The Shift of FMCG to E-commerce

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Source: OC&C Strategy Consultants

The Chinese fast moving consumer goods online market is worth morethan $25.3bn today, far surpassing any other country in the world.China has always been the winner in the e-commerce space — on theannual Single’s Day event in 2015, Alibaba alone sold almost double ofCyber Monday, Black Friday, and Thanksgiving combined — $14.3bn.FMCG categories represent the largest area of retail spending overall,however it has lots of headroom to grow online.

To understand the role and relevance of FMCG in the Chinesee-commerce space, OC&C recently conducted a survey in Q3 2016and looked into 13 selected sub-categories, ranging from infant milkformula, packaged food and soft drinks, alcoholic beverages, tobeauty and personal care. The survey covers 4,600+ respondentsacross all demographics from 16 cities. The goal is to betterunderstand the three key questions which are commonly sharedamong FMCG executives

1. HOW RELEVANT IS ONLINE FOR FMCG IN CHINA?

2. IS ALIBABA THE ONLY BET?

3. WHERE, AND HOW, CAN I PLAY?

IT IS GETTING BIGGER……AND BIGGER

The online FMCG market has come a longway in the past few years, growing rapidlyat 78.4% CAGR (Figure 1) from 2010 to2015 amidst weakening offline (15.4%in 2011 to 6.2% in 2015) and GDP (9.5%in 2011 to 6.9% in 2015) growth. Movingonline for FMCG, however, has beenstructurally challenging when comparedagainst other categories.

FIGURE 1

1. Online sales of FMCG includes B2C (business to consumer) sales of baby food, packaged food, soft drinks and beauty & personal care.Alcohol and soft drinks online value is derived from online volume.

2. Indonesia, Malaysia, Singapore, Thailand and Philippines

Source: Euromonitor

For instance,consumer electronics enjoys one ofthe highest penetration rates across allcountries (Figure 2). Pertaining partly to itsone-off and high-value nature, consumersare therefore more willing to investadditional time across the purchasingjourney: from researching on differentproducts, reading customer reviews, andto comparing prices. More importantly, asmost online channels can now satisfy allof those demands more efficiently thanoffline channels, consumers are utilizinge-commerce platforms more extensivelyto purchase consumer electronics, drivinga much higher online penetration in thecategory. FMCG categories are a day-todayexpense, though, and are shoppedvery differently. Customers tend to buyimpulsively and they want the productsimmediately, which historically has beentricky to achieve online.

FIGURE 2

1. Value penetration for soft drinks and alcoholic drinks derived from volume penetration. All online sales exclude C2C (Consumer-to-consumer).

Green = over-indexed in China; Red = under-indexed

2. c.90% of overall baby food market is made of Infant Milk Formula (IMF)

Source: Euromonitor

China has long been labeled as thegiant incubator of e-commerce thanksto its favorable macro trends: rapidurbanisation, increasing internetand mobile penetration, continuousinnovations etc. In addition, its unique andfundamentally different dynamics havesupported much higher online penetrationrates, whereby most categories are over-indexedin China against both the UK andthe US. So, what does that mean for thefuture of China FMCG e-commerce?

In China, we see a number of pointsof evidence that suggest that onlinepenetration in FMCG will be significantlyhigher — and make it an imperative forFMCG companies to succeed.

The post-80s and 90s generation inChina who grew up with the internet arecoming of age, entering the workforce andforming families, increasing their abilityand need to buy FMCG. They are indeedthe people who are the most familiar withthe concept of “FMCG Online” , especiallyin packaged food & soft drinks, and beauty& personal care (Figure 3).

FIGURE 3

Q: Have you purchased <category> online in the past 6 months?

Source: OC&C FMCG e-commerce survey 2016

Today, 50% ofthe population is within the age group of10-29 which, complimented by tailwindssuch as the new two-child policy andincreasing average household income, willsee this post-90s generation becomingan important group in the comingyears and driving the growth of FMCGe-commerce. Growth is not only comingfrom the younger generation though, infact, there are also an increasing numberof consumers from the 30-50 year-oldbracket who intend to spend more inthe next 6 months (Figure 4), suggestinggrowth of FMCG e-commerce will comefrom all segments.

FIGURE 4

Q: In the next 6 months, are you planning to rely on more or less online shopping for <category> compare to past 6 months?

Source: OC&C FMCG e-commerce survey 2016

Price and convenience related factors areconsistently identified as top reasons forbuying FMCG online in China. The growingmiddle class shows strong intention tosave money from everyday consumablesin order to support a better lifestyle, suchas dining out more frequently or buyinginternational fashion brands (see OC&C’srecent publication ‘Dress for Success’ and ‘Serving up a Winner’ ). They also live a verybusy life, on average working 8.3 morehours per week than OECD countries. Assuch, consumers’ need for convenience hasfuelled the surging demand to buy FMCGonline anywhere, anytime. In addition,the rapid development of infrastructureand logistics across the country, vastimprovements in both intra-countrymovement of goods as well as last-miledelivery to consumers, have effectivelysatisfied the consumers’ desire forconvenience (Case study: Developmentof Logistics Network). With the concertedinfluence from multiple drivers, onlineshopping of FMCG in China has becomeseamlessly cheap, easy and fast.

Incentivised by the favourablefundamentals, FMCG in China willunquestionably move further online andbecome even bigger. Recent successesof FMCG players like Costco, which hasachieved a staggering US $3.5 million ofsales on Tmall’s Singles Day alone, havealso proved the immense opportunities in the market. The question is — how shouldFMCG brands play online?

DEVELOPMENT OF LOGISTICS NETWORK:

The unrivalled development of thelogistics network in China has been drivenby both government-led and platform-ledinitiatives.

On the government side, in 2014, theState Council issued a document toiterate the long-term developmentof logistics in China. In particular, thedocument highlights the importance ofmergers, acquisitions and partnershipsof logistics enterprises in consolidatingtoday’s fragmented logistics market. Inaddition, the government also furtherincreased investment in infrastructure,exemplified by the 1.65 trillion RMBinvestment in highway construction (up20.6% from 2013).

On the platform side (Figure 5), JD.comstarted to build its own logistics system asearly as 2007. With 7 mega warehouses,234 large warehouses and 6,756 deliverystations throughout China, JD has thelargest proprietary delivery network ofall the e-commerce platforms in China.Additionally, JD’s extensive network ofoffline stores (i.e. JD Daojia) has enabledtop-notch 2-hour FMCG delivery forconsumers across 18 cities in China.

In 2013, Alibaba and various privateequity funds have jointly invested anddeveloped the Cainiao network — anopen and shared logistics platform thatpartners with 15 third-party logisticscompanies such as SF Express. Theplatform has dramatically improveddelivery efficiencies through theunification and digitisation of trackingnumbers. For instance, while it took7 days for Cainiao to ship 250 millionparcels on 2014 Single’s Day, it wassignificantly reduced to 1.5 days in 2015.Cainiao itself runs on an asset-lightmodel (Figure 5), owning only 5 megawarehouses in Tianjian, Wuhan, Shanghai,Chengdu and Guangzhou. However, asof March 2016, its network of companiesemploy over 1.7 million delivery personnelin 600+ cities and collectively operate150,000 hubs and sorting stations.

Thanks to Cainiao, Tmall supermarketcustomers now enjoy same day deliveryin 32 cities and next day delivery in 122cities without incurring any extra cost.With merchants having access to a rangeof logistics partners on Cainiao, they areno longer bound to one single providerand they now enjoy more options ofbetter quality. The more competitiveenvironment will certainly encourageimprovements in the logistics market.Undoubtedly, last-mile delivery in Chinahas become faster and better. And asChina’s logistics sector matures, adoptionof FMCG e-commerce should alsoaccelerate at an unprecedented pace.

FIGURE 5

Source: Desktop Research, OC&C Analysis

ALIBABA?YES…

Any conversation around online in China will certainly involve the largest e-tailerin the world — Alibaba. As one of theearliest entrants in the e-commercespace (Figure 6) with its eponymousB2B (business to business) platform in1999, Alibaba has since then launchedtwo more hugely successful platforms tocover the rest of the spectrum: Taobao forC2C (consumer-to-consumer) and Tmallfor B2C (business-to-consumer). Overthe same period, though, many otherplatforms have emerged to challengeAlibaba’s dominance. While many tried,most failed, with JD.com being the mostnotable exception which has establisheda substantial foothold in the highlycompetitive China e-commerce market.

FIGURE 6

1. JD started in 2004 selling only computers, communication and consumer electronics products and opened its marketplace, expanding to other categories in 2010; Amazon entered China in 2004 selling books andexpanded to other categories through the acquisition of Joyo.com in 2007

Source: Desktop Research

FIGURE 7

Q: In the P6M, what is your experience with the following platforms when purchasing FMCG online: Not aware; Aware; Know it sells FMCG; Have visited website for FMCG in P6M; Have bought FMCG from the website in P6M;Frequently buys FMCG from the website in P6M

Source: OC&C FMCG E-commerce survey 2016

The platform landscape in China is highlycompetitive, with rival platforms jostlingfor customer traffic and market share atalmost any cost. Thanks to the aggressivepromotional strategy, consumers widelyperceive shopping on platforms likeAlibaba as a bargain. The Single’s Dayevent (11/11) is arguably the best showcaseof how Alibaba delivers competitive priceoffering to customers. With over $1bngross merchandise value generated injust 8 minutes of trading, this staggeringresult has compelled offline players suchas department stores to match Alibaba’ssteep discount on the same day.

In addition to its attractive promotions,Alibaba also presents Chinese customerswith a breadth of categories thatoutclass all its competitors. Whetherit is discounted apparel, the latestsmartphone, wedding rings, fishingboats or even booking of medicalappointments, Alibaba can always providea solution. Their FMCG portfolio is alsovery extensive: c.23,000 chocolate &confectionary and c.25,000 shampoolistings are available today on Tmall,compared to c.13,800 and c.13,600 onJD respectively. They are not restingon their laurels though, as Alibabacontinues to search for and introducenew and unique products to Chinesecustomers. For instance, in order tobring directly-sourced bottles to Chineseconsumers, Alibaba launched the ‘TmallVineyard Direct’ program in 2015 andnow collaborates directly with selectedvineyards. Just a year on, Tmall alsohosted the ‘9/9 Global Wine & SpiritsFestival’ where c.100,000 varieties ofalcoholic beverages across 50 countrieswere available for sale on its platform.

Alibaba’s proprietary payment system,AliPay, is also a driver of their success.Since 2004, AliPay has transformedfrom a pure online payment system intoa giant lifestyle app, online and offline.From buying movie tickets, hailing acab, ordering take-aways, getting lotterytickets, paying utility bills to investing,Alipay is always the central tool forhandling transactions. Threatened byAlibaba’s 43% share in the third-partypayment market and its c.450m+ users,competitors such as JD and Suning, havetherefore developed their own paymentsystem and stopped accepting AliPayto minimize discosure of sales data toAlibaba. This defensive move has comeat some cost — as they are cut off fromChina’s largest payment system.

FIGURE 8

Q. Why do you prefer to shop <category> on Taobao/T-Mall?

Source: OC&C FMCG E-commerce survey 2016

IT COMESAT APRICE

While Alibaba has a 70% share of theoverall E-commerce market, its position inthe FMCG scene is not as strong. (Figure 9).The online FMCG market is characterizedby a much stronger presence of categoryspecific / specialist platforms whencompared to other popular categories likeelectronics and apparel. These specialistshave captured the hearts of consumers,thereby limiting Alibaba’s success to acertain extent. Furthermore, as Chineseconsumers tend to rely less on C2Cchannels in purchasing FMCG products,the potential of Taobao is simultaneouslysuppressed. Given its unique dynamics,brands enjoy greater flexibility in the onlineFMCG market.

FIGURE 9

1. Derived from shoppers’ penetration and share of wallet with Taobao and Tmall within each FMCG category with value share calculated as themultiple of % penetration and % share of walletPenetration

Q: In the P6M, what is your experience with the following platforms when purchasing FMCG online: Not aware; Aware; Know it sellsFMCG; Have visited website for FMCG in P6M; Have bought FMCG from the website in P6M; Frequently buys FMCG from the website in P6MShare of wallet

Q: Of all your online purchases for <category> in P6M, can you split your overall spending on online shopping with the belowwebsites?

Source: OC&C FMCG E-commerce survey 2016, Eurominitor data

Working with Alibaba is undoubtedly thequickest way to access a sizable pool ofChinese shoppers, which is particularlyattractive to new entrants in the Chinesemarket. However, it does come at a cost. Infact, credibility has always been a key issuefor platform players, especially for Taobao.A survey conducted by CCTV in 2014 saw68.2% of interviewees having receivedfake products from Taobao. Even the B2Cplatform Tmall, that partners directly withbrands owners and distributors, has beenplagued with credibility concerns in termsof fabricated customer feedback or salesrecords. ‘Shuadan’ has long been a popularmethod used by merchants to generatefictitious sales records and to improve theirrankings, usually via ‘fake customers’ whichmerchants hire externally. This has drivensome brands, such as the LVMH-ownedBenefit Cosmetics in 2010, to pull out ofTmall in fear of hurting their premiumpositioning. In fact, these two concernsare both among the top reasons why someFMCG shoppers move away from Alibaba.

Moreover, brands typically incur muchhigher costs when collaborating withAlibaba. For example, in order tooperate a flagship store on Tmall andto deliver Tmall-specific customerservices, marketing activities, warehousemanagement and store webpagemaintenance, brands sometimes haveto hire up to 3 times more full-timeemployees than on other platforms.Finding ways to differentiate amidstthe large pool of merchants is not easyeither, with many using services such as ‘Zhitongche’, a pay-per-click search engineoptimisation tool developed by Alibabaand Yahoo China to drive traffic.

DIVERSIFYYOUR ONLINECHANNELS,LIKE YOU DOOFFLINE

Traditionally, FMCG brands have thrivedfrom establishing an extensive offlinedistribution network covering allstore formats such as hypermarkets,convenience stores, specialist stores andeven traditional mom-and-pop stores.This has allowed brands to reach multiplegeographies and customer types. Thisshould not be any different online. Winningonline should not constitute just reachingout to a single key account. Moreover,while popular, Alibaba’s platforms areneither the most highly rated, nor are theyalways rated amongst the top 5 in theFMCG categories which we have explored(Figure 10). Given the higher degree offragmentation in the FMCG online market(c.50% non-Alibaba share in FMCG vs 30%overall), other players have a key role toplay as well.

When it comes to infant milk formula ( IMF), product authenticity and quality iscritical. Driven by a mix of milk scandalsand a rising middle class, Chinese parentsare willing to pay a premium for importedIMF, in the hope of providing their babieswith the same high quality nutrientformula which foreign babies enjoy. Infact, the trend has become so significantthat Hong Kong, a beacon of free trade,has passed a new law to restrict theamount of IMF which an individual cancarry out of its borders, so as to inhibitparallel trading activities. In return, bytaking advantage of, and capitalizing on,Alibaba’s fragile credibility, platforms withan international origin have registeredstrong performances. For instance, bothAmazon and Yihaodian have been hugelybenefited from the phenomenon. (Casestudy: Cross-border E-commerce)

One way specialists can differentiatethemselves is through providing greatservices. For example, each customerservice manager from PinShangHui(Wine9) is paired up with a selected batchof customers and reaches out within 24hours once customers have completedthe online registration, gives them anintroduction to the platform, whilehighlighting the latest promotions, andeven suggesting the best grape varietalsto go with an A5 Wagyu beef fillet steak.It feels just like walking into a wine storeand having a chat with the staff about yourfavourite French vineyard. This level ofpersonal touch and interaction is not foundin your typical hypermarket, or similarly, alarge generalist platform.

Another example is Sephora, where itstands out for its wide product rangeoffering. Like many other specialists whooften struggle to generate high customerawarenesses and traffic, Sephora alsooperates a flagship store on 3rd partygeneralist platforms such as JD in additionto its own site. However, Sephora ensuresthat its site remains relevant by only listingabout half of its product on JD. Consumerswho want to purchase premium brandssuch as Lanvin and Estee Lauders, forexample, would have to pay Sephora’s sitea visit.

Just as one does not turn down a smallmom-and-pop store looking to sell itsproducts, the same should be true foronline whereby one must not neglect theimportance of ‘the other’ platforms.

FIGURE 10

Q: How do you rate <platform> against the following criteria based on your experience about <category> shopping?

Source: OC&C FMCG E-commerce survey 2016

CROSS-BORDER E-COMMERCE

Historically, Chinese shoppers couldonly turn to individual sellers who liveor regularly travel overseas as ‘delegateshoppers’ (代购) for the access toimported goods, especially for IMF.However, due to the highly unregulatedand high ease of tax evasion, it is oftenunreliable. For example, there was nochannel to trace or dispute lost parcels.

International websites such as eBay US orAmazon Japan have therefore emergedand attempted to provide an alternative.But due to the hefty and lengthydelivery, especially for FMCG productswhere consumers usually want themimmediately, ‘overseas treasure hunting’ (海淘) remains as an inconvenient option.However, despite the inconvenience,demand has been significant as parentsconsider quality of food to be veryimportant. According to iResearch,growth of the cross-border e-commercemarket has jumped from 53.0% in 2013 to111.8% in 2015.

As the market develops, the Chinesegovernment finally stepped in andregulated the market In 2014 and for thesecond time in 2016. Through levyingtaxes on small parcels, and reducingimport tax for e-commerce platforms aswell as introducing ‘tax-freeze’ bondedwarehouses (where imported goodswarehoused in China only becometaxable when customers place an order)the Chinese government effectivelypromoted the formation of officialchannels to satisfy the population’s thirstfor imported goods. Eventually, this hasshaped the ‘cross-border e-commerce’ (进口跨境电商) model, through whichdomestic players such as Tmall and JDhave now opened dedicated sections(e.g. Tmall international, JD worldwide),which enable both direct sales anddirect delivery of imported goods fromoverseas merchants to the doorstepsof Chinese households. While delegatedshoppers and international platforms stillexist today, consumers now benefit fromcross-border e-commerce that is quicker,cheaper and much more reliable.

From brands’ perspective — this movehas opened up a new, regulated andprofessional channel, especially for thosewho have not yet established a localpresence, to sell into China with minimalcapital investment. Brands can ‘test thewater’ by partnering with platforms thatprovide ‘cross-border e-commerce’.

MAKE YOURONLINECHANNELREALLY WORK

1 Find the Right Platforms

Brands should partner withstrategically aligned platforms toachieve their online objectives. Glengoyne,for example, exclusively sells its single maltwhiskey on Womai due to the platform’sreputation for authenticity and expertisein alcohol logistics. Montes also selectedPinShangHui as its strategic partnerpertaining to the platform’s unrivalledknowledge on red wine. La Mer, a premiumcosmetic brand also established its ownflagship store on Tmall for brand building.

2 Customise your Offerings

Different customers prefer differentplatforms. It is important forbrands to recognize this and adjust theirsales strategy accordingly. For example,Elizabeth Arden targets pricesensitivecustomers by using VIP.com as an outletstore, clearing its inventory by slashingprice (e.g. Millennium Night RenewalCream at 84% off RRP). Algenist, on theother hand, targets more sophisticated andattached customers by selling exclusiveproducts on Sephora (e.g. anti-agingvitamin C+ serum).

3 Make it Effective

Selling online in China is rewardingyet not easy. Brands need tounderstand the level of controls andcapabilities required to decide whether tooperate the online store in-house or relysolely on the platforms. Godiva, for example,runs its Tmall flagship in-house while Dovechocolate’s JD flagship store is operatedby the platform. A long list of TrustedPartners (TPs) with different strengths andweaknesses are also available in China tosupport brand-owners on operations alongthe value chain (e.g. flagship store layout,pricing, logistics and customer service).Making the right choice here, based on yourneeds, is critical for success.

FURTHERCONSIDERATIONS

Treat e-commerce not only as a sales channel but also a platform to build your brand. For example, premium players caneducate a wide range of audiences on their brands by launching flagship stores, while brands without any physical presence inChina can leverage cross-border platforms to ‘test the water’ prior to their full market entrance:

–How can I leverage e-commerce platforms to achieve my brand building initiatives?

–What are the roles and intersection of social media and e-commerce and how do I engage closely with my end-customers to gainreal insights?

–What are the implications on costs, tax, logistics or potential cannibalisation with my existing presence in China of selling importedgoods on cross-border e-commerce platforms?

Integrate offline and online channels to create a win-win proposition — either through leveraging existing offline infrastructure (e.g. distributor network) to facilitate online sales, or using e-commerce to facilitate offline strategies:

–How do I transform my offline distribution network into a potential competitive advantage in online play?

–How can I leverage e-commerce to facilitate offline strategies such as product launches, inventory management or geographicexpansion?

–Should my product offering and pricing be the same or different online and offline?

–How do I safeguard the profits of my offline distributors, channels and existing investments when moving online?

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