Changing winds of consumerism
Updated: 2013-02-08 08:50
By James Roy (China Daily)
Foreign brands, catering to middle-class Chinese consumers' needs for safety, familiarity and lifestyle experiences, set to make maximum gains
It's an accepted truism that as people make more money their spending on what they eat and drink rises disproportionately. The Chinese middle class is certainly following this pattern, and there are big opportunities for international brands that cater to their demands for quality, safety and service.
However, there are three main points that food and beverage companies need to keep in mind when selling to the Chinese middle class.
The first is that middle-class Chinese are willing to pay significant premiums for food that they trust to be safe and of high quality. In the 2,000 interviews that we conducted last year with Chinese consumers from households with at least 30,000 yuan ($4,812) in annual disposable income, the No 1 concern is food safety, ahead of even children's education or air pollution (although worries about the latter are becoming more serious). Consumers maintained that they were willing to pay at least 20 percent more for food and food products they consider safe.
The steady stream of news reports and scandals surrounding food products with harmful or toxic ingredients despite official pledges to crack down on the problem has had a profound effect on the psyches of middle class Chinese shoppers when it comes to food brands.
In their minds there is a clear hierarchy of safety and trustworthiness, which goes like this: products bought overseas at the top, imported products next, followed by products made in China by multinational companies, then products made by national-level domestic brands, and finally local or regional brands at the bottom. For the most sensitive and hot-button products, consumers are willing to fly overseas to ensure safety.
The other gauge they use for judging safety is simply price. Middle class consumers do not bargain-hunt for food - they typically refuse to even consider products below a certain price point and limit their choices to a set of brands on the premium end of the scale. If the price is too low, consumers think, the company that made it could not have invested in the proper safety and quality standards.
Some foreign brands have misinterpreted China's lower overall income levels than in developed countries to mean that shoppers are more price-sensitive, and positioned themselves so low as to be eliminated from consideration by middle-class consumers. For several years the Swiss dairy giant Nestle made this miscalculation with its ice cream products and priced them too low; in 2011 Nestle closed down its ice cream factory in Shanghai because of stiff competition from Chinese dairy brands Mengniu and Yili. Both had done a better job of not just offering a broader range of ice creams than Nestle, but selling them at higher prices as well. Nestle has since shifted gears and now offers products that are priced even above Mengniu and Yili, and is seeing record sales in China as a result.
Aside of the worries on safety and trustworthiness, consumer focus is also not just on food brands, but also on where they are being sold. A street-side fruit stall, a local mom-and-pop shop and a large Carrefour hypermarket may all sell the same Fuji apples with the same labels on them (and indeed may even get them from the same supplier), but Carrefour can command a price several times more than what the fruit stall charges because of the perception that the fruit stall and the mom-and-pop shops are putting the labels on themselves.
At the same time, they are confident that larger retailers would not resort to such practices. Food brands need to pay careful attention not just to their own reputation, but also the reputation of the vendors selling their goods.
Second, middle-class Chinese want foreign food brands to make what they are good at, and usually do not want them to ape Chinese food too much. Though companies need to tinker with their flavor and taste profiles to suit Chinese palates, they should not go overboard in localizing their products. For example, Oreo has toned down its cookies' sweetness to better match local preferences, while Lay's offers crisps in flavors like cucumber and Italian red meat. But you don't see Kraft or Frito-Lay selling dried tofu snacks.
Even KFC, which has been famous for offering strongly localized limited-time menu items like rice set meals and tendon skewers, understands what its key products are, that is, chicken sandwiches. What the more localized products do accomplish is obviate the veto vote from a member of a group that does not want fried chicken.
Incorporating familiar tastes and concepts shows consumers that they are respected, but at the end of the day they want brands to make what they are best at and not stray too far out of their depth.
The final trend is that in the last 18 months, middle-class Chinese have begun to shift their discretionary spending from "things" - like nice clothing, shoes and bags - to experiences that they feel are part of a high-quality lifestyle. Rather than looking to project status through luxury items and high-tech gadgets, they are increasingly doing so by taking trips to exotic new places and sharing those experiences with friends over social media networks like Weixin (WeChat). On a more everyday level, this impulse translates into spending more on activities like going to the movies and, crucially, dining out.
There are big opportunities for companies that can provide experiences that project a certain lifestyle. Starbucks has thrived in China because it was one of the earlier brands to recognize this opportunity. It has successfully sold the experience of drinking and lingering in Starbucks as a lifestyle statement, rather than a place to stop for a take-out cup on the way to work in the morning as it is in the United States and many other markets. As a result, Starbucks was able to be more premium in China than in other markets, and its coffee shops in China are among its most profitable in the world.
As middle-class Chinese increasingly dine out more as a lifestyle rather than just to save the hassle of cooking for themselves, they are becoming increasingly demanding about service. No longer are they satisfied with absent-minded waiters, instead they want to be doted on and treated like royalty.
The hotpot chain Hai Di Lao has perfected treating the customer like a king, and by doing so has created a key point of differentiation between it and its competitors. Hai Di Lao restaurants are usually full to bursting, with long waiting lines for tables, but the wait is turned into an enjoyable experience as customers are given free drinks, popcorn and even manicures for women and shoe shines for men. During meals the staff entertain customers with mini-performances and are known for being attentive, alert and efficient. They know when customers need them and are fast about bringing them what they want.
In our interviews, middle class consumers in their 20s and early 30s consistently rated Hai Di Lao as their favorite place to dine with friends because the efficiency of the service doesn't interfere with them enjoying themselves while the extra service touches make them feel special.
Brands that cater to middle-class Chinese consumers' needs for safety, familiarity and lifestyle experiences are the ones that will be the most competitive in the market.
James Roy is a senior analyst at the China Market Research Group, a strategic market intelligence firm based in Shanghai. He can be reached at email@example.com. The views do not necessarily reflect those of China Daily.
(China Daily 02/08/2013 page11)