The dizzying pace of change in China’s retail and consumer landscape has kept consumer-packaged-goods (CPG) manufacturers on their toes. In the past few years, demand for their products has grown rapidly in China, but success is far from guaranteed in this evolving and wildly competitive market. The behavior and preferences of Chinese consumers are shifting, aggressive new online and omnichannel players are emerging and the regulatory environment is becoming trickier to navigate.
Against this backdrop, what constitutes commercial excellence? What are the most successful CPG manufacturers doing that aspiring companies should emulate?
In this article, we present highlights from our latest Commercial Excellence Benchmarking of CPG companies. A collaborative effort between McKinsey and Nielsen, Commercial Excellence Benchmarking is a unique global benchmark that quantifies how a company performs compared with the best industry players. It pinpoints strengths and weaknesses using our proprietary Commercial Excellence Index (see sidebar, “About Commercial Excellence Benchmarking”). It reveals what “winners” do differently from “others” — winners being companies that achieved higher sales growth than the categories they play in, while also outperforming peers on one or more commercial metrics. Winners in pricing, for instance, outgrew others by 3.4 percentage points even while increasing the prices of their products.
Broadly speaking, our benchmarking indicates that top-performing CPG companies develop a more granular view of consumers and local markets; make greater use of data; collaborate more closely, both internally and with customers and adopt a performance-based mind-set.
Three market trends
Consumer companies in China are experiencing three fundamental changes, each with a massive impact on commercial practices.
The spending power of Chinese consumers is increasing
In 2005, only two percent of urban Chinese households were in the “new mainstream” income group — those earning between 103,000 and 222,000 renminbi, or between approximately $16,000 and $35,000, annually. By 2016, that proportion had risen to 43 percent, and we estimate that by 2025 the new mainstream will encompass 66 percent of urban households in China (Exhibit 1). The top two income groups — affluent consumers (those earning more than 222,000 renminbi annually) and the new mainstream — have disproportionately contributed to consumption growth.
These consumers are trading up in many CPG categories — that is, they’re switching from their preferred brands to higher-priced brands. In McKinsey’s latest survey of Chinese consumers, one in five respondents said they traded up, whereas only 2 percent said they traded down to cheaper brands or to private-label products. The highest trade-up rates were in cosmetics, spirits, milk and personal-care products.
That said, China’s population is widely dispersed across the country, and there are vast differences in consumer behavior from one city to the next. To be able to tap into the areas with the highest growth potential, CPG companies need a detailed understanding of local markets.
A new breed of retailer is emerging
China’s online retail market has been growing at about 18 percent per year over the past two years and is now the largest in the world at over $800 billion. In fact, online retail sales in China are approximately equal to online retail sales in the next six largest markets combined — the United States, the United Kingdom, Japan, Germany, South Korea and France. And there’s much more room to grow: online sales still account for only 17 percent of total retail sales in China.
But the most powerful trend in China’s retail landscape today isn’t just e-commerce. Rather, it’s the emergence of the truly omnichannel Chinese retailer, which offers multiple offline and online touchpoints and allows consumers to move seamlessly from one to the other. Take, for example, the food retailer Hema. Each of its brick-and-mortar locations is a retail store, restaurant and warehouse all in one. It delivers fresh food and meal kits in 30 minutes or less to consumers located within three to five kilometers of a Hema store. The company proactively migrates offline customers to its digital channels — for instance, by rewarding in-store staff for helping consumers install the Hema app on their smartphones — thereby extending consumption occasions far beyond the store. Hema builds an integrated view of each of its customers by requiring all transactions to be made electronically, either through its app or Alipay. And it uses data and analytics to constantly generate consumer insights that inform its product mix and sales strategy.
As retailers such as Hema and food-delivery platform Ele.me (both owned by Alibaba) gain ground, CPG companies will need to learn how to partner with them effectively.
Regulations are constantly changing
CPG companies must keep up with the ever-changing regulatory environment in China. In the last four months of 2017 alone, the Chinese government introduced new regulations governing online advertising, food safety, e-commerce and import tariffs. To stay abreast of — and compliant with — new laws and regulations, CPG manufacturers need agile processes that enable fast communication and coordination among internal departments, rapid decision making and speedy implementation of market initiatives.
What sets winners apart?
These trends have compelled the most forward-thinking CPG companies to adjust their commercial practices. We’ve found that, globally, leaders in commercial excellence are companies that make informed choices about where to play, which investments to make, how to execute in the market and how to sustain momentum. These choices allow them to consistently outperform the competition and drive sustainable, profitable growth. In particular, our survey reveals that the winners in China prioritize the following imperatives.
Take a localized view of the consumer decision journey
Winners in the Chinese market have invested in generating both offline and online consumer insights and thus can claim a much deeper understanding of how consumers make buying decisions (Exhibit 2). All winners say they understand the in-store consumer decision journey, and about 80 percent of winners (but only 25 percent of others) say they understand the online consumer decision journey as well — making them much better positioned to partner with China’s emerging omnichannel players. In fact, most winners build direct-to-consumer capabilities, often through the Tmall platform — not necessarily to generate sales but rather primarily to capture consumer insights — whereas for others, direct-to-consumer initiatives aren’t a priority at all.
Another striking difference between winners and others is in decision rights. Winners place almost all commercial decisions — including setting price guardrails, launching new products and allocating customer-specific budgets for shopper-marketing initiatives — in the hands of local or regional managers, rather than the global brand leader or global franchise leader. Empowering local managers by giving them decision-making authority is crucial to success in China.
Foster cross-functional collaboration
This emphasis on local-market expertise and knowledge is also evident in how winners in China tackle revenue-growth management (RGM) initiatives. At best-practice companies in developed markets, including the United States and Western Europe, a centralized RGM team is accountable for all RGM initiatives. But in China, winners tend to distribute RGM resources and responsibilities across marketing and sales teams, spreading them out across the entire commercial organization. Drawing on local resources for RGM expertise ensures that local-market understanding is embedded into RGM decisions.