Part 7: Fast Moving Consumer Goods (FMCG)
The following is part seven of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4, part 5 and part 6). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's FMCG industry.
The Chinese FMCG industry has grown dramatically over the past decade in step with rapidly increasing disposable incomes and improving economic conditions. Not only are China's 250 million strong middle class buying more products from companies like Estee Lauder (NYSE:EL) and Johnson & Johnson (NYSE:JNJ), but China's 800 million new consumer, formerly peasants, are now just becoming part of the global ecosystem and buying products from P&G (NYSE:PG) and Clorox (NYSE:CLX). Chinese FMCG companies are increasingly looking to go abroad in search of profit and growth opportunities. A full 100% of large industry leaders interviewed by CMR have already started moving overseas, and nearly half of smaller industry leaders plan to start moving overseas within the next five years.
Of those companies who have already started to move overseas, the majority are doing so in response to large demand for their products, particularly from emerging markets. Given increasing competition at home from both domestic and international rivals, these markets are an attractive place for companies to grow, increase competitiveness and profits.
Respondents also hope establishing overseas presence will help them build brand awareness and improve brand image by adding cache to their brand, allowing them to market themselves as a true international brand, both abroad and at home. "We need to enhance our brand's image and build up brand loyalty among consumers, which is a key for FMCG company to grow big and stay alive," explained one large industry leader.
The majority of respondents have started their move overseas by targeting emerging markets, where regulations and quality standards for imported goods are more lenient and consumers seek cheaper but "good enough" products. Respondents can easily undersell the competition in emerging markets and win market share, helping to generate revenues and brand awareness. Neighboring areas such as Russia and Mongolia, and Southeast Asian countries are particularly attractive due to the comparatively low cost of transport and the desire for consumers to buy on price rather than brand.
Still, respondents consider establishing brand image and winning market share in developed markets their ultimate goal. Most respondents have already begun to target North American, European, and Japanese markets; the remainder of those respondents who have started to move abroad plan to target these markets within the next five years.
Most respondents are relying on pure export strategy to grow their presence overseas, of branded products or a combination of branded and OEM products. Two respondents have also set up R&D centers abroad to build the technological capabilities and consumer insights that will allow them to better serve local markets and build a profitable brand image.
Respondents plan to enter developed markets via export and establishment of R&D centers, production facilities, partnerships and/ or joint ventures for product marketing and distribution, and local insight. As one respondent company stated, "establishing a joint venture with the right contracted partner would be extremely helpful for us because they will provide the necessary network and expertise for local success."
Respondents feel passing international rules and regulations will pose the biggest challenge in moving overseas, and into developed markets in particular. For instance, exported cosmetics must be approved by the FDA if meant for sale in the U.S. market. Some interviewees have also mentioned that the fees for obtaining product certifications, especially in the U.S. and Europe, are high enough to pose a barrier to entry in and of themselves. As one respondent explained, "if we want to enter American or European market, we need to pay several hundred thousand dollars or Euros to get the right certification. The issue is the money, not the technology." Respondents also reported understanding local culture and business environment, as well as finding the right talent to lead their companies overseas to be considerable challenges.
Many respondents complained about the rising costs of raw materials at home, and RMB appreciation, factors that are motivating some companies to develop production facilities abroad.
The other critical challenge for many Chinese FMCG companies is creating a brand image that is not just about price. Many companies compete in China on price, essentially commoditizing themselves, or by positioning themselves as the best Chinese brand so patriotic Chinese should consumer their products. While a low-pricing strategy might trigger short-term sales, it is not a long-term strategy in markets where consumers are gettting wealthier and will not create brand loyalty. Clearly, the patriotic card won't work outside of China.
Chinese FMCG companies have already made significant progress in establishing overseas presence. Going forward, they should continue to establish partnerships and/ or joint ventures in their target markets in order to better understand local conditions and overcome the challenges of cultural differences, new business environment, and how to pass international regulations and laws. Partnering with third party experts such as law firms and marketing agencies can also help provide necessary insight into how best to operate in the target market and reach its consumers.
Most importantly, they need to learn how to compete on more than just price and learn how to connect emotionally with Western consumers. This starts with analying their brand positioning at home and creating a global brand image.
The next several sections of this report will be published on Seeking Alpha by product category. For more information about this report and accompanying charts and graphs, please contact CMR directly at cmrconsulting.com.cn/services/casestudies/strategycase.html
CMR Senior Analyst Ben Cavender, Analysts Natalie Zhu, Meredith Sun, and Charlotte MacAusland, and Summer Intern Christie Sze Contributed to this report.