Why Chinese Dairy Brands are Running Circles Around Foreign Brands
Today is a big day for China Skinny. It is the first time that we have made our internal tools available for companies to track and monitor their categories. Over the past decade we've worked with, spoken to and surveyed thousands of brands exporting to China, and the most common challenge we hear is getting reliable and actionable information about the market, and keeping up with the constant change. The limited consumer and market-knowledge held by most foreign brands is also confirmed every time we do a category audit. With the massive changes in the market and consumer preferences since Covid, we think that there has never been a more important time for brands to be in sync with the China market.
The first of our tools off the rank is our Dairy Tracker. Every time we do a dairy-related project, the results surprise us. The majority of Chinese consumers still have a preference for foreign brands as they believe they are safer and healthier than domestic alternatives, yet most foreign brands don't capitalise on this advantage due to poor marketing decisions.
Dairy has been one of the fastest growing FMCG categories since Covid, endorsed by state media and renowned doctors as a way to boost immune systems. This official advocacy has seen China’s dairy giant Yili report a 23% increase in revenue and Mengniu 19% in the June quarter. Unfortunately, few foreign brands are likely to have also ridden the increase in demand. Data from our Dairy Tracker indicates that since the outbreak, foreign brands' share of dairy sales on Tmall has dropped from 35% in December to an average of 23% between January to August. This trend is not new, our analysis in 2016 found that foreign brands accounted for 52% of sales on Tmall.
One of the biggest eye-openers in our 2016 study was that domestic brands commanded a premium of 38% per litre over imported brands. This has improved, with Chinese dairy now just 7% more expensive, but it is unbelieveable that local dairy is higher at all given the perceived advantage of imported milk.
Many brands point to rising nationalism as the reason for their eroding market share in China. Whilst this does have an impact on brand preference, we believe that getting the basics right influences sales notably more, particularly in a category like dairy where safety and health almost always trumps patriotism. Domestic brand's increasing share and premium over foreign brands is influenced by Chinese brands focusing on smaller formats, targeted segmenting and more resonant marketing claims, as the Dairy Tracker data illustrates:
- Foreign brands sell very few products in the popular 250ml format, contributing to just 12% of sales, whereas 250ml products account for 63% of overall sales on Tmall
- Foreign brands continue to pin their hopes on 1 litre packages for dairy, accounting for 100% of the top selling brands in this format, yet the format makes up just 6% of sales overall on Tmall
- Domestic brands have been more likely to adopt timely claims such as ‘healthy’ and ‘nutritious’ which commanded a 38% and 34% premium respectively.
Arguably the most concerning tactics from foreign dairy brands is using discounting as their go-to tactic to generate sales. Between January to August this year, their average discount on Tmall was 48%, versus 16% for domestic brands. The lower level of discounting by Chinese brands and their subsequent growth in share would confirm that discounting does not work as a long-term growth strategy in China.
Some of this discounting is likely to be the result of foreign brands having less control over their sales than domestic competitors. Just 18% of foreign brands' revenue goes through their flagship store, versus 32% for Chinese brands. With the pandemic making travel to China challenging at present, it's never been more important to have a greater view into the market to better-direct staff, agents, distributors and partners on the ground.
The challenges for the dairy category in China are not unique. China Skinny delivers studies for almost every consumer category, and we see similar challenges for foreign brands in most of these products. We are currently working on launching trackers for other categories, so please let us know if a Tracker for your products may be of interest. For dairy brands, learn more about the Dairy Tracker here.
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