U.S. Brands Expected to Suffer in Short Term, Consultant Says

American consumer brands may take a hit in China amid the countries’ ongoing trade dispute, but the impact will likely be short-lived, a partner at consultancy Bain & Co said Wednesday.

Bruno Lannes, partner in Bain’s Greater China consumer products practice, noted a similar effect on South Korean companies last year, after Beijing strongly opposed Seoul hosting a U.S. missile defense system. Korean retail giant Lotte Group, for instance, suffered increasingly negative sentiment among Chinese consumers, and sold some of its China stores earlier this year. But tensions have eased in recent months.

Meanwhile, Chinese are continuing to embrace domestic brands — with consumer sales up 7.7% in 2017. By contrast, foreign brands saw a mere 0.4% increase during the same period, according to the latest Chinese shopper report released Wednesday by Bain and market researcher Kantar Worldpanel.

Similar gaps have existed since the report debuted in 2012. Foreign brands were ahead of their Chinese rivals in only four of 26 categories surveyed in 2017: toothbrushes, baby formula, clothing softener and biscuits.

“There are multiple reasons for this, but a major one is speed and an agile operating model, which is so critical in this fast-changing market,” said Lannes, who co-authored the report. Chinese consumer companies are more innovative and have a more comprehensive understanding of the local market, he said.

The report suggested that foreign companies improve their digital capabilities to cater to the younger generation, which shops online.

With a growing middle class and rising incomes, the pace of China’s consumer-market expansion has quickened. Total sales increased 4.3% last year, up from 3.6% a year before, the report said, the first increase in the growth rate since 2012.

E-commerce took up 10% of total sales in 2017, double the rate two years before. And the momentum is shifting from bigger to smaller cities. E-commerce penetration rates grew by around 20% last year in small cities and counties, but were only by up to 10% in first- and second-tier cities.

Against this backdrop, hypermarkets have been losing customers. Families in China shopped at a hypermarket 21.3 times on average last year, down by 4.5% from the year before.

This may explain why retail giants, which have traditionally operated hypermarkets, are trying out smaller stores. In May, France’s Carrefour SA launched its first midsize Le Marche store in Shanghai. A month before, Walmart Inc. launched a convenience store in Shenzhen. Chinese retailer Suning Group, which had 23 smaller stores at the end of 2017, said it plans to open 1,500 new locations this year. It acquired Spanish retailer Dia’s China stores to aid the expansion.

Contact reporter Coco Feng (renkefeng@caixin.com)