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What complicates matters is the fact that Chinese consumers are on different trajectories in terms of their evolution. Photo: Bloomberg
What complicates matters is the fact that Chinese consumers are on different trajectories in terms of their evolution. Photo: Bloomberg

Deciphering the Chinese consumer

A Starbucks Grande Latte costs RMB 30. So a T-shirt, something that can be used multiple times and comes for the price of a cup of coffee, is a steal, right? Wrong

Three years ago a Chinese friend and I were killing time at a mall in Beijing. We spotted a Mango outlet with the magic word: “Sale". After looking at some of the clothes, we came across a rack with basic Mango T-shirts. Renminbi (RMB) 30, the price tag said, which is much, much lower than Mango’s standard prices in China. My friend scrunched up her nose and said, “Let’s leave. I will never buy from Mango again. It’s too cheap."

To put things into context, a Starbucks Grande Latte costs RMB 30; a standard Subway sandwich, RMB 25. So the T-shirt, something that can be used multiple times and comes for the price of a cup of coffee, is a steal, right? Wrong.

From that day on, my friend wouldn’t be caught dead in a Mango T-shirt. By dropping the price of the T-shirt, Mango had just become more accessible to a wider group of consumers and that fact alone made it unattractive for her.

Like my friend, China’s consumers are becoming hard to decipher.

What complicates matters is the fact that Chinese consumers are on different trajectories in terms of their evolution. In tier I cities, you’ll find a varied set of consumer groups. One group in particular doesn’t fit into the traditional notion of the developing world consumer in terms of how they spend and how they live. Their jet-setting lifestyles are similar to their rich Western counterparts.

A second set, a category I would put my friend in, aspires to join the club of jet-setters. These consumers, I would say, are among the more complicated ones from a marketer’s perspective because you can’t say for sure when they will be thrifty and when they will spend with their image in mind. My friend, for instance, doesn’t bat an eyelid while splurging on a $1,000 purse, but during lunch hour in office she would rather eat at the food court than waste money on a more expensive restaurant.

Then there are the consumers at the lower end who care even more about value for money but are aspirational too. Our maid recently got a new touchscreen phone. She still makes calls from her old push-button phone. And the new one is used to surf the Net and for messaging on WeChat. As you go down the city tiers, the picture gets even more complicated.

One thing is common to all the consumer groups. They are all constantly looking to upgrade if their wallets allow. As a recent McKinsey survey says, “Chinese consumers are also increasingly trading up from mass products to premium products: we found that 50 percent now seek the best and most expensive offering, a significant increase over previous years." McKinsey’s survey further found that the premium segment was growing faster than mass and value segments.

These subtle shifts can often catch companies unawares. Take Procter & Gamble Co. (P&G). For years it was held up as the textbook case study of how to win in China. It brought the disposable diaper revolution to China with the Pampers brand—earlier, parents here didn’t bother with store-bought diapers. In 2010, the company was leading in 13 of the 14 categories it was present in. In 2012, China was P&G’s second-biggest market globally and was contributing nearly 6% of its global sales.

But it wasn’t just the high-end that P&G focused on: it made an attempt to create—and customize—products for lower income households in China, a departure from its usual core business. It was betting big on these emerging consumers to help it reach its ambitious goal of a billion customers by 2015. The focus on what the company called the “$2 a day" consumer meant immersing research teams in their environment and coming up with offerings and price points more relevant to their situations. In effect, P&G was trying to straddle different parts of the income pyramid, and was apparently doing it successfully.

Yet, things haven’t turned out well for P&G in China and it has started losing ground here. The mistake, as P&G chief executive David Taylor puts it, lies in misjudging the Chinese market and perhaps losing focus on the high-end market. “We looked at China too much like a developing market as opposed to the most-discerning market in the world," he said at a conference. To regain lost ground, the company is now focusing on expanding its higher-priced offerings in China.

So what went wrong? The Chinese consumer changed. A recent report from market research firm Millward Brown may help put things into perspective. It says: “(Chinese consumers) sought to save money on items viewed as commodities, while for other items, particularly in personal care and healthcare, consumers willingly paid a premium when justified."

The Chinese consumer has become this ambiguous shape-shifting mass that is constantly evolving. If they are to win in this increasingly complex country, marketers need to frame their understanding of the Chinese consumer at one point of time, rapidly unlearn and then reframe their understanding again. A single misstep, after all, can become a costly mistake.

Given this backdrop, it might be better for companies to focus on a certain segment instead of trying to win over different consumer groups by straddling the income pyramid. In 2014, L’Oréal pulled its Garnier brand out of the Chinese market after seven years.

Somewhat like P&G, L’Oréal also straddles different parts of the income pyramid in China. It was at the top-end with brands like Lancôme and Yves Saint Laurent Beauté, in the middle with brands like Vichy and Kérastase, and the lower-end with brands like Maybelline New York, L’Oréal Paris and Garnier. But that strategy has its limits.

One of the reasons for Garnier’s demise in China was how consumers viewed the brand. As Shaun Rein, author of ‘The End of Cheap China’, told the ‘Financial Times’, Garnier was seen as a “cheap L’Oréal". “Garnier is not cheap enough and it’s not luxury enough. Chinese consumers are no longer willing to pay a premium for a Western brand unless it is demonstrably better," he said.

For foreign consumer brands in China, it might be a better idea to narrow down the focus to fewer segments rather than try to cast the net wide and end up diluting strategic focus in the process.

Read an unabridged version on www.foundingfuel.com.

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