China's Consumer Products Markets: Understanding the Changing Chinese Consumer
This week, Bruce Tompkins takes the reins and speaks with Steve Ganster about China’s consumer product market. What does the future hold for this bustling industry?
This is Bruce Tompkins. I’m the leader of the consumer products team for Tompkins International, and I’ve got the pleasure of having with me Steve Ganster, our executive vice president for Asia. Steve has a lot of answers to the questions that I’m going to be asking today and so Steve, very glad to have you with us.
Bruce, it’s a pleasure to be here. Hopefully I can answer those questions.
I’m confident you can. We want to start off by talking about some things to do with China.
The first question I have is that there are 1.3 billion people in China – if I have my facts straight – and obviously they’re buying a lot of consumer goods and consumer products.
What kind of headlines can you give us about the growth in the area of consumer products in China?
Well let me start out just talking about the consumers themselves. You mentioned 1.3 billion people – which is the general number that’s thrown around, but it can be plus or minus 200 million, 300 million people – which is interestingly about the size of the United States. It’s a big market and nobody has real precise numbers, but we know there are a lot of them.
If you start to look at these consumers, obviously there is a wide spectrum in their income levels. Generally people talk about a middle class and again there are definitional differences there. But in an area of 300 million people, these are people who have enough money to buy an apartment, maybe to buy a car eventually (not quite that many), to buy a number of the consumer goods, and even some fashion goods. So that 300 million is big compared to the total population of the United States.
And with China’s continued urbanization – you may not know this but there are over 170 cities with a million or more people – and we expect over the next 10 years or so that another 50 cities with over a million [in population] will just emerge. And some ways they will emerge out of a rural area, so the growth is just astounding. China is now the #2 economy in the world behind the US, surpassed Japan not long ago, but there is expected another 5 to 6 trillion dollars of economic activity to come into play over the next ten years or so. It is definitely a high priority for consumer product companies.
That is very interesting, Steve, that not only is it a huge market, but there’s really lots of people that are in the buying world. What kinds of things are they buying, and what kind of customers are we seeing?
Well the question is: What things aren’t they buying? We are seeing the staples and food, which is a high consumption item in terms of income relative to here for many Chinese consumers. But those in that middle class and upper class — certainly a lot of apparel, very fashionable, ready-to-wear casual, the whole full line you would see here – lots of accessories, beauty and body care is a big area, travel – they are spending money on various travel plans, both domestically and internationally. Some is even spent on some type of recreational level – golf, casinos, various adventure – sports, climbing. You’re starting to see a lot of activity there.
And certainly cars – there are some seventy million or so cars on the road now. An interesting ratio is: If there were the same cars per person in China as there were in the United States, then what would that number be? It would be a billion cars on the road and the roads are pretty congested at 70 million so that’s hard to imagine.
Another interesting aspect of that: It isn’t just what they are buying, but who are they, and we’re starting to see as China sophisticates a lot of different consumer groups and buying groups and more creative areas.
You’ll have the traditional buyer who wants the top 5-25 kind of luxury products and they’ll stay within very preferred traditional brands. And you’ll have the new luxury shopper, often younger people, who are seeking different experiences, maybe niche-oriented brands. They’ll kind of go on a new, more trendy path and with the internet everyone is aware of what’s going on in the world.
Of course, you have in China, in multiple aspects, the powerful woman and maybe other places; often they control the purse strings on a lot of products, and significant spends too. You may know China is basically still a one-child system, so there is a lot of little what you call “little emperors,” who are privileged, have a lot of money, and they are buying a whole spectrum of kinds of luxury and middle class kind of products.
Is there a similar level of online buying in China that we see here in the United States? Is that exploding?
It’s absolutely exploding. There are probably 10-12 what we call “Amazon wannabes” as consumers are increasingly turning to e-commerce. The Internet has been for a number of years a good place to market your products, but now it is becoming a very active channel to sell your products. Where it didn’t exist before for some consumer product companies, it can be 5-10 percent of their sales, and we see that rapidly growing.
So that was really interesting about the consumer base there. Do they spend at the same kind of rate in the US? In other words, do people, when they go in the store, do they spend quite a bit of money, or are they still reserved in what they do?
No, they spend a lot of money, especially proportionally so. Let me give you an example of that.
In the United States the average, what we call ‘female prestige consumer’ with a registered household income of $150,000 spends $3,000 annually on things like handbags.
Her counterpart in China would have an annual income of $18,000 or so versus that $150,000, yet spend up to $2,000 of that on handbags and related. So you have 2/3 of that spend at a fraction of the income level.
They do spend. What we find especially is these luxury consumers are young — three quarters are below 45 and almost half the market is below 35 in age. We have a lot of young consumers with money.
There is a statistic that the average millionaire in the West may be in his 50s, where the average millionaire in China would be in his mid 30s — so we’re finding these people coming in at a lot younger age.
You’ll see in other products too, such as cosmetic or personal care products, particularly women spend a lot of money; some say 10-15 percent of their income on cosmetics and skin care. The Chinese are very concerned with getting the look and not a lot on perfumes and things, although that’s changing.
You’ll find in a lot of these products, 70 percent is skincare, and the rest might be color cosmetics, so a little different kind of spin so as a consumer product company you have to be aware of what they are buying and what they are not buying. And obviously with the different environment, the Chinese skin, a lot of consumer products in that area have to tailor their product to suit the local clientele.
How about other kinds of consumer products like appliances and those sorts of things? Are they as open to spending in those areas?
Yeah, I think that the incidents rates for things like TVs is extremely high, and you have to remember most of these products are made locally, so the price points are more accessible.
Even back in the downturn a couple of years ago, part of their stimulus plan — and they had one much like ours here but it actually worked — but part of it was to help the rural consumer without a lot of money, so they subsidized the prices of small cars, appliances, rice cookers, things like that. So you go to even a small apartment, the incidence levels of these appliances are very high.
Steve, what motivates the Chinese buyer to buy consumer products?
As you might suspect there are a number of different factors. This is one of the areas in China that things may be quite different than here. Certainly status. I’m sure you’ve heard that face is an important thing: Status, ostentation, in many cases is a big motivation, particularly for branded products, self reward, a desire to be part of the world.
There are lots of expressions like political expressions. China is a communist country, but it is a socialist country with communist characteristics — Chinese characteristics rather — and it’s the same way: They like to be part of the world with Chinese characteristics if they can.
Research says more than 70 percent of goods are bought to demonstrate status or economic success. People are coming into millionaire status and a good middle class income to show to family and friends. Many luxury goods are bought as a reward for hard work and satisfaction. Again, there is a lot more sophistication today in segmenting consumers and demographics by type and buying groups with Chinese characteristics.
We already talked about the online channel, but going back on to that discussion a little bit more: What other channels are really important in China for consumer product companies? Where do they focus their time and efforts for the channels that people are buying in today?
There are two traditional channels that are still at the bulk of the market, but then maybe three emerging channels: ecommerce. Certainly for a lot of consumer goods there’s the classic department store, a supermarket in some case, shopping malls – you’ll find those in pretty much every city.
China is segmented into city tiers, classically tier 1, 2, 3, and now even tier 4, based on their economic level. One important thing to go back to the consumer targets is the tier 1 cities and tier 2 cities, which have traditionally been across those east cost cities – Beijing Shanghai, Guangzhou – those are not saturated but relatively soaked by brands and competitors.
Where we’re seeing a lot of the new money, this new 50 million class of consumers coming into the game, is in those tier 3, tier 4 cities, which are more out in the west if you will. So we’re seeing a lot of growth there in those traditional channels, whereas in the tier 1 cities, a lot of those traditional channels are getting very competitive — really tough to get space, and costly to get space.
So that still represents, for many consumer products, the bulk of the market still today for consumer companies. Then stand-alone stores, apparel companies that have a single brand store, a lot of these will be in the shopping malls, again, very choice location and central district of all tier cities. Those are still growing, but are a little more competitive and intensely developed for many cities — certainly the more mature cities.
The three emerging channels we talked about included ecommerce, which is increasingly important for all types of products. But then we’ll have multi-brand retailers which are starting to get traction in different markets, multi-brand boutiques, which are again tending to cater to higher-end specialty, luxury brands.
You may not know but for Amway, China is their biggest revenue market in the world. They can’t do the traditional direct-channel but it is a direct channel, so even that market is fairly sizeable and still growing.
Is the infrastructure for buildings and creating these department stores keeping pace with that, or is it sliding to the west too?
For the malls — China is ahead on building in that context, so you’ll find shopping malls popping up very quickly. I used to live in China, and now I commute every month. If I’m gone for two months – as it might happen – I may not be able to find my apartment, because there is a new highway or building, so that gives you a flavor of the pace of change.
On the infrastructure and logistics side, I think that is where the market is trying to catch up, especially on the fulfillment side. We will talk about that a bit later when we talk about supply chain. I would say that the venues and malls are developing rapidly, but the fulfillment side to get product is trying to hang on and catch up.
So let’s talk supply chain, and things that are going there. Not just the infrastructure, but in general how supply chain is working for CPG companies in China.
We’re in a tipping point in some markets. Over the last 10 years, China has been in the double digit growth for retail spending, even in 20-30 percent level of growth. A lot of consumer products companies were dotting the map with distribution centers randomly just to keep up. Now that it has gotten large and more complex, we are seeing a number of companies stepping back, saying, we need to get a handle on this and design a more efficient and future-friendly distribution structure.
We’re seeing a lot of network analysis today and a lot of companies are rethinking how to go to market – where they consolidate, where they have a main DC versus a depot or forward kind of fulfillment – so there is a lot of rethinking, and part of that again is pace of change. We’ve probably talked about this before, but China years are like dog years – one year is like 7 years in the US – it is very difficult to anticipate what the market is going to be.
Particularly ecommerce, it’s growing fast so how do we design supply chain? At the same time we’re dealing with issues of growth of tier 3 and tier 4 cities, which is largely is in the Central Western part of China. So now we go farther out and the infrastructure to get there is inefficient or costly — for keeping up with that new consumer growth we are seeing.
At the same time we talk about how good the market is, but it is a very competitive market. Every major brand is there including the emergence of some local brands, so supply chain is becoming important for competitive differentiation.
Now we have to get some points or costs out from supply chain. First, cost has been brought down a lot from China, especially for exports, but labor costs are rising and land costs are higher today. My costs are going up, so how do I get a handle, how do I be competitive? Supply chain is becoming a more important differentiator in that context.
Are multinational companies learning how to compete in China?
Some do it better than others, but we won’t mention names.
Over the last 15 years or so, many large consumer product companies have been there a long time. They are on their fifth duration of their strategy. The shelf life of a strategy, supply chain, or other is usually only 2 – 3 years, because of that rapid pace of change. Foreign and local companies are learning a lot and doing well. It is just difficult to plan with a lot more uncertainty than you’d have in a more mature western market.
Steve, this has really been interesting, and helpful for me. And I have one last question: What do you see working in China, and on the counter side to that, what is not working so well in China and needs some improvement?
Good question. One thing we have learned – and I say us as Tompkins has learned – through the years as well as clients: We’ve learned a lot the hard way in China: lessons learned and mistakes made. One thing that we’re keen on in terms of our clients is: Let’s not make those mistakes, but let’s make new mistakes to call our own.
There is no reason to go into China with your eyes shut, because there is a lot of experience, and we need to tap that. So if we go back and look at some of those lessons learned — and one of my favorite ones and one thing that still happens — is structure before strategy.
We get ahead of ourselves in terms of setting up an operation, doing a partnership without really understanding where our addressable market is, what’s our goal and what’s realistic, and then let strategy or structure follow. That sounds like business 101, but you’d be surprised how many people still violate that.
Companies still have a snapshot view of the market. We talked about pace of change. In China, information is hard to get, and we get more misinformation. So even to understand the current market is not easy, and now you have to look ahead 3-5 years and anticipate with a lot of uncertainly what it’s going to look like. Planning not in a snapshot sense, but where the market is going and having your timing at the right point in the curve.
Consider unexpected competition particularly at local Chinese companies. I think western firms often underestimate the capabilities, as many of these companies are learning and growing and getting more sophisticated every day, so you probably have to have a broader view of who your competition is.
Many companies have partnerships in some form: firm equity or contractual not doing enough due diligence in that partner selection. Here again it is more difficult in China when you have financial information that is not as transparent. You often hear two sets of books or maybe the real book is in the stakeholder’s head.
Poor relationship management: China as much of the world is more relationship-oriented, and we tend to be a little bit more of low context communicators. Black is black, white is white, well China is gray, so it needs a lot of face-to-face relationships.
China is a long ways away — but spending time there and going out to dinner and understanding the people you are playing with; — This is very important in China. We use that term guanxi for relationships, and that is a critical, often underestimated capability for western management.
Getting enough support: China can be in favor on Wall Street one month and not in favor the next. China has a long-term strategy so we need to give them the right support. In the history of China’s ups and downs, our of polling managing directors in China found that that was one of the biggest areas of discontent. When China got off the top of the table in terms of corporate management, they didn’t get that support and suffered dramatically.
The flip side of those are often the key principles of success, so instead of structure before strategy, strategy before structure. We say observe the six “Ds” — due diligence, due diligence, due diligence in everything you do — Understanding culture.
Probably one of the most important areas I’ll close with is “Chinafying” your business model. Obviously to be successful in China you need to do well there what you do here. We have to bring something competitive, but in bringing it to China – whether it’s your product, branding, marketing approach – that often has to be “Chinafied,” and understanding that right blend of what we do well and what the local market demands — that can be a tricky balance, but often that’s the key to success.
Great. This has been very helpful, and I’ve learned a lot. I’ve been engrossed by what you’ve been saying, so I thank you very much for your time.
My pleasure, Bruce, and let’s do it again.