China Consumer

Big spenders

For multinationals like Apple and Yum, China’s consumers are now vital

Big spenders

"Queue here if you want an iPhone": Apple products have sold well in China

When Tim Cook announced Apple’s quarterly results last month, even he appeared taken aback at its China numbers. “It is mind-boggling that we could do this well,” the Apple chief executive admitted.

Cook is forgiven for being a little wide-eyed. Sales in Greater China (including Hong Kong and Taiwan) accounted for about 20% of Apple’s $39.2 billion quarterly revenue, a three-fold increase on a year earlier. There is little sign of slowing revenue growth either: in the first two quarters of this year the company had already made $12.4 billion in the region, compared to $13.3 billion for the entirety of 2011.

Apple’s success in China underscores the depth of the country’s growing consumer class. Needless to say, the Californian tech firm is not the only brand to perform well. Other firms from Audi to Samsonite are already calling China their single most important market.

For luxury goods companies in particular, China is a pulse-quickening opportunity and it is poised to become the world’s largest luxury market by 2020, with sales of $101 billion.

But we’ve also looked at wider demand, publishing 129 articles in our China Consumer section. Many of these have looked at the market opportunity in China and how some companies have got their strategies spot on.

Yum Brands is a classic example. In the US, the fast food chain KFC, which is part of Yum Brands, is struggling to compete with McDonald’s. But in China, it has 3,700 restaurants – more than three times as many as its rival – and is generally regarded as the dominant force.

In fact, Yum has become something of a business school case for its China strategy, and now counts on revenues there for much of its growth. One (former) secret to its popularity was to give local managers more freedom to adapt its cuisine to the Chinese palate, which meant less drumsticks but more congee and egg tarts (see WiC53).

To maintain its growth Yum has also bought a local brand: Little Sheep, a popular hotpot chain, where diners cook their own meat and vegetables at their tables, using a hot communal soup.

Other Western firms have found it tougher going. Home Depot and Best Buy struggled to export their business models to China. Both have closed their stores across the country. Fast-food chains like Popeyes Chicken & Biscuits and Dunkin’ Donuts also tried to establish China operations but were forced to retreat, in part because they didn’t cater well enough to Chinese consumers (see WiC96).

Domestic firms were also quick to respond to the foreign invasion, in part by playing to national pride or trying to invoke superior understanding of local tastes. They also tore pages out of their foreign rivals’ playbooks by poaching staff or ramping up their own research, development and marketing.

One such company is Wahaha, which mostly sells bottled water and teas. Following a bruising break-up with former partner Danone, (WiC39), it now ranks third in China’s soft-drink market by volume, behind Coca-Cola and Taiwan’s Tingyi (see WiC142).

For the multinationals that have established a China bridgehead, the battle is now moving inland to more rural and less-developed markets. P&G, which makes Pantene shampoo and Tide detergent, and its Anglo-Dutch rival Unilever have been typical in preparing for a “second consumer revolution” among the 665 million Chinese who live in rural areas. The income gap between China’s wealthier coastal cities and its rural interior is six-to-one. But rural incomes are rising fast and people outside the tier one cities are eager to try new things.

“Third-and-fourth-tier cities are twice as big as the first-and-second-tier ones in terms of population, and the growth rate [is] twice as fast. So that’s where the big opportunity is,” says Mitch Barns, president of Greater China for Nielsen. “China is going to add more megacities in the central and western parts of the country and urbanise 200 million more people.”

The payoff could be a good one. On a trip to China, Alexis Perakis-Valat, L’Oréal’s chief executive, made a stop over at Anshan in Liaoning province. “There was so much dynamism [in Anshan],” he told the Financial Times. “And there are 300 Anshans in China.”

That leads analysts to predict a generally robust outlook for China’s consumer market despite fears that the wider economy could be heading for a hard landing.

Although there has been scepticism in some quarters about the figures, the official data suggests that domestic consumption accounted for 77%, or a full 6.2 percentage points, of China’s GDP growth in the first quarter. That compares with a 55% share of growth for last year. Retail sales also continue to rise. For the first four months of the year, they were up 14.7% to Rmb6.49 trillion.

Still, the Chinese market also presents plenty of challenges. Murky regulations, localised corruption and homegrown copycats are some of the more typical problems that foreign firms encounter. International brands must also guard their reputations carefully. As we reported a fortnight ago, Coke, Unilever and P&G have all been forced to deny product quality issues.

Another thing to watch out for is how shopping behaviour can differ across the country. In a sense there is no ‘China consumer’ as the domestic market is made up of lots of different types, whose preferences differ by city or province.

Taobao, China’s biggest consumer site, released a survey recently which illustrated this point well. For instance, the people of Xinjiang bought more bikinis than any other region (slightly odd given that they live so far from the beach) while men from the coastal city of Ningbo were most likely to buy a gift for their loved ones (see WiC141).

Generalisations, maybe. But for a continental economy like China’s, marketers should have a handle on locally-held stereotypes (some of which we detailed in issue 124).

And then there’s the thorny issue of government relations. Unilever got into trouble last year for raising prices at a time when Beijing was trying to reduce anxiety about food price inflation. Walmart also found itself on the wrong side of the authorities when it was discovered to have mislabelled ordinary pork as a more expensive, organic product. The Chongqing government temporarily shut down its operations for two weeks.

That might sound a little draconian, especially when food safety agencies have proved incapable of preventing a stream of Chinese firms from selling contaminated food. Cynics might wonder if a little more regulatory zeal might be redirected away from the foreign brands and back towards a few homegrown ones.

But don’t expect these factors to dampen the enthusiasm of those looking to cash in on the burgeoning China market. And three new insider guides on how best to do that are coming to an airport bookshop near you: What Chinese Want: Culture, Communism and China’s Modern Consumer from Tom Doctoroff, chief executive at advertising agency JWT in Shanghai; The End of Cheap China: Economic and Cultural Trends that will Disrupt the World by Shaun Rein; and Mary Bergstrom’s All Eyes East: Lessons from the Front Lines of Marketing to China’s Youth.

For more on this topic from WiC, try The Magnificent Seven, our Winter 2011 Focus edition – profiling a select group of multinationals who have made it big in China.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.