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China consumer goods: Left on the shelf By Louise Lucas Published: April 4 2011 20:52 | Last updated: April 4 2011 20:52

A supermarket in the north-western city of Yinchuan. With the spread of prosperity, western as well as local branded products are increasingly available across China

Hair damp and skin aglow, women stream out of a nondescript Communist party-owned block in a drowsy Shanghai neighbourhood where the most colourful attraction appears to be the Disney-branded English lessons on offer on the building’s lower floors. But the women too are the object of a big multinational’s attentions: they have just been given a cosmetics pampering by Unilever. The diligent market research undertaken by the Anglo-Dutch consumer group is just one testament to changes in the way multinationals tackle the world’s most sought-after consumer market. Where once multinationals shipped out tubs of creams and potions invented in the US or Europe, they are now taking their cue from Chinese consumers – in some cases bringing the resultant products back to the west. From how Chinese make soup to the way they wash their hair is thus the stuff of increasing commercial scrutiny. Hence the mock-up salon the women had been invited to in central Shanghai. All these questions will only become more acute as multinationals embark, more or less en masse, on the next step of what Patrice Bula, until recently Nestlé’s top man in China, refers to as “the last big industrial adventure”. The hunt for new consumers is shifting west, away from the multinationals’ relative comfort zone of the big coastal cities and into areas where distribution, logistics and consumer behaviour are all less than certain. Nationwide, the question is whether the western groups’ juiced-up research and development budgets and consumer insight efforts are enough. Competition in China is escalating – and some of the strongest rivals are local companies that barely featured a few years ago. Domestic groups are eating into multinationals’ market share, in part by playing to national pride and claiming superior knowledge of local consumers – but partly also by taking a leaf out of the foreign rivals’ books, poaching their staff and ramping up their own research, development and marketing. Many of these local groups have deep (sometimes government-backed) pockets and equally big ambitions: witness Bright Food’s appearance as bidder for foreign food groups from United Biscuits of the UK to France’s Yoplait. Further proof of multinationals’ determination to make a go of China emerged last week when Unilever bowed to pressure from Beijing to rescind planned price rises in the interest of reining in inflation. “There’s a big change in the landscape,” says Mr Bula, now back at Nestlé’s Swiss headquarters as head of strategic business units. He points to the rise of “powerful” mainland companies such as Wahaha, the beverages group, and Taiwan’s noodle-maker Tingyi. “If we want to emulate [anyone] and rally the troops at Nestlé, we compare ourselves with these people, because they have some of the competences and skills we want to have,” he says. No wonder. A cursory glance around any supermarket is enough to show China is shaping up to be the world’s biggest grocery market within just three years. The choice, even by western standards, is staggering. At a hangarproportioned Carrefour outlet in suburban Shanghai, there are enough soft drink varieties to allow a customer to try something new every day for a year – and still not have exhausted the different herbal teas, flavoured milks, fruit and vegetable concoctions or slimming beverages on the shelves. “Can Chinese companies innovate? The evidence is, sure they can. They are incredibly entrepreneurial,” says

Mitch Barns, China president of Nielsen, the information and analytics group. They can also win the hearts and stomachs of Chinese consumers – throwing down the gauntlet to the likes of Alan Jope, Unilever’s ebullient chairman for China. Elsewhere in the world, he says, Unilever ranks number one or two in laundry. In China, however, both his group and Procter & Gamble, its US rival, play second fiddle to a brace of formerly state-owned domestic manufacturers. Nice Group and Guangzhou Liby Enterprise control a combined 35 per cent of a sector including powdered and liquid detergents, by Euromonitor’s numbers, while Unilever and P&G have around 8.5 per cent each. The story is similar in tea. Guangdong Strong’s kookily named U-loveit instant tea helped that group rack up tea sales of Rmb4.2bn ($642m) in 2009. The youthful group doubled its market share to just under 20 per cent in two years. Unilever, by contrast, has seen its share virtually halved since 2006 to below 4 per cent. “These locals are increasingly sophisticated, not at all cheap-and-cheerful,” says Mr Jope. In ice cream – another category where Unilever and Nestlé are outranked by locals – they are “highly innovative”, he says. ... Unsurprisingly, the locals concur. Shanghai Jahwa United has had a chequered history but Ge Wenyao, its chairman, reckons the cosmetics maker’s time has come to knock foreign rivals off the shelves. “P&G entered China in the 1990s when consumers did not have much choice, so thought they liked the brand. But now there are multiple brands and they cannot tell whether another brand is good or not,” he says. “Now Chinese companies have grown and learnt a lot from foreign companies. They now have better marketing and feel much more confident. Look at our Herborist brand [of skincare]. It is priced higher than P&G’s brand and last year our sales revenues increased by 50 per cent.” There is other evidence. Multinationals are losing their allure for employees, suggesting citizens, too, increasingly see their future with local companies. The number of candidates preferring to work for foreign-owned companies dropped 10 percentage points in the past four years to 73 per cent of jobseekers, according to a survey by Manpower. This reflects narrowing pay differentials, as local companies enhance salaries and benefits. But there is also a sense of greater opportunity. Joseph Tcheng, managing director for greater China at Diageo, the UK drinks group, tells of how he recruited a marketing director from Nike of the US: one year later he was out of the door because a local sports company with big ambitions lured him away with the promise of equity in its planned initial public offering. “He said: ‘I love working for you but here’s an offer I cannot refuse: I get shares and to work with a local entrepreneur who wants to take his company global.’” Indeed, vibrant competition is putting pressure on virtually every link of the chain, beginning with the supply of raw materials. If commodity price inflation is a scourge across the globe, in China the issue is even more acute. In an effort to source inputs from potatoes to sugar in a country where agriculture is woefully inefficient and farming is far from a top career choice, multinationals are themselves turning to the land. PepsiCo’s Chinese farms supply roughly 40 per cent of the potatoes used in its Lay’s crisps. Nestlé counts 25,000 dairy farmers among its suppliers – all of whom the Swiss group deals with directly – and Associated British Foods’ Chinese operations are so focused on procuring sugar beet that Tony Cheung, managing director for the British Sugar unit, says he regards the farmer as his top priority. Poaching of suppliers is rampant as farmers jump ship for a bigger cheque. The scars of competition show through, too, in advertising, distribution and, ultimately, landing a place in shoppers’ baskets. Multinationals spend about 50 per cent more on advertising and promotion as a percentage of sales in China compared with the rest of the world. Unilever globally, for example, spends about 15 per cent of sales on advertising and promotion; in China it is half as much again. P&G, media analysts say, spends 25 per cent of sales. “It’s a land grab, right?” says Unilever’s Mr Jope. “Everyone’s investing today for share tomorrow and that’s what drives up media rates.” Media cost inflation, analysts say, is running at around 20 per cent.

Gains, goals and guesswork How big is big? Euromonitor calculates that the Chinese spend close to $500bn a year on food, drink and cigarettes alone and expects the tally to approach $600bn in 2015. IGD, an industry think-tank, is more bullish still, seeing China overtaking the US as the largest grocery market in 2014, when it forecasts a !761bn ($1.08bn) shopping trolley. That there is guesswork in the numbers is inevitable. Chinese data are notoriously inconsistent and a huge

... All these dynamics are shifting, however, as multinationals embark on their next big step in China – taking them away from the relative comfort zone of big coastal cities such as Shanghai and Beijing and into mushrooming metropolises deeper in the country. That means tackling virtually virgin terrain where populations are big and getting richer but where the pipework – logistics, distribution and modern retail – lags behind. “Third- and fourth-tier cities are twice as big as the first- and second-tier ones in terms of population, and the growth rate [is] twice as fast. So that’s where the big opportunity is,” says Nielsen’s Mr Barns. “China is going to add more megacities in the central and western parts of the country and urbanise 200m more people.”

informal sector means much goes uncounted: gross domestic product was summarily revised up by 17 per cent in 2005 on the back of a services sector that was bigger than thought. Companies are banking on these projections coming true. Procter & Gamble of the US puts current per capita spending on its consumer goods in China at $3 a year, a fraction of the $100 it nets in the US. Reaching US levels remains a long way off, but the company is eyeing a shorter time-frame for it to bring China up to its global average of $11.50. That may prove a bold bet, even if the underlying dynamics – an emerging middle class, ever more dualwage households – remain in place. One tripwire is Chinese consumers’ propensity not to spend. Savings rates are far higher than in the developed world. The welfare safety net is rudimentary, forcing citizens to save for their own retirement, healthcare and their children’s education.

L’Oréal of France is among those striving to sell more face potions and shampoos in these cities, which it plans to do in part by following the big international retailers including France’s Carrefour and Walmart of the US, as well as using smaller cosmetics stores and third-party distributors. Alexis Perakis-Valat, L’Oréal’s chief executive, enthuses about a recent trip to Anshan in the north-eastern province of Liaoning; in the week he was there, two huge department stores opened. “There was so much dynamism,” he says. “And there are 300 Anshans in China.” But access is tough beyond the top 30-40 cities, says Ted Hurley of Nielsen. “It’s a pure distribution game. Get your product on the shelf any way you can. But getting a foot on the ground takes a lot of time and money.” Otherwise it means an increasing reliance on third-party distributors – and thus an element of ceding control. Multinationals’ products turn up in the most unlikely mom-and-pop stores – in places where the usually ubiquitous cars are absent and children look goggle-eyed at foreigners. But it is also true that you can pick up a flat bottle of Coke or a chocolate bar well past its expiry date. It also requires new consumer insights: the Shanghai office worker with her swishing hair is a long way from the farmer in the north-east who has no more than a bucket of water – and probably substantially less time – to complete her ablutions. Besides, in fast-changing China, even the Shanghai consumer recruits for trying out cosmetics could prove an endangered species. Andrew Steel, director at Unilever’s consumer research institute – where 30,000 Chinese a year try everything from soup to shampoo and where staff include anthropologists, psychologists and sociologists – has his problems too. “Now people are living in condominiums, it’s much harder for agencies to go knocking on doors to find consumers for testing.” Copyright The Financial Times Limited 2011. Print a single copy of this article for personal use. Contact us if you wish to print more to distribute to others.

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