THE CHINA MARKET

THE OPPORTUNITY

The China opportunity rests, from my perspective, on three key elements:

  1. The compounding value of a large, growing population and the increasing wealth of the individuals within it.

  2. The expanding interest in and loyalty to brands and an increasing willingness to trade-up

  3. The upside associated with retail sophistication as operators gain capabilities and improve propositions

 

1. More people with more money. China’s population is astounding.  At over 1.3B, even its tempered growth of 0.5% means it is adding nearly 7M people a year.  At the same time, its citizens continue to move to cities.  China’s urban population is growing at a rate that is 5 times faster than the rest of the country.  18M more people are urbanized each year and its urban population is expected to reach ~825M by 2020 – more than 2 times the entire US population.  China currently has 100-150 cities (estimates vary) with over 1 million people.  The US, in contrast, has 10. 

 

Compounding this population growth is the expansion of disposable income. China’s citizens, particularly its urban citizens, are getting wealthier.  As a group, their disposable income has been growing at 10-year CAGR of more than 12%.  Within that group, those households that were already in higher income brackets are seeing their disposable income increase even more rapidly – between 20-30% a year.  And they are driving a new outlook on private consumption. 

 

2. An increasing willingness to spend.  Chinese consumers have been known to take a pragmatic approach to their purchases, focusing primarily on the perceived value of products.  However, today, while they remain concerned about product quality and safety we continue to see a shift from a purely functional conversation towards one that is more emotional.  Consumers are looking to express their individuality and are more willing to spend on brands that project a desirable image.  In one study on apparel, ‘buying the right brand’ was the number one purchase factor. 

 

As wealth grows, these consumers are increasingly willing to trade-up and are becoming more brand loyal.  In another study of urban consumers, 69% were willing to splurge on themselves.  They are more likely than ever to stick with brands they know and have grown to trust – either through experience or marketing – and they are willing to pay a premium for them. 

 

3. And more, more attractive places to do so.  Perhaps one thing that is happening more quickly than the changing behavior of Chinese consumers is the changing landscape of Chinese retail.  In a country that can build a 57-story skyscraper in 19 days and is adding them, more generally, at a rate of one every 5 days, you can imagine that the shape and value proposition of malls is also evolving rapidly.  With the entrance of many higher-end, vertical brands in the early 2000’s, Chinese consumers were exposed to sophisticated merchandising and service models. 

 

As Chinese retailers, often in partnership with global brands, add front and back end capabilities, including technology, infrastructure, and inventory planning and allocation, we will see the productivity of retail rise and in many cases growth accelerate.

 

THE CHALLENGE

The most important challenge in entering or expanding in China is understanding and connecting to the Chinese consumer. Simply having a beloved western brand is not enough.  Chinese consumers are looking for brands that also reflect who they are and who deliver against their needs and preferences at retail and online.

 

To be more specific, here are some cultural considerations that have I have seen to be true over multiple pieces of work and years:

  • Shopping is a social activity.  Socializing with family and friends outside of the home is a strong part of China’s culture.  “Retail-tainment” remains an attractive past-time and consumers seek input from their network as they browse.  This means shopping can be less intentional than in the United States and more frequent. Typically, the shopping center is the destination, not a specific store.  As a brand, it is critical to be present and engaged in a physical and compelling manner, even if the purchases are ultimately online. 

  • Consumers are optimistic, upwardly mobile and incredibly digital. As mentioned, the culture of consumption is increasing.  Single’s Day – a uniquely Chinese holiday – is the biggest online shopping day in the world.  Chinese consumers are taking social media and social commerce to new levels, in many cases well ahead of their Western counterparts.  And, given the density of the urban environment, things like same day delivery and box-drop returns are closer to baseline expectations than emerging models.   

  • Young, urban Chinese consumers are looking to express their individuality.  Chinese consumers want to project an appropriate image while at the same time demonstrate their individuality.  Consumer goods allow them to express style and status in a public way but they are cautious about purchases without the approval of friends and family.  The brands they buy are viewed as a reflection of who they are or want to be, but if those brands have also been endorsed by the people in their network they become much more meaningful. 

  • Budget constrained.  I have often described the objective of a China strategy as one that aims for consumer participation versus home or closet penetration.  While more and more wealth is becoming available for millions of Chinese consumers, the absolute magnitude remains limited for most.  Chinese consumers are not cheap and are willing to pay for a product they value, but they will also comparison shop to find the best price.  Trading-up is typically trading off – buying one more expensive item and subsidizing that by purchasing less or less expensive items overall. 

​​

SUCCESS HIGHLIGHTS

Given the tremendous opportunity that exists, it’s worth it to get this cultural context right.  As you contemplate the potential of the Chinese market three success factors to keep in mind.

  • Connect directly. Chinese consumers are an incredibly unique and diverse group.  They see themselves as modernizing NOT westernizing. The cache of large, global brands will wane if those brands don’t also reflect with their lives and with them individually.  Your brand will need to resonate with the young, urban, contemporary, Chinese experience while remaining authentic to itself.  This likely requires your brand be as digital as they are while also being physically present and accessible where they are.  It includes offering insight into North American life but valuing equally their needs, preferences and expectations.   

  • Have an omni-channel perspective from day one. The idea of a seamless retail experience reaches entirely new heights in the Chinese market.  Chinese consumers expect their e-commerce, social media and bricks and mortar experiences to be linked – today. This means same day or even hourly delivery and integrated mobile payments; it means facilitating sharing and the solicitation of feedback from friends at the point of purchase; and it requires a presence and consistency in content across all points of access. 

  • Do the research. The Chinese market and Chinese consumers are evolving rapidly.  I can’t emphasize enough the value of talking to them directly through both qualitative and quantitative research.  For example, the importance of versatility crystalized when we did in-home research in Shanghai.  Independent of budgets, our target consumers were space constrained.  Given they could fit only a few items in their wardrobes, those items had to work for nearly every occasion. 

 

FINAL THOUGHTS

Winning in China is not simply offering western brands at crazy price points - it is the cliché of winning the hearts and minds of the Chinese consumer.  It requires that your brand break through with a message that resonates while remaining authentic to its own heritage.  Over the long term, it will be determined by how well you manage your brand’s equity and the investments you are willing to make to maximize its value.