Chasing China’s Consumers

Stephen DeAngelis

July 30, 2012

“I keep stumbling across unswerving predictions that the future belongs to China,” writes Philip Stephens. [“The great middle class power grab,” Financial Times, 26 April 2012] Stephens isn’t referring to China’s growing political clout or its military might. He’s talking about China’s middle class consumers who, along with other emerging global middle class consumers, are starting to wield “transformative power.” Stephens reports, “Within 20 years or so a world that is now predominantly poor will be mostly middle class.” What will be transformative about the emerging middle class, Stephens claims, is that “the way most new global actors behave will be steered by an unprecedented redistribution of power from rulers to ruled.” People with a little extra money in their pockets and a little extra time on their hands inevitably chafe at being ruled by autocrats. They want the freedom to spend their extra cash on both products and experiences free of most government interference.

Stephens admits that “the precise definition” of what constitutes a member of the middle class is illusive. “The ISS measure of what constitutes middle class,” he writes, “counts the number of people with between $10 and $100 a day in disposable income. Others set the bar higher, with a starting point of daily expenditure of $15 or so. By western standards even that figure is very low – but then think of how many people survive on $1 a day. The important thing is that even the most conservative assumptions point to an irrevocable redistribution of economic power.” The reason that the global middle class will become so powerful is because their numbers will be so large. Stephens explains:

“The raw numbers are set out in a compelling report – Global Trends 2030 – … published by the Paris-based European Union Institute for Security Studies. On current trends, it says, the ranks of the global middle class will swell from about 2bn today to 3.2bn by 2020 and 4.9bn by 2030 – the last of those numbers out of a total world population of just above 8bn. Put another way, for the first time in human history more people will be middle class than poor.”

A good number of those people, of course, are going to be living in China. Stephens reports, “China already has upwards of 160m middle class consumers, a number second only to the US. But they represent only about 12 per cent of the Chinese population. By 2030, the ISS projects, the proportion may be 74 per cent.” As a result, it is not surprise that manufacturers and retailers are desirous of tapping that population as a source of growth. Laurie Burkitt and Bob Davis insist, however, that “western companies have misjudged Chinese shoppers’ priorities and clumsily tried to export U.S.-style stores.” [“Chasing China’s Shoppers,” Wall Street Journal, 14 June 2012] Burkitt and Davis agree with Stephens that “the potential buying power of China’s middle class is vast.” They also note that China’s leaders are as interested in getting the emerging class to become consumers as western companies. They explain:

“With export markets weakening in Europe and the U.S., economists say, Beijing needs to lift spending by its own middle class or risk that growth will slow sharply. Steady middle-class growth also could help China’s trading partners, bolstering a market for computers, cars and trendy clothing, as well as for commodities such as copper, oil and cotton. China already is the world’s largest market for some middle-class emblems, including cars, personal computers and smartphones. And multinational companies show no signs of taking their feet off the gas. Whirlpool Corp. plans to boost distribution of fridges, washing machines and other appliances to China’s inland cities. Coca-Cola Co. plans to invest $4 billion over the next three years.”

What makes chasing China’s consumers so difficult, say Burkitt and Davis, is that “Chinese consumers are different.” They explain:

“For one thing, they are poorer. Median household income in Chinese cities was about $13,400 in 2010, according to Moody’s Analytics, about a quarter the U.S. figure. The Chinese middle class also is at a different stage of development. Many Chinese want appliances and basic TV sets to fill their first apartments. Chinese on average also save more than 30% of household income, vastly more than Americans, and rarely use credit cards. And many Chinese shoppers expect to haggle over prices—a foreign concept for the U.S. company.”

Jason Chow indicates that another reason that Chinese consumers are different is that they “are brand-obsessed when they do their shopping, though not in the way some might expect.” [“China’s Promiscuous Consumers,” Wall Street Journal, 28 June 2012] He explains:

“According to a new study by Bain & Company and Kantar Worldpanel, Chinese consumers are adventurous shoppers who are constantly trying out new brands and are rarely loyal to one. The findings are likely to disappoint the marketing departments at major consumer product companies, the researchers say. ‘There’s always been an expectation that the Chinese will become more loyal as the market becomes more mature and we’re saying “no” to that,’ said Bruno Lannes, a Shanghai-based partner for Bain and the lead writer of the report. ‘This may be sobering news for brand managers. The reality is that consumers in China, like in other countries, don’t think of brands when they shop.’ The researchers studied the shopping habits of 40,000 Chinese households by arming them with scanners to track their purchases in real time. Twenty-six types of consumer products were tracked in beverage, packaged food, personal care and home care categories. Chinese shoppers are most often engaged in what Mr. Lannes calls ‘repertoire behavior,’ which means that they consider and buy several brands when shopping rather than sticking to one favorite.”

As Chow notes, that has to be disconcerting for marketers who believe that advertising and promotions can build brand loyalty. Chow continues:

“The more they shop in a category, the study found, the more brands they’ll try. The 20% of Chinese shoppers who shopped the most for biscuits, for example, bought 10 different brands of treats, while the average shopper tried six. ‘Chinese do love brands. It’s a reassurance for them. But even though they love them, in most categories, it doesn’t mean they love one in particular.'”

It’s not all bad news for marketers Chow reports. He notes that “certain products do inspire loyalty, including beer, soft drinks and chewing gum.” Other brands that appear to garner consumer loyalty include “diapers and infant formula.” He believes that loyalty to particular brands of infant formula may have a lot to do with “recent scandals of tainted products.” Chow concludes:

“With such little brand loyalty among most categories, what are marketing executives supposed to do? Mr. Lannes advises to scrap the idea of creating loyal customers and focus more on attracting shoppers in stores so they take notice of a particular brand. ‘There was an expectation that loyalty would increase,’ he said. ‘But we don’t expect China to really evolve this way.'”

Jeff Walters, Amitabh Mall, and Vaishali Rastogi, analysts with the Boston Consulting Group, agree with the Bain & Company and Kantar Worldpanel analysts that western “companies cannot treat these markets as fledgling versions of the developed economies that have been their mainstay. They must rethink how they ‘go to market’ in these places, which frequently do not have a state-of-the-art marketing, distribution, or retailing infrastructure.” [“Going to Market in Developing Economies: How to Improve In-Store Execution,” bcg.perspectives, 28 March 2012] They continue:

“Retailing in developing markets is highly fragmented, and going to market requires a different set of strengths and commercial relationships than in developed markets. Consumers have vastly different levels of disposable income and extremely different needs and wants. They are accustomed to a shopping experience that is unlike what consumers in more developed markets are used to. At the same time, consumers in developing markets are less jaded and more trusting of pitches, promotions, and displays inside stores. Many of the tried-and-true principles of in-store execution are universal. No matter where they live or how much they earn, consumers respond when they are offered the right products, at the right price, and in the right retail environment. But achieving that alluring mix of product, price, and environment is especially challenging in developing markets. Companies that can adapt to the specific challenges of in-store execution in these markets stand to win big.”

Yuval Atsmon and Max Magni note that what is true for emerging markets in general is certain true in China “because of the vast economic and demographic differences across the country.” [“Meet the Chinese consumer of 2020,” McKinsey Quarterly, March 2012] “These differences,” they write, “are set to become more marked, with significant implications for companies that fail to grasp them.” They continue:

“While income is expected to rise across China, some cities and regions are already significantly wealthier than others. Understanding these variations in the rate of development is important because they will affect which categories of goods and services grow most rapidly, and where. Today, about 85 percent of mainstream consumers live in the 100 wealthiest cities; in the next 300 wealthiest, only 10 percent of consumers are mainstream, but that percentage will rise to nearly 30 percent by 2020. At that point, many families in these cities will be able to afford a range of goods and services (such as flat-screen televisions and overseas travel) that are now largely confined to the wealthiest urban areas. … Some of them (Foshan in Guangdong, for example) are small in terms of absolute GDP or population size. But it’s worth noting that the affluence of their populations could make them as attractive to companies as leading tier-one cities, such as Shanghai and Shenzhen.”

If you want to know which Chinese cities your company should be concentrating on, you might read a report by published by Jones Lang LaSalle, a global real estate services firm, that highlights 50 Chinese cities worth watching over the next decade. [“50 Chinese Cities to Watch Over Next Decade in Such Sectors as Retail and Logistics,” SupplyChainBrain, 23 March 2012] Atsmon and Magni conclude:

“No doubt China and its consumers’ behavior will take some unexpected turns over the next decade. Nonetheless, our research reveals the clear direction of travel. To be sure of taking part in that journey, companies in the market should start making the acquaintance of China’s 2020 consumers today.”

Although the world remains tightly in the grasp of an ongoing fiscal crisis, the future isn’t necessarily bleak. If the global middle class can continue to grow, it will spark economic growth in both emerging and developed markets. Since the Chinese middle class is the most advanced, learning how to capture its discretionary spending is going to be worth the effort.