16 NOV 2021
For years, Western brands have focused on affluent consumers in China. In 2022 the new source of growth will be value, says Saw Gin Toh, Managing Partner at Incite Consulting (The Growth Division of MediaCom China).
For the last couple of decades, the China story has been all about premium. Many Western brands have targeted newly middle-class consumers who want to buy the latest and best the world has to offer.
It’s certainly true that luxury brands, for example, now look to China for much of their sales. Market analysis suggests consumers in Mainland China will account for the largest share of luxury spending globally by 2025.
The drive for premium has occurred across all B2C categories, however. For the past decade, brands from household cleaning products to food and alcoholic beverages have sought to create brand aspiration via premium ranges that appealed to the 300m strong white-collar middle class on the Eastern Seaboard.
China is changing and the need for Western brands to deliver value – as demonstrated by the success of local brands such as FreshHippo, Lining and mobile handset brands Xiaomi and OPPO – has never been more urgent. Beyond the current political rhetoric about less ostentation, key economic trends are driving the need for value brands:
- GDP growth has slowed from the highs seen over the last 30 years – it was just 6% in 2020;
- For the first time in many years, there is downward pressure on salaries thanks to an over-supply of university graduates compared to the number of innovative private sector jobs; and
- Rises in living costs in urban centres are no longer being met by equal gains in disposable incomes.
The bottom line is that Chinese consumers are becoming increasingly value driven. The percentage that define themselves as ‘thrifty with money’ has risen dramatically in the last two years.
A recent report estimated the size of the second-hand economy in China at 8.8 trillion RMB (around $1.4 trillion) by the end of 2019, a rise of 19% year on year. It was expected to hit $1.6 trillion by the end of 2020, according to Sws Research.
China’s population is reframing what success means and how money is spent, seeking greater value for money and spending less frequently.
We’ve already seen evidence of this shift, ironically in the luxury sector where white collar workers in Tier 1 cities are shifting to diffusion lines such as Emporio Armani, and REDValentino. These lines maintain the value of the luxury brand for a relatively low price, helping consumers look good for less.
Western brand owners in all sectors looking for growth will need to satisfy similar aspirations for the rising number of lower middle-class consumers, often living in newer, emerging cities.
They will need to understand how value across all price points is defined in China, matching core consumer needs; social currency, community centric benefits and ‘good enough’.
A premium brand may be perceived good value if it delivers social currency via the fact that other people recognise the brand, thereby elevating the purchaser’s status in wider society. Such brands often have exclusive stores and premium customer service.
Community centric value means products or services that show empathy and strengthen communal behaviour. They are often interest-based and satisfy specific emotional needs where brands involve their loyal consumers/ “brand fans” in the development of products and services. Sales channels can be more scalable, such as social media or via offline gatherings.
The final and biggest value position is based around ‘good enough’. A product or service that delivers only what people know they need, sometimes by imitating a premium rival. Low-priced and with limited functionality, these are often sold via wholesale or online sales channels. Good examples would be mobile handset brands OPPO or Vivo.
In short, to crack the value challenge, companies need to create entry-level ranges that cater to the rapidly growing, value-seeking demographic, often living in markets that lack 1st-tier infrastructures. They will need to develop more affordable product designs and manufacturing processes that can handle the extreme financial pressures of value competition.
The challenge for many will be to find manufacturing partners that can deliver on price while also matching the quality standards needed to maintain brand reputation. Some may seek to launch value ranges as online only, whilst keeping brand premium and aspiration high in physical retail.
The future of China growth will be in lower-margin value ranges that sell right across the country, not just in Beijing, Shanghai and Guangzhou.
For more information on growth opportunities in China read Incite Consulting’s Seven Business Strategies to Find Growth In China.