The Chinese Ministry of Commerce (MOFCOM) views the fast-moving consumer goods (FMCG) market and industry in China with increasing optimism going into the second half of 2017. On the backs of China’s ongoing supply side reforms, MOFCOM sees an upswing in innovation and internal market development. 2016 saw a rapid increase in the number of FMCG enterprises as well as a significant increase in sales figures. New, big-data driven solutions began to enter the market, but major challenges remain for the FMCG industry.
STATE OF THE INDUSTRY
At the end of 2016, there were some 18.1 million businesses within the FMCG sector, an increase of 5.2% from 2015; of these, 2.45 million were corporate entities, which was an increase of 28%, a shift MOFCOM believes reflects increasing sophistication on the part of FMCG enterprises. Total sales of FMCG reached 29.65 trillion yuan (US$ 4.36 trillion), an increase of 10.4% from 2015.
Profits among mid- and large-sized enterprises remained stable, growing 3.8% to reach 165 billion yuan (US$ 24.2 billion). While the ROI for mid- and large-sized enterprises fell slightly to 3.64%, gross profit ratio increased slightly to 9.72%. There may be the beginnings of a reduction in corporate debt in this
Profits among mid- and large-sized enterprises remained stable, growing 3.8% to reach 165 billion yuan (US$ 24.2 billion). While the ROI for mid- and large-sized enterprises fell slightly to 3.64%, gross profit ratio increased slightly to 9.72%. There may be the beginnings of a reduction in corporate debt in this
Profits among mid- and large-sized enterprises remained stable, growing 3.8% to reach 165 billion yuan (US$24.2 billion). While the ROI for mid- and large-sized enterprises fell slightly to 3.64%, gross profit ratio increased slightly to 9.72%. There may be the beginnings of a reduction in corporate debt in this sector, but the evidence is still lacking; at the end of 2016, the debt-to-capital ratio of these mid- and large-sized enterprises fell to 72.3% from 2015’s 72.8%.
Within the FMCG sector, the online retail market remained a bright spot, with consumption rapidly expanding even as quality and safety within the market increases. Online sales hit 5.16 trillion yuan (US$ 759 billion), an increase of 26.2% from 2015; online FMCG sales were 4.19 trillion yuan (US$ 616 billion), an increase of 25.6%.
The market for physical retailers showed some signs of warming up in 2016, especially in convenience and local stores, malls, and supermarkets. However, there were signs of an increasing divergence within the physical retail sector between department and specialty stores (which showed sales growth of 1.3% and 3.1% respectively) and supermarkets and malls (with the growth of 6.7% and 7.4% respectively).
The market for physical retailers showed some signs of warming up in 2016, especially in convenience and local stores, malls, and supermarkets. However, there were signs of an increasing divergence within the physical retail sector between department and specialty stores (which showed sales growth of 1.3% and 3.1% respectively) and supermarkets and malls (with the growth of 6.7% and 7.4% respectively).
The market for physical retailers showed some signs of warming up in 2016, especially in convenience and local stores, malls, and supermarkets. However, there were signs of an increasing divergence within the physical retail sector between department and specialty stores (which showed sales growth of 1.3% and 3.1% respectively) and supermarkets and malls (with the growth of 6.7% and 7.4% respectively).
The market for physical retailers showed some signs of warming up in 2016, especially in convenience and local stores, malls, and supermarkets. However, there were signs of an increasing divergence within the physical retail sector between department and specialty stores (which showed sales growth of 1.3% and 3.1% respectively) and supermarkets and malls (with the growth of 6.7% and 7.4% respectively).
CHALLENGES
There are also major challenges ahead for China’s FMCG industry. Retail floor space in 2015 was 53.8% larger than in 2011 but was concentrated in Eastern China, cities, and department stores and supermarkets. This has led to an “unbalanced network” problem in which Western and rural China are underserved, as well as a “last mile” problem in which there are far fewer local and convenience stores than in the similar Japanese and Taiwanese markets (54 per million people in China vs. 425 in Taiwan).
Additionally, increasing costs have placed pressure on profit margins within the industry. While purchasing costs grew at a rate lower than sales growth (2.0% vs. 2.7%), labor costs grew at 4%, much faster than sales growth. Rent costs, meanwhile, have virtually doubled since 2011. Additional cost pressure comes from logistics, which consumes some 14.9% of GDP and a similar proportion of costs within the FMCG industry.
Rent costs, meanwhile, have virtually doubled since 2011. Additional cost pressure comes from logistics, which consumes some 14.9% of GDP and a similar proportion of costs within the FMCG industry; this figure has fallen recently, but is still approximately twice the ratio found in developed markets (USA, Japan, Germany).
Big data, while offering a way forward for FMCG retailers, is as yet still in its infancy; data gathering is still limited by the lack of POS (card) transaction data and prevalence of a cash economy, though online payment apps promise to change this lack. The use and analysis of existing data are still in its infancy. Quality, safety, and fairness, especially within online markets, is still a point of concern; fraud, false advertising, and lack of accountability are still commonplace.
Consumer association data (which must be regarded as incomplete) shows a 2.3% increase in complaints and a whopping 65.4% increase in complaints directed at online retailers. Similarly, data safety is an issue; some 51% of online accounts have suffered from data links leading to spam and telemarketing, while losses to ID theft and fraud reached 91.5 billion Yuan (US$ 13.5 billion).
Quality, safety, and fairness, especially within online markets, is still a point of concern; fraud, false advertising, and lack of accountability are still commonplace. Consumer association data (which must be regarded as incomplete) shows a 2.3% increase in complaints and a whopping 65.4% increase in complaints directed at online retailers. Similarly, data safety is an issue; some 51% of online accounts have suffered from data links leading to spam and telemarketing, while losses to ID theft and fraud reached 91.5 billion yuan (US$ 13.5 billion).
PROSPECTS
Looking towards industry prospects, MOFCOM sees a new round of change in the FMCG sector. In addition to major activity and growth within the online retail markets, there is increasing integration of on- and offline sales and payment methods, and online payment software has increased in efficiency, security, and versatility. These trends have allowed for better integration of sales channels and increasing digitalization on the part of physical retailers.
Big data and cloud computing applications are becoming more commonplace, providing better targeted marketing and more convenient payment. This will, in MOFCOM’s view, make it easier for enterprises to position themselves, their brands, and their products within a competitive market.
Consumer spending habits are undergoing major changes. In addition to the normal slow increase in consumer spending, there have been significant improvements in consumer sentiment surveys from mid-2016 on. Consumer expectations, as regards purchases, have shifted towards health and quality of life rather than fulfilling basic needs. Consumer spending increasingly rewards healthy or green goods, high-quality durables, smart goods, and luxuries, and is increasingly conducted online.
CONCLUSION
Despite the challenges, the advent of big data-driven strategy and planning, the shift to online retail, and the integration of physical retail with “wired” methods of payment and sales channels are driving major changes in business models for FMCG enterprises. These changes, as well as changes in the economic climate, regulatory environment, and environmental sustainability will continue to transform this industry in China.
How to satisfy Chinese consumers’ demand in digital retail era