Spotlight on China July - August 2011 15/08 - Kantar Worldpanel

Dear partners and clients,
Welcome to the July/August issue of ‘<strong>Spotlight</strong> on China’.
The digital landscape in China continues to evolve rapidly, with the recent
CNNIC report indicating total internet population hitting 485 million and micro
bloggers users hitting 195 million. While advertising budget increasingly shifts
from traditional media to internet, marketers must ensure that they can
accurately measure the ROI of their campaigns. Kantar Worldpanel China is
pleased to introduce a new digital ROI measurement tool that will help
advertisers analyse cohort purchase behaviour of those seeing their adverts
versus the rest. Please contact us if you wish to know more about our
approach.
Jul/Aug 2011 中文
In July, Inflation in China hit its highest level in 37 months and the rising costs of food and commodities have pushed up
the cost of living and remain a hot business issue in China. In this issue, we would like to share with you the recent
shopper response to rising supermarket prices. This is followed by a joint paper co-developed with Kantar Retail on why
shopper loyalty is so low in China and what retailers and suppliers can do to improve this critical metric. The final article
takes a fresh look at the consumers in D cities (counties) in China.
We hope that you find this issue of interest. If you have any comments or suggestions on future topics, please send
them through to us at kantarworldpanel@ctrchina.cn.
Best wishes,
Marcy Kou
Managing Director
Kantar Worldpanel Asia
INSIDE THIS ISSUE
Paying more, getting more!
How are Chinese supermarket
shoppers responding to
rising prices?
Prices- we keep hearing about them. In
fact over the past year the one
common, global, macro-economic
consistency has been rising prices.
Through rising and falling stock
markets, fears of national debt defaults,
Eurozone and currency
instabilities....>>>
Previous Issues
Jason Yu
General Manager
Kantar Worldpanel China
Shopper loyalty In China
- Why Is It so low and what can
retailers and manufacturers do to
Improve It?
Retail landscape in China is diverse
and fragmented, yet evolving rapidly.
As modern trade retailers such as
Wal-Mart, RT-Mart, CR Vanguard and
many other local and international
players expand their store networks
across China, shoppers have a
growing... >>>
A fresh look at D city consumers
– 4 areas of critical importance
uncovered
.
Since April 2010, Kantar Worldpanel
China started to look deeper into our
lower tier D city shoppers. They
represent 34 million households and
1,300 cities on their own and also
provide a crucial link to rural shoppers
as many rural consumers will travel to
the nearby D cities to shop...>>>
Jan/Feb 2010 Mar/Apr 2010 May/Jun 2010 Jul/Aug 2010 Nov/Dec 2010
Jan/Feb 2011 Mar/Apr 2011 May/Jun 2011
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Paying more, getting more!
How are Chinese supermarket shoppers responding to rising prices?
Home
Prices- we keep hearing about them. In fact over the past year the one common, global, macro-economic consistency has
been rising prices. Through rising and falling stock markets, fears of national debt defaults, Eurozone and currency
instabilities, the one thing that has affected everybody is the rate at which consumer prices have been rising.
For governments, this is a matter of macro-economic policy, for brand owners it is a matter of supply, demand and brand
positioning, and for consumers…well, for consumers, at best it’s inconvenient but at its worst rising prices can have a
significant impact on the choices they make when they go shopping, and ultimately the lifestyles they live. This paper will
investigate how FMCG prices in China have evolved over the past year, and how Chinese supermarket shoppers have, or
haven’t reacted to them.
Of course in many ways China stands alone amongst the global economic superpowers in terms of relative stability in the
economy and consistently positive macro economic indicators. The latest published month (July) inflation figure in China of
+6.5%* also compares relatively favorably with many countries in the region and across the globe. However, there is still
much attention given to this metric in China and full year forecasts have been adjusted upwards to reflect the latest data.
What about prices in supermarkets?
What about in the supermarkets? How are prices behaving in the stores where 150M Chinese urban households do their
regular supermarket shopping?
To get a fix on the rate of inflation of grocery products in supermarkets we can use the full Kantar Worldpanel purchase panel
dataset in China to analyse the change in average price for all products across over 80 product categories over a 12 wk
period versus a year ago. We can see the results of this exercise below:
This shows clearly that prices of supermarket goods have risen faster in fact, than the overall rate of inflation.
So have consumers reacted against these price increases and made different choices? Have they done their shopping in
cheaper stores? Have they bought less items? Have they traded down to cheaper items? Have they sought more deals or
discounts? Well the short answer is no, not really. How do we know this? Well, put simply, if we compare the rate of
supermarket inflation with the actual rate of spend change amongst households this tells us the extent to which households
have either ‘Traded up’ or ‘Traded down’. The chart below illustrates:
So what this tells us, is that despite rising prices in fact households have continued to trade up their purchasing behavior
faster than the change in average prices. Importantly, the main two drivers of this behavior are, selecting more premium
products from the categories they bought last year, and accessing more categories altogether.

This effect is illustrated in microcosm when we look at the Kantar Worldpanel Consumer React analysis for the Toothpaste
category. In this unique approach we can analyse real shopper purchasing behavior to understand what is happening within
a category in relation to inflation:
What we see from this case study is that in Toothpaste we see household spend increasing well above the rate of inflation in
the category (and in this case inflation is measured on a like for like basis on all SKUs in the category). This ‘Trading up’ is
driven by households buying more volume and through making more premium choices in terms of brands/promotions &
stores. The picture we see for Toothpaste is a good indication of what we see in China overall – but how does it look in your
category? (This technique is unique to Worldpanel and can be applied to any product category to understand how shoppers
are responding to inflation)
Is everybody behaving the same?
If we are surprised to find shoppers ‘trading up’ even in the face on rising prices, then one might expect to find this
phenomenon limited to only to most affluent households. Yet we find this not to be the case; in fact all household groups
(based on monthly household income) demonstrate FMCG spend growth well ahead of supermarket inflation.
Interestingly, we note that in fact the lowest income households were the ones historically increasing their spend at the
fastest rate above inflation. Maybe initially this seems counter-intuitive, however can be explained in terms of the rate of
change as opposed to the absolute level of spend - the lower income households are starting from a lower base and their
continued increasing affluence sees those households exhibiting the greatest FMCG change.
However, the one indication that that there may be some pressure from increasing prices on households is observed in the
fact that the rate of ‘trade-up’ amongst the lower income households is slowing, whilst that amongst the highest income
household s is increasing. So whilst the lower income households are still increasing at the fastest rate, the gap is closing,
suggesting that the lower income households are just starting to feel the pressure.
So what does this all mean for FMCG brand owners?
Understanding the true pricing environment and shopper behaviour in China’s supermarkets holds key implications for
FMCG brand owners. Most significantly, the demand for premium products is not slowing. It will be critical for brand owners
not to make rash decisions regarding the price of their products - maintain price index versus competitive set, don’t reduce
prices through fear of consumer driven cut-backs, they’re not evident. Also, maintain premium innovation pipelines – the
appetite for premium remains strong; don’t adjust towards mainstream and certainly don’t pull back. Lastly, it will be ever
more critical to bring rich consumer and shopper insights to your customers to ensure both brands and retailers make
informed decisions in response to the ever changing pricing environment.
So what of the outlook for the coming year?
On a global basis the markets are currently in turmoil, the oil price remains high and the cost of food production shows no
signs of easing, whilst in China specifically demand for goods and services remains strong. So, all factors indicate prices will
continue to rise over the coming year, and we can expect this to be reflected in supermarkets as it has been during the
course of this year. We can also expect continued media attention on this subject which will of course raise conscious
awareness of prices more than would otherwise be the case.
Will we see consumers starting to trade down to cheaper stores or products, or buy less items? Maybe a little bit more than
this year, but not to a significant extent. The year ahead looks very much like the year past. In China, shoppers will continue
to access more categories, continue to spend on FMCG at a faster rate than inflation and continue to aspire to and buy
premium brands. Trade-offs may be made in other areas of their lives, but the outlook for supermarket shopping and brand
owners who distribute their products through those channels remains bright.
Martin Hanscombe: Director Kantar Worldpanel Region Centre of Excellence
If you have any questions about this article or would like to learn more about CONSUMER REACT in China to understand shopper
response to price, please contact your main Kantar Worldpanel contact
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Shopper loyalty In China
- Why Is It so low and what can retailers and manufacturers do to Improve
It?
Home
Retail landscape in China is diverse and fragmented, yet evolving rapidly. As modern trade retailers such as Wal-Mart,
RT-Mart, CR Vanguard and many other local and international players expand their store networks across China, shoppers
have a growing number of options for their grocery products. This trend will accelerate in coming years as retailers speed up
new store openings, introduce new formats and new retail channels emerge. A key question for the consumer goods industry
is what will happen to shopper loyalty? Will Chinese shoppers be as loyal as their counterparts in the West? What can
retailers and suppliers do to improve shopper loyalty?
Shopper loyalty as measured by average household spending on grocery items at top retailers is currently lower in China
than in more mature retail markets such as the UK and the US. Most retailers in China are focused on expanding their store
networks. Attracting and retaining loyal shoppers will become the new battleground as the retail market evolves.
In almost all city tiers shoppers allocate less than a quarter of their total household spending to any one retailer. In the UK
shoppers are twice as loyal as shoppers in China, spending more than twice as much at a single retailer – or 42% compared
to an average of 19% in China. There is a significant opportunity to grow shopper loyalty in the China market.
As the retail market evolves, growth will come less and less from adding new space than from driving sales per store. We
predict the market is poised to shift from a Race for Space to a Race for Loyalty. According to the Kantar Retail Market
Evolution Model, the China retail market is entering the Concentration phase. In this phase the need to attract shoppers and
grow shopper loyalty become more important as retailers can no longer rely exclusively on new space to drive growth and
returns. This will put pressure on retailers who are currently concentrating on building and operating stores and distribution
centers, as opposed to driving shopper loyalty.
This paper shows that it is time for the industry to focus on shopper loyalty. We examine how purchase behaviour and
shopper loyalty rates differ across different city tiers and regions within China. And also discuss what factors drive consumer
loyalty and what retailers and suppliers can do to encourage repeat business in this hugely competitive market.
Development of Modern Trade & Level of Retailer Consolidation
To understand shopper loyalty in China we need to first understand how the retail market is evolving. While the China retail
market overall is moving from the Exploration to the Concentration phase, the picture is vastly different across cities and
regions. The level of differentiation can be analyzed by looking at the share of spend that modern trade accounts for and the
level of consolidation (i.e. share of spending at the top 10 retailers). The chart below shows these two measures for each city
tier and region within China:
Modern trade, which is defined as supermarkets, hypermarkets and convenience stores, represents 53% of grocery
expenditure within China’s Top 4 cities compared to 34% in China’s D cities.
In mature retail markets such as the UK the top 4 modern trade retailers account for more than 75% of total grocery
expenditure. With fewer options shoppers by default become more loyal to the key players. In the UK, shoppers spend 42%
of their total grocery spend at one retailer, which is much higher than the 19% figure we see for China.
The current level of consolidation in the China retail market is much lower but varies substantially depending on whether you
look at China’s top cities or at the lower tier cities. In the top cities the top 10 retailers represent 50% of the modern trade
spend compared to only 18% in D cities.
In reality, China at the national level is a fragmented retail market with many retailers – including global, regional and local
companies – all fighting for market share. Some are trying to build national chains; others are focused on specific provinces
or even cities. The net result is a dynamic yet fragmented retail landscape as illustrated in the market segmentation map
below.

In short, due to a low level of concentration in the retail market Chinese consumers have more choice than their counterparts
in more mature markets. Could this explain why loyalty is low compared to other markets?
The answer is no. Market evolution does not fully explain low levels of loyalty. If retail market concentration is the key driver
of loyalty we would expect to see far greater loyalty in the most concentrated cities. Yet this is not the case. This suggests
that low levels of loyalty cannot fully be explained by market concentration.
Shoppers in China generally have the same level of loyalty to modern trade retailers whether they live in an A city or a D city.
Actually in the top 4 cities, where modern trade is most consolidated, we see lower levels of shopper loyalty. This is partly
driven by the fact that consumers shop much more frequently in the top 4 cities. They also tend to shop around looking for
in-store promotions. In Shanghai, for example, shoppers will on average visit nine different modern trade banners in one
year.
The „Average‟ Chinese Shopper Does Not Exist but the “Average” Retail Store Does
If the market evolution doesn’t explain the low levels of loyalty in the China market, perhaps the answer can be found by
looking at shopper behaviour and attitudes, as well as at the practices and behaviours of some retailers and manufacturers
in China.
In many western countries it is possible to look at shopper behaviour of average consumers because of a smaller divide
between the least and most affluent households and also because there are generally only small regional variations in the
distribution of key retailers’ stores. When looking at shopper behaviour in China, it’s a more mixed picture. In an average D
city, for example, shoppers will spend 4,984 RMB in a year on their grocery products purchased from any channel compared
to 10,629 RMB in Beijing.
This difference is substantial and interestingly is driven not by the basket size (which is quite similar across all city tiers) but
by the number of shopping trips. In Beijing shoppers will visit a modern trade retailer 89 times on average per year compared
to only 30 times in D cities. This is because modern trade is less developed in D cities. But even if you look at the total
number of shopping trips across all channels, shoppers in key cities make significantly more shopping trips in a year (153
times for Beijing versus only 87 times for an average D city).
Despite this, few retailers are seeking to differentiate themselves from their competitors and most are focused on major
operational issues such as building and opening new stores, constructing distribution centers, hiring people and operating
efficiently. For most retailers in this market, winning the Race for Space has taken precedence over winning the Race for
Shopper Loyalty. The retailers in China have yet to become effective marketing companies- focused on attracting and
retaining loyal customers. This will mark a transition from property centric to shopper centric companies.
This is borne out by shopper behaviour. In Shanghai and Guangzhou the top 5 modern trade retailers have on average seen
more than half of the households in the city visit their store at least once a year. This means retailers have yet to appeal to a
specific group of shoppers and therefore improve their loyalty. Another way in which retailers differentiate themselves in
many European countries is through their Private Label range. In the UK, retailers’ own brands account for 46% of sales,
while in China this number is less than 1%. Private Label helps the retailer differentiate their offering but also gives the
consumer more choices unique to their store.
How Retailers and Suppliers Can Grow Shopper Loyalty
There are a number of actions retailers and suppliers can take to improve loyalty. Retailers must find the balance between
expanding their networks and driving customer loyalty. In order to increase loyalty retailers must turn their attention to:
� Clearly defining their market position and target customers
� Clearly defining their points of differentiation versus competitors
� Adapting the offer to reflect this, thereby creating a differentiated customer experience
� Creating customer friendly layouts and shopping environments- most retail shelves in China are organized by
manufacturer not by consumer need or occasion
� Raising standards of execution in store
� Investing in identifying and rewarding loyal shoppers
� Strengthening marketing capabilities and improving customer understanding across the organization
� Shifting the focus of the organization from property and operations to shopper loyalty
� Introducing new store formats over the longer term
For suppliers the challenge is to help retailers improve loyalty. Those suppliers that can add value to the loyalty opportunity
will likely make strong progress with their retail partners and see their brands benefit as a result. Manufacturers can create
their own points of differentiation in their relationships with retailers by:
� Supporting retailers in defining their target customers and market positioning
� Sharing relevant consumer insights
� Providing analytical support in understanding shopper loyalty
� Proposing activities that reflect the retailers’ positioning and points of difference
� Proposing shopper marketing activities that are true to the retailers’ shoppers and points of difference.
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A fresh look at D city consumers
– 4 areas of critical importance uncovered
Home
Since April 2010, Kantar Worldpanel China started to look deeper into our lower tier D city shoppers. They represent 34
million households and 1,300 cities on their own and also provide a crucial link to rural shoppers as many rural consumers
will travel to the nearby D cities to shop.
The results of our investigation were sometimes surprising as they show that the key priorities for Chinese consumers have
different meanings in these areas and some of the assumptions that marketers used to make were incorrect. This article
using data from the household panel and also some qualitative interviews we conducted with our panelists using online
questions on retailer decision and interviews on overall attitudes.
Kantar Worldpanel identified 4 main areas of critical importance for shoppers in D cities- Personal Relationships,
Convenience, Quality and Trust.
Personal Relationships
Whilst family is key to all shoppers; however, in D cities family ties are much closer than in other tiers. They are more likely to
have young children and also to have larger HH Size suggesting parents also sharing the home.
Kantar Worldpanel visited the homes of some of our panelists in a mid-income HH in Fujian Province and also a lower
income one in Shanxi Province. Kantar Worldpanel discovered that households were buying personal care products for
everyone to share. Despite the fact there were many users, D cities were buying smaller sizes in personal care than other
city tiers. This represents an opportunity for manufacturers for drive loyalty and consumption rates by increasing pack sizes
available.
Another key point about personal relationships is D cities is about how shoppers make their purchase decisions. When our
fieldwork team interviewed our panelists it was found that the majority considered recommendations from friend and family
the most important factor in deciding to purchase a new product. They also ranked ‘Attractive advertising’ as the least
important reason in choosing their retailer.
Convenience
D City retailer landscape is less developed than other tiers with limited Hypermarket presence (though there are local chains
following Hypermarket format in some of the more affluent cities) and reliance on grocery stores. D city shoppers are used to
smaller formats and therefore place less value on long opening hours and having huge product ranges and more on a high
level of personal service. This means that retailers should consider how they can use smaller formats to penetrate these
areas and ensure staff are friendly and attentive.
Quality
Premium products generally have lower penetration and shares in lower tier cities. Affordability is not the only reason for this
as many households in D cities have high disposable incomes. One big issue stopping D city shoppers buying more
premium products within their city is accessibility. They are willing to travel to larger cities to buy special products- cosmetics
and electronics were particularly popular. Our panelists said they could get better prices and quality assurance in the more
developed areas.
One expectation is that D cities shoppers would be using the internet to source goods as this channel is very popular in C
cities, yet the penetration reveals there was a drop when you got to D Cities. KWP found from asking the panelists that they
went online to look at products, but they did no follow through and purchase. Some reasons suggested were that going
online is less convenient as delivery times are slower, but the main barrier was the fear that the quality would not be good.
Panelists made comments such as ‘Need to find trust-worthy shop’ and ‘No quality guarantee’ as being key reasons for not
purchasing online. This demonstrates the potential retailer own shops could play if they can prove their credentials and
inspire trust.
Trust
The concern about fake products is more pressing for D city shoppers as with more independent and small retailer chains it
is very hard for shoppers to be clear on if a branded product is real or not. To encourage shoppers to pay extra for branded
good manufacturers and retailers need to work hard to provide reassurance that their product is real. Given word of mouth is
a key factor in making a purchasing decision a poor product experience from buying a fake could impact family friends or
families’ decisions in future.
Overall when thinking about how to target shoppers in D cities, marketers need to fully understand how they can relate the
following key decision making factor to the local consumers.
Personal relationship: family being Important in influencing decisions
Convenience: smaller shopping with essential products formats and good service
Trust: consumers will not buy your products unless they can trust they are real
Quality: there is a demand for premium goods and the internet offers a great opportunity to break the accessibility barrier,
but only if you build confidence in quality offered.
Currently 50% of China’s population is in the rural areas. In the next 20 years this will decline to 30%. Many will move into D
cities and therefore it is essential to get in early to set up your product reputation and distribution to benefit from these major
shifts in China’s population.
If you have any further questions or are interested in seeing any of the photos we took from trips to Fujian and Shanxi D
cities then please contact your client service team.
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