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From “Made-in-China” to “Sold-in-China” – The changing face of Chinese consumers

From “Made-in-China” to “Sold-in-China” – The changing face of Chinese consumers

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Maggie Yang is a young editor working at a Chinese state-owned media company in Shanghai. After a holiday in Europe last year, she fell in love with shopping in Europe. “It is so cheap to shop in Europe (compared to the products from the same brands and quality available in China)… Luckily there are so many shopping Apps in China allowing us to buy products directly from European shops, or to get products from European origin.” Maggie says.

This 27 years old office worker, is now addicted to shopping online from foreign, cross-border e-Commerce, shops. “Not to mention goods like cosmetics and handbags, I even try to buy everything I use on a daily basis through these cross-border e-Commerce Apps, from hair shampoo to vitamin pills, even toothpaste. “ Maggie says. “Oh, look here, my facial tissues are from Japan, bought at Xiaohongshu[1].”

If you are still debating whether “made-in-China” is in good quality or not, you are definitely old-fashioned. Nowadays it is more fashionable to talk about “sold-in-China”.

Designing goods in Europe or North America, having it produced in China or somewhere else in Asia and then shipping it back for distribution to Europe and other parts of the world has become a well-known business model used by many of the top international brands.

There are however some smart fish sensing the changing current and changing their course. The most successful brand in this case is Coach, America’s biggest homegrown luxury accessories brand, positioned as the US equivalent to LVMH’s Louis Vuitton or Hermes. Coach succeeded in transforming China from one of their largest manufacturing source countries into one of their largest target markets, with sales in China growing by 9% in 2015 as Coach meets the desire for Western designer brands. This can be attributed to a notable phenomenon in China: China’s consumer upgrade.

A lot has been written about China’s consumer upgrade, but why is it so important and what does it mean in terms of business opportunities?

China’s Consumer upgrade

In contrast to the consumer upgrade in Western countries in North America and Europe over the past number of decades, the Chinese consumer upgrade is much more visible[1]. Due to China’s rapid economic growth and a population of over 1 billion, the upgrade has been happening much faster.

Chinese consumers are upgrading their lifestyles through travel, fashion, dining and entertainment, household products etc. A good example of this: Instead of paying 5 renminbi (¥5) for coffee at a local shop, consumers looking to upgrade their lifestyle would be more than willing to pay ¥27 (about $3.90 USD) at Starbucks. According to Esther Lau[2], a research analyst with market research firm Mintel, price is seen as a measure of quality. “The more expensive the better. There is still this concept in China, and Starbucks and Costa realize this,” she adds. “They want to brand themselves as premium chains, that’s why they price slightly higher in China.”

As the Chinese are increasingly traveling the world, often working and studying abroad, they are realizing that they have been paying higher prices in China for the products of international brands, like Maggie Yang experienced. This has left many of them feeling discontented.

Consumer goods companies, who are able to provide Chinese consumers with good quality products and services at reasonable prices, have the opportunity to grow in the Chinese market. This is especially true for companies who respond well to the trends we will be focusing on in this article. It is important to note here that it is imperative to act soon, as the increasing brand loyalty of consumers will make it more difficult for newcomers entering the market to get a foothold. It is also important to take advantage of social media to promote brands and products, as more and more consumers in China, as is the case in the rest of the world, search for reviews of products on social media platforms before buying.

The Rising Upper-Middle Class
Even though economic growth in China has been slowing down, generally Chinese consumers continue to be cautiously optimistic about their financial future. According to findings in the BCG China Center for Consumer and Customer Insight’s annual survey of consumer sentiment[3], this could be explained by the fact that Chinese consumers on the lower end of the consumer market have become more cautious while consumers on the higher-end, the middle- and upper-middle-class as well as the affluent households continue to be more and more optimistic as they see their incomes rising.

Consumption of households earning more that $24 000 per year (upper-middle-class and affluent households) is projected to increase by 17% every year until 2020. These households will account for 81% of China’s incremental consumption until 2020. The number of these households is expected to double from 50 million in 2015 to 100 million by 2020.

A New Generation
Chinese consumers born after 1980 tend to spend a greater share of their incomes than the generations before them[4]. Compared to their elders, for each college graduate in older generations, there are eight graduates in this new generation. For every overseas traveler from the elders, there are two travelers in the new generation. They are also far more brand conscious than their predecessors. The share of urban consumption by consumers aged 35 or younger has more than doubled from 2005 to 2016. They are furthermore expected to constitute 65% of consumption growth from 2015 to 2020.

Beauty, fear of death, lack of love
As incomes rise, Chinese consumers are not satisfied with products that only satisfy basic needs anymore. These days consumer preference emphasizes quality of life, emotional factors, individuality and design. Inexpensiveness is of lesser importance. Most Chinese finds happiness and health more important than wealth[5].

Spurred on by an increasing need to save money, Chinese consumers are becoming more selective about how and where they spend their money. In their annual research on the Chinese consumer[6], McKinsey has found that they increasingly desire premium products. “Within a range of prices I can afford, I always pay for the most expensive and best product (FMCG, apparel, consumer electronics). They have also found that overall the following statement rings true: Ï would buy famous branded products if I had more Money.

Biggest E-commerce market in the world
With annual active buyers reaching 439 million on Alibaba China retail marketplaces in the third quarter of 2016[7], retail e-commerce sales is estimated to have exceeded 19% of the total retail sales for 2016[8].

China is expected to become the biggest cross-border e-commerce market by 2020[9]. This is mainly due to a growing demand of foreign products stimulated by overseas travel, exposure to foreign brands as well as an increase in Internet usage and the convenience of online retail, especially on mobile devices.

Interesting to note is that online shoppers are much more likely to visit a physical store before buying a product than shoppers in physical stores are to visit an online store, which might give brick and click stores an edge.

Services will drive growth
According to BCG’s New China playbook[10], the expectation is that from 2015 to 2020, spending on consumer services will be growing by 11% per year and will account for 51% of growth in urban consumption. When looking at the Emerging-middle and middle class[2], the share of them who said that they had recently spent money on the following services is: Entertainment (53%), Eating out (50%), Personal care and fitness (32%), Education (30%) and Outbound travel (17%). For the Upper-middle class[3] and affluent[4], the share is markedly larger with:  Eating out (73%), Entertainment (68%), Personal care and fitness (49%), Outbound travel (45%) and Education (37%).

Continuing importance of small cities
According to research conducted by BCG[11], companies will have to move beyond the biggest metro areas in order to seize China’s growth opportunities. There will be high concentrations of upper-income consumers in more than 300 Chinese cities.

Number of upper-middle-class and affluent consumers outside of China’s top 100 cities:

  • 2015 – 45 million
  • 2020 – 98 million

Number of Chinese cities with more than 100 000 upper-middle-class and affluent consumers:

  • 2015 – 195
  • 2020 – 373

Consumer product companies will have to develop specific strategies to win over younger, wealthier and tech-savvy consumers spread over hundreds of cities across China. If they don’t they will fail to capture the largest growth opportunities.

Important trends
In their 2016 China Consumer Report[12], McKinsey has identified four important trends:

1. Loyalty to brands
Chinese consumers are increasingly becoming more loyal to a shortlist of brands or even a single brand. In personal care, for example, the number of consumers who are willing to consider a brand outside of their shortlist of brands, dropped from 28% to a mere 17%. In a market that used to be notorious for is lack of brand loyalty; this is good news to the brands that are on these consumers’ shortlists. On the other hand it does mean that it will be more difficult for newcomers to be successful in the market.

2. Healthy living
In dealing with all the pressures of modern life, Chinese consumers (42% of respondents) are finding it more and more difficult to enjoy their lives. This is part of the reason why they are becoming increasingly health conscious and are striving to find a new balance through developing healthier lifestyles. This can be seen in the decline in the consumption of drinks and foods considered to be unhealthy like carbonated soft drinks, ice cream and Western fast food.

Safe and healthy food (Organic/ “Green”; imported; added vitamin), preventative healthcare (both products and services) and an active lifestyle (participating in sports and buying sporting goods) are becoming increasingly popular in China.

3. Family Focus
Having a happy family defines success for the majority of Chinese consumers (75% of respondents). 64% of respondents agree with: “Going shopping with my family is one of the best ways to spend time with them”. Despite the popularity of e-commerce, the allure of ‘retailtainment’ has benefited shopping malls, especially the ones that combine shopping, dining and entertainment for the whole family. Another way of strengthening family ties is through travel – in 2015, 45% of international trips were with family.

4. Experiences / International travel
During 2015, more than 70 million Chinese consumers travelled abroad making on average 1,5 trips each. Shopping is an essential part of the Chinese consumer’s travel experience with 80% making overseas purchases. Of the 70 million, 30% even based their choice of destination on shopping opportunities. The most bought items are watches, handbags, apparel and cosmetics.

Conclusion
The Chinese consumer has come of age. Gone are the days when they were easily convinced to spend money on cheap consumer goods. These days, Chinese consumers are more likely to base their buying decisions on product quality and desirability. This does however not mean that they do not care about value for money. They are well aware that they will often be able to find products of a specific brand at a better price abroad, and it is therefore no wonder that for Chinese tourists travelling abroad, shopping opportunities play an important role in their travel experience.Companies, who are focusing on and are able to respond to these trends towards a more balanced, healthier and family-centric lifestyle will have the best chance of success in this changing landscape. Where in the past two decades scale, speed and simplicity proved to be essential to success, understanding and responding to the changing spending habits of consumers will determine who will succeed and who will disappear from the scene.

Are you looking to take advantage of China’s consumer upgrade?

Why not contact us for a no strings attached, free orientation? Goglo will help you to pave your way to online China. We will help you to discover, localize and approach your Chinese customers through online marketing strategies and initiatives. We deliver results!

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[1] Xiaohongshu is a shopping App that introduces goods from all over the world to Chinese consumers.
[2] Emerging-middle- and middle-class households = annual disposable income of $10 001 to $24 000
[3] Upper-middle-class households = annual disposable income of $24 001 to $46 000
[4] Affluent households = more than $46 000 in annual disposable income

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