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

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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 UNSUBSCRIBE TERMS AND CONDITIONS/ABOUT US ©2011.KANTAR WORLDPANEL
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Spotlight on China July - August 2011 15/08 - Kantar Worldpanel

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