China's Growing Consumer Market - Opportunities and Challenges
Klaus Koehler, Managing Director, Klako Group

As China's economy grows, the average income rises proportionally, and as a result a large number of middle class consumers emerge. The Bureau of Statistics in China announced in May 2006 an increase in retail turnover of 17 %, with retail sales reaching a new record high during Chinese New Year at the end of January. China's consumers spent RMB 190 billion during the seven days of the 2006 holiday and this was spread to rural areas as a large number of migrant workers were returning home.

This increase is not surprising as economic growth generally results in new capacities, modern technologies and productivity, which naturally has a positive impact on living conditions. As residential space and income grow, China's citizens can not only afford to purchase more durable goods, but also have more space for storing these. It is also shown that people owning property tend to spend more money for home related products and home improvement such as decoration, fixtures, furniture, furnishings, electronics and appliances. And although a certain number of small shops exist, which offer brands and products to meet the demand for home improvements, several foreign and domestic retailers for example Kingfisher, B&Q and Home Way have already established their presence in China. Especially consumers appreciating convenience and quality, the selection of premium brands, authenticity and reliable information from the well trained service staff prefer to shop at such modern retail centers.

An increasing number of young residents have obtained higher levels of education, leading to a new young consumer group. The population attending university has nearly doubled during the time frame of 1997 to 2003. This newly skilled generation will raise the expected future earning power, developing a new confident young consumer group, which is willing to spend money. This is making them an important target for international companies interested in the Chinese market, as already citizens between the age of 20 and 30 belong to the majority of big-spending consumers in China. As long as the country's growth rate continues at 8%, it has been predicted that by 2020, 100 million households will achieve European income levels.

Luxury Goods and Brands

China's population has a great demand for luxury goods, with a global share of 12%. Demonstrating consumerism is of great importance in China, as this is a way of individualizing oneself from the mass. In addition money is a cherished status symbol of wealth in China and expensive clothes as well as luxury goods like Louis Vuitton bags, Cartier wrist watches and Dior perfumes are considered an effective way of expressing this. Products which may be seen by others are therefore highly demanded. For example during the 9th annual auto show in Harbin, northeastern Heilongjiang Province, the luxury class limousine Maybach 62 was introduced to the province by Daimler-Chrysler and in addition Ferrari displayed its F430. Both cars were purchased by local buyers with the Maybach 62 selling for RMB 10 million.

With China's consumer's spending money on luxury and brand products, their expectation in receiving high quality products is also very high. In cases where brand products do not keep the promise generated through advertising for example, consumers are not willing to easily accept such circumstances. In order to express dissatisfaction about a product, the internet, with its 123 million Chinese users, is playing an important role.

An example of this can be seen when a Chinese consumer settled a complaint when a skincare product of Procter & Gamble did not reduce deep lines and wrinkles by 47% after 28 days as promised in the advertisement, but caused an allergic reaction instead. First this case was only reported in a newspaper, but was quickly picked up and spread by the internet, causing reactions throughout China's consuming population and creating damage to the brands image.
In December Nike was subject to another consumer attack through the internet, when it was accused of insulting China's dignity with a commercial showing a NBA-player fighting Chinese cartoons and symbols.
The power of online consumers should not be underestimated and therefore online activities should be monitored closely and online strategies should be developed.

Fashion

A lot of money in China is spent on clothing and with an emerging middle class, opportunities are created for other goods rather than just basic, low priced clothing. Many global apparel retailers are already approaching the Chinese market, operating stores and selling their brands to department stores. The basic structure of only two apparel types sold in China - luxury high quality and cheap goods - is changing slowly with a developing middle level involving both foreign and Chinese quality brands being sold.
Upscale, but not luxury international brands such as the Japanese brand Uniqlo as well as Mango or Zara from Spain, which is affordable to middle class consumers have already been introduced to the Chinese market. As the number of shopping malls increases continuously, a growth in the segment of fashion and clothing is predictable.

Travel Industry

With China's residents reaching greater spending power more money is also invested in non-essential services such as tourism, entertainment and leisure in general. The country already accommodates a large scale of national and international business travelers as well as tourists. While international visitors are used to high end luxury hotels, domestic travelers generally find accommodation in smaller budget and basic facilities. Encouraged by this situation leading discount hotel chains are planning their investment in China aiming to offer good quality accommodation at affordable prices. The expected rise of domestic travels will also have a positive effect on related industries such as China's airlines, restaurants, amusement facilities and shopping centers.

Consumers in China's Major Cities

Even though there is a general trend in China's consumer behavior, spending slightly differs depending on regional and geographical differences. Shanghai's residents for example prefer to invest more money in food, housing, recreation, transportation as well as communication than the rest of the nation, yet they do not own as many cars as the residents of Beijing or Guangdong province.

In Shanghai retail space covers 16,000 franchise stores, 15 shopping malls with a total floor space of over one million square meters and an additional 25 either under construction or seeking approval. By the end of 2006 Shanghai will also have approximately 150 hypermarkets. Unlike other competitive Asian cities like Hong Kong and Singapore, Shanghai does not host popular seasonal sales, which drive retail spending during traditionally slow months.

A weak point in consumer behaviorism is the Chinese preference for cash payments. Even though in 2005 920 million credit cards were officially circulating, consumers adapted to this payment method only slowly and until recently most consumers held no debt of any kind.
A damage of several billion RMB was caused in April of this year, when credit card and ATM machines in Shanghai and surrounding coastal provinces were out of service for several hours. The collapse was generated by a failure in the system at China UnionPay, who is hosting the nation's sole bankcard payment system.

Second and Third Tier City Consumers

In search of revenue growth most global consumer goods companies focus initially on China's four largest cities Beijing, Shanghai, Shenzhen and Guangzhou, only slowly expanding into second and third-tier cities.

While around 20 million households in the considered smaller cities and towns have a very low income, approximately 43 million dispose of an average monthly income of 1,400 RMB and an additional 35 million households have an average monthly income of 3,800 RMB. While these figures might be low compared to standards in developed countries, in China this income level allows individuals to enjoy a few small luxuries beyond the bare necessities of life.

Surveys show that those between 18 and 34 years of age make up 55 % of the market segment in urban areas. These consumers also tend to be more brand conscious as keeping up with fashion trends is considered to be quite important. The potential in China's urban areas can be distributed through low cost channels such as catalogue and TV shopping as well as door-to-door sales, which second tier residents favor more than first tier city consumers. In addition cash-on-delivery payments are common in these areas, since credit cards and cheques are still rare, especially in rural areas.

Summary

With China's continuously growth, income, properties, cars, computers, stocks and traveling abroad have become very important for spending and consuming. The lack of daily articles and groceries has vanished completely and consumer behaviorism has changed accordingly. Spending for substantial food, clothing and articles of daily use decreased, while people are spending more on things representing self-development and pleasure like housing, transportation, telecommunication, healthcare, entertainment, education and sports. Substantial and fine food as well as restaurant dining is becoming more and more popular among urban residents. Especially young dual income professionals prefer to eat out rather than to prepare fresh or bring home an already prepared meal, presenting a fair opportunity for the restaurant industry.

The quantity and quality of long life consumer goods such as electrical household appliances has also increased. In addition the popularity of purchasing large screen TVs or refrigerators with high capacity and several doors as well as noiseless computer functioned washing machines is increasing especially in urban areas. Air conditioners, home cinemas and furniture of high quality have become big sellers and the number of private purchases for cars, camcorders, computers, sport equipment and properties are increasing constantly.

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All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.