Wealthy, mobile and elusive: chasing China’s consumers

Wealthy, mobile and elusive: chasing China’s consumers

Thu, 06/09/2018 - 11:28

LINING UP Shanghai's retail market is becoming crowded as brands battle to be noticed by Chinese consumers. Photo: Shutterstock

Keong Chan
Aumake Haymarket

Discerning, big spending and sophisticated – they are the focus of any consumer-facing corporation and the backbone of many a global growth ambition.

But as rapidly as China’s wealthy new consumers have attained discretionary spending power, they have also become increasingly difficult for international brands to understand and reach.

Earlier this year, China moved past the United States and became the world’s biggest retail market – with more than $US1,463.8 billion ($2,031 billion) in sales in the first quarter of 2018, according to China’s National Bureau of Statistics.

In the US, retail sales amounted to $US1,306.7 billion in the same period.

And it’s not just rapid sales growth that has made the Chinese market an attractive proposition, with the nation’s consumer landscape evolving more rapidly than any other international market.

Chinese e-commerce is the world’s biggest online marketplace, with more than $US300 billion in sales in Q1 2018 driven by the simple convenience and astonishing pace that is the reality of shopping online in the People’s Republic.

E-commerce giant JD.com recently boasted it made 90 per cent of its Chinese domestic deliveries within 24 hours, with 57 per cent of those arriving within 12 hours.

JD even offers delivery within 30 minutes in select cities, using drones and other technologically sophisticated automated delivery processes that give an indication the future of retail has already arrived in China. 

Payments are made in the digital space in China more than in any other country, with physical wallets quickly becoming ‘forgotten’ as smartphone-based platforms such as WeChat Pay and Alipay have become preferred payment methods.

Alibaba Group’s high-end Hema Supermarkets are also driving technological innovation to the next level, offering consumers instant insights into the origin and authenticity of imported products as quickly as the shopper can scan a QR code.

At the same time, Chinese consumers are faced with a daily barrage of hundreds of new brands, making an entry to the China market a challenging proposition, even for retailers and manufacturers, which are well-known in their home countries.

Marketing expert Mark Tanner, who has helped more than 150 international brands make their Chinese market entry as the founder of Shanghai-based firm China Skinny, said on average, 160 new consumer products were launched every day in China.

“If you add wealth management products, tourism products, new apps and new websites, it goes up to more than 500 new products per day, and they are all singing out, trying to get attention,” Mr Tanner told Australia China Business Review.

“It’s phenomenal. But nothing is that special for them anymore because they are just bombarded every day.

“In many cases the consumers are more sophisticated, they are more likely to buy those premium, imported products, but it is significantly more competitive.

“The consumers are so used to all these new products that a lot of these exotic things are not that novel any more, they are not that special.”

Mr Tanner said the usual first step for an international brand was to land in one of China’s big four cities – Beijing, Shanghai, Shenzhen and Guangzhou.

“If you look at a city like Shanghai, everyone will go there, it’s an easy, convenient place to do business, it’s a direct flight from most places, but everyone is trying to sell there, everyone is trying to enter the market,” Mr Tanner said.

“It’s convenient, the food’s good, there are good hotels, most people speak English so, from a foreign brand perspective, that’s where a lot of them start.”

However, Mr Tanner said that strategy was increasingly providing limited benefits, with China’s lesser-known cities providing better opportunities, if manufacturers and retailers were willing to take on the additional challenge of entering a more unknown or complex market.

“Lower tier cities are much more appreciative of new products – they don’t have the same saturation, they don’t have the same competitiveness and they still find imported products to be a little bit novel,” he said.

Mr Tanner said a crucial factor in China’s consumption growth that was not yet well understood outside of the country was that most of the growth in Chinese spending power was occurring outside of its major destinations.

In tier one cities, research by China Skinny shows there are an estimated 16 million households, whereas in the second tier, made up of around 23 Chinese cities which have gross domestic product of between $US68 billion and $US299 billion, there are around 38 million households.

The third tier is even larger, with 229 cities with GDP of between $US18 billion and $US67 billion having more than 75 million households across them.

Mr Tanner said recent forecasts indicated China’s middle class would grow by more than 50 million households between 2016 and 2020, with half of those households likely to be located in cities that were not ranked in China’s largest 100.

“There’s these cities that no one has ever heard of and they are going to account for half of the growth of the middle class,” Mr Tanner said.

“They are all going to be wanting good, safe, healthy products.”

That desire for safe and healthy products was providing the opportunity for Australian food and beverage players, Mr Tanner said.

Australia as a brand had a strong following in China, thanks to its clean environment and reputation for high-quality products, he said.

And while denizens of China’s lower tier cities are generally more parochial than those who live in the major cities, preferring domestic brands over imported, consumers still perceive Australian products as premium, safe and healthy, particularly among those who have visited Australia.

Mr Tanner said Tourism Australia research showed that 58 per cent of Chinese visitors to Australia each year came from non-tier one cities, and that by travelling to Australia, consumers developed an affinity for Australian-made goods.

“(Tourism Australia) has found that 27 per cent of Chinese overall consider Australian food and beverage to be good, but for those that have visited Australia, it goes up to 69 per cent,” Mr Tanner said.

“There are a lot of positives coming out of that 1.4 million Chinese tourists that come to Australia each year, and that will be reflected in demand for products.”

However, Mr Tanner said while there was no doubt growing opportunities for foreign brands to service the needs of China’s lesser-known cities, those cities also provided significant challenges.

“They are complex, they are even more weird, wacky and unknown than the likes of Shanghai and Beijing, and they are much more difficult to navigate,” he said.

“Just finding service providers and distributors that really understand those markets is much more challenging than the well-trodden paths of Shenzhen, Shanghai or Beijing, where most distributors that are working with foreign brands are based.

“They will claim to have the country covered and they will claim they can get to all these cities, but I am yet to meet a single distributor that has everything covered.”

Another big challenge, Mr Tanner said, was to tailor a strategy for each individual market, a move many retailers overlooked in favour of a generic ‘China strategy’.

“If you look across China, there are phenomenally varied lifestyles, climates and tastes, so it’s worth keeping that in the back of your mind,” he said.

“Brands are increasingly looking to connect at an emotional level, but it’s quite different in each city, even across the tier one cities.

“We’ve spoken to a lot of consumers around China, and the themes that have resonated are quite different.

“Guangzhou is a 30-minute fast train trip from Shenzhen, but they are just completely different.

“If you look at Guangzhou, it’s an old city, most people there speak Cantonese, then just down the tracks in Shenzhen, it’s got a migrant population that has come from all over China so the common language is Mandarin.

“In Guangzhou, a lot of the people there are millennials, they live at home with their parents or their only see their parents most nights and on the weekends.

“Whereas people from Shenzhen have all travelled from somewhere else, some may see their parents once every Chinese New Year, or a few times a year.

“That’s just two tier one cities – when you go into the lower tier cities there are significant variations, and you can’t localise for every city, but it’s worth keeping in mind.”

Daigou shoppers

Back in Australia, AuMake International chairman Keong Chan is keenly aware of the challenges that suppliers encounter in seeking a foothold in China.

AuMake, which listed on the Australian Securities Exchange in October last year, has been developing a unique distribution strategy of targeting Chinese tourists and consumers when they visit Australia.

Mr Chan said AuMake had based its retail distribution model on the ‘daigou’ shopper, Chinese citizens who purchase goods for customers in mainland China while visiting other countries, often earning a significant mark-up on the retail price.

AuMake has established a network of retail stores, known as daigou hubs, showcasing a range of Australian-made products known to be popular with Chinese consumers such as milk formulas, wool products, health supplements and honey.

AuMake’s network, which recently expanded by five stores with the acquisition of retail chain Kiwi Buy, has created a new pathway for Australian suppliers to reach Chinese consumers by tapping into the psyche of daigou shoppers.

“Every time a tourist comes here from mainland China, 99 per cent of them will be asked to purchase products and send them home,” Mr Chan said.

“Even our chairman, Peter Zhao, he’s a qualified accountant, he’s a professional, and he still has friends and family asking him to send products back to China.

“He doesn’t put a margin on it, he just has to do it. That’s normal, but he still needs to make the decision about what to buy to send back.”

Complementing AuMake’s retail network is its manufacturing arm, which recently entered a partnership with New Zealand’s second biggest dairy co-op to develop a range of A1 and A2 milk formulas for the Chinese market.

AuMake also owns its own medicinal honey brand, Medigum, and a range of health supplements that are manufactured under the Health Essence brand.

Mr Chan said AuMake had been able to successfully launch its own products and give a leg-up to other suppliers with daigou shoppers by providing alternatives to popular products that were providing limited returns.

“From a daigou’s point of view, they understand that it’s very hard for them to make a decent income from selling popular products, because of declining margins, so they are always looking for new products and brands,” Mr Chan said.

“They’ve just never had someone providing all the necessary tools and marketing material to make that easier. That is a big deal for us and we spend a lot of time thinking about that.

“The fundamental question here is why some brands really dominate.

“There is a handful of them, infant formula brands and the likes of Blackmores and Swisse – there is a huge gap between them and everyone else.

“That is why AuMake was established, to bridge that gap.

“We know the consumers want it, and we know that there are really good suppliers out there in Australia who have amazing products and there is just a gap in between.”

Mr Chan said it was important for Australian suppliers with ambitions of an entry to China to not underestimate the power of the daigou shopper and, perhaps more importantly, to dismiss the stereotype of desperate buyers snatching tins of baby formula from supermarket shelves.

“If your market is China, you really can’t do it without their support,” he said.

“A lot of people have tried, believe me, a lot of brands that we know, even quite large and well-known brands, they have gone straight to China and in six months’ time they’ve come back because it’s like a drop in the ocean.

“How do you promote your brand and your product in a market where you are competing with brands from all around the world and the market moves so fast?

“Then there is a realisation – all the Chinese that live in Australia are the ones we really need to engage with to have the best chance of success.

“Lots of people have tried and a lot of money and time has been spent trying to go direct to China.

“If you are a global brand, that’s probably a bit different, but for everyone else, even for the popular brands in Australia at the moment, they still need the daigou, that’s just the way it is.”