Insurgent FMCG brands on the rise in China at expense of incumbents

Fast moving consumer goods brands globally face increased competition as domestic incumbents pick up steam. New analysis shows that Chinese domestic incumbents are growing rapidly, focused particularly on quality products – in 2017 local incumbents saw nearly twice the whole category rate of growth. Market penetration is a key asset for incumbents.

Global fast moving consumer goods (FMCG) companies have held a dominant place in markets across the world. Major brands are sold across global markets, and have managed to penetrate deeply into consumer spending habits in some regions. However, consumer sentiment tends to be fickle, with different markets wanting different things, requiring companies to put local flair into their products – or risk losing out.

Over the past decade, international companies have been the leading players in a host of markets. However, their dominance is increasingly being challenged by local insurgents that are managing to create local flavours, understand their consumers better, and are better integrated with local policy and similar matters.

To better understand how these changes are affecting both global and local incumbents, Bain & Company recently released its ‘Local Insurgents Shake Up China’s “Two-Speed” Market’ report into shifts in demand and incumbent strength. To compile the report, the firm analysed data from Kantar Worldpanel (which has now been folded into the single Kantar brand), analysed key brands’ financial documents, and interviewed consumer products and retail industry experts.

Incumbent brands in China have been on the rise in recent decades, many having become powerful international players in their own right – such as Huawei and Lenovo – while at home, these companies have been able to leverage their local knowledge of consumer wants and expectations to create products and services that meet them, in some instances resulting in significant market share control, Chinese incumbents however remain small in the Chinese FMCG market, at around 6% of total market share.

While a small share as it stands, the incumbents are enjoying strong revenue growth. Around half of the group achieve revenues of between $100 million and $500 million, and the Bain report notes that the group is growing much faster than the category average in revenue growth yearly, with nearly 70% of the category growing at twice the whole category rate.

The segment is mainly connecting to consumers in the premium and “good enough” segments, which reflect quality over price and quality at a good price. This means that the sales that local companies make tend to be in the higher price segment. Overall the largest numbers of local competition are found in the personal care and beverages categories.

Incumbents are facing the heat, with the relatively small market share of newcomers managing to siphon off 20 percent of the market’s revenue growth over the past three years across the 33 subcategories considered. In some areas, for instance juices, the insurgents have managed to unseat other brands’ long-standing share of growth – with the insurgents seeing their market share grow by $300 million while incumbents have seen it decline by $100 million. In packaged water products, the insurgents have managed to capture around a quarter of market growth between 2015-2017, boosting their overall market share to above 10 percent.

One of the driving forces behind the performances of the strongest insurgents is their ability to penetrate markets. The research points out that the brands’ value growth contribution stems in part from their ability to manage penetration, representing around 50% of their total value gain in terms of volume, while around 20% of revenue growth results from changes in selling price.

The ability to increase volume through penetration is being achieved through, among others, increasing distribution of products as well as tailoring products to meet the needs of specific, often high value, groups. The report states: “Insurgents benefit from three major external factors: digitalisation that has lowered the barriers to entry; China’s “New Retail,” which is redefining the roles of consumers, merchandise and stores; and Chinese consumers’ growing preference for products that improve their lifestyle, health and wellness.