TNS China

Who will replace the American consumer?

Vacancy for the top slot

Robert Zoellick the president of the World Bank is leading a global search for the replacement of the American consumer. The American consumer served the world well over the past decade. They bought in large quantities, extravagantly and indiscriminately. They bought regardless of where the product came from, what it did for them and whether they had place in the house to keep it – which led to their having to buy larger and larger houses to keep the things that they bought.

The workers in far off lands of China, India and Africa toiled away in Dickensian conditions to satiate the American consumer demand. They worked 12 hours a day in sweltering workshops, with no overtime or social security to provide affordable goods to American consumers, who in turn obliged by consuming prodigious quantities of them. However, it is felt that American consumer can not do an encore of this remarkable performance in the coming decade. A desperate need exists to find a replacement. Someone, who could continue to fuel the global growth that we benefited from in the last decade – or else the world faces a recession.

The Chinese candidacy

In a number of circles the name of the Chinese consumer is being whispered as a possible candidate this role. Can the Chinese consumer spin the same magic as the American consumer and keep us on the growth trajectory? The advocates for designating the Chinese consumer as the replacement of the American sustainers of world economy argued, that the fact that there are four times as many Chinese as Americans is a good starting point and makes the Chinese consumer a good potential candidate. “But they don’t even have one tenth of the purchasing power,” argued Robert Zoellick. “That money is required to make a purchase, is an old-fashioned concept and is has been clearly demolished by the American consumer,” argued the advocates. Anyway money is a nebulous concept, we have seen trillions go here and there and none is wiser as to why and where it went and how it seems to be re-appearing again. What we do know is that when it re-appears it does seem to gravitate to the bonus packages of the American bankers. In fact sometimes it reaches the banker even before it reaches the bank, which itself needs to be kept afloat by funding from the State.

The clinching argument came from those who triumphantly revealed that it was anyway the Chinese money that the Americans were spending. Hence it wasn’t really the American consumer but actually the Chinese consumer who was providing the growth to the world economy. The Chinese consumers toiled in sweatshops and gave a part of their hard-earned money to Americans who used it to buy the goods that the Chinese workers sweated to produce. So it all worked out quite well – Americans did what they did best and are known for, and the Chinese did what their culture and tradition guided, giving them satisfaction of following their values of hard work, thrift and moderation.

Then why bother to change? Change will mean that both Chinese and American consumers will need to go against their grain. Imagine embarrassed and flustered Chinese moving through the supermarket aisles and staring at large packs of frozen dumplings or dried beef that they know they will not be able to eat, or looking at toys for their only child who they know does not need any more. At the same time, American consumers having to change their perception of a bank to a place where they save their money than where they borrow money from (and take out sub-prime mortgages from), is also an uphill task. Given the current image of the banks and the federal bail-outs, how will American consumers have the heart to trust their own money with a bank? For decades they have been guided by a belief that it is better to have the bank’s money with them than have their money in the bank and it will not be easy to change this principle which has served them so well over the years..

Status quo

Still immersed in deep reflection, Rober Zoellick concluded,” The solution is status quo - and even more status for the Americans and more quo for the Chinese”. Let Chinese workers labor more and produce even cheaper and better goods for the American consumers. Let them lend more money to their American brethren so that they can continue to stuff their large houses with more toys, electric drills, synthetic carpets and dildos made by Chinese factories. Only the Americans have houses large enough to accommodate more shopping any way.

President Obama congratulating Ben Bernanke on being the Person of Year for the TIME magazine for 2009 said, “Ben, you do us proud. You have done well so far. If you need more money – go East, young man. Work closely with your runners up in TIME magazine – the unnamed Chinese worker – and you might just save the world.”

Written by Ashok Sethi

Ashok.Sethi@tns-global.com

Chinese consumers’ tight fists

The magic eight

Eight is a lucky number in China. The opening ceremony of Beijing Olympics commenced on the eighth day of the eighth month of 2008 at 8.08.08 pm. The car number plates with a few eights go for thousands of dollars in auctions and the consumer will willingly cough up a significant premium to acquire a mobile phone number which is festooned with a couple of eights.

Eight is also the percentage by which, the economists believe, the Chinese economy must grow to provide jobs to the millions of students graduating from Universities, or the rural folks migrating to the cities in search of a better life. The first two quarters of this year have been difficult – China could only muster up a 6.1% GDP growth in Q1 of 2009 and just missed the magic mark of eight in Q2 with a 7.95 growth. However the Q3 figures came at 8.9% and the whole of China heaved a collective sigh of relief that the growth of 8% will be achievable this year.

Clearly the magic has been achieved with a lot of stimulus - Chinese government is trying to spend four trillion yuan in stimulating the economy. Money is being poured into building roads, bridges and some income generating activities. In the first nine months of the GDP growth of 7.7 percent, 7.3 percent came from investment and 4 percentage points from consumption (decease in exports brought down the total figure to 7.7%). Exports continue to decline, though as the mood in the US brightens a little, the rate of decline has come down. Economists predict that the exports may actually start growing next year – but are unlikely to touch the 2007 levels in the near future as the American consumer may never reach back the frenzied shopping that they exhibited to the delight and the economic growth of the whole world.

Consumer

Economist say (softly in China and more shrilly in the West) that the Chinese consumer must spend more to compensate for the loss of exports and redress the global imbalance where the American consumers were sustaining the global economy with their profligate consumption of Chinese goods and the Chinese Consumers saving as much as one-fourth of their incomes. Hence the critical question now is whether the Chinese consumer will spend more and save the global economy.

The traditional reason that is given for the Chinese consumer to save a large proportion of their income is that a large number of them do not enjoy social security and need to set aside for their retirement and possible medical expenses. Secondly, culturally Chinese are considered to be thrifty and saving rather than consumption is considered a virtue. While these factors – whether cultural or structural – do contribute to the Chinese households stashing away a large proportion of their income there are other social and emotional reasons for this behaviour.

The other barriers to consumption

Owning an house ranks among the most important desires and goals for a Chinese. The idea of living in rented accommodation is alien and unacceptable. Traditionally Chinese have liked the idea of stability and state provided that by allotting life long accommodation, which you keep even after retirement. With state housing gone for most, the Chinese are rushing to buy apartments. The strong demand coupled with a relatively controlled supply has made the cost of housing disproportionate to the consumers’ income. Today the average per capita annual urban disposable income in Shanghai will buy two square meters of an apartment. Additionally Chinese need to cough up 30% of the price as down payment.

On the other hand social norms today make the idea of continuing to live with the parents after marriage as nearly inconceivable (no pun intended) and no self-respecting woman will accept a man’s hand in marriage unless the hand holds the keys to an apartment. With low starting salaries even for University graduates, parents need to bear the burden of saving for the down payment. The high mortgage payments in relation to the income further reduces the spending ability of the consumers.

Secondly, while impending marriage of the child brings a substantial financial burden for the family, the university education before that is also a formidable expense. As China moves towards becoming a market economy, the cost of education has been increasing steadily. Today for an average family the cost of providing a university education may take up as much as one-third to half the disposable income of the family. Even school education costs are going up as more Chinese consider the idea of sending their child to an expensive private school.

Thirdly the average Chinese consumer is value driven. Products receive a microscopic scrutiny and intensive comparison and valuation. Prices are compared thoroughly and promotions and deals welcomed enthusiastically. While there is a trend of premiumisation, it is not universal and applies more to products of visible consumption which can make the consumer look good and successful. Additionally the disappointment that many consumers faced, when the salary increases and bonuses were less than generous in the beginning of the year or the business growth challenged, has thrown a spanner on the path of moving to premium products.

Hence while the Chinese consumer will gradually spend more, and consumption as a proportion of the Chinese GDP will move up from its uniquely low level today, the movement is going to be gradual unless significant changes are made to make housing and education more accessible and affordable and the consumer regains the confidence of continued prosperity.

Written by Ashok Sethi

Ashok.Sethi@tns-global.com

What the current environment means for fine tuning marketing strategies in China

There is no time in China like today. On one side it is buffeted by the tsunami of global economic crisis, on the other side its consumer base is rapidly increasing in size and value. How can marketers make the best of this unique juncture in time and deploy the most effective strategies for establishing a firm position in China.

Presented below ten strategies that the marketers can consider to thrive in these times.

1. New strategies for new times

The changed economic conditions is affecting consumer behaviour and attitudes. Can the marketing strategies based on the understanding of the consumers in the prosperous times still hold water now. Consumers are changing their behaviour in several different ways and various underlying attitudes and values govern these changes. It is critical for us to re-look at the consumer and refresh our understanding to fine tune the marketing strategies.

2. Segment and decide

Not all the consumers react to the environmental changes in the same way. Different consumers have different reactions to the financial challenge –  ranging from an extreme tightening of the purse-strings, to a nonchalant continuation of the current indulgences. Tightening may be reflected in different tangible and psychological ways. Manufacturers also need to offer a range of different solutions and propositions to meet these changes in behavior.

Additionally, different consumer segments may be affected to different extent – and growth may vary from segment to segment. In luxury goods, for example,   connoisseurship and indulgence segments may grow more as compared to the pure status segment, as these consumers’ relationship with luxury segments is not only emotional but also very tangible.

3. Find new pastures

In these times, growth may be easier to come about through geographical expansion, than competitive fight in the current markets. The impact of the slowdown is more pronounced in larger cities – though the smaller towns and villages are also affected if they relied on export based industries. Hence while growth may be challenged in the larger cities, it may be a good time to set forth and explore new markets in county towns, townships and villages. These are the markets which are growing at a faster pace and offer greater return for investments.

4. Emphasize value – re look at your brand portfolio

It does not take rocket science to conclude that in these times the consumers will look for value. The challenge is to offer value without compromising the image. There are different strategies to deliver value – some are appropriate and some ill-advised – some will damage the brand equity permanently, some will keep the image intact but still help adjust to the times. Research shows that direct price reductions are likely to damage more than temporary discounts, and decreasing pack sizes more harmful that increasing pack size at the same price.

5. Look at your distribution channels

A strained economic situation not only changes the consumer, but also changes the shopper. Consumers are normally more attached to the brand than the retail store, hence their first choice is not to change the brand, but try to locate the same brand at a cheaper price at another store.

With more time at hand and greater incentive to economize, more consumers are likely to shop at hyper markets than the more ubiquitous but pricier supermarkets and convenience stores. The search for value and bargains will also turn the shoppers to internet shopping–the only channel that will grow even faster than hypermarkets

6. Help the consumer – teach her, train her, comfort and reassure her

Research indicates that Chinese consumers’ response to the economic challenge is cerebral. When opportunities are fewer and the competition more fierce the Chinese consumers will want to further enhance their skills and knowledge. Clearly it is very good news for companies teaching English or computer programming. But the opportunity is not confined to these firms – the FMCG industry could also take a more educative communication stance - wine makers could try to educate the consumers about appreciating fine wines, cosmetic companies could offer lessons on skin care and food companies could coach on diet and nutrition.

7. Family, home and security

When the going gets tough, the consumers tend to take comfort at home and in the arms of the loved ones. Recession is the ideal time to catch up with friends, take the children to the park and visit the parents, and in the process enjoy emotional warmth to compensate for the coldness of the economic climate. The children are likely to pay a heavy price for this, with parents having more time and inclination as well as a renewed determination to help their children with their studies. This offers opportunities to promote in-home consumption, rather than out of home consumption – which in many categories such as alcohol, is much more expensive.

8. Communication

It is not just the product but also the message which needs to reflect the current consumer mind. The communication messages of today needs to reflect sentiments of care and protection, rational and considered behaviour and performance and value These tones of communication, which always appealed to the Chinese consumers, are likely to find even greater resonance in these times.

9. Go digital

For the largest internet population in the world, internet has so far been a tool of entertainment and information – less so a tool for commerce. However the initial barriers are being overcome and consumers are discovering the joys of internet shopping. The attributes consumer associate with internet shopping are variety, enables detailed evaluation and comparisons and competitive prices. These are the attributes the consumer will be looking in the times of economic slowdown.

10. Keep a permanent hand on the pulse of the consumer

These are dynamic times. Things are changing at a phenomenal pace. As a result, so is the consumer mood and sentiment, which will have an effect on her decision making and the brands and products that she buys. If marketers don’t feel her pulse all the time, they could go wrong. One can not just listen to the consumer once a year - marketers need to put their ears firmly on the ground and listen to every change of beat, every nuance of the consumer mood and continue to fine tune the strategy.,

Published in South China Morning Post, July 27, 2009
Written by Ashok Sethi, TNS China

The most important consumer insight from China

China’s most important insight

Gaining consumer insights is critical for marketers to design optimal strategies for the large and complex market of China. Of course, there are many insights we can share about the Chinese consumers - their peculiarities, idiosyncrasies as well as common values and guiding principles that they often shares with consumers in the rest of the world. Each of these would be a relevant insight and could serve as a good input to the development of marketing strategy for China.

However, in this article, I want to talk about just one insight - an insight which I feel is really the most important insight about China. An insight which is enduring and universally applicable. And that insight is:

There is no universally applicable and enduring insight about China.

Now I know some of you may want to contend this – but think about this - if you disagree - you just prove my point - as this insight that I am giving you is also not universal. Of course when I say this, I am exaggerating a bit, but there are two reasons why I exaggerate and there are two points that I would like to make.

Firstly, given the size and complexity of China, Newton’s law of Consumer trends applies to China. For every consumer trend that you see, there is an opposite, though not necessarily an equal trend. Hence, if I tell you that Chinese consumers are  becoming more health conscious - and that is absolutely a valid trend, I also need to tell you that junk food restaurants have been growing in the country at a phenomenal rate. Obviously, they are catering to two different segments of the market – both of which are growing. Or at times it could even apply to the same consumers - who display different behaviour at different occasions or situations.

Similarly if I mention that for the market for luxury goods is expanding, and consumers are willing to pay a premium for better quality, there is also a phenomenon that consumers down trade for products which do not have social or image connotations. And hence we also see that private labels, though still small in China, are also growing significantly.

Or if we say that the Chinese consumer is getting westernized - in terms of adoption of Western food (at least junk food), or customs, (e.g. Christmas and Valentine’s day are celebrated with great gusto in China) at the same time I need to point out that there is a resurgence of interest in traditional culture, studying Confucius philosophy and Chinese art and design. Even if you take a very broad trend such as urbanization - and it is said that 10-15 million Chinese are urbanized every year, this year there is a reverse trend of sort as 20 million migrant workers return to their villages as they can’t find a job in the cities.

I think from a marketing point of view this fact has significant implications. As it means that if your opportunities and threats may not be just determined by the obvious trend but also by the counter trend.

Secondly, China is a market of explosive change. For example in the past 5 years, sales of luxury goods have tripled, sales of luxury automobiles have risen five fold. But it is not just luxury products -  the sales of passenger cars have grown 2.5 times. The number of internet users has tripled to 300 million to make it the world’s largest internet population. Even if you look at consumer goods - the fabric softener market has more than doubled in the past 5 years. Since I came to Shanghai a little over 6 years ago, the average salary of a Shanghainese has more than doubled and in my company it has tripled (I wish the same was true for me!)– as we pay well to attract the best.

If this is the pace of change that is happening in the market, and the marketing landscape is changing so rapidly, the insights that we discover may not be very enduring and hence for marketers, it is necessary to keep a permanent hand on the consumer pulse - once in 4 or 5 years usage and attitude research studies will not do.

Written by Ashok Sethi, TNS China

Ashok.Sethi@tns-global.com

Country road, (don’t) take me home

The reluctant march home

Twenty million migrant workers from the Chinese countryside, who have lost their jobs in the aftermath of the global financial crisis, do not wish to go home. Driven by the export boom, nearly 130 million rural Chinese had left their farms to toil in urban workshops and construction sites, sending money home to supplement the meager agricultural income. Unfortunately last year the Wall Street brought down the Main Street, which in turn resulted in the closure of factories in China which churned out products enjoyed by American consumers with borrowed money. Last month the Chinese government revealed that 20 million of these workers have lost their jobs and will possibly need to return to their rural homes.

The workers do not want to go home as their income from tilling their small farms is woefully inadequate to provide them with a comfortable existence and even a modicum of savings and security. The per capita rural income in 2007 was less than one third of what the urban Chinese enjoyed. Despite the harsh conditions of work and stay in the cities and the emotional pain of living separately from their loved ones, they willingly accepted this existence to be able to provide their families with a better quality of life.

The official deliberations

Not surprisingly, the welfare of these migrant workers and the economy in general was salient in the deliberations of China’s top legislative body (National People’s Congress or the NPC) and the top advisory group (CPPCC) which meet every year in Beijing around this time. As can be expected in China, scale is important and the meetings are held with great pomp and ceremony. The sheer size is staggering – NPC has nearly 3000 deputies, and the CPPCC National Committee has 2,235 members. Unlike the House of Lords in UK and the Rajya Sabha in India, attendance is high even in the advisory body and members are expected to remain awake during the proceedings. The publicly released pictures of the meetings show the members in a state of significant alertness, despite sometimes soporific speeches of fellow members and leaders. Previous meetings have debated, modified and adopted other important issues such as the Labor Contract Law and the Property Law. Discussion on China’s economy has always been prominent, but the tone in the past has been congratulatory and exuding pride. Economic achievement offered much fuel for pride in the past (in the 2008 meeting of the NPC the Chinese Premier Wen Jia Bao had proudly declared that China's economy grew by 65.5 percent over the past five years, or an average annual increase of 10.6 percent)

Not only is the agenda this year single-mindedly focusing on economic development, for the first time this year, in recognition of the need of the hour of judicious spending, the agenda of the meeting itself has been trimmed to 10 days from the usual 14 days. The euphoria of a decade long galloping economy has evaporated and the party officials are scratching their heads for how to keep the gravy train going and continue to provide jobs for the laid of workers as well as the new workforce entering the market (including a crop of 5.5 million university graduates every year). The languishing countryside and the widening urban-rural income gap was always an area of anxiety for the leaders. Guided by this concern, the party leadership in the past raised slogans like “the new socialistic countryside” accompanied by supportive actions such as abolishing the tax on agricultural income. The 2009 meeting clearly recognized that more needs to be done.

The rural stimulus

Research done by TNS in the cities, indicates that the urban Chinese though fearful of the global crisis (63% think that they will be affected slightly and 28% significantly) still sport a staunch optimism. However the rural folks – particularly the migrant workers are already in distress. The workers are obviously not happy to lose an income which they will never able to match with digging the small piece of land back home. They will perhaps be willing to work for even less, driving down the labor prices, and undoing some of the strength they had gained since the adoption of the Labor Contract Law last year. The government is helping out by infrastructure spending in the 4 trillion Yuan stimulus package– including expansion of railways, building roads and housing - much of which will go to rural areas and small towns. It is also trying to boost domestic consumption and cheer the rural masses by offering a 13% subsidy on a range of home appliances ranging from washing machines to mobile phones.

While the new DVD player and a color television may serve as a temporary palliative and help the returned workers while away their time (of which they have no scarcity now) a more lasting smile on their faces can only be achieved through alternate meaningful employment. The workers need an alternative to a miserable though lucrative toil in the cities and leisurely but penurious existence at home. More needs to be done to equip the laid off workers with new skills which make them eligible for other employment opportunities in and around their homes.

Equally important will be to offer them advice, guidance as well as small loans to start village level enterprises which could offer a sustained source of income. Micro-credit, the business of giving small, mortgage free loans in rural communities, which has transformed the lives of millions of peasants in many countries, possibly has a major role to play in China too. The new motorcycle that a rural resident may buy, aided with a newly introduced 13% discount, needs to become a vehicle for entrepreneurship and its engine also serve as an engine for rural growth.

Written by Ashok Sethi, TNS China

Ashok.Sethi@tns-global.com