Young Chinese in the Hinterland€¦ · Russia 492 -7.6% Australia 485 2.9% Country User (million)...

Young Chinese in the HinterlandHow to Tap This Blossoming Market

While China’s huge consumer markets continue to get bigger, two important yet underappreciated sea-changes are occurring. First, the nexus of spending power is shifting from wealthy middle-aged residents to younger generations. And second, as consumer markets in coastal cities such as Shanghai and Guangzhou become saturated, the strongest economic growth is shifting to inland cities.

But marketing to the younger generations in the hinterland requires different strategies than those used for coastal areas. Several companies—by moving quickly, knowing customer preferences, and developing creative marketing tactics—are pointing the way to success in China’s hinterland.

2 | Young Chinese in the Hinterland

Introduction

Setting the stage

Inland economies on the rise

Targeting “little emperors”

Get creative with distribution

Popularity follows close on trust

Internet sales a latent opportunity

Think engagement

Conclusion

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Table of contents

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Already the world’s second largest country in gross domestic product (GDP), China is poised to have the world’s largest private final consumption expenditure—the market value of all household purchases of goods and services—by 2020. It is currently sixth in private final consumption expenditure, and rising rapidly (see Figure 1).

Recent history illustrates this meteoric rise to the top: In 2010, with more than 800 million mobile phone users, China became the largest cell phone consumer market worldwide (1.2 billion subscribers in May 2011). Its automotive market rose to the top in 2009, and its beer market, which eclipsed the United States in 2003, is still expanding. Its television and personal computer markets are forecast to become the world’s largest in the near future. In 2009 China had 384 million Internet users—1.6 times as many as in the United States (see Figure 2)—and this number, along with Internet sales, is steadily growing.

Setting the stage

Country Amount Annual Growth

USA 9,180 -1.2%

Japan 2,575 -1.0%

Germany 1,676 -0.2%

UK 1,498 -3.3%

France 1,297 0.6%

China 1,239 9.1%

Italy 1,047 -1.7%

Canada 705 0.4%

Spain 669 -4.2%

Brazil 661 4.1%

India 646 4.3%

Mexico 584 -7.4%

Korea 508 0.2%

Russia 492 -7.6%

Australia 485 2.9%

Country User (million) Diffusion/population

China 384.0 28.5%

USA 239.9 76.2%

Japan 99.1 76.8%

Brazil 75.9 39.2%

Germany 65.1 79.3%

India 61.3 5.1%

Russia 59.7 42.4%

UK 51.4 83.6%

France 44.6 71.6%

Nigeria 44.0 28.4%

Korea 39.4 81.6%

Italy 29.2 48.8%

Mexico 28.4 26.0%

Spain 28.1 62.6%

Figure 1. Private final consumption expenditure 2009 (US$ billion)

Figure 2. Internet penetration by country, 2009

Source: United Nations Statistics Division

Source: International Telecommunication Union

GDP per capita

>=$4,000 $2,500-4,000 < $2,500

GDP growth rate

> =13% 11–13% < 11%

Figure 3. Rising inner cities

Source: National Bureau of Statistics of China 2010


Until recently, China’s economic growth has been driven largely by coastal cities. But while coastal areas are recovering from the global financial crisis and economic downturn, they are unlikely to return to their previous levels of growth. For one thing, China’s central government aims to accelerate the growth of the inland economy by

Inland economies on the risesteering infrastructure investments such as railways and roads to the hinterland. Cities there, previously less relevant to the global economy, are now expected to show double-digit GDP growth, with natural resources and energy, agriculture, and manufacturing for domestic demand playing prominent roles (see Figure 3).

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A large gap still exists between the per capita GDP of China’s coastal areas and that of the inland areas. But the average personal after-tax income per month in Chengdu, Chongqing, and Xian, which comprise the western triangle development zone planned by the central government, was 6300 RMB in 2008—almost the same as that of the major coastal cities of Shanghai, Guangzhou, and Shenzhen in 2006 (see Figure 4). And because the cost of living in the hinterland cities is much lower than in coastal cities, purchasing power there can go farther and potentially grow faster.

These cities are growing—China’s urbanization rate, only 20 percent in 1978, rose to 46 percent in 2008 with more than 400 million people migrating to cities from rural areas in the past 33 years. Some analysts predict the urbanization rate will exceed 70 percent by 2030, with an additional 500 million people migrating from rural areas. This level of large-scale and high-speed urbanization is unprecedented—the United States, for example, took 90 years to reach a 70 percent urbanization rate, with 250 million people migrating to urban areas from 1860 to 1950.

Xi’an

5,695

4,0633,714

Chengdu

6,535

5,3784,487

Chongqing

6,687

5,011

3,900

Shenzhen

8,687

11,235

Guangzhou

7,0347,045

5,383

Shanghai

9,754

7,491 7,554

5,816

2006 20082007

Coastal 2006 average: 6,251

Hinterland 2008 average: 6,306

Figure 4. Average personal after tax income per month by city

Sources: Credit Suisse Annual Chinese Consumer Study, Accenture Research analysis

In today’s market, contrary to past experience, a multinational company might consider avoiding first-tier cities such as Shanghai and Beijing where competition is fierce, and target instead the lower-tier cities. Market competition for consumer goods manufacturers in China will expand not only in first- and second-tier cities such as the capitals of provinces and direct-controlled municipalities— cities that have a status equal to provinces and are controlled directly by the Chinese government—but also to third- and fourth-tier cities. According to the China City Statistical Yearbook 2009, there are 25 second-tier cities, 24 third-tier cities, and 18 fourth-tier cities in China. The fourth-tier cities have populations of more than 20 million people.


The past several decades have seen extraordinary changes in China’s social, economic, educational, and work environments—all of which have led to changes in its consumer market (see Figure 5). The post-1980s generation (21-30 years old) and the 1990s generation (11-20 years old) together number approximately 400 million (see Figure 6). They are becoming the main segments of the Chinese consumer market, and they differ from other generations in many respects. These offspring of China’s one-child policy constitute the first large cohorts

in China to grow up in affluent circumstances with comfortable childhoods, enjoying “six pockets”—with both parents and grandparents willing to spend money on those they fondly call their “little emperors.” With much-improved educations, these young consumers have been exposed to competition in school and in the workplace. They long for the lifestyle in coastal cities and Western countries, glimpsed on TV and the Internet, are sensitive to fashion and other consumer trends in Western countries, and many of them consider consumption a virtue.

Targeting “little emperors”

Consumer groups by age

Born in 1950s and 1960s

Born in 1970s Born in 1980s Born in 1990s

Social/political experience

Education inter-rupted by Cultural Revolution

Experienced some hard-ship in childhood, received education after cultural Revolution, benefit from economic reforms

‘Little Emperors’, first generation to grew up under the one-child policy

Born in the economic booms and opening era

Psychological/ social profile

Frugal, some level of resistance of westernizing environment

Self perceived as hard working and want to be recognized for their efforts, feeing the stress of growing old

Self confident, prone to western culture and merchandize, pressured to establish themselves in career

Optimistic and confident, follower of westernized culture

Financial status Benefited from the booming economy but not as much as younger generations

Major beneficiary of economic reforms and better-off than their older brothers and sisters

In addition to income of their own, enjoy the financial support from their doting parents

Significant purchasing power based on generosity of parents and relatives

Pressure in employment

Low Moderate pressure: • Established status and

level • Concerns about the

job security and future growth ceiling

High pressure: expansion of higher education enrollment and resulting competitive job market for junior talents

Start entering job market, pressure for inexperienced educated talents

Consuming behavior

Spend conservatively, high sense of crisis

Major driver for trade up on home decor, appliances and financial services. Willing to spend for their children’s future

In pursuit of style and fashion, spending on their first homes

Eager to try new brands, (in big cities) increas-ingly tech savvy (mobile, internet, digital products), heavily spending on clothes, snacks, etc.

Figure 5. Consumer group distinctions among different age groups

Sources: Analyst reports, Accenture research analysis

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Figure 6. China population structure in 2010*

*Source: United Nations “ World Population Prospects, The 2008 Revision Population Database”

100+

95-99

90-94

85-89

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0-4

0 20 40 60 80 100 120 140

80s

90s

People (in millions)

Figure 7. Age composition of consumers of foreign brand perfume

Sources: MasterCard Global Consumer Confidence Index Report, Sino Monitor Consumer Goods Market Tracking 2009

15-2425-3435-4445-5455-64

AuspreAvonChanel Lancom CD

26.6%29.8%

32.5%27.0% 26.4%

1.7%2.6%0.9% 0.9% 3.0%

33.9%34.4%

34.4%35.9%

41.6%

26.8%24.3%24.7% 29.0% 23.1%

11.0%9.0%7.5% 7.2% 5.9%

The 1980s generation in urban areas has become known for the impulsive lifestyle called Yue Guang Zu (those who spend all disposable income and have no savings). This generation spends freely on premium brands, and sees these expenditures as investments for themselves: 60 percent of Chinese who buy foreign premium brand perfume such as Chanel and Christian Dior are under the age of 35, and more than 25 percent are under the age of 24 (see Figure 7).

Although they are restricted from moving freely, young hinterland Chinese have rising incomes, and they have only just begun to gain access to the products that represent the lifestyle they covet, as large retail chains penetrate nearby urban areas.

Some local Chinese companies and multinational companies have begun to successfully target the young Chinese in hinterland cities. Here’s how.


Simply wholesaling products to powerful retail chains and distributors/dealers as they have in coastal cities hasn’t worked for multinationals in the hinterland; instead they are developing creative ways to directly access inland consumers. Here are some instructive examples:

Nokia, the Finnish mobile phone manufacturer, worked with a fulfillment distributor in addition to its existing distribution agents, in order to get its products to retailers throughout China. By building a comprehensive distribution network, Nokia has retained its leading market share position in the fiercely competitive Chinese market.

Shiseido, the Japanese cosmetics manufacturer, entered China in 1991, establishing its main distribution channel in department stores in coastal cities such as Shanghai. In 2004, the company expanded its store network to hinterland cities. In 2006, Shiseido launched Urara, a brand limited to specialty stores. Shiseido lends Point-Of-Sale systems to these boutiques and regularly dispatches supervisors to provide thorough training on Japanese-style service skills and make-up techniques. It has expanded its specialty store network to more than 5,000 stores, and has sales of 6 billion RMB in China, just behind sales of L’Oréal.

Get creative with distribution Pigeon, a Japanese childcare and maternity product manufacturer that faced a competitive challenge in coastal cities, has focused since 2005 on improving its sales network in China’s hinterland areas. It signed contracts with three primary channels— retailers specializing in baby products, department stores, and mass retailers such as supermarkets. And it has developed 33 secondary distribution agents for the specialized stores. Pigeon trades with all distributing agents using a deposit system that eliminates accounts receivable risks. There are more than 7,000 retailers in Pigeon’s network, which cover every province in China. The company’s 2009 sales in China were 550 million RMB, an increase of 53 percent over the previous year. Sixty percent of sales came from outside coastal cities.

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Popularity follows close on trustGoods and services of foreign or multinational companies that are popular elsewhere in the world are not necessarily so in China. For example, in China’s Internet search market, Google has only 20 percent market share while Baidu has a market share of 75.5 percent (Q4 2010). Other market leaders in China are Taobao vs. eBay, Renren vs. Facebook, and Meituan vs. Groupon.

When a foreign company enters China’s hinterland, the company’s brand will initially be completely unknown. So entering the market by simply translating content into Chinese will likely have little impact. Thus, educating people on the value of the company’s products is an essential first step. And it is most important to localize the company’s content and make creative efforts to gain popularity and trust from local young people.

Benesse, a leading Japanese remote education provider, is targeting middle class Chinese people keen on investing in their children’s education, They send education materials specific to a child’s age to families on a monthly basis. Although their service is more than $10 per month—relatively high for Chinese people—the service has become popular throughout China and the annual contract update rate has reached 85 percent.

When Benesse entered the Chinese market in 2006, parents knew nothing of their service. Rather than using mass media advertising, the company posted advertisements at events in shopping malls. In conjunction with local education organizations and media in each area, offered promotions on their website, and provided free sample education materials. The

proportion of consumer-members who joined immediately after trying a free sample reached 25 percent. Additionally, the company has 200 telephone sales representatives who call families, listen to their concerns about education, and explain the company’s service. Some 40 percent of the company’s consumer-members signed a contract in this way. Also, 25 percent of all consumer-members joined through hearing about Benesse from existing members and other people. From 2006 to January 2011, 300,000 people became members; Benesse is targeting 1 million new members by 2015.


Internet sales a latent opportunityThe Internet is an effective channel for building sales in hinterland areas. Roughly 70 percent of the 400 million Internet users in China were born in the 1980s or ‘90s, and they play a major role in Internet culture. While the current rate of Internet penetration is higher in coastal areas, the number of Internet users in hinterland areas is steadily increasing (see Figure 8). But here, too, trust is an issue: Many Chinese Internet shopping sites are fraudulent, and even legitimate sites have frequent problems with delays or damages during delivery. Internet sales, therefore, present another important opportunity to build customer trust.

These two companies are leading the way:

Taobao is a Chinese language web site for online auction and online shopping, similar to eBay. Taobao drastically expanded its market share using Alipay, a very popular third party assured settlement account, which facilitates secure payment both for stores and Internet users. Taobao expanded its share by becoming a site trusted by both shops and users.

VANCL, a Chinese apparel manu-facturer and Specialty store retailer of Private label Apparel (SPA) since 2007, focused on Internet sales and outsourced manufacturing of basic fashion items for young people, to reduce costs and offer products at a reasonable price.

VANCL also made efforts to ease concerns among consumers and build trust by appointing overseas designers for product design and by investing in public relations. The company is now the second-largest online advertiser in China.

After two years in business, VANCL had a market share of nearly 30 percent in the Chinese apparel retail market, with sales of 700 million RMB. The total market for retail apparel is approximately 2.4 billion RMB.

>=50 million people

30–50 million people

<30 million people

>=30%

20–30%

<20%

>=40%

30–40%

<20%

Internet penetration rate by region2

Internet user growth rate by region2

Population distribution1

Figure 8. Inner city opportunities

1National Bureau of Statistics of China2CNNIC “ Statistical Survey Report on Internet Development in China” (2010)

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Think engagementAs future competition will be fierce in hinterland cities, outstanding brand positioning is a critical strategy in addition to building effective channels and developing trust. Creating differentiated, engaging, and valuable experiences for customers is key.

Take IKEA, the renowned furniture and home goods company, which entered China in 1988 and opened eight stores in eight cities in 2009. In 2010, its Chinese sales reached 3.72 billion RMB, and it achieved the top market share (0.9 percent) in the furniture retail market.

IKEA targets the middle class in China, rolling out stores which provide well-designed furniture at a reasonable price, as they do in other countries.

The power of the IKEA brand comes from its focus on offering a lifestyle and a customer experience rather than from simply selling products. For example, IKEA stores don’t display single items on their own, but rather show a whole room and the lifestyle that could occur there. The Company’s catchphrase in Chinese TV advertise-ments is “Better Life with IKEA” and its catalogs are edited by room style, as opposed to product category. Its website also is also structured to help consumers design their lifestyle. The Company has a Do-It-Yourself room design function, where consumers simulate the positioning of furniture and colors in various rooms. And it also has an online community, IKEA Family Club, in which customers share their ideas and experiences.

A different approach, rolled out by Meters/Bonwe, consists of creative positioning and providing customer experiences on the Internet. The company, established in 1994, is an apparel manufacturer targeting young Chinese. It owns two brands—Meters/Bonwe, which targets ages 16 to 25, and Me & City, targeting ages 22 to 35—and it outsources its manufacturing and retail so that it can focus on designing and branding. Its flagship stores are expanding in second-, third- and fourth- tier cities, and its sales grew to $770 million in 2009 (5b RMB), a compound annual growth rate of 55.4 percent from 2005.

Unlike IKEA, which is positioned as an advocate, Meters/Bonwe positions itself as a friend or adviser to young people. It targets students, holds events, and advertises outdoors. And it is working particularly hard to provide customer experiences on the Internet. For example, the company has opened stores at major Business-to-Consumer Internet malls, such as Taobao and Paipai, it provides customers with the opportunity to dress their online game characters in the company’s clothes, and it offers a fashion adviser service that explains fashion trends on its website.

Five tips to guide your effortBased on our experience and the examples of leading players in China, we’ve distilled five factors that will raise the odds of success in this up-and-coming market:

• Move quickly. First-mover advantage comes into play here, as it can take years to build a trusted brand.

• Learn your customers’ priorities. Balance a global brand and operations with a willingness to learn about and understand the needs and desires of this varied group of consumers.

• Choose distribution channels carefully. Hinterland cities require creative approaches, such as developing new brands for specific channels, using fulfillment distributors, or managing a network of both primary and secondary channels.

• Engage customers rather than just transacting. Create a consumer experience that is personal and engaging and speaks to young consumers’ hopes and fears. The online channel in particular can be used not only for transactions, but as a way to build trust.

• Experiment with marketing tactics. Play to young consumers’ enthusiasm for new experiences, through such methods as embedding ads in online games and sponsoring events.

ConclusionYoung, educated inland Chinese, who value consumption and have increased spending power now comprise a relatively open consumer market, poised to grow substantially in coming decades. Agile companies willing to explore new territory with innovative marketing approaches have a good chance of success if they forgo market-saturated coastal cities, and instead set their sights on China’s hinterland youth. Companies can look to examples set by others that have been successful thus far.



Masamichi Ohhara is a senior executive in our Strategy service line based in Tokyo. He has over 16 years of experience consulting clients mainly in Electronics & High-Tech sector on strategy, organic growth, and emerging market expansion, and leads Accenture’s Growth Strategy area in Asia Pacific.

[email protected] Wayne Borchardt is a senior executive in Accenture’s corporate strategy group and the global lead for our Strategic Planning & Growth practice. Wayne brings over 17 years of experience consulting with clients on strategic planning, growth strategy, pre-deal and post-deal M&A, shared services, and broad transformation programs.

Most of his consulting experience has been in the Consumer Goods, Retail, Pharmaceutical, Healthcare, and Infrastructure sectors. He is based in Kuala Lumpur, Malaysia.

[email protected] Jill Dailey is a senior executive in Accenture’s Management Consulting practice and leads our Strategic Planning and Growth Offering in North America. Jill brings over 12 years of experience consulting with global clients on strategy, new growth opportunities, international expansion, and mergers and acquisitions, especially in the Health industry. She is based in Florham Park, New Jersey.

[email protected]

About the authors

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About AccentureAccenture is a global management consulting, technology services and outsourcing company, with more than 223,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com.

About Accenture Management ConsultingAccenture is a leading provider of management consulting services worldwide. Drawing on the extensive experience of its 13,000 management consultants globally, Accenture Management Consulting helps clients move from issue to outcome, with pace, certainty and strategic agility. We enable companies and governments to achieve high performance by combining broad

and deep industry and functional offerings and capabilities across seven service lines: Customer Relationship Management, Finance & Performance Management, Process & Innovation Performance, Risk Management, Talent & Organization Performance, Strategy, and Supply Chain Management. Accenture Strategy consulting services help clients develop and implement practical strategies focused on tangible business outcomes that create enduring value and consistently deliver high performance with greater speed and reduced risk.

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