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China 2015: BRAND BUILDING BEST PRACTICES | Premiumization

Strong concepts will drive growth as categories mature

Premiumization. For manufacturers it’s frequently the holy grail of brand growth – retain shoppers or attract new shoppers by offering a more expensive product. Done well, premium products can satisfy consumer desire while enhancing brand image and the bottom line. 



William Marks

Account Director 

Kantar Worldpanel 

william.marks@ctrchina.cn 

In China, premiumization has been a core growth engine across certain categories, as illustrated by the rapid emergence of automobile, fashion and technology luxury brands. Last year, nearly half of FMCG growth came from price increases at a rate far exceeding inflation. However, with the Chinese economy cooling and FMCG growth slowing, two questions arise: will the classical global model of trading up still apply? And can it be applied in more categories?

Within FMCG, the most visible exponents of premiumization frequently have been multinational brands like Este?e Lauder and Lanco?me, spending lavishly on media and celebrity representatives to extoll skincare products and capitalize on Chinese women’s desire for beauty. The rapid development of business-to-consumer ecommerce through Tmall has allowed these brands to broaden their footprint, reaching consumers in more remote cities and towns, while retaining control of their brands visual merchandising. The number of online shoppers is growing twice as fast in lower tier cities compared with growth in the urban core markets of these prestige brands.

However, beauty experts who interact with consumers in department stores and beauty counters still have a strong role to play in educating consumers about the broad range of products offered by high-end brands. Brands will need to offer digital equivalents of these experts, online consultants who can support women living outside of the catchment area of traditional brick and mortar stores.

CHINESE BRANDS CHALLENGE MULTINATIONALS

While developments in ecommerce present opportunities for traditional premium concepts, the Chinese consumers’ identification of premium is changing – challenging multinationals ownership of this concept. Xiaomi has become the most popular mobile handset by offering an affordable luxury concept – premiumization with Chinese characteristics. Consumers have become savvier, demanding quality products with superior functional properties but at a price point adjusted to the new more modest economic outlook. In FMCG we also see the first Chinese manufacturers responding to this new normal. Vinda, a facial tissue brand, delivered the combination of product and communications quality, convincing eight million new consumers to purchase the brand last year by offering a more affordable price point than premium multinational competitors.

Generational shifts within China point to continued opportunities. Young women from the 90s generation are already 30 percent more likely to purchase prestige face care brands like Laneige, in comparison to their older sisters of equivalent income. As members of this generation age, taking along with them their demand for premium brands, we will see this sector continue to boom, requiring manufacturers to shift brand portfolio balance. Catering to this younger generation requires a different set of brands. The plethora of niche brands available online provides a very different competitive set and enables women of the 90s generation to better express their individuality. Manufacturers may need to consider the launch of ecommerce-only brands to allow these new consumers to find the product that matches their personality.

EVEN COMMODITIES CAN BE PREMIUM

Strategically, an ability to premiumize offers new opportunities to marketers. When markets mature and competitors consolidate their share, offering an innovative new premium concept can be an effective tool for entry. In China we see Hengda differentiating by introducing premium rice, water and cooking oil, products usually considered commodities. Hengda has used Korean star Kim Soo Hyun to push premium water into new consumption occasions, moving beyond typical on-the-go drinking into more Chinese-suited cooking and tea brewing, with its healthy beauty concept.

The emergence of locally tailored premium products in these previously low margin categories marks a milestone in the evolution of China’s FMCG market.

Across all categories, from high involvement products like facial care to staples like water, premium products are emerging and offer a continued route for brand growth over the coming five years. As categories continue to mature, and growth potential from expanding the size of the market basket diminishes, marketers will need to innovate and invest in building strong concepts and brands to drive growth.