International brands in China are losing market share to domestic companies in everyday items ranging from fruit juice and make-up to toothbrushes, according to a large-scale survey released on Tuesday, as multinationals struggle to adapt to changing tastes in the world's largest consumer market.
White-collar Chinese consumers with rising incomes are switching to pricier premium brands in categories of fast moving consumer goods from bottled water to shampoo. The trend has even reached toilet tissue, where there has been a switch from two- to three-ply.
But domestic companies have been quicker to capture the premium market, with brands owned by multinationals such as Nestlé, Procter & Gamble and Unilever losing market share in 18 of 26 FMCG categories last year, and gaining in just four, according to a survey of 40,000 households by Bain and Kantar Worldpanel.
While China's urban FMCG market grew 3 per cent in 2016 to about $190bn, Chinese companies expanded their sales more than 8 per cent while foreign brands grew just 1.5 per cent. "Multinational brands are moving backwards while local brands are jumping on the premiumisation wagon quite well," said Jason Yu, general manager of Kantar Worldpanel China.
The shift to domestic brands has been most pronounced in categories traditionally dominated by foreign companies, such as cosmetics. The tables have been turned by little-known Chinese groups such as Seeyoung, which launched a silicone-free shampoo ahead of overseas rivals.
In the juice market, local producers such as Huiyuan and Nongfu have scored hits with expensive not-from-concentrate juices packaged as health drinks, which have resonated with growing middle-class interest in fitness and left overseas brands such as PepsiCo's Tropicana behind.
Domestic groups also have benefited from a shift to online purchasing, which drove three-quarters of value growth last year. "Local brands are moving fast in these areas and embrace ecommerce much earlier than the multinationals," Mr Yu said.
Bruno Lannes, a partner at Bain based in Shanghai, said: "Multinationals have been slow to adapt to the speed at which the market is changing."
Chinese consumer companies, generally family-run, are more focused on their home market. But they can be "as innovative or more innovative than western companies", while multinationals are "on the verge of becoming or have become bureaucracies", Mr Lannes added.
Shaun Rein, of Shanghai-based consultancy China Market Research Group, said Nestlé fell behind in China's bottled water market by positioning its offering more lower-end than that of local rivals, while Unilever's flagship ice-cream was "too cheap and too small".
"They wanted to be a mid-level product for Chinese, but because of quality people were willing to pay a premium for foreign brands," he said.
The consumer divisions of multinationals can be hampered by "silos" with key decisions made outside China, he added. "The power tends to be Europe or the US."
It was not all gloomy news for multinationals, according to Kantar and Bain. They gained market share in beer, where Chinese brands have struggled to shed their low-price image. Some individual high-end brands have performed well such as the cosmetics of Armani and YSL, while Philips has seen sales of its electric toothbrushes grow as "premiumisation" hits the oral care sector.
Multinational companies are moving to adapt. "Chinese consumers are changing so rapidly, and sometimes they lose loyalty to brands," said John Bell, vice-president of external innovation at Johnson & Johnson Consumer. "So what we are trying to do more and more is test and learn. For us it's about launching new innovations."