China: Engaging the New Middle Class

Warren Wang
Few countries have experienced the pace and scale of economic development that China has over the past two decades. The effects of this growth can be seen far and wide, from world class infrastructure projects to outbound investments and tourism.

As economic prosperity is sustained, the resulting growth of the middle class is becoming the next economic engine in China. From 2009 to 2020, the size of the middle class will have expanded by 350%— or, in more concrete terms, over a period of just 11 years, more than 400 million consumers (more than the whole of the United States) will join the ranks of China’s middle class.

For years, many average Chinese consumers had common objectives: study hard, work hard, and network hard in order to distinguish oneself from the masses and secure financial security for one’s family. This is a gross oversimplification of Chinese consumers’ life goals, and the intensity of those pursuits is diminishing amongst many of those in the middle classes. These consumers, particularly those of the post-80s generation that have lived their entire lives in a state of relative prosperity, having realized a sustained level of financial security and quality of life, are fundamentally changing their brand preferences, expectations, and consumption habits. They want their purchases to be an experience that has purpose and adds value to their journeys through life. They want to move beyond basic product features and benefits, which is how most Chinese brands have traditionally marketed themselves, and be engaged – both online and offline – in an emotionally stimulating way.

Brands that deliver on these desires will capture market share, engender customer loyalty, and command premium margins.

The move towards higher quality
One of the most noticeable effects of this greater emphasis on “life enjoyment” is consumers’ increased expectations of quality. The great majority of Chinese middle class consumers have moderate-to-extensive overseas experience, either through study, work, or leisure. Imported product retailers such as T-mall International have significantly increased the range of foreign brand availability and marketing exposure in China.

Over time, middle class consumers (as well as domestic product brands) have developed a more refined sense of quality across a wide range of product categories.

Quality in this sense extends far beyond the safety and trustworthiness of products or the level of brand luxury. Many consumers are now eschewing the typical luxury labels that were so sought after a decade ago, preferring brands with greater craftsmanship, purpose, and truly authentic stories to tell. Leading Chinese juice brand, Weichuan, for example, made significant share gains recently with the launch of a semi-premium, not from concentrate (NFC) juice range. Brands across all sectors – from tea to flower delivery to consumer electronics – are placing significantly increased focus on unique and premium packaging design as a lever to drive sales gains.

These new middle class consumers are still in the process of self-discovery; they are very open to trying new brands and products that enable them to express their individuality and explore their life purpose. In 2016, overall Fast Moving Consumer Goods (FMCG) spend grew by 3%, marking the fifth consecutive year-over-year deceleration. In contrast, spend on international travel increased by 10.4%. For many, consumption is no longer functional or a means to demonstrate status, but rather a means to enrich their lives. Yili, China’s largest dairy brand, recently stated that Greek yogurt was its fastest growing category.

Bogged down by competition for limited resources, consumers in China have typically neither engaged in mainstream fitness nor shown significant regard for environmental quality. This too is changing. As the comfortable middle class seeks improved life quality, these consumers are joining gyms and sports clubs at record numbers and demanding products that support both a healthy lifestyle and a clean environment. Buoyed by strong government support, New Energy Vehicle sales are skyrocketing and are forecasted to comprise over 11% of the total vehicle market by 2023, representing a 16% 10-year compound annual growth rate (CAGR), with brands like BAIC, BYD, and JAC leading the way. Despite the deceleration in the economy, local and imported air and water filtration brands such as Unilever’s Qinyuan are witnessing record sales with average growth rates over 20% in 2016.

Time is of the essence
As much as consumers are consciously seeking out enriching experiences, products, and life quality, they’re also afforded increasingly less time to do so. Urbanization and increased commute times, extended office hours and workplace bureaucracy, and more frequent business travel are contributing to longer and more stressful days for many members of the white collar middle class.

Consumers are placing increased importance on convenience and pleasure in the customer journey. Ten years ago, it was the hypermarkets that led retail growth. Today, large format retail is in a multi-year decline, and growth is seen almost exclusively in e-commerce and neighborhood convenience stores. Today, upwards of 80% of all e-commerce in China transacts through mobile devices, making it the must-have channel for nearly every brand. In addition to Alibaba and JD.com, a myriad of other category-specific e-commerce platforms exist and are growing as fast—if not faster—than the two giants. Similarly, in traditional trade, big players such as Bailian and Carrefour often first spring to mind, but it’s specialty retailers such as Watson’s (personal care) and Muji (multi-category consumer durable goods) that are winning customer loyalty through carefully curated portfolios and in-store customer journeys.

Brands that deliver on consumers’ desire for life enjoyment and pleasure while also making the experience fun, convenient, and effortless are winning in China.

Self-disruption
Middle class consumers expect services to be delivered flawlessly at breakneck speeds and affordable prices. Fortunately for Chinese consumers, mobile technology and the proliferation of affordable manpower has enabled the growth of multiple new business models. Out-of-home dining, for example, is now seeing roughly 25% of total annual sales transact through door-to-door express delivery providers like ele.me and Dianping-Meituan. Far ahead of the Amazon Fresh movement, Chinese middle class consumers have been purchasing perishable groceries through retailers like T-mall Supermarket or Tian Tian Guo Yuan for years. The sharing economy is a perfect response to the emergence of the middle class urban dweller. Ride and bicycle sharing brands like Didi Chuxing, Mobike, and Ofo have captured significant share of consumers in most major cities in China. These developments are completely disrupting the way people engage with food, dining, and mobility.

The middle class consumer demands that brands be omnipresent and seamless, personally relevant and engaging. Mobile convergence and social media have fundamentally changed the way that brands engage with consumers, as well as the “personalities” they engage them with. Traditional celebrity spokespersons have seen their lead role as brand endorsers eroded by thousands of grassroots Key Opinion Leaders (KOLs) and “wang hong.” Some brands, such as white-goods global market share leader Haier, have carefully crafted a social media personality that is fun, humorous, and speaks plainly on all manner of topics from popular culture to current affairs. The result is a corporate weibo social media account with more than one million active followers – extremely impressive given their industry.

To capitalize on this unprecedented growth of the Chinese middle class, brands must deeply understand consumerS and the dynamics of their rapidly changing preferences, expectations, and consumption habits. Brands must engage consumers through unique and enriching user experiences. The customer journey should be meticulously designed to ensure that it is immersive, seamless, convenient, and fun. Brands that deliver on these elements and engage the middle class will continue to grow.

Chief Executive Officer, China