Over the next decade, we believe that Chinese brands will continue to extend market share by leveraging local tastes and presence. We believe this will be beneficial for our strategy of acquiring and developing mass-market premium brands that are familiar to, and resonate with, increasingly sophisticated Chinese consumers who are willing to pay more for better quality.
Domestic brands continue to gain ground versus their multinational peers. According to a recent Bain report, local brands in the FMCG sector contributed 87% of the market growth between 2013 and 2014, gaining in more than 70% of the categories tracked. The largest gains were in food and beverage sectors, such as with juice and biscuits, while foreign brands gained in chocolate, chewing gum and infant formula. Overall, domestic products are winning in categories familiar to local consumers, while foreign brands are gaining in niches that are newer to local consumption.
Market share gains for domestic brands grew across all regions, while foreign brands lost market share even in traditional strongholds like tier-1 cities. Local players are benefiting from a better ability to localize products to specific consumer requirements, and quickly achieve economies of scale. Further, there is “advantage in backwardness”, as these brands leverage globalization to their advantage, by leapfrogging and integrating the latest technologies. Finally, many homegrown champions find innovative ways to benefit from low-cost labor pools and overcome shortages of skilled talent.
This analysis supports our confidence in transforming domestic leaders in niche categories. Well positioned businesses are able to leverage their stronger regional presence to tackle new channels for distribution and grow margins through innovation. For example, Chinese skin care brand Pechoin expanded by focusing on lower-tier cities and then penetrating larger markets with upgraded products and a premium brand image. Within the Lunar portfolio, our expansion plans similarly focus on extending a strong regional presence to new channels. We have recently entered into an agreement to acquire Project Nuts, where we will take snack food brands with a strong Eastern China presence (which AT Kearney estimates is a market of more than RMB 15 billion in annual sales) to neighboring regions and online e-commerce channels. This is similar to what we have begun doing with other regional snack food brands, like Yonghong, and we will benefit from lessons learned in other sectors, such as developing Yeehoo into a large nationwide brand and a leader across e-commerce channels.
We believe the opportunity to find more businesses like Nuts, Yonghong and Joysun, strengthen management, implement new strategies to grow revenues and improves margins is particularly attractive given where we are in China’s economic development. As the rate of Chinese economic growth slows, new skillsets to build market share and strengthen margins will be especially necessary. We look forward to reporting back on how we leverage this opportunity for the benefit of our investors.
Lunar | September 30, 2015