinese consumers, whether it is for healthy, lifestyle or eco-friendly products. They take a distinctly Chinese approach to building their brands and make their record-setting gains by moving at Chinese speed.

We focused our efforts on 46 important FMCG insurgents representing 33 subcategories. These are locally owned, independent brands or conglomerate-owned brands that operate separately and are outpacing subcategory growth with revenue growth in excess of 10% from 2015 to 2017. We excluded retail-oriented insurgent brands such as Luckin Coffee (瑞幸咖啡), HeyTea (喜茶) and BlissCake (幸福西饼).

Most local insurgents are small -- about half of them have urban revenues in the 100 million yuan to 500 million yuan range. However, they are quickly gaining ground: 67% of them grew at least two times faster than their category average. They either target “premium” consumers (those who tend to value quality over price) or the “good-enough” segment (where both price and quality matter). As such, these local insurgents typically sell their products for above-average prices.

EN 46 Rising Brands Categorized 

Moreover, while these brands only represent roughly 6% market share across the 33 categories they disrupt, they contributed disproportionately to the category growth, delivering nearly 20% of the revenue growth from 2015 to 2017 in these categories. And they are doing it at a historically swift pace. Consider that it took YNBY (云南白药) just five years to gain an additional 5% market share in China’s toothpaste category and became the No. 1 brand in 2016. It took four years for local insurgent SAKY (舒克) to leapfrog from the No. 14 spot to become the No. 2 player in toothbrushes.

EN Rising Brands Share

How insurgents grow

So how do they do it—get so far so fast?

Understanding China’s boom-or-bust market. First, it is important to realize that for every YNBY (云南白药) or SAKY (舒克) there are dozens of local insurgents that either never make it or exit in a boom-and-bust cycle. Most of China’s FMCG categories are dynamic, with a steady stream of brands coming and going each year. One consequence of this fluidity is that this year’s spectacular insurgent success relatively easily can be displaced to become next year’s sensational loser. To catch a glimpse of China’s market dynamics, look at the revolving door in skin care and makeup. In 2013, Kantar Worldpanel identified 276 individual brands of skin care. Four years later, 27% of those brands were no longer in the market or had negligible market presence. Makeup had a similar rate of attrition: During the same time, 22% of the brands were no longer in the market or had negligible market presence.

EN Cosmetics And Skincare Come And Go 

We tracked the fates of 29 high-growth insurgent brands in the years 2013 to 2015. In 2015 to 2017 about half of them failed to maintain their more than 10% growth rate and nine actually suffered negative growth. Many factors come into play. While the overall FMCG growth slowdown accounts for part of the disappointing performance, some new brands fell victim to wrong channel strategy decisions, heavy debt incurred in overly ambitious expansion and an inability to innovate their products to respond to the rapidly changing needs of consumers.

WuGuDaoChang (五谷道场) serves as another example of the fragility of China’s FMCG market for insurgents. In its earlier years, the brand gained market attention by distinctly positioning itself as a “healthy” instant noodle brand. However, a number of external forces led to the decline of this once high-growth brand, notably the slowdown of growth in the instant noodle category and the competition from established players. As a result, the brand suffered from double-digit decline in revenue in the last two years.

Even in this dynamic environment, some local insurgents have been able to sustain high growth relatively consistently in the past five years — a long time in China’s swiftly changing market — outgrowing frustrated competitors, gaining significant market share and in some cases challenging the leadership position. Consider that Pechoin (百雀羚) rose from the No. 10 player to the No. 1 player in skin care, with 56% annual growth from 2013 to 2015 and 19% from 2015 to 2017.

Our research helped us understand this and other important factors contributing to the success of local insurgents.

1. Penetration wins— for insurgents, too.

Digging deep into local insurgents’ value growth performance, we found that roughly 80% results from volume growth and 20% from price growth. This finding is in stark contrast to the overall FMCG market, which is characterized by stagnant volume growth and rising prices. Penetration is the single biggest component in volume growth — not frequency or volume per trip. For example, shampoo and hair conditioner brand See Young (滋源) grew revenues by 99% from 2015 to 2017 as it increased the penetration rate of its shampoo products from 1.4% to 5.4%.

2. Three key external forces propelling insurgent brands.

In addition to internal factors, a set of external forces is helping China’s insurgents flourish. Digitalization tops the list. The rapid growth of digitalization and advanced technology lowered the barriers to entry or expansion in China’s FMCG market — and there is a willing pool of venture capital eager to invest in small brands with big potential.

Another major external factor: the redefinition of consumers, merchandise and stores known collectively as“New Retail.” China’s consumers have growing expectations for tailored and specific offerings, which creates many niche opportunities for insurgent brands to capture. The traditional scale advantages of incumbents, such as large sales forces and large retail shelf space, have in some ways turned into disadvantages by digital disruption. For example, the e-commerce channel can reach millions of consumers without a single sales rep, and online platform advertising can reach millions of consumers with much lower budgets than traditional brands typically spend.

Finally, as we tracked in previous China Shopper Reports, Chinese consumers are showing a growing preference for healthy goods, a better quality of life and eco-friendly products. All of these require rapid product innovation and effective brand marketing, which are often more easily achieved by newer brands.

Winning with a Founder’s Mentality

Insurgents making the most of these external factors exhibit traits of what we refer to as a Founder’s Mentality: an insurgent mission, a frontline obsession and an owner’s mindset. We see this in three important areas:

1) Product innovation, branding and assortment

Insurgents thoughtfully innovate in product and branding, focusing their assortment on proven “hero” SKUs or product variants that attract consideration and fulfil unmet needs of Chinese consumers.

Another key to the success of high-growth insurgents is their decision to narrow product assortment. They typically focus on one or two hero SKUs or product variants that target or create the white space of a category. More than half of the insurgents we examined derive a large proportion of their total revenue from these heroes. Focusing on a narrowed assortment helps them accomplish two important goals: It eliminates unnecessary product complexity and ensures that an insurgent brand’s limited resources are devoted to a very focused message to the target consumers.

YNBY (云南白药) puts its muscle behind product development and marketing efforts for two hero SKUs—its Mint and Spearmint toothpaste products, which uniquely combine Traditional Chinese Medicine and modern oral care ingredients. These two product variants account for 70%–75% of its toothpaste sales.

EN YNBY Focus On Star Products 

2) Route-to-market and marketing

Another secret behind insurgents’ quick success: They take highly localized route-to-market and marketing approaches. They embrace new and alternative channels, selectively choose geographies for entry, and incorporate popular Chinese elements when marketing or generating consumer engagement.

Unlike large multinationals that can draw on massive resources for traditional distribution and marketing channels, insurgent brands are more restricted from the start. However, that becomes an advantage for them. China’s New Retail has brought with it many non-traditional distribution and marketing channels.

Without established offline distribution relationships, many insurgents shift their focus to high-traffic online platforms such as Tmall and JD.com, even using those platforms to promote and sell products directly to consumers.

Unlike established brands, most young insurgents do not feel the immediate pressure to launch products nationally. They have the luxury of selecting the right strategic market to enter. They test and refine their products in those markets, building consumer advocacy and brand image before expansion. This is the approach favoured by many insurgent brands appealing to the good-enough segment. Among the insurgents we evaluated, more than half launched their products in lower-tier cities, a move that enables them to avoid early competition from multinational brands.

According to Kantar Worldpanel data, even today, many “good-enough” insurgents still have a higher penetration rate in lower-tier cities. Founder Qichuan Zhuang made the strategic decision to sell fabric detergent brand ChaoNeng (超能) in lower-tier cities, where he would encounter less direct competition from brands such as Tide and Omo. ChaoNeng was heavily marketed in Tier-3–Tier-5 cities as a cost-effective brand, gaining strong recognition, which eventually helped ChaoNeng expand to Tier-1–Tier-2 cities.

EN Lower Tier Win 

In addition, we see many insurgent brands taking advantage of the creative opportunities made possible by New Retail. They are rolling out interactive shopping experiences and investing in personalized online advertising. When makeup brand Marie Dalgar (玛丽黛佳) introduced its automated “TO GO machine” and augmented reality (AR) mirror, it wowed store consumers with a novel shopping experience — and immediately boosted sales.

3) An agile operating model

Because they are young and entrepreneurial, most insurgent brands retain a nimble organization with an owner’s mindset. They outpace incumbents by having lean, cross-functional organizations that give them the flexibility and the freedom to adapt in-market. Instead of waiting for multilayers of discussions and approvals, insurgent brands can move quickly.

Insurgents win by establishing an ecosystem of partnerships, including co-manufacturers and co-marketers, allowing them to remain asset light themselves. Instead of building every distribution and marketing channel on their own, insurgent brands strategically form partnerships with online platforms, taking advantage of their resources and traffic to attract consumers. Yogurt brand SanYuan (三元) collaborates with JD.com to benefit from the e-retailer’s “unbounded retail” program, in which SanYuan (三元) gleans JD’s market data. In addition, front-page promotion on the platform boosts SanYuan sales. Indeed, by forming such deep partnerships, insurgents normally gain access to additional market-trend analysis and a prioritized listing or search ranking. In essence, they are outsourcing some of their sales efforts to external parties.

The strategy has allowed Three Squirrels (三只松鼠), Chando (自然堂), Marie Dalgar, Kans (韩束) and Unifon (御泥坊) to be ranked as the monthly top-three sales brands multiple times in their relevant categories on Tmall or JD.com.

The 3D approach to outsmart insurgents in China

Incumbent FMCG brands—both multinational and domestic—have a lot to learn from insurgents. Instead of continuing to lose so much growth to these newcomers, incumbents can compete more effectively by adopting three critical ingredients of insurgents’ success. We call it the 3D approach.

Design for Chinese consumers. Chinese FMCG consumers are unique among their counterparts in other markets. What they need and how they engage are different from consumers in developed markets or other emerging markets. They also are changing fast. As such, incumbents — especially multinationals — should be intensely devoted to localizing in everything from product design to branding to marketing.

This is a lesson Unilever has learned. It opened an R&D centre in Shanghai, one of six such centres worldwide, in 2009. This centre enables Unilever to understand Chinese consumers’ needs better, respond to Chinese market changes more quickly and be more innovative in locally relevant product design. The facility brings together cutting-edge technology and expertise in pilot plants, labs (analytical, sensory and packaging) and consumer insight capabilities.

Unilever Shanghai R&D Centre Full

Unilever unveils its China R&D centre in Shanghai on September 8, 2009, in Shanghai. -- Courtesy of Unilever

Another important consideration is the composition of a company’s team. Global experience is important, but what is often more valuable is a local team that deeply understands both the Chinese culture and the latest trends: the significance of Traditional Chinese Medicine, for instance, or the shopping behaviours of the Chinese millennials born under the one-child policy, or the importance of product quality and need for traceability.

Decide in China. The Chinese FMCG market is moving so swiftly that by the time a decision rises from the local to regional to global headquarters for an approval, a brand is likely to have missed out on an opportunity to a more nimble insurgent competitor. That’s just one of the reasons that multinationals need to delegate product, marketing, distribution and other decisions affecting their China business to their China teams.

There are numerous other reasons why we caution multinationals to avoid having global headquarters force their China business to use or adapt global approaches and solutions. The fundamental question for multinationals is whether the benefits of their global scale can more than compensate for the lack of local speed, both in decision and execution. Evidence so far suggests that the answer is no.

Headquarters should provide tailwinds instead of headwinds to the China team by either delegating decision rights to the team or collocating to China. The same principle can be applied for the operating model within China. China is not a homogenous consumer market but one with clear differences across provinces and city tiers. Take a lesson from local insurgent brands. Within the boundaries set out by their China headquarters, the local teams of some of these Chinese insurgents are empowered to make decisions in areas such as marketing and distribution to respond to the specific needs of local consumers.

Do it at Chinese speed. Undeniably, speed is in the DNA of local insurgents. While traditional brands by their nature are typically less nimble, they can take two proven approaches to improve their ability to act quickly on market opportunities: rely on ecosystems and deploy micro-battles.

To understand the potential of ecosystems, think about how scale insurgents like Tencent and Alibaba grow and gain market power. For them, leadership no longer is defined by the assets the company owns, but rather by its role in the ecosystem that surrounds them. In the past, they undoubtedly would have gained scale by building capacity and acquiring assets within the organization. That approach to scaling up worked well during the years in which market changes happened at a slow and steady pace, and when organizational boundaries within the value chain were more clear-cut.

With the rise of platform companies and digitalization, changes occur far more swiftly than ever and organizational boundaries become blurred. So, many insurgents grow fast by setting up an ecosystem, establishing a role there, and making use of other resources within the ecosystem. It is an option open to incumbents, too. For example, an FMCG company can focus on core functions such as product development and marketing while relying on players in the ecosystem for other functions, such as manufacturing and distribution.

Or, a brand can use the ecosystem to help speed products to market in record time. In recent months, Unilever acted on Alibaba consumer data that pointed to the need for an affordable, antipollution skin cleanser. It developed 48 different product prototypes, market-testing them on Alibaba’s online malls Taobao and Tmall, before introducing Purifi (净淳) line, starting with a skin cleanser based on the purchasing decisions of tens of thousands of young mothers. The entire process of conception, design and testing took Unilever just 6 months with Alibaba’s help, down from the usual 18 months to two years for a new product.

The other way to make big consumer products companies more agile: deploy micro-battles—small, achievable battles that later can be scaled. The micro-battle approach involves an extremely focused initiative that starts by attacking the hardest problem first and iterates on the solution. Micro-battles are distinct from typical strategic initiatives in several ways. First, they are run by small, cross-functional teams that operate in an agile manner and are empowered to progress and make recommendations. Second, every micro-battle has clearly defined deliverables that can scale. Third, the teams are devoted to test and learn, with a willingness to fail fast and adapt—this is invaluable in China and other rapidly changing markets.

Consider the experience of AB InBev in China. It applied the micro-battle approach to become the top imported beer player in China. The company prototyped the whole route to affluent consumers in three cities, starting by understanding consumer needs, which helped to identify the relevant specific occasions and trendy channels. Then, it created a new route to market with dedicated distributors that could win in those channels in those three cities. After several trials and adjustments, the company realized that to succeed, it needed to create a whole new company, separate from the current business, which became a true “Engine 2” when rolled out to 120 cities.

The effort is teaching AB InBev a valuable lesson: Even for a huge and established company, it is possible to quicken the pace and prevent insurgents from taking over the fast lanes in China’s two-speed FMCG market.

Source: Kantar Worldpanel

Editor's Notes

* About the authors and acknowledgments

Marcy Kou is CEO at Kantar Worldpanel Asia. Jason Yu is managing director at Kantar Worldpanel Greater China. Bruno Lannes is a partner with Bain & Company’s Consumer Products and Retail practices, and is based in Shanghai. Derek Deng is a partner with Bain & Company’s Consumer Products and Retail practices, and is based in Shanghai.

This report is a joint effort between Kantar Worldpanel and Bain & Company. The authors extend gratitude to all who contributed to this report, in particular Rachel Lee, Tina Qin, Robin Qiao and Lorna Peng from Kantar Worldpanel and Simon Wong, Christina Ye and Jane Jin from Bain; 

* To download the full report, please click here 

 

 

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