Angelina S. Gustilo

 MODERN CHINESE CONSUMER TRENDS By: Angelina S. Gustilo JUNE 3, 2017 As incomes have risen in China, its consumers have stepped up their purchases of imported goods. But now, impatient for the latest products and better prices, they can buy directly from foreign retailers and suppliers at the click of a mouse or the swipe of a screen. Cross-border consumer e-commerce amounted to an estimated 259 billion renminbi ($40 billion) in 2015, more than 6 percent of China’s total consumer e-commerce, and it’s growing at upward of 50 percent annually. The country’s major e-commerce site, Alibaba’s Tmall, has moved into the market with a cross-border site (Tmall Global), as have smaller consumer rivals and start-ups, while US e-commerce leader Amazon is increasingly active in China. A number of factors are fueling the cross-border trend (exhibit). Chinese middle- and upper-middle-class consumers are looking to trade up to foreign clothing and gadgets not yet available in China, and they like the niche offerings that traditional “bricks or clicks” merchants rarely sell. Overseas imports purchased through such channels, moreover, are often expensive: for example, baby formula from overseas, popular with affluent Chinese parents, often costs up to twice as much as the same product in the United States or Europe. Shoppers on cross-border e-commerce sites also feel some degree of protection from fake or counterfeit goods that often pass for offshore brands, particularly in second-tier cities and rural areas. Government action is responsible, too. In an effort to stem illegal gray-market imports, China has created a favorable postal duty of 10 to 50 percent for a large list of personal-use items—sometimes as little as half the normal one. (Duty taxes of less than 50 renminbi are typically waived.) Eight Chinese cities have established trade zones qualifying for this tax regime, with more likely to do so, and e-commerce players have moved to speed up the clearance of goods through customs. Established logistics operators are building new distribution channels to handle the expanding trade. Fengqu.com a new e-commerce spin-off from SF Express, is one example. Fast growth and rising competition are spurring alliances and new strategies. Tmall Global has attracted major foreign retailers, such as US-based Costco and South Korea’s Lotte Mart, to its cross-border site. Amazon not only recently opened its offshore shopping sites to Chinese consumers but also offers users of its Chinese site (Amazon.cn) a list of selected foreign products with Chinese-language descriptions and specifications.e At Your Fingertips: Approaching China’s Mobile App Store Market ‘Appification’, or the process whereby web pages are translated into mobile operating systems for ease of access and use on smartphones, has gained momentum in China. As a result , mobile apps have become the main user interface, and have changed the ways in which people consume and businesses sell. According to a notice released by the Cyberspace Administration of China (CAC), all mobile application (“app”) stores in the country are required to register with the government. Effective since January 16, 2017, the notice cites the dangers of illegal information, user rights violation, and security risks that can be spread through mobile apps. By requiring app stores to register with the government, the notice clarifies that legal responsibility for content lies with the app store. This latest attempt by the Chinese government to increase regulatory control over mobile information and services underscores the growing importance of the industry. ‘Appification’, or the process whereby web pages are translated into  mobile operating systems for ease of access and use on smartphones, has gained momentum in China. As a result , mobile apps have become  the main user interface, and have changed  the ways in which people consume and businesses sell. The growth of mobile apps In 2016, total worldwide downloads from the iOS App Store and Google Play increased by 15 percent, exceeding 90 billion downloads. This same year, smartphone users spent almost 900 billion hours on apps, an increase of 25 percent from 2015.  China was largely responsible for this rapid growth,  contributing almost 50 percent to the iOS App Store’s annual growth. In the third quarter of 2016 alone, the Chinese market created over US$1.7 billion in iOS revenue. China now leads the market by more than 15 percent over the next largest market, the United States. This command is only expected to widen as internet penetration increases and the Chinese app market continues to mature. The mobile app market in China is highly conducive for growth. Compared to the US or UK, Chinese consumers on average use more apps . According to App Annie, an app intelligence firm, the average Chinese consumer uses an average of almost 40 apps per month, while the average American consumer uses about 35. Chinese consumers now spend five times more in the App Store than they did two years earlier. A burgeoning Chinese mobile app market App Annie predicts that China will have the largest revenue growth of any country by 2020. Games were the most popular downloads in the third quarter of 2016, making up 75 percent of all revenue. However, entertainment and video streaming apps have gained popularity, and mobile shopping apps show great promise. Social networking apps such as Tencent’s QQ messaging app, which saw  its largest increase in revenue thus far, also performed well this past year. Android is increasing its share of sales in the Chinese market, while iOS has had a harder time. However, Google Play is blocked in China, allowing for the growth of several domestic firms. There are over 200 app stores in China, and about 54 percent of all app users go through third party app stores. Large domestic companies, like Tencent, Qihoo 360, and Baidu, have created their own stores, which have performed well. The top five android app stores in China, ranked by coverage, are the following: Regulating the market Fragmentation of the market makes government regulation difficult , and leaves the market susceptible to  a proliferation of viruses. China is one of the markets most affected by malware infection. According to Cheetah Mobile Security, more than 1.4 million mobile devices were contaminated by viruses as of January 2016. With the CAC notice, the government is signaling its intent to crack down on this issue, but whether it will have much effect still remains to be seen. Key takeaways The growth of China’s mobile app usage and the bright future of the market is attracting app developers from around  the world. However, industry competition is fierce, with top international companies targeting the market, and strong performance from local teams as well. Government regulatory oversight is likely to expand and influence the development of the industry, making a clear understanding of China’s idiosyncratic cyber security laws all the more important for foreign entrants Latest survey of Chinese consumers reveals significant change lurks beneath the surface. Reflecting 10,000 in-person interviews with people aged 18 to 56 across 44 cities, a 2016 China consumer report, The Modernization of the Chinese Consumer, found that the days of broad-based market growth are coming to an end. Consumers are becoming more selective about where they spend their money, shifting from products to services and from mass to premium segments. They are seeking a more balanced life where health, family, and experiences take priority. The popularity of international travel is astounding among Chinese consumers, as is their adoption of trends such as mobile payments. And despite many similarities, consumer behavior can vary significantly among the country’s 22 city clusters. In short, the latest research suggests we are witnessing the modernization of the Chinese consumer, and that will only make the market more challenging for consumer-goods companies. But for those able to get it right, the rewards may be substantial. In this article, we’ll examine the evolving behaviour of Chinese consumers through three lenses: how willing they are to spend, what they are buying, and where they are buying. How willing they are to spend When asked about their expectations regarding future income, 55 percent of consumers interviewed were confident their income would increase significantly over the next five years. That’s not to say that Chinese consumers are unaware of the deteriorating condition of the economy. A growing number are seeking to save and invest, and found differences in consumer confidence widening at a regional level. While confidence about income growth during the next five years rose to 70 percent in the Xiamen–Fuzhou city cluster, for example, it decreased to as little as 35 percent in Liao Central. What they are buying We found that consumers are generally becoming more selective about their spending. They are allocating more of their income to lifestyle services and experiences—over half plan to spend more on leisure and entertainment (the 50 percent surge in box-office receipts in the past year is just one indicator of that trend). At the same time, spending on food and beverages for home consumption is stagnating or even declining. Chinese consumers are also increasingly trading up from mass products to premium products: we found that 50 percent now seek the best and most expensive offering, a significant increase over previous years (Exhibit 3). It’s no surprise that the growth of premium segments is outpacing that of the mass and value segments, and foreign brands still hold a leadership position in that premium market. What’s more, a rising proportion of Chinese consumers focus on a few brands, and some are becoming loyal to single brands. The number of consumers willing to switch to a brand outside their “short list” dropped sharply. In apparel, for instance, the number of consumers willing to consider a brand they hadn’t before dropped from about 40 percent in 2012 to just below 30 percent in 2015. Becoming part of the closed set of the few brands that consumers consider, or even the one brand that consumers prefer, is increasingly challenging. Fewer consumers are open to new brands, and promotions are becoming less effective at encouraging consumers to consider them. With a few notable exceptions, such as Huawei’s growing share of the premium-smartphone market, Chinese brands have not gained much traction in many premium segments, such as skincare, cars, sports, and fashion. That contrasts starkly with the mass segment of the market, where local brands are winning market share from foreign incumbents by offering a much stronger product proposition. Where they are buying Although China is the world’s largest e-commerce market—generating revenue of about 4 trillion renminbi ($615 billion) last year, around the same as Europe and the United States combined—and consumers increasingly purchase online, physical stores remain important. Consumers engage with brands both online and offline (Exhibit 4), and satisfaction with physical stores remains higher than with online ones. But the gap is narrowing, especially as satisfaction with hypermarkets declines. One trend that is helping maintain interest in physical stores is “retailtainment.” Two-thirds of Chinese consumers say that shopping is the best way to spend time with family, an increase of 21 percent compared with three years ago. Malls—which combine shopping, dining, and entertainment experiences the entire family can enjoy—have benefited most from this trend, at the expense of big-box retail outlets such as department stores and hypermarkets. Consumers also reinforce family ties through travel: 74 percent of consumers say it helps them to better connect with family, and 45 percent of international trips were taken with family in 2015, compared with 39 percent in 2012. More than 70 million Chinese consumers traveled overseas in 2015, making 1.5 trips on average, and shopping is integral to this experience. Some 80 percent of consumers have made overseas purchases, and nearly 30 percent actually base their choice of a travel destination on shopping opportunities. Among international travelers, around half of their watch and handbag purchases are made overseas, while apparel and cosmetics are the most frequently purchased categories. Overall, Chinese consumers are adopting new products, services, and retail experiences at rates unseen in developed markets. To take one example, mobile-payment penetration in China went from zero in 2011 to 25 percent of the population in 2015. At the same time, there are still differences in how Chinese consumers in various regions spend. While new highways, high-speed-rail links, and mobile Internet access have strengthened connectivity between neighboring clusters over the past few years, we found that differences across the country’s 22 geographic clusters1have grown even more pronounced. For instance, 35 percent of consumers in the Shanghai city cluster have purchased apparel online in the past six months, compared with just 4 percent of consumers in the Chengdu city cluster The Chinese consumer is evolving. Gone are the days of indiscriminate spending on products. The focus is shifting to prioritizing premium products and living a more balanced, healthy, and family-centric life. Understanding and responding to these changes in spending habits will be decisive in determining the companies that win or lose, whether international or domestic competitors. And while scale, speed, and simplicity proved advantageous in the past 15 to 20 years, the changing shape of Chinese consumption seems sure to topple some giants of the past and elevate new champions. Which will your company be? 10 trends of urban Chinese consumers in 2017 Despite the commonly sensed gloomy economic outlook, evidence has shown that Chinese consumer confidence remains resilient. As wages continue to rise, urbanization furthered and unemployment rate kept under guard, Chinese consumers are still willing to spend and continue to unleash their spending power. However, how consumers spend and why they are spending have undergone significant changes in recent years. Based on its extensive interactions with consumers from all over China and clients with a variety of background, Kantar TNS has launched 2017 new urban Chinese consumer trend report, identifying 10 trends about urban Chinese consumers: I. Trends fuelled by the shift in value and psychology of consumers: 1. Something for “me” - The new consumer is not going to settle with something every “common people” use, but something unique to set her/him apart from others. 2. Small Contentment - Self-defined happiness takes over traditional definition of success (i.e., wealth and status) and becomes people’s new pursuit. 3. Self Pampering - Modern lifestyle and western value is affecting how Chinese consumers see her/himself in relation to her/his family and the social world. Although family and social obligations are important, one’s own needs should also be taken good care of. 4. Show Time - The sense of “self” is manifested by Chinese consumers’ strong desire to be visible on social media. Behind the obvious motive to show difference, also lies the desire for social approval. II. Emerging trends as a result of consumer lifestyle evolves: 5. Health+ - A new level of consciousness on health and well-being unfolds. This is reflected in the basic necessities of life (e.g. clothing, food, shelter and transportation, etc.), from physical health to holistic view of body, mind and soul. 6. Buy Time - Time scarceness has always been a pain point for today’s consumers. Consumers are willing to buy time to free themselves from the boring and repetitive chores for hobbies/favourite activities. 7. Omnipresent Shoppers - Chinese consumers are now global shoppers and are able to shop anywhere whenever they want. III. Trends evolved with the changing demographical structure 8. A different kind of youth - This generation of youth (90s/00s as referring to people born in 1990s and 2000s) is more diversified and digital native. Their views and knowledge are greatly shaped by the Internet world. 9. Single Nobles - Modern lifestyle, rising individual earning, and open social views foster the growing number of single nobles in higher tier cities. This group of “rich, idle and happy” single nobles has "the freedom to choose for my own and choose as I want.” 10. New definition of “aging”- People who were born in the 1960s are about to enter their retirement age. This segment of consumers have a greater level of confidence than their previous generations, financially, physically and psychologically. These trends manifest that Chinese consumers now have unprecedented power to shape brands as they become more confident individuals. The rise of ecommerce and social media are increasingly important facilitators of the change. All of these have posed infinite opportunities and bigger challenges alike to marketers. Only when brands accurately capture the pulse of the new consumers can they weather the competition in this huge and ever-changing Chinese market. Leap-frogging adoption is placing new technologies rapidly and more deeply into more consumers’ daily lives. “Alternative payments, artificial intelligence and automated services will see a lot more development over the next year. There is a growing sense that anything is possible, an expectation of efficiency, a desire for customisation within boundaries, a rising acceptance of new technology, and robots are everywhere!” “Mintel research shows that 60% of Chinese consumers used Internet pay-by-credit service in 2016. What’s more, third-party online payment services, like Alipay Wallet and WeChat Wallet, have become the No.1 payment method in China after cash, while mobile app payment ranks second with 65% usage. In comparison, the usage rate of credit cards is below 50%, while that of near field communication (NFC) payment is only 12%.” “Meanwhile, China is already getting comfortable with the idea of robots taking over menial functions in daily life, including foodservice operations and robot journalism. China’s skies are also rapidly being populated by various kinds of civilian drones. While robots and drones are already finding their way into more aspects of Chinese consumers’ (and companies) lives. As more of their daily lives become automated, consumers will utilise the greater spare time afforded to them by taking up new pursuits.” said Matthew Crabbe, research director of APAC. ALTERNATIVE REALITIES The stress of fast-paced living is creating demand for technologies that enhance quality of life and provide channels of escapism. “Growing affluence is driving innovation in application and uptake of virtual reality (VR) and augmented reality (AR) technology. Consumers are already using VR devices to choose where they go on vacation. Thanks to increased adoption, consumers expect greater levels of interaction and free play.” “Virtual reality and electronic media are increasingly finding new applications and adoption for new tasks in China. This is helped along thanks to a population eager to adopt new things, having become used to continual change. We are already seeing retail companies experimenting with the concept of virtual supermarkets. This is bringing consumer engagement into the realm of online gaming-style play, augmenting the interaction with brands.” “VR is rapidly helping to grow try-before-you-buy services, which could increase customer satisfaction and reduce returns, and is likely to lead to more of a modify-before-you-buy concept. What is lacking up to now is content. Developing new VR content will be a key area of new development, from movies to games to brand campaigns.” “The development and adoption of VR in China has been rapid and world leading. But the full range of potential applications of this technology is only just beginning to emerge. We are likely to be spending a lot more time in the virtual world, doing virtual things with virtual people.”said Delon Wang, Manager of Trends APAC at Mintel.