Target the Chinese Consumer of Tomorrow

HomespotlightTarget the Chinese Consumer of Tomorrow

By Allison Malmsten, Public Research and Marketing Director, Daxue Consulting

‘Target the Chinese Consumer of Tomorrow’ was published in the spring 2023 edition of the German Chamber Ticker. Editor: Noga Feige, Senior Editor of the Ticker Magazine. 

 

The years 2020 to 2021 were a true test for brand resilience in China: it was all about digitalizing, diversifying presence on platforms, co-branding and ‘Guochao’ (favoring domestic brands) marketing, and dodging KOL and celebrity scandals through either using virtual KOLs or swift crisis management.

But if the increased patriotism, celebrity scandals, and shaky international relations of 2020 and 2021 were a test for brands in China, the COVID-19 outbreaks, lockdowns, and plummeting consumer confidence of 2022 felt like the final exam.

For the next year, resilient brands will continue to diversify their digital strategies, look for new co-branding partners, and get more attuned to Chinese culture. However, what will define a resilient brand in the next decade is the ability to cater to the changing demographics.

 

Be Ready for China’s Growing Middle Class

In recent decades, as nearly all of China has been lifted out of poverty, the entrepreneurial and governmental upper class leaped ahead, leaving behind a large gap between low and high-income groups, and a small middle class.

Though the benchmarks qualifying a household as the middle class is cushioned in grey ambiguity, the government’s definition is an annual income of between RMB 60,000 to 500,000 – translating to RMB 5,000 to 42,000 a month – with a majority of the population towards the lower end of the range.

According to the World Bank, China’s middle class in 2000 was only 3.1% of the population. In 2018, it reached 50.8%, of which 68% are in the lower-middle income bracket. In the short term, during COVID-19, China’s Gross National Income (GNI), which measures a country’s income inequality, has had short-term hiccups. Yet the long-term direction is clear: moving the mass low-income population up the scale.

In 2021, the Chinese government coined the term ‘Common Prosperity,’ which implies leveling the playing field between high- and low-income groups. Common Prosperity is taking place in the form of regulating excessively high incomes, encouraging high-income individuals and enterprises to give back to society, and discouraging showing off egregious spending on luxury on social media. The essence of ‘Common Prosperity,’ however, is to grow China’s middle class. Therefore, brands should plan ahead for the changing demographics.

For luxury, this means catering less to the few, new-money, flaunting upper class, and more to the growing, humble, upper-middle class. For consumer goods, this means focusing on quality and practicality rather than competing with the price.

As incomes go up, purchasing priorities shift. In DaXue Consulting’s March 2023 survey on Chinese women’s consumption, we found that the importance of price in both beauty and fashion purchases declines rapidly as average household income rises. Price is the number one concern of those in the income group of under RMB 5,000/month. However, in beauty purchases, price is already the last ranking priority in the RMB 10,000-20,000/month income group. It’s also the last priority in fashion purchases in the RMB 20,000-50,000/month income group.

 

For Long-Term Success, Focus on the ‘Sinking Market’

Over the last decade, there’s been a lot of focus on foreign brands to enter tier-1 cities like Shanghai and Beijing. These markets have become increasingly saturated over time. But to stay in China long-term, brands’ new focus should be on what’s called the ‘sinking market’ – lower-tier cities and rural areas. Lower-tier city consumers’ disposable income is growing at a faster rate than high-tier city consumers, and the markets are less saturated. Luxury brands like Coach, F&B chains like Starbucks, and e-commerce platforms like Pinduoduo are all focusing their efforts on low-tier cities, which house 70% of China’s population.

Chinese rural consumption growth is out-pacing urban consumption. In 2021, rural consumption was valued at nearly RMB 6 trillion, and grew by over 12% year-on-year. Rural consumers have more time to compare brands, are less likely to live paycheck-to-paycheck even though their paychecks are smaller, and have less money locked up in housing. What else makes rural and low-tier city consumers different? They rely more on e-commerce and social media (which they have more time to browse, and have less access to shopping malls); they are also more likely to have memberships for online games.

How does the sinking market spend differently?

  • They are pragmatic: in a 2021 Accenture survey of over 10,000 Chinese consumers, there was an inverse correlation between city tier and pragmatism. 60% of first-tier city consumers and 83% of fifth-tier city consumers agreed with the statement: “When I buy expensive goods, I prioritize the product’s cost-effectiveness and pragmatism of the purchase.”
  • Sinking market consumers are more inclined to follow the Guochao trend and buy domestic products.
  • The sinking market is more likely to make purchases online compared to high-tier city consumers.

 

Targeting Consumer Values in a Changing Nation

We can’t talk about future-proofing without mentioning sustainability – from the consumer’s perspective as well as the government’s. China’s mission for carbon neutrality will deeply affect the way companies operate in the country, and your brand must be ready.

The changing demographics are one aspect of future-proofing a brand’s success in China; another is navigating the central government’s policies and their effects on consumer values. Sustainability is one of the best examples of it: DaXue Consulting asked over a thousand Chinese consumers what the most important action was for environmental sustainability. Options included buying local, reducing packaging, buying reusable products, and sorting waste. Consumers named waste sorting the most sustainable action, even though it contradicts the “3 R’s” hierarchy of what actions have the biggest impact on the environment.

Why did Chinese consumers select one of the least effective options as the most effective in sustainability? The answer is simple: exposure through government-sanctioned media. What does this mean for brands? It’s not just about waste sorting, but rather understanding the massive impact of government campaigns on consumer mindset. With China’s ambitious 30-60 goals, brands must stay ahead of the curve and future-proof their brand from a sustainability point of view. This will ensure both smooth operations in China in the upcoming years and addressing consumer needs.

 

What’s Next?

When foreign brands first entered China, their target consumer was well above the middle class. In 1987, a single piece of KFC’s chicken cost RMB 2.5, while the average monthly salary was under RMB 100. Today, this would be the equivalent of spending RMB 200 on a piece of chicken – not exactly middle-class spending behavior. However, KFC has since started catering to the middle class, and now has over 9,000 restaurants nationwide. This shift is true for many brands and consumer goods, showcasing the buying power of this new demographic group.

As China transitions to a more humble upper class and a growing middle class, buying luxury goods as a status symbol will be phased out. As the country shifts from new money to old money, luxury purchases will be less about logos and more about self-expression. In other words, luxury will be more about what consumers think about themselves and less about what their peers think of them.

Overall, these demographic changes expand the potential target market of brands – if they can adapt accordingly.

 

Allison Malmsten is the public research and marketing director of Daxue Consulting, a China-focused market research and strategy consulting firm. During her career in the major business hubs of Shanghai and Hong Kong, she has been frequently quoted in media like Bloomberg, BBC, CNBC, and SCMP on topics ranging from Chinese consumer behavior to Chinese brands’ expansion abroad.

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