Making Sense of the Chinese Consumer Revolution
Michael Zakkour, co-author of China’s Super Consumers, tells us what makes Chinese shoppers tick
The Chinese consumer revolution shouldn’t be news to anyone, but the knowledge of what makes it tick, and how to profit from it, is much rarer. From Best Buy to Groupon, there are plenty of foreign companies who learned the hard way that this understanding doesn’t come easily. But for intrepid executives, thankfully trial by fire is no longer the only way to glean the necessary insights, and now there is a whole series of literature where they can consult the China business wisdom of others.
One such guide is China’s Super Consumers: What 1 Billion Customers Want and How to Sell it to Them, co-authored by Michael Zakkour and Savio Chan. It tells the story of how China’s consumer market has developed from the start of reform period, as well as setting out its ever-increasing maturity, giving readers the inside track on how to ride the Chinese consumer wave, the effects of which are not only felt in China, but also globally.
In this interview, Michael Zakkour, a consultant with more than 18 years of experience, much of it in China, discusses some of the crucial points of the book and tells us why culture is key.
Q. In China’s latest phase in consumption, what are the things that distinguish Chinese consumers from consumers in other countries?
A. When talking about how Chinese consumers differ from consumers around the world, the real differentiation isn’t so much in what they buy, but why they buy it. So in the book actually almost half of [it] is really a study in [the] culture, history, philosophy, language that creates the mindset of the modern Chinese consumer, which ultimately leads to the purchase decision. The truth is, buying the same products [as a Western consumer] is not the same as why they buy those products. It’s very much about face, a lot of it has been showing off. But we’ve seen a lot of morphing in that, so a lot of spending now is turning… to a much bigger focus on the self and well being and the home and experiential spending.
Q. How should companies vary their approach when targeting different demographics?
A. We look at now the McKinsey model of China having 22 distinct market clusters, and a lot of the old thinking about tier 1, tier 2, tier 3 cities and the consumers who lived in them doesn’t really apply anymore. So the first step is to look at China as these market clusters and determine how to appeal to the consumers within each cluster—where there are commonalities of development, wealth, industry, politics, culture, food, climate, etc. The other is to start thinking about Chinese consumers as global consumers—it’s no longer just about going to China and setting up shop and doing your marketing and selling products here. It’s about how do I address the Chinese consumer in China, in my home market and in my third-party countries around the world, and harmonize my messaging, my pricing.
Q. What’s the best way to reach out to and connect with these Chinese consumers?
A. Social media and digital marketing, and especially with a focus on mobile. So you know in the West, especially the US, there’s still a debate about whether social media really can sell products—it may help with your brand image, your brand awareness. In China, there’s absolutely no doubt that social media and digital marketing sell products. And that has a great deal to do with peer recommendation and group acceptance being much more important in China than it is in the West.
It’s a matter of still being on the ground with the Chinese consumers to let them touch and feel and engage with your product and your brand, but having a more interactive relationship with your brand and the consumer, and really focusing on mobile, e-commerce, social media and digital.
Q. What are the things they need to be aware of when they’re thinking of e-commerce in China?
A. The first thing they have to take into consideration is their relationship with Alibaba. It’s estimated that roughly 70% of all e-commerce transactions in China somehow touch an Alibaba property, so whether it’s Alipay, whether it’s Tmall, whether it’s Taobao, that’s your first consideration—how do I engage with, understand and build relationships through the Alibaba network.
The second is to really spend the time on segmentation and defining the consumer so you can take the right combination of steps for your e-commerce. So, is a Tmall store right for you? Are you better off starting on JD.com? Are you better off selling through a retail e-commerce platform? Those are really important to get down right.
And then you really have to consider everything in the supply chain too. I mean it’s great to set up a shop and sell your product, but if you don’t have the product available and you can’t deliver it quickly and efficiently, you’re gonna have a problem and you can lose Chinese e-commerce consumers very quickly by failing to deliver.
Q. How brand loyal are Chinese consumers and what can companies do to drive that loyalty?
A. Chinese consumers are very brand aware, but they’re not particularly brand loyal. So there’s kind of a paradox where brand is everything—the brand history, the brand story, what it says about you because you’ve engaged that brand, providing legitimacy for the product, knowing that it’s a safe product. [But] it doesn’t take much for them to move to a competitor brand in the same category if you don’t keep up that constant dialogue and engagement.
The other part of it is the Chinese consumer is very price aware, but isn’t always necessarily price sensitive. So it’s that area where you’re saying, I could charge more than I am now and actually increase sales.
I think the other most important thing to do is to really build a scale for yourself and say, on one end of the scale I need to change very little to nothing about my brand, my business model and my operations to succeed in China, and on the other end of the scale I need to change almost everything to succeed in China. So on one end of the scale, I think if you look at Starbucks and their success here, there’s very little they had to change. I think the reason for that is Starbucks tapped into something that already existed in Chinese culture. When they wanted to go to China, people told them they were crazy because there was a tea drinking culture. But what they understood was that along with tea drinking, there was tea house culture. And so Starbucks’ whole value premise is we’re your third place [in addition to your home and you office]. What they really did was they brought the tea house back to life in a modern sense.
On the other hand, if you look at what happened with Pizza Hut and Domino’s here, Pizza Hut were successful almost immediately and until recently they had almost a 20-year run of uninterrupted success here. [Domino’s came in and more or less failed] and the reason was they didn’t understand that it wasn’t about the pizza—it was the first Western dining experience so to speak, it was the menu, it was the atmosphere. Domino’s came in and tried to make it about the pizza and about delivery.
Q. How can foreign companies and executives best familiarize themselves with Chinese culture and history?
A. What I’ve been encouraging my clients to do for a long time is really take seriously the need to understand the culture, history, language, mindset first. And that’s usually achieved through some combination of bring some knowledgeable people in house and, not to be self-serving here, but to really bring in experts to do this every day all day all year to help you with that assessment. And so we encourage the business to start with a cultural analysis and then a market analysis, a consumer analysis, and really start with a “Is there even a go, no go here where we fit in?”
Q. What can foreign companies learn from local brands when it comes to selling to Chinese consumers?
A. We think there’s as much if not more to learn from their success than what foreign companies have done. One example we gave in the book was a company called octmami (a maternity wear retailer). Where did they come up with a name like octmami? A pregnancy in China is viewed as 10 months. October is the tenth month of the year, [so] you have octmami, which is something that immediately has resonance here, but a foreign brand might never have approached it that way when naming.
What they’ve done is they’ve gone roughly 15 years from one small shop in Hangzhou to being the largest maternity wear line in China with I think 2,000 retail touch points across the country. And a lot of their success was due to their [being] very forward thinking about marketing and branding and using technology and digital media to create that interactive experience for the consumer.
We talk about Lenovo in the book and I think a great lesson for companies around the world, and for Chinese companies, is viewing it as an opportunity to engage with 700 million consumers. On the one hand [Lenovo’s] harmonized their China marketing to appeal to everybody… but when it actually comes to merchandizing and marketing their products, they really do it differently in the different market clusters. When they were approaching the rural, undeveloped market… what they did was they actually produced [an old-fashioned] PC for the rural market that was specifically aimed at people buying it as a wedding gift. And they packaged it appropriately in red and gold. They had the local insight that said there’s going to be a lot of face for the givers and the receivers of this PC. So everything they did from the packaging, to the pricing, to the size, it was a runaway success—they sold, I think, 2 or 3 million units. They didn’t dismiss 500 million rural residents and say, “Well they’re not our technology customers”, they found a way to make them their customers.
Q. Just how strong is the competition from local brands now? You’ve touched on a few like Lenovo, and obviously Xiaomi has a lot of buzz about it, so with the rise of these brands, how much more difficult is it for foreign companies?
A. The competition in general is fiercer than it’s ever been. As a foreign company [you’re] coming into China and having to compete with other foreign companies in your category as well as competing with local Chinese companies. Xiaomi is doing very well, but it’s not necessarily because they’ve branded well, it’s because they’re basically saying we can give you an iPhone 4 for a third of the price, so they’re really competing on price, which segues to the bigger story, which is for foreign brands, don’t come here and compete on price and don’t come here to compete in the mass market—your appeal lies in being foreign and whether you’re a luxury company, or what we call affordable luxury. Now you’re talking about, look how well Coach and Michael Kors and Kate Spade, GNC Vitamins [have done]… so companies like those. The question about competing is more about what the category is, but you need to differentiate based in a large part on your foreign appeal.
Q. The luxury sector has been a key area for foreign brands—how do you see the prospects of that market? Obviously the anti-corruption crackdown has affected it somewhat.
A. Even with the anti-corruption crackdown and the reported slowdown in the Chinese luxury market… the fact remains that still right now as we have this conversation about 30% of every luxury purchase made globally is made by a Chinese consumer.
What I think has changed, and you hear this in some other places but I don’t know if everybody really understands, about 60% of those purchases are being made outside of the mainland of China… [you need to be] integrating your products, your services, your offerings, your messaging, your experience and your pricing on a more global level.
But there are real effects. [I recently did a talk about] the Macau luxury watch and accessory show that got cancelled. And to me, the only surprise in that was that they even attempted to put it on—I mean, Macau has been a ghost town for the last three years and timepieces in particular were early targets of the campaign.
Q. What are the common mistakes that foreign companies make when trying to sell to Chinese consumers?
A. I would go back to the opening line of Anna Karenina: “All happy families are alike, and all unhappy families are unhappy in their own way” [laughs]. There’s a pretty basic set of rules on how to do it right, but a multitude of ways to screw it up. But I think if I had to boil it down, impatience and irrational exuberance about the market and not really taking the time to understand all the implications of doing business in China. The number two mistake is companies who rush into China without properly caring for all of their intellectual property. Number three I would say is assuming that the relationship with Chinese consumers is a one-way conversation with you speaking to them. [Also] don’t be swayed by short-term market changes. There’s a long game here. The other mistake I would say you need to avoid is not properly understanding the context of where the government is taking the economy and the direction of the economy. Always be keenly aware of the latest regulations, rules, because it’s much easier to go with where they’re going, than to go against it.
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