Older consumers may value price over quality, but younger generations are increasingly willing to pay premiums for higher-end products.
Since China started its “reform and opening” policy in 1978, its economy has expanded rapidly, and most leading international retailers and manufacturers have entered the China market. Some foreign companies are hesitant to enter the market, however, because they do not understand Chinese consumers and their shopping habits. Despite the country’s rapid economic rise, China’s regions have developed at different rates, and consumer trends vary greatly among different groups and regions. Understanding the preferences and mindset of consumer groups is the key to successfully expanding a retail business in China.
Chinese consumer groups
In the past three decades, Chinese consumers’ shopping habits have changed dramatically as incomes have risen and new products and concepts have entered the China market. Consumer habits continue to evolve today, and examining generations of consumers can reveal certain shopping trends. Planet Retail has found that the older generation generally maintains “traditional” spending habits, middle-aged Chinese oscillate between tradition and new trends, and the younger generation is becoming more Westernized and quality conscious.
Generally, Chinese consumers develop shopping habits in their youth and keep these habits through adulthood. Though increased wealth can change some preferences, such as beverage and snack food preferences, most Chinese consumers’ habits are identified by their objective living conditions and limited earnings. The current Chinese consumer population can be separated into several groups with distinguishing characteristics.
Born before 1960, most of these Chinese consumers grew up in tough political and economic times, did not receive systematic education, and worked at state-owned enterprises. The difficult environment during their early lives made these individuals frugal and sensitive toward changes in consumer goods prices.
This group experienced difficulties similar to the frugal retired consumers, but wealthy retired individuals primarily worked in government and government-funded enterprises that provided higher wages and better retirement benefits. Though many of these consumers are frugal, they are less price-sensitive and often value quality more than cost.
In the next 5-10 years, spending habits of Chinese consumers who are older than 50 will change slightly. These consumers will increase spending on groceries as the government raises retirement pensions in line with inflation rates. Though they will consume healthcare and entertainment products, their children will likely buy these products for them.
These consumers, who grew up during the Cultural Revolution (1966-76) and early stage of the reform era, swing between tradition and new trends. They work in various companies—state-owned, private, and foreign-invested—and earn modest incomes. These consumers generally save a large proportion of their earnings to take care of their children and parents.
These consumers share the same background as the frugal forties, but they work for the government or large state-owned enterprises and have slightly higher incomes. Though they must also raise children and look after their parents, they are willing to pay premiums for quality products. In the next decade, consumers in their forties will have fewer childcare responsibilities and expenses. These consumers will thus increase spending on entertainment, groceries, travel, and high-quality and healthcare products.
Many consumers in this group are well-educated and grew up in a more open environment than their parents. Compared with older generations, Chinese in their thirties save less, spend more on entertainment, and often shop online. They also pursue value and quality rather than low prices. These individuals will become the most important consumers in the next decade, buying for their parents, children, and themselves.
Consumers in the first generation of the one-child policy have opposite shopping habits from their parents. These consumers barely save and spend most of their income on entertainment, advanced electronics, and other trendy products. They often shop online and look for products that help distinguish their personalities. They can also be impulse buyers. As consumers in their twenties age and start new families, their shopping habits may become slightly more conservative, though they will still favor high-quality and convenient products and spend more on groceries than previous generations.
The new generation of consumers (under the age of 20) is the most Westernized and open to new products. These consumers pursue individualism and often use the Internet to follow global trends. Though most in this group do not yet earn an income, they significantly influence their parents’ decisions on food, clothing, electronics, and other purchases. Social media is an effective marketing tool to reach this group of consumers (see the CBR, January-March 2011, Social Media in China: The Same, but Different).
Migrant workers (generally 25-45 years old) are rural residents who moved to the cities for jobs starting in the 1990s. They can be even more frugal than elderly consumers, buying only the necessities and saving money to send remittances to their families in rural areas. Many migrant workers are expected to see a big increase in incomes and move their families to the cities in the future. They will significantly increase spending on groceries once they receive city household registration, or hukou, status and fully integrate into city life. Migrant workers’ consumption levels are unlikely to match that of their urban peers, however.
There are more than 1 million Chinese with assets over $1.5 million, and the number is increasing rapidly. Rich consumers (generally 20-60 years old) are fairly concentrated in large urban areas, with Beijing, Guangdong, and Shanghai housing about half of this group. These individuals are successful entrepreneurs, top managers, and business owners. They pursue the best products available, particularly imports, and are the perfect candidates for marketing new products. Premium supermarkets have already emerged in China to provide high-quality products to wealthy consumers (see Choosing the Right Retail Format).
Fast-growing consumer product categories
As incomes increase and the young generation becomes the main body of consumers, the Chinese will gradually turn from buying only basic necessities to leading comfortable, high-quality lifestyles. Planet Retail expects the following consumer product categories to expand rapidly in the next 5-10 years.
The younger generation of parents is more willing than older generations to pay for toys. New parents tend to buy Western brands for their children, as they perceive those toys to be safer than Chinese ones.
The young generation spends significantly less time cooking than their parents and instead turns to restaurants and convenience foods, such as microwave meals and instant noodles. Many Chinese do not consider Western convenience food appetizing, though it is generally easier to prepare than Chinese convenience food. Many local companies are researching how to make Chinese food more convenient.
Many Chinese consumers own pets—mostly cats and dogs—but few spend money on pet products, such as food and toys. Instead, they make these items at home. The new generation, however, is wealthier and has less time to make “do-it-yourself” products. As this generation ages, the consumption of pet products will rise.
Personal care products
The consumption of personal care products in China remains low, but this market has great potential for growth. For example, most Chinese men do not wear cologne and most Chinese buy shampoo without conditioner. As incomes increase, more Chinese consumers will be able to afford non-essential personal care products—especially cosmetics and men’s personal care products.
Wine and whisky
Wine and whisky have broken traditional alcohol preferences in China, as the young generation seeks alternatives to strong traditional spirits, such as baijiu (see Opportunities in China’s Alcoholic Beverage Market). Wealthy consumers often flaunt their status by drinking high-end wine while lower-income consumers drink local beer. Though traditional alcoholic drinks will still dominate the China market in most places, big cities and their young wealthy consumers will contribute to a fast rise in wine and whisky sales.
The young generation will spend more than their parents on snacks for themselves and their children. Traditional Chinese snacks, such as roasted sunflower seeds and dried sweet potatoes, are generally made by small local factories. But recent food and product safety scares have led some Chinese consumers to view food products made by such factories as unsafe or unclean. The market for Western snack foods, such as chocolate products and potato chips, will expand as young consumers fancy these snacks more than traditional Chinese ones (see Chocolate Fortunes).
Health food and products
Though health food and products are still generally expensive, Chinese consumers are paying more attention than ever to their health. Most elderly and low-income Chinese consumers turn to natural solutions and Chinese herbal medicine while younger and wealthier consumers often look to Western products, which are generally pre-prepared.
Older generations raised their babies with self-supplied products—such as cotton diapers and homemade baby food—but younger generations will rely on disposable diapers and canned baby food. New parents and grandparents hope to buy the best products possible for their children, especially given recent food safety concerns. For example, after the Sanlu Group melamine-tainted milk incident in 2008, most parents interviewed said they no longer trusted local brands of infant formula and would buy imported brands if they can afford them. In addition, many new parents will turn to Western baby products because the variety of traditional Chinese baby products is limited. Many young parents are already buying baby products online from US and European producers.
Personal car ownership in China remains low but is rising quickly. Many Chinese consumers cannot afford expensive cars, but they will spend money on products—such as cushions, gadgets, and tinted window films—to improve their cars’ appearance. In addition, short car trips are gaining popularity as many Chinese drive out of the city on weekends for picnics, hikes, and other leisure activities. As a result, consumption of related products, such as disposable silverware and convenience food, will also rise.
Products for the elderly
In the next 5-10 years, China’s population of senior citizens will reach 250 million, close to the entire population of the United States (see the CBR, April-June 2011, Can an Aging China Be a Rising China?). Though these elderly consumers’ incomes will not increase significantly, their children will look after them and buy them health food and elderly care products.
Because of high consumer demand for low prices, many retailers in China stock cheap products and have little space for mid-range or high-end items. Though retailers have tried to fill the gap with private labels, few have done so successfully. Consumers are concerned about the safety of cheap goods and are willing to pay slightly more for safe food products, but many shoppers think the private labels and other mid-range products they have tried are not worth the premium prices, according to a 2009 China Chain Store and Franchise Association survey. Retailers must use effective marketing, accurate pricing, and consistent quality to build trust among consumers and sell more higher-priced items.
Tips for retailers in China
Foreign companies must understand certain factors to successfully sell to Chinese consumers.
- Some consumer habits can change Wine provides the best example of changing Chinese consumer habits. Spirits once dominated China’s alcohol market, but wine consumption has skyrocketed in the past decade. Many Chinese consumers now prefer wine because it is less potent than spirits, less bitter than beer, and promoted as a healthy drink. In contrast, some companies have had to adjust their products to better suit Chinese tastes. For example, McDonald’s Corp. tried to promote its beef burgers when it first entered China in 1990. After realizing that chicken and pork are more popular in China, the company adapted to consumers’ unchanging habits and launched a menu of chicken burgers.
- Small discounts are better than none Many Chinese consumers, particularly elderly shoppers, wish to save as much as possible. Retailers, especially hypermarkets, often cut prices of basic produce and price-sensitive items, such as eggs, pork, seasonal products, and local specialties. Retailers limit the amount of those products consumers may buy at a time to encourage shoppers to visit the stores more frequently. These types of promotions have proven effective as many Chinese consumers are willing to wait for half an hour to save on a particular item.
- Product safety mistakes can be devastating Food and product safety problems exposed in the media can strongly influence Chinese consumers. For example, media reports in March revealed that clenbuterol, a drug that accelerates growth, was found in pork from the Shuanghui Group, a local leading pork manufacturer. The following month, Shuanghui’s retail sales dropped 45 percent, and many consumers interviewed would not buy its products.
- “Face” matters Chinese greatly value “face”—a quality associated with dignity, honor, and pride—and will pay more to save face. For example, when purchasing gifts for important friends and family during Chinese New Year, consumers generally buy gifts that are of the appropriate value for the receiver and pay particular attention to product packaging. Consumers that cannot afford a higher-quality gift will buy the product with the nicest packaging within their price range. In addition, consumers will pay more for gifts with fancier packaging, even if the product is of equal quality to a less expensive item.
- Chinese consumers generally favor foreign brands Product safety incidents and lax government supervision have scared Chinese consumers away from certain domestic products. Consumers will often pay a premium for foreign brands to ensure quality, particularly for important items such as infant formula. To increase their products’ appeal, many Chinese companies register an office in the United States or Europe and brand their products as “foreign.” This has made it increasingly difficult for consumers to discern domestic from foreign brands, and they thus turn to famous and leading brands instead. Foreign companies should devote resources to ensure Chinese consumers know their products’ true origin.
- Pricing is a sensitive issue Pricing a foreign brand in China can be tricky. On one hand, Chinese shoppers believe the higher the price, the better the quality or the higher the status. If a foreign brand is priced lower than a local one, shoppers may suspect that it has defects. On the other hand, the premium Chinese consumers are willing to pay varies by product category and by consumer groups. For example, Planet Retail finds that young shoppers are willing to pay double for foreign-branded infant formula or five to seven times more for foreign bottled mineral water, but older consumers are not. Most modern retailers in China implement a high-low pricing policy. To create a low price image, hypermarkets and supermarkets price frequently purchased products low to match and compete against rivals while charging a premium on impulse purchases and other price-insensitive products.
- Understand the government Foreign players have found China’s complex legislative and political system difficult to navigate, especially if they do not have a local partner. To meet central-government development targets, local governments may provide incentives to attract more foreign investment to their region. Local regulators may deduct taxes, coordinate with real estate developers to reduce or eliminate rent, offer discount utility fees, speed up approval processes, or help companies find local suppliers and secure loans. In exchange for these measures, local governments sometimes ask foreign retailers to open more stores or establish regional headquarters in the area. In general, such negotiations may be more difficult in larger cities, where the local government has a greater choice of foreign direct investment options.
- Localization is key Facing such a unique group of consumers, foreign companies should focus on localizing operations. Localization does not simply involve opening an office and using Chinese packaging, but it also includes marketing, maintaining patience, and investing in research and development. Though the PRC government no longer requires foreign retailers to form joint ventures with local companies, many foreign retailers still favor partnering with local companies, which have more regional knowledge.
Demand for quality to skyrocket
Chinese consumers demonstrate different shopping patterns depending on their wealth, age, and location. Though many Chinese consumers demand less expensive products, a small but significant proportion is willing to pay a premium for higher quality. The biggest change in Chinese consumer behavior comes from the young generation’s rising wealth and increasingly Westernized lifestyle. As time goes on, the demand for higher-quality products, particularly among younger generations, will accelerate and present huge opportunities for foreign brands.
Choosing the Right Retail format
Before China opened its market to foreign investment, commodity availability was limited. Department stores, state-owned distribution points, and wet markets dominated the retail market. International retailers were allowed to enter the market in 1992, but only if they held a non-controlling stake in a joint venture with a local company. Today, China has a wide range of retail formats, from hypermarkets and shopping malls to wet markets and online stores. Choosing the right format can be critical to business success.
Hypermarkets and shopping malls
Hypermarkets generate a steady cash flow for retailers and are popular with Chinese consumers, who like to spend time shopping with their families on weekends. Hypermarkets that include a shopping gallery with specialty stores and restaurants are particularly popular. As a result, many operators in this channel tend to build large shopping complexes with hypermarkets as their anchors and invite clothing retailers, restaurants, and entertainment operators to create a small shopping mall.
Hypermarkets will continue to be successful in China. Though Chinese incomes may increase significantly, consumers will still opt to buy groceries at hypermarkets because of the low prices and one-stop shopping experience. As urbanization continues, hypermarkets will find new opportunities in smaller emerging cities, and an increasing number of big box chains may emerge.
Ordinary supermarkets are fairly unprofitable in China because they face fierce competition from hypermarkets and wet markets. Wealthier Chinese cities are saturated with supermarkets, but consumers in smaller towns are often too poor to support a profitable supermarket chain.
As the number of wealthy consumers rises in first- and second-tier cities, a demand for better quality lifestyles has emerged. These affluent consumers favor imported products, which are associated with high social status and a more leisurely lifestyle. Though most Chinese shoppers perceive hypermarkets as the place to find bargains, premium supermarkets, which offer more high-quality and imported products, are expanding rapidly in larger cities. Premium supermarkets are likely to open near high-end office buildings and in shopping centers in central locations and affluent residential areas. Many local retailers—such as Beijing Hualian Department Store Co., Ltd. and China Resources Enterprise, Ltd.—have already started testing this retail format.
Some larger cities—such as Beijing; Guangzhou, Guangdong; and Shanghai—are saturated with convenience stores. Planet Retail expects that consumers in rapidly expanding second-tier cities will also accept convenience over low prices soon.
Most local convenience store chains operate as small supermarkets with fewer stock-keeping units, higher prices, and no fresh produce. Modern convenience stores are likely to develop in second-tier cities, but they face high rent and competition from local “mom and pop” stores. It will take time before a convenience store chain can increase in scale, build an efficient supply chain, and become profitable.
Foreign companies are looking to tap the expanding convenience store market. For example, Japan’s FamilyMart Co., Ltd. has announced plans to move from Shanghai to other first- and second-tier cities—such as Chengdu, Sichuan, and Hangzhou, Zhejiang—this year. The retailer aims to operate 8,000 stores in China by February 2021, up from 600 stores currently.
Hypermarket and department store operators have taken advantage of the popularity of their brand to develop freehold shopping malls, leasing the remaining space to complementary retailers. International and local retailers have announced plans to open more shopping malls in first-, second-, and third-tier cities. For example, Japan’s AEON Co., Ltd. has announced plans to operate 10-15 shopping malls in China by 2015. The retailer is also looking to open outlets in smaller cities where there is more space on centrally located streets. In general, more shopping malls are likely to open in suburbs of major cities.
Neighborhood stores, located in populous areas, are similar to small supermarkets. They sell more groceries than convenience stores but charge more than hypermarkets. Typical neighborhood stores include Walmart Stores, Inc.’s Smart Choice and Tesco plc’s Texco Express. These stores enjoy moderate sales but still operate at a loss because of their small scales of operation and inefficient supply chains. As incomes rise, however, more Chinese shoppers are expected to buy products from neighborhood stores for convenience than from hypermarkets.
This format should theoretically be popular among Chinese consumers, but private labels have yet to gain consumer acceptance—a prerequisite for this retail channel’s growth. Discount stores are unlikely to thrive in China in the short term.
Roughly 8 percent of the Chinese population currently shops online, and the e-commerce market reportedly totaled ¥263 billion ($40 billion) in 2009 (see the CBR, January-March 2011, Understand and Tap Into China’s Digital Generations). Online grocery stores are still developing, however, and most of their sales come from consumer-to-consumer platforms, such as Taobao. Online grocery stores face several obstacles, such as poor distribution networks, competition from hypermarkets and supermarkets, impersonal shopping experience, poor online store design, higher prices, and limited product options.
Despite these difficulties, the online grocery sector in China can be successful, particularly as the population becomes more affluent. Younger city dwellers are willing to pay a fee for delivery as they have less time to grocery shop. Retailers must be willing to make an upfront investment to improve the look and range of their online merchandise, advance their supply chain, and shorten delivery times to meet consumer needs.
—Yujun Qiu and Julia Zhao
Yujun Qiu ([email protected]) is a retail analyst at Planet Retail. He is based in Qingdao, Shandong. [/author]