SHANGHAI/HONG KONG With green-tea flavored 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 (KO.N), Procter & Gamble Co (PG.N) and Colgate-Palmolive Co (CL.N) are being forced to adapt as the challenge posed by local firms intensifies in a slowing economy.
Last year, China's 1.15 billion yuan ($185.31 million) 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 (000538.SZ), 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 (0322.HK), which bottles and distributes PepsiCo Inc (PEP.N) 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 (0787.HK) 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 (PEP.N) fell 1.8 percentage points to 3.9 percent, according to Euromonitor data.
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 center in Shanghai helped it develop products geared to the local market.
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 (MJN.N), Nestle SA NESN.VX, Danone SA (DANO.PA) and Abbott Laboratories (ABT.N) 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 (1112.HK) and Beingmate Baby & Child Food Co Ltd (002570.SZ) 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 (4452.T).
"The potential challenge from Chinese domestic manufacturers has grown remarkably," he said.
(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)