Actionable insights straight to your inbox

Equities logo

What Are Chinese Consumers Thinking?

Since the Reform and Opening-up Policy of 1978 that opened China up to international companies, the Chinese people have become global consumers. Initially, Western companies could rely on novelty
Jianyu Zhao is a second-year journalism graduate student at the University of Southern California. He's served as Executive Producer at the Annenberg Digital News for five months. Jianyu Zhao is a citizen of China.
Jianyu Zhao is a second-year journalism graduate student at the University of Southern California. He's served as Executive Producer at the Annenberg Digital News for five months. Jianyu Zhao is a citizen of China.

Since the Reform and Opening-up Policy of 1978 that opened China up to international companies, the Chinese people have become global consumers. Initially, Western companies could rely on novelty to succeed in China. But Chinese consumers have since become more sophisticated. They have evolved, and Western companies must evolve with them – or fail.

In the 1990s, Chinese consumers loved, and even admired Western brands. It was the salad days for international companies, when Chinese consumers regarded most all Western goods as possessing nobleness, fashion, and high quality.

In the West IKEA is a normal European brand, while in China it was considered exclusive furniture. Haagen-Dazs ice cream was very common to Americans, while Chinese people considered it as special as a Thanksgiving turkey.

With such psychological advantages, Western companies once appeared to have the Chinese market figured out. They tended to “educate” Chinese consumers, leading Chinese people’s shopping habits. For the Chinese, buying Western goods “was a way of showing off”.

However, with the high-speed development of the Chinese economy since the 90s, the market has become more mature, and so have Chinese consumers. Western companies no longer dominate. Companies that came into China in the very beginning such as Coca-Cola (KO) and KFC (YUM) were lucky,that they finished acclimating Chinese people to the products.

The Chinese market is becoming more complex, and so have Chinese consumers. Only to understand what Chinese people are thinking can Western companies make profits in the emerging market.

For Many Chinese, Luxury Goods Still Equal Prestige

In all likelihood, China has overtaken Japan to become the world’s second-biggest consumer economy. China’s roughly $3.3 trillion in private consumption is approximately 8 percent of the world total, and that number is still growing. Given historical factors, Chinese people are likely to purchase things that provide feelings of stability and safety when they have money. This includes houses, premium cars, and luxury goods.

On the other hand, luxuries mean prestige, or mianzi in Chinese, and this desire for prestige applies especially to the newly rich, or “upstarts.” After relieving the pressure to merely survive, upstarts tend to peruse social status. Brands like Gucci, Prada, and Chanel have made an impression that people who wear those luxuries are in the upper classes. This is exemplified in the saying, “we choose the most expensive, not the best.”

Before purchasing, upstarts would rather consider how others may see them than the luxury itself. Local property barons are now building half the world’s new shopping malls in China, many of them in smaller cities, because even punters without big incomes are becoming big shoppers. For instance, many young migrant workers earning less than 5,000 RMB ($830) a month will spend a month’s wage on Apple’s (APPL) iPhone.

Rising Health Concerns Grip Chinese Consumers' Minds

It seems that materialism is prevalent in China. But there’s another trend happening in the Chinese market. Environment issues like bad air quality and food safety issue have shifted public consumer focus. Although a section of Chinese consumers still hold foreign luxury brands in high esteem, more have begun paying more attention to domestic health issues.

The 2008 Chinese milk scandal, involving milk and infant formula, caused more than 300,000 victims, with six infants dying from kidney stones and other kidney damages and an estimated 54,000 babies being hospitalized. The chemical, melamine, appeared to have been added to milk to cause it to appear to have a higher protein content.

In the following years, there’s been a rumor that KFC serve its customers with genetically modified chickens that have six legs, in which Chinese people believe is totally unhealthy and disgusting. Despite KFC attempting to clarify, the sales of Chinese KFC restaurants plummeted as the food safety issue became extremely sensitive.

The newly middle class in China now prefer products with signs of “green” or “organic”. According to a report conducted by Boston Consulting Group (BCG), food and beverage marketed as healthful continues to enjoy higher-than-average trade-up intentions. This includes organic foods, tea, dairy products, fresh foods, and juice. Consumers also spend more on items related to personal and family well-being, such as all-natural products and personal care. Meanwhile, consumers are willing to cut their spending in areas that they consider to be superfluous, such as luxury goods, jewelry, and foods perceived as unhealthful such as soda, alcohol, and frozen foods.

Be Aware of Chinese Smartphone and Social Media Habits

With the world’s largest e-commerce market at their fingertips, Chinese consumers are online from the start. As a result, what was once a foreign marketers’ fantasyland is now the world’s fiercest battleground for brands. Firms that thought they enjoyed a “first-mover advantage” have discovered that their brands are now seen as stodgy or old-fashioned.

Olay, a cosmetics brand, defined skin care in China for a generation. But the new generation (born after 2000) thinks it’s a brand from yesterday. Whereas Louis Vuitton once symbolized good and expensive taste in China, the new generations are seeking brands that can differentiate themselves from peers.

Traditional advertising methods have been shrinking, while social media like WeChat, or Weibo ($WB) becomes dominant. Given the increasing concerns of health, a negative comment can be spread hundreds of thousands times within several minutes through social media. Companies that neglect their social media reputation are vulnerable.

High smartphones penetration in China has led to the emergence of social media management. According to a survey conducted by PricewaterhouseCoopers (PwC), in the US only a quarter of online shoppers make weekly purchases. While the U.S. is home to social media powerhouses Facebook and Twitter (TWTR) , 29 percent of American online shoppers gather brand information or make purchases through social media platforms, comparing with the number of 75 percent who shop online weekly, and 86 percent buy products on social media.

According to a BCG’s report, enthusiasts of social media are more likely to both read and post comments. More than half of the online shoppers are used to forward or save product-related information on Weibo and other Chinese social networking sites such as Renren, known as the Chinese version of Facebook (FB) .

Online advocacy is most important and most evident in apparel, skin care, and cosmetics. Approximately 60 percent of Chinese consumers read and post comments online in these categories annually. To successfully leverage the power of advocacy, brands need to build a basic level of online awareness. Currently, most famous companies like Pepsico, Inc. (PEP) have their official account on social media like Weibo, where they create product-related content that is engaging and fresh so that they keep an intimate impression. In China, offering samples or discounts can often be an effective mechanism for gaining consumer advocacy.

The advertising content also matters. Foreign companies need to localize their communication strategies. For example, the advertisement of infant formula has to stress that baby will become clever if they drink it, rather than being happy. Having a meal at Pizza Hut is not only for delicious pizza, but a prize as children that score highly on a test.

Chinese consumers are increasingly accessing the online world through different devices and multiple locations.They expect to move seamlessly between these options, and to and from offline realms as well. This new multichannel environment has brought with it complex consumer behaviors. The need for an integrated experience across the online and offline world is rising, yet the experiences themselves vary significantly by product category. Understanding and leveraging these behaviors is the first step for a foreign company to successfully integrate its offerings across many platforms, and gaining a critical competitive advantage.

A weekly five-point roundup of critical events in fintech, the future of finance and the next wave of banking industry transformation.