(Corrects figures in paragraph 3)
By Adam Jourdan and Clare Baldwin
SHANGHAI/HONG KONG, July 29 With green-tea
flavoured toothpaste and pickled plum juice, an army of Chinese
retailers is tapping local tastes to whittle away market share
from global rivals that are banking their future growth on the
world's second-largest consumer market.
Senior executives at companies such as The Coca-Cola Co
, Procter & Gamble Co and Colgate-Palmolive Co
are being forced to adapt as the challenge posed by local
firms intensifies in a slowing economy.
Last year, China's 1.15 trillion yuan ($185.31 billion)
consumer goods market grew at 7.4 percent annually, half the
rate of three years ago, according to a report this month from
Bain & Company and Kantar World Panel.
In this tougher market, both local and foreign brands are
targeting the same customers, and increasingly, the domestic
firms are winning: nearly two-thirds of foreign brands surveyed
lost market share in China last year, according to the report.
"The good domestic brands are closing the gap really quickly
and are able to play off the idea that they know how to develop
something that a Chinese person is going to want," said Ben
Cavender, a principal at China Market Research Group.
Understanding the needs of Chinese consumers has given local
companies an edge. Privately owned Jiaduobao Group (JDB) makes
canned herbal tea which it says can put out internal "fires",
playing on a concept in traditional Chinese medicine. The firm
also sponsors a popular TV talent show, "The China Voice".
"Our campaign around 'fearing internal fire' has helped JDB
herbal tea become the highest selling canned drink in China...,"
said Wang Yuegui, a senior executive at the firm.
JDB accounted for 6.1 percent of the soft drinks market in
2013 by value, up from 4.2 in 2009, according to data from
consumer consultancy Euromonitor. Coca-Cola had 13.1 percent,
while Pepsi had 3.9 percent.
GREEN TEA TOOTHPASTE
With a population of 1.2 billion and a rapidly expanding
middle class, China is the largest consumer goods market after
the United States and even with a slowing economy, remains key
to the future of global brands.
China's economy is expected to grow at its slowest pace in
24 years this year, but that's still 7.4 percent. The U.S.
economy, by comparison, is expected to grow at just 1.7 percent.
Many of the Chinese firms taking on the international
conglomerates are little-known abroad, but their local know-how
is helping them broaden their appeal at home.
Hawley & Hazel, a joint venture owned by Colgate-Palmolive
and its Hong Kong-based founders, makes Darlie toothpaste which
leads the domestic market according to Kantar and Bain, playing
to Chinese tastes with green tea and jasmine flavours.
Another popular toothpaste brand is made by Yunnan Baiyao
Group Co Ltd, which uses its history as one of the
biggest and oldest traditional Chinese medicine makers in the
country as a selling point.
Taiwan-based drinks maker Tingyi Cayman Islands Holding Corp
, which bottles and distributes PepsiCo Inc
products in China, also says it makes a point of developing
traditional Chinese flavours such as snow pear and pickled plum.
"There are a lot of things that Chinese prefer localized,"
said Bruce Rockowitz, chief executive of Global Brands Group
and former CEO of global sourcing firm Li & Fung.
"Foreign brands haven't adapted well enough."
In a bid to fend off competition, market leader Coca-Cola
launched small-sized products, which helped boost its China
sales. It also offered shoppers discounts, like rival PepsiCo.
Coca-Cola, however, saw its market share drop more than 3
percentage points to 13.1 percent last year, while PepsiCo Inc
fell 1.8 percentage points to 3.9 percent, according to
Coca-Cola International president Ahmet Bozer said he was
happy with the company's 9 percent sales volume growth in China
during the second quarter.
"From a competitive standpoint, we are quite pleased," he
said on a conference call with reporters.
Pepsi said in an email to Reuters that its China revenue
grew by low double-digits in the second quarter. It also said
its relationship with Tingyi and a research and development
centre in Shanghai helped it develop products geared to the
Even traditional strongholds for foreign brands are under
attack in China, including the market for infant milk formula.
That market is one of largest and fastest growing, expected to
be worth $25 billion by 2017, according to Euromonitor data.
Global companies including Mead Johnson Nutrition Co
, Nestle SA, Danone SA and Abbott
Laboratories have long dominated the premium formula
segment but they have increased tie-ups with Chinese partners
and boosted domestic supply chains to protect their position.
Chinese milk powder firms including Biostime International
Holdings and Beingmate Baby & Child Food Co Ltd
increased their market share last year, helped by a
food scare that hit foreign brands as well as government drives
to consolidate the sector.
In diapers, another area traditionally dominated by foreign
brands, local firms are becoming more credible rivals, said a
spokesman for Japanese diaper maker Kao.
"The potential challenge from Chinese domestic manufacturers
has grown remarkably," he said.
($1 = 6.2033 Chinese yuan)
(Additional reporting by Chang-Ran Kim and Ayai Tomisawa in
TOKYO, Anjali Athavaley in NEW YORK and James Zhang in HONG
KONG; Editing by Miral Fahmy)