Retail in Asia

In Markets

Report: Winning over today’s Chinese consumer

Chinese consumers are becoming more sophisticated with value-for-money replacing brand and costs as the key decision factor in retail purchases. However, brand is still an important consideration for Chinese consumers and international brands should achieve a large-scale presence in top cities in order to maximise the marketing impact and returns from the lower-tiered cities, according to the latest report by Deloitte released on Tuesday at the 3rd Annual Asia Retail Congress 2010 in Hong Kong.

Entitled Winning the Wallet of Today’s Chinese Consumers, the report aims to provide insights to companies that are planning to enter, or have entered China’s retail markets, which exhibit much difference among the first- and second-tier cities. The report was put together through about 2,000 computer-assisted telephone interviews of Chinese customers, coupled with a number of interviews with retail executives in China.

The increase in sophistication of Chinese consumers was reflected in the growing importance of value for money as a purchase factor. According to the report, quality has remained the top decision criterion for consumers in third- and fourth-tier cities. However, value for money is consistently the top decision factor for consumers in first- and second-tier cities and it increasingly drives many purchases in third-tier cities. Over half of the respondents feel that big brands are not properly priced and may not be worth the money they charge.

"Chinese consumers are still less sophisticated than their Western counterparts, but over time the importance of value for money may be expected to rise in all tiers of cities. Consumers are getting more sophisticated in thinking about whether what they buy is really worth the money they pay. This bodes well for many foreign mid-range brands, which are likely to be perceived as premium in China," said Alan MacCharles, partner, M&A Transaction Services, Deloitte China during his presentation at the congress.

To enter the China market, the report suggests that premium brands can enjoy a definite "halo effect" by penetrating into first-tier cities. Consumers in lower-tier cities appear to have a high preference for brands "seen in big cities" and this indicates their desire to emulate the lifestyle of the first-tier city. In addition, it is also easier for a recognised brand to gain access to department stores, a conventional channel for apparel.

The report also covers other brand preferences of Chinese consumers. It is found that Chinese consumers are willing to experiment, with approximately 70 percent of respondents across all cities interested in trying new premium brands. As to retail promotion, consumers in first-tier cities consider word of mouth and well-positioned media and advertising campaigns as critical drivers for them to try new brands. Interestingly, brand image has a stronger influence on men than women. Male consumers in China were found to be using brand as a short-cut for evaluating quality while women are moving past brands in their buying habits.

Despite the growing importance of sustainability, the report indicates that Chinese consumers are unwilling to pay premium for abstract concepts, such as "low carbon". A majority of consumers recognised the concept of "low carbon", but were not motivated to buy goods marketed in this way. Only 10 percent of consumers would accept low carbon as a value proposition and would be willing to pay a 10-20 percent premium over goods not making this claim.

"While developing softer attributes such as environmental credentials may promote a brand’s reputation for social responsibility, it does not lead directly to a pricing premium in this cost-conscious and confused marketplace in China. Features with clear and direct benefits to consumers, especially for those in the lower-tier cities, are better able to secure premium prices," said Wakeman Gao, associate director, M&A Transaction Services, Deloitte China.

"As with almost everything in China, the purchasing power and sophistication of Chinese consumers is developing at an exceptionally fast pace fuelled by economic growth. We advise retailers to carefully analyse their target markets before entering China and, just as critically important, keep their finger on the pulse of the Chinese consumer by continuously and actively monitoring their brand positioning after their market entry," concluded MacCharles.

To view the Deloitte/Beacon report, visit Deloitte.