DEMYSTIFYING REBOUND: HOW DOES THE NEW NORMAL REALLY LOOK LIKE IN CHINA

FOREWORD: as the world is gradually return to some sort of normal, and looking up to China to get a fresh perspective or at least to prepare for the nearest future, we here in China have been living in rebound and trying to understand what exactly the new normal means. In this article, I will try to share with you Nielsen perspective of how does rebound look like in China, and which factors affect the New Reality, will try to quantify some of the assumptions that we discussed and put forward over the last couple of months!

MACRO

The latest time the World and China have faced such a significant slowdown, was back in 2008/2009 during the World Financial Crisis. And while there are some lessons we can learn from the past, we need to keep in mind that China Today is very different from China more than a decade ago: Disposable incomes have doubled, dependence on Export and Manufacturing has reduced, at the same time there is a much bigger role in the global landscape, and thus impact from Global Recessions and reduced Demand is unavoidable.. Another important difference vs 2009 is the nature of the current crisis as well as concerns that it arises: it affects a wider number of industries, especially services, information, logistics, aviation, hospitality and tourism, which in China employs more than 350 mn ppl today. Another important difference is information accessibility, which creates a more informed consumer, and thus a more concerned consumer in the current world. Last but not least, Government stimulus is one of the key differentiators of the current slowdown both globally, as well as in China - defines a different nature and possible outcomes of the rebound.  And while Government has not set a target for GDP for 2020, they have identified key areas of focus to support the recovery of GDP and well-being of population:

• Job Security and Basic Living needs: focus on poverty and job creations 
• Support to SMEs through concessions and subsidies
• Improvement of investment climate and trade 
• Measures to support local consumption

And while consensus outlook for GDP is conservative, and Q2 still expected to have a negative growth mainly on the account of services and export trade, with a gradual recovery in the second half of the year, Labor market stability remains one of the key indicators for future consumption and overall recovery of the FMCG industry.

LABOR:

If we have a closer look at the labor market in April, we can see its still quite turbulent, and although official unemployment rate is just 6%- it doesn't include migrant workers, who have not yet fully returned to their workplace, and idle workers, who might be currently on an unpaid leave. Therefore the number could be as high as 100 M people currently w/o stable income. Job insurance today only covers ~50% of urban employees, and the insurance pay-out is significantly lower than their regular incomes. As a result, real HH income has compressed as opposed to positive growth Q1 last year. SMEs are not fully recovered , and the number of new job openings has compressed by 27%. Which also creates additional pressure on 8,6 million graduates who will join the workforce this July.

RETAIL AND MARKET

So let's have a look at how this affect retail trade, and more importantly FMCG market

Total Retail Business decline has slowed (-7% in April, compared to -15% in March), with a few industries finally returning to growth and stabilising (Cosmetics, Office, Auto). FMCG on the contrary have finally posted a positive growth of 8% in April, mainly driven by online momentum, while offline has finally slowed down to just 3% declined vs last year.

Core Consumption trends from COVID are still prevailing, with increased in-home consumption, as well as hygiene and safety although slowing down, still remaining top of mind for purchase intent in the next coming months. 

Not all occasions are fully restored though, and while basic personal care and some of food categories are back to growth, discretionary and majority of indulgence/impulse categories are still struggling

In the next section we tried to address some of the hypotheses and expectations that we have discussed with our clients and global leaders, and try to quantify some of the trends and shifts in the market, specifically around :

1. Consumption shifts across city tiers and categories
2. Reduced consumer demand and saving strategies at the face of unknown and reduced incomes 
3. Go-to market strategies amidst channel shifts, and expected assortment changes
4. Innovation trends as well as the Rise of Local manufacturers. 

CONSUMER: One of the key parameters to evaluate consumer state of mind is our consumption trend index, which we have been measuring in China for more than a decade, which reflects consumers expectations around job prospects, personal finance as well as purchase intent. In May we see an improvement of CTI, however it still remains at its record lows since WFC of 2009.

Income, Health and Job Security have become the top 3 concerns of Chinese consumers, as opposed to income, children's education and welfare in Q4 last year. Number of people who feel feel positive about their Job Prospects, and Personal Financial Situations and with strong Purchase Intent has reduced dramatically compared to Q4 last year.

Interestingly, the most affected consumers with the lowest purchase intent and the biggest decline across all parameters are actually in lower tier cities, especially in Tier 3 and 4. While upper tier and Rural areas although concerned about Job prospects and Personal financial situation still feel more positive compared to the middle tier.

So overlaying these consumer sentiment with the actual sales dynamics across city tiers offline: its not so obvious, since upper tier cities decline at a faster rate, however given the online momentum, when overlaying ecommerce sales trends by cities, we see that theres a high correlation between Consumer Sentiment and sales dynamics.

So how did consumers adjust their wallet, and what actions did they take to compensate for reduced income levels: they naturally reduced their expenditures on travel, entertainment, dining out, as well as apparel and even food and beverages. As an outcome after covering all the essential living costs, more consumers are putting money into saving, education, and even health. Apparel still remains a significant part of their new wallet structure.

MYTHS or REALITY? 

Online acceleration for Food categories as well as continuous growth for established e-commerce categories  has increased its importance within total FMCG by 10 points this April compared to first for months of 2019. Most likely E-commerce will gradually stabilise at 35-40% importance by year end, with disproportionately higher contribution in upper tier cities. 

The golden stores have changed, across all channels, with more visible changes in the top 5% of stores: small format trade sees the biggest change: proximity, consumer traffic as well as O2O has affected golden stores landscape and forced some rebalancing of power within offline .

Assortment is shrinking gravitating towards fresh, health and hygiene.  Requiring more focused and consistent assortment distribution/strategy to capture and maximise the efficiency of your portfolio.

Affordability, health and reliability - are the key choice drivers for consumers today, and first signs of down-trading are already visible for basic personal care and basic food categories where brand loyalty and impact on health are minimal, while health and hygiene are up-trading. Polarisation becomes more obvious across indulgence and non-essential categories with impacted shopper down-trading to cheaper alternatives, insulated shoppers sticking with their preferred brand choices. 

Promotion volume is intensifying in April, for all major categories except high demand categories, however does not yield the necessary volume recovery, only diluting price and forcing further value contraction.

Local Giants are growing across food and beverage categories, with 5 out of 10- Local companies gaining share .  

Regional players are enjoying momentum in rural and lower tier cities, especially within Non-Food categories, sourcing volume from Mid-size players, who are affected by lower distribution, supply chain challenges and speed of innovation. 

Innovation Landscape had a slow start in Q1’20, however a number of new launches both innovations and renovations are picking up in April and March and already exceeding last year  Interestingly that despite lower number of launches, their share this QTD is the same as last year, 7 out of 10 innovations belong to small regional players, and cumulative share of their launches since last year has reached 3,4%- being the key driver of regional players growth. 

Summarising, there are significant shifts in the market landscape post COVID-19, and while these shifts might not have a strategic-long-term effect, they are going to dominate Chinese consumer demand in the next 3-6 months, and thus is important to adjust your strategies to be fit to WIN in the new reality: specifically:

• Omni Channel presence and sales strategy
• Distribution efficiency vs quantity
• Demand planning and assortment planning by City Tiers: Premium vs Mainstream vs Economy
• Reassessing promotion strategies to build Loyalty vs Fight over price
• Innovate to drive organic growth and create new consumption occasions
• Maximise efficiency of your core portfolio through “golden SKUs” within Golden Stores

And of-course we are there to support you on the journey with the new and existing tools that we have developed POST COVID-19 to reflect and adapt to the new reality!