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China Daily Website

Building China's consumer markets

Updated: 2009-07-20 07:47
(China Daily)

Building China's consumer markets

Editor's Note: Domestic demand is expected to become a key driver of China's GDP growth amid a global economic downturn.

Yet China's private consumption now only accounts for 36 percent of its GDP - versus 70 percent in the United States and more than 50 percent in other developed countries.

China has a huge potential to grow private consumption. At the end of May, Chinese families' bank deposits totaled 25 trillion yuan.

Consumer confidence is vital to growing consumer demand. Boston Consulting Group (BCG) recently conducted a consumer survey in China that showed Chinese consumers are confident in the economy for the midterm and long term.

Carol Liao, a BCG partner and managing director, shared her views on the prospects for China's consumer market in an interview with China Business Weekly reporter Bi Xiaoning.

Liao has more than 10 years of experience targeting China's consumer markets.

She has extensive consulting experience with multinational companies and Asian corporations on a wide range of strategic and organizational issues.

Prior to joining BCG in 1995, Liao worked in the marketing department of P&G China. Liao holds an MBA from Harvard Business School.

Q: How has the financial turmoil affected China's consumer industry? Have you seen any signs of recovery?

A: The consumer industry was not immune to the turmoil. Consumers are becoming more cautious, selective and price-sensitive. This is mainly driven by lower than expected income growth this year, rather than anxiety caused by the economic outlook.

If we take a further look, consumer spending patterns vary by product sectors. We see strong demand for fresh food categories - fresh fruit, vegetables, meat and milk - driven by the growing trend of healthy living concerns, together with concerns about food safety.

Other basic necessities are not really affected by changes in spending, since they remain an important purchase in all households.

Product segments being hit hard are dining out, fashion accessories, fragrances and perfumes, snack foods, Western liquor - the discretionary categories.

The most volatile categories are cars, home appliances and consumer electronics. Overall demand is there and people still want to trade up, but consumers are more cautious about these big-ticket items. They spend more time shopping around to look for good deals. Hence, we see that these categories respond well to promotions and government stimulus programs.

Overall, consumer confidence is still high. According to our recent consumer sentiment survey, two-thirds of Chinese consumers are "not too worried" about the economic situation.

About 75 percent of Chinese consumers still plan to maintain or increase spending, while only 27 percent say that in the United States.

China is the only country where trading up still beats trading down.

This shows that Chinese consumers are less nervous about the overall economic outlook. Therefore, we will see recovery as soon as the economy stabilizes and shows positive signs.

Q: The Chinese government has released industry support plans to drive GDP growth. In your opinion, do these present any opportunities for the consumer market? Can the consumer industry benefit from the country's stimulus package?

A: We already see a positive economic impact from the 4-trillion-yuan stimulus package.

However, the near-term impact will be seen in the infrastructure sector. It will take time to create real impact in the private consumer sector.

Of course, one direct impact from the stimulus package is to create employment, which helps stabilize consumption.

However, private consumption only accounts for 36 percent of today's China GDP versus 70 percent in the United States.

It will take a long time to achieve any structural changes to our GDP composition. Parts of the government's stimulus policies are aimed at long-term consumption.

For instance, the government's recent healthcare reforms will steadily expand insurance coverage and access to healthcare. This will have a long-term impact on releasing private consumer power, but we will not see drastic changes over night.

Q: Compared with their overseas counterparts and multinational companies in China, what are the main advantages and weaknesses of Chinese consumer industry companies? What are your suggestions for them?

A: Compared to foreign competitors, we do see some unique advantages of Chinese companies.

First, they have a strong understanding of local consumer insights, especially in the food sector.

Second, we see improving product quality in certain sectors such as home appliances.

Third, Chinese companies are quick and nimble. They can react quickly to market changes. They also have a more competitive cost structure.

However, compared to multinational companies in China, there are challenges for Chinese companies such as weaker branding, marketing and key account management support.

Many multinational companies also have better information and management systems. In retail, Chinese companies also need to improve category management.

We believe companies that act now to protect their brands will emerge from the crisis in a stronger position.

We recommend these eight strategies to win in the downturn:

Further improve your cost position and cash management processes.

Be a predator, not the prey, to capitalize on a competitor's weakness.

Focus on value, seeking out fresh consumer insights to deliver what matters most.

Avoid the discount spiral. Treat brands as assets, not liabilities.

Invest now for the rebound, and take a new look at what drives consumption.

Revisit market categories, segments and channels to focus on investing in more bright spots.

Adapt 'go to market' strategies to current realities, and re-examine high-margin businesses.

Develop post-downturn scenarios to prepare your business now to thrive after the recovery.

Q: What strategies do you suggest to help companies win over today's cautious consumers?

A: First, fully understand your customers; then, focus on 'value, value, value'.

Learn why consumers justify their spending for functional and/or emotional benefits.

How can your brand give them what they really want? How can you include add-on features at no extra cost?

To deliver more savings to consumers without hurting your profit margins, consider eliminating features that don't add value such as excess packaging or too many variations in product size.

At the same time, companies can shift away from focusing on price to a focus on product quality and delivery of service. Over-deliver on what really matters most.

In addition, companies should make sure consumers know their value story, and why their brands and products are worth more money. That's a matter of better communications and redefining values.

During the downturn, there is more pressure on cutting brand investments. Our experience shows that companies that continue to invest in their brands are more likely to benefit.

Chinese consumers are extremely brand-conscious. Our survey indicated that 71 percent of Chinese consumers would consider trading up because of better brand names. Compare that to the United States, where only 21 percent of consumers cited a company's brand as a main reason for trading up.

Q: Looking ahead, what will the landscape of the consumer industry look like in the near future?

A: We will see some shakeouts, not only in retail and distribution, but also in fragmented industries.

We will also see some mergers and acquisitions in the future.

The economic crisis is driving down valuations of leading companies and creating opportunities for local acquisitions.

Crisis-stricken Western companies are selling Chinese assets. Conversely, cash-rich Chinese companies are starting to acquire assets abroad.

Having said that, quality assets are still hard to get even in today's environment. It requires systematic searches and careful due-diligence.

Generally speaking, companies that think strategically and take proactive steps against the competition, manage their costs and search for the right partners will emerge even stronger.

Q: A recent BCG survey showed that most Chinese consumers remained optimistic about the future economy. How do you translate that into more domestic demand?

A: Confidence is very important. More than 70 percent of respondents in our survey report feeling "not too worried" about the economy, and that sentiment is backed up by strong retail sales leading up to the Chinese New Year this year.

Even after the Chinese New Year, more than 80 percent of consumers in Shanghai and Beijing continued to feel optimistic about their future finances and job security.

The good news is that consumers are still spending, as we mentioned before. And when we asked consumers why they would increase their spending, most cited a desire to use better products, rather than expectations of increased income. So the demand is still robust.

However, it will require effective economic policies to fundamentally shift the country's consumer mentality - to drive down savings rates and boost consumption. An effective social safety net remains important to resolving this challenge.

(China Daily 07/20/2009 page2)

 
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