Shopping habits of China’s ‘suddenly wealthy’
Published: August 21 2009 14:41 | Last updated: August 21 2009 14:41
In the past decade China has become the workshop for the world, its low-cost labour force toiling in factories to churn out cheap goods destined for western consumers. Many of the raw materials needed to feed this industrial juggernaut have to be imported from other countries and today China is the biggest driver of markets in commodities such as copper, oil and iron ore.
But as well as a multitude of low-paid factory workers, the country’s manufacturing boom has also created a large and growing number of baofahu – literally, the “suddenly wealthy”. Their shopping habits and changing tastes are reshaping global trade flows at the other end of the production chain.
The rise of the Chinese consumer has provided unprecedented opportunities for enterprising global corporations and many now look to the country as their biggest growth market for the indefinite future. And while China’s nouveaux riches share many of the tastes of their counterparts in any other part of the world, there are also a number of customs and cultural legacies that have created new markets for products that have little value elsewhere. This has encouraged global companies to invest an increasing amount of time and money in understanding what makes the Chinese customer special and how best to market or customise products.
In some cases, traditional Chinese tastes, combined with the explosion in wealth during the past decade, have created a rapacious and unsustainable call for the body parts of endangered species. The manufacture of traditional delicacies, ornaments and medicinal ingredients has helped to cut swathes through populations of sharks, elephants, seahorses and other species across the world – and that demand is only expected to increase.
Jamil Anderlini, FT deputy Beijing bureau chief
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Big cars, flashy cars
In the US, cars need giant cup-holders, but in China, it’s chauffeurs that are de rigueur. So when Porsche recently decided to launch a four-door sedan in the midst of financial Armageddon, it chose to do so in China – perhaps the last place on earth where anyone still has RMB2.5m (£200,000) to spend on a chauffeur-driven sports car.
At the Shanghai auto show in April, the Porsche Panamera – which offers the ample legroom required by China’s back-seat-riding bosses – premiered alongside the Geely GE, otherwise known as the Baby Rolls-Royce (much to the displeasure of the real Rolls-Royce). Then came news that China plans to buy Hummer and make it greener. China’s love affair with big, flashy autos is clearly just beginning.
The newly wealthy everywhere love to flaunt their money, but China’s rich are even more shameless than most: cars are not a means of locomotion for the affluent Chinese, they are a symbol of success, status and the naked power of the internal combustion engine over the bicycle or pedestrian.
According to Friedhelm Engler, director of design for GM’s Shanghai-based Pan Asia Technical Automotive Center, cars in China are all about “face”. He says the bulky, “three-box” shape that is still overwhelmingly popular is deeply embedded culturally in a country where the rich traditionally rode in palanquins. To western eyes, that makes many Chinese cars look old-fashioned, especially on the futuristic streets of Shanghai, with its space-age skyscrapers. And parking such cars – not to mention parking a “Baby Rolls” – is a nightmare in the city’s congested, narrow streets.
China needs smaller cars, and some younger consumers are leaning toward hatchbacks; but in a country where grandpa or dad is often footing the bill, four doors still often win out over five (not least because grandpa or dad may not know how to drive, so they rely on the younger generation to squire them around at weekends in the three-box). This is a world where the young can start their motoring life with a Buick, not a 2CV or Beetle; Buicks are more popular in China than they have been in the US for decades.
But western car manufacturers are betting that things will change, as China’s budding love affair with the automobile matures. The country is on track to become the world’s largest auto market this year – several years ahead of expectation – and car styles could be transformed at the speed of light. “Chinese consumers are used to moving quickly, from no TV, to a flatscreen,” says Engler. Their auto style may be dowdy today – but in China, tomorrow is always just around the corner.
Patti Waldmeir, FT Shanghai correspondent
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China loves gold in all its forms: as a reserve currency, jewellery, an investment – even gold that is not real at all, or “virtual gold”, the internet commodity used as currency in online games such as World of Warcraft. The Chinese government is trying to crack down on trade in virtual gold, which is “farmed” by online gamers in China and sold to online gamers in the first world.
But when it comes to the real stuff – gold jewellery and gold bullion, for either adornment or investment – trade in China has risen sharply. Beijing recently revealed that it had been secretly buying gold for years in order to diversify its foreign reserves, and had almost doubled its bullion holdings. But they are not the only ones: the rising tide of wealth among middle-class Chinese has made China the second-largest gold jewellery market in the world since 2007, behind only India. Sales of gold and silver jewellery in China rose by an astounding 28.7 per cent in May year on year – proof, if any more were needed, that Chinese consumers have certainly not stopped spending money during the financial crisis. Total gold demand in China last year was nearly 400 tonnes, up by 21 per cent from 2007.
But Chinese people like their gold purer than their western counterparts: 24 carat, rather than 18 carat. The reasons for that, says Shi Heqing, gold analyst at Beijing Antaike Information, are partly historical: “Chinese people have gone through several wars in the last century, and the memory of those is still fresh, so they like secure ways of keeping their money. In the west, people seem to use gold more for decoration or beautification.”
The recent rollercoaster ride in the mainland stock market – which at one point last year had fallen by 70 per cent from its 2007 height, but has since crawled back to half the peak level – has also prompted more investment interest in gold in bullion form, gold market analysts say.
Mr Yu, a 55-year-old antiques trader in Shanghai who declined to give his first name, says he bought 500g of gold in 2007 and increased his holding to 2,000g at the end of last year. “I know people who are still buying stocks at this moment … but gold may be better for people my age who are more risk-averse.”
Or as Shaun Rein, managing director of China Market Research in Shanghai, puts it: “In China, the banking system has only recently become stable. Chinese people like gold: you can always melt it down and it’s easy to carry.”
Patti Waldmeir, with additional reporting by Yan Jin, former FT Shanghai news assistant
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No one knows more about shopping than the women in the Shanghai typing pool: all those one-child babies have grown up into over-indulged 20-somethings with office jobs and 100 per cent disposable income. Their parents or grandparents pay for rent, food, healthcare and every other human need; all the rest goes on clothes, shoes, make-up and … Barbie?
Mattel is banking on Shanghai’s girlie-girls to revive its flagging fortunes. The biggest Barbie store in the world recently opened on the city’s Huai Hai Zhong Lu shopping street, where all six floors are infused with the spirit of that 1960s model of female perfection, the blonde and cinch-waisted doll whose brand must rank as one of the greatest successes in the history of world marketing.
But in China, Mattel is breaking that brand mould in a big way: Barbie is supposed to transform herself from a doll into a lifestyle. Nearly a whole floor of the store is devoted to Barbie clothing in grown-up sizes – exorbitantly priced sequined tops that my American eight- and nine-year-old girls would not be caught dead in because Barbie (to them) is a little kid thing. But Shaun Rein of China Market Research says “cute sexy” is what the typing pool wants, and judging from the huge popularity of the Hello Kitty character in that age group, it might just work.
Jinky Gu, spokeswoman for the Shanghai store, has another perspective altogether. “Chinese parents won’t stop investing in their children’s education even during the economic crisis.” The notion that Barbie is an educational toy might horrify the feminists among us, but it just might work among the stiletto-heeled Shanghainese. It would not be the first time that a jaded western brand got a new lease of life in China.
Patti Waldmeir, FT Shanghai correspondent
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Spirits and fine wine
Shanghai White is the latest product offering from Diageo, the UK drinks business behind such brands as Johnnie Walker and Guinness, and its launch this summer gave the world a glimpse of how the tastes of China’s new rich are changing the liquor landscape.
Shanghai White is being marketed as premium vodka but it is produced in a venture with a Chinese baijiu distillery, combining the distilling process of both vodka and baijiu. The “but” in there is because baijiu is the national firewater in China, with a taste sometimes described as a mixture of tequila and dirt.
Of the roughly five billion litres of spirits consumed every year in China, the vast majority is baijiu; the combined consumption of all foreign spirits is estimated at less than 1 per cent of the total. The allure of such a large market has convinced Diageo that it needs to adjust its product line.
In the wine market, meanwhile, bottles of Château Lafite and Louis XIII are indispensable accoutrements for display in the gleaming new mansions of China’s super-rich, although such badges of wealth are more likely to be seen as investments. The cachet of ordering an expensive bottle also still far outweighs the pleasure derived from drinking it, and Chinese nightclubs are filled with wealthy people ordering top-shelf cognac then mixing it with gallons of sweet, green-tea-flavoured soft drinks.
Only around 5 per cent of grape wine consumed in China is currently imported but this is changing and at numerous recent European wine auctions the winning bidder has been Chinese. While European winemakers have not yet contemplated changing their products to suit Chinese tastes, the marketing strategies of wine dealers are already shifting eastward.
Jamil Anderlini, FT deputy Beijing bureau chief
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For more than 7,000 years, Chinese artisans have been crafting elephant ivory. Favoured by the Imperial household as far back as the Qing dynasty (1680), ivory has an illustrious reputation and an association with the wealthy and elite. But in 1989, the trading of ivory was banned worldwide through the Convention on International Trade in Endangered Species (Cites), after more than half of Africa’s 1.3 million elephants were poached in a single decade. And yet, with a carving trade established in antiquity and a burgeoning middle class who, for the first time, can afford to buy ivory, China remains its biggest importer.
As Asian elephant herds dwindle, African elephants have become the only source of ivory. In late 2008, Cites authorities allowed China to bid with Japan for tusks from official stockpiles – consisting of ivory collected from elephants that had died a natural death – in four southern African countries. In an open declaration of a continuing demand, 12 Chinese traders bought 62 tonnes at an average price of $144 per kilo. Since this legal purchase, more than 11 tonnes of illegal African ivory have been impounded en route to China.
Elephant poaching largely takes place in central Africa, where poverty and political instability are rife. Chronic unemployment, the availability of firearms and corruption all facilitate the illegal ivory trade. These regions are also home to unregulated domestic ivory markets, where carved items are bought and sold. According to ivory expert Esmond Martin, the majority of buyers are Chinese. In a scramble for Africa’s minerals and resources, the continent has seen a recent influx of Chinese workers – a presence that is visibly reflected in the illegal retailing of ivory. On a recent trip to Addis Ababa, Ethiopia, Martin recorded 1,433 items of ivory openly displayed in the city’s main streets and central market. Among these were 149 pairs of freshly carved ivory chopsticks, selling for $16 each – in sharp contrast to a Chinese retail price of $139 – and signature stamps and jewellery. All of these items were small enough to potentially smuggle through customs.
Martin had previously estimated that 4,900 to 12,000 elephants from central Africa were killed each year to supply tusks to the craftsmen of Africa, China and Thailand. Conservationists are deeply concerned. According to Barbara Maas, CEO of Care for the Wild International: “With the number of Chinese nationals resident in Africa rising, and poaching on the increase, the frontline between supply and demand for ivory is now perilously close, with a disastrous outcome for elephants.”
Rose Gamble, freelance journalist
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The Chinese have become the second-biggest consumers of milk globally, after Indians. Demand has been helped by Beijing bombarding the populace with health messages about the benefits of dairy, by urbanites adopting more western diets and by rising incomes. Dairy consumption in China has doubled since 2000, and reached some 30 million tonnes in 2007, according to Rabobank, the food- and agriculture-focused bank.
International dairy producers got a further boost last year in the form of China’s milk and infant formula contamination scare, which led to two death sentences for men involved in deliberately tainting the country’s milk supply with the chemical melamine. “China’s milk powder imports have more than doubled since the melamine crisis,” says Tim Hunt, senior dairy analyst for Rabobank. “It played a huge role in shoring up market prices for internationally traded products in the first half of 2009.”
Nevertheless, at just 22kg per head each year, China’s dairy consumption falls well short of wealthier Asian countries such as Japan (where people eat some 75kg of milk, cheese, ice cream and yoghurt each year) and is piddling next to European Union residents, who consume 223kg each year. Still, foreign dairy groups see potential in the Chinese market. Although consumption fell in the wake of the melamine scare, it is expected to return close to pre-crisis levels by the end of the year.
Meanwhile, MilkLink, the UK dairy co-operative, this year became the first British cheese maker to export Stilton to China, targeting urban Chinese as well as western expats. The company’s cheeses, which will soon include English cheddar, are being sold in supermarkets along the country’s east coast, including branches of Tesco and Wal-Mart. Simon Mercer, head of export at The Cheese Company, part of MilkLink, claims natural cheeses will be the next big growth story in China’s dairy sector, a forecast backed up by research group Zenith International. It says cheese consumption, currently less than 4 per cent of the country’s dairy market, will rise alongside the expansion of fast food chains such as Pizza Hut and McDonald’s.
As the dairy sector grows, Mercer forecasts China will “suck in” imports, but warns that the UK – where milk production is in decline – is not in a position to meet demand.
Jenny Wiggins, FT consumer industries correspondent
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The aphrodisiac counter is always the most arresting section in the menageries that are Chinese medicine shops. Among the eyes of newts and toes of frogs are mounds of dried seahorses. In traditional Chinese medicine, consuming seahorses is thought to be beneficial for human kidneys, improving memory, reducing swelling, helping women give birth, treating arthritis and even curing breast cancer. But the most important function of the humble hippocampus is the treatment of impotence. Maybe it has something to do with the fact that seahorses are the only known vertebrate species for which males rather than females give birth. Or maybe it’s just because they are so exotic.
For most of the past 1,000 years, only the richest Chinese patients could afford to include seahorses in their love potions. But with industrialisation, rapacious modern fishing techniques and China’s economic renaissance, dried seahorses have become widely available and are even sold pre-packaged by the dozen in supermarkets across the country.
Chinese consumers demand up to 250 tonnes of dried seahorses annually, but populations in China’s own territorial waters have been so depleted that only 10-20 tonnes a year can be sourced domestically. The remainder is imported from places such as Vietnam, the Philippines, India and Africa. And because dried seahorses weigh so little, 250 tonnes is equivalent to tens of millions of seahorses killed every year for Chinese aphrodisiacs – figures so enormous that even some in the Chinese medicine industry have started to voice concern that this precious ingredient will soon be fished into extinction.
The obvious answer? Farming seahorses. But attempts to do so on a commercial scale have so far had little success.
Jamil Anderlini, FT deputy Beijing bureau chief
“Penny pinching, ruthless, suspicious shoppers”
Hail the Chinese consumer, putative saviour of the global economy, writes Sameena Ahmad. China is still growing, at an enviable 8 per cent clip, and within that retail sales are rising by 15 per cent and more each year. The country now boasts more millionaires than the UK and glossy malls to serve them are springing up even in tawdry third- and fourth-tier cities. Parched of profits at home, a growing number of multinational corporations are betting on China’s billion-strong army of shoppers to bail them out and the rest of the world.
But in order to sell successfully to the Chinese, you have to understand them – and too many international companies (still) don’t. While the country is growing richer rapidly, the absolute numbers remain relatively small. Total consumer spending in China reached $1,700bn in 2007, according to the most recent figures available, compared with $12,000bn in the US. In new research on the Chinese consumer to be published next month, McKinsey, the management consultancy, classifies just two million households out of a population of 1.3 billion as “wealthy” and that is based on fairly modest annual earnings of more than $30,000. The mass middle class is certainly growing and numbers some 70 million urban households, but these still earn just $5,000-$10,000 a year. That buys western shampoo, Ikea furniture and a television, but not many cars or diamonds.
The current healthy growth in retail sales is also not as good as it looks. Government purchases at retail stores are included in the figures and in many cities, including Beijing, the government has also been helping indirectly by handing out vouchers to finance purchases of anything from computers to weddings. The big spender in China, in years past and even more so today, is the state: private consumption as a percentage of gross domestic product has fallen from 60 per cent in 1968 to 36 per cent last year and could be as low as one-fifth in 2009 as the government ramps up capital investment.
In fact, the Chinese, who already have a world-beating savings rate of nearly 40 per cent of their income, tend to become more frugal when times are tough. As bank deposit rates decline, most of us spend more. The Chinese tend to stash away even greater sums to make up for the lost interest. The reason for this conservatism is the lack of a social safety net in China – citizens have to provide for their own medical care, old age and possible unemployment.
This makes them “penny pinching, ruthless, suspicious shoppers”, says Tom Doctoroff, north Asia director of advertising agency JWT and a writer on Chinese consumer trends. In a recession this behaviour only grows worse. “The downturn has made people keener on finding the cheapest deal,” says Yuval Atsmon, an associate principal in McKinsey’s Shanghai office. Even when they can easily afford it, buying a PC typically involves six visits to a store, and more often than not, customers will wait six months before making their decision after consulting blogs, online comparison sites and – the most important source of information in China – friends and family. Sales of copycat mobile phones, with all the functions of top models but a lower price, have soared from 17 million units in 2006 to 62 million units last year.
Brand consciousness is high, at least in the big cities, but brand loyalty is much lower than in the west. A price cut or good in-store promotion can often sway shoppers. And for cultural reasons, appealing to an individual’s taste or personal comfort typically doesn’t work, Doctoroff points out. A purchase either has to publicly signal status or wealth, like a flashy car does. Or provide a practical benefit: the latest craze in China is chocolate with added calcium, eaten not for pleasure but for the health benefits. The growing appeal of diamonds to women is not based on romance, but as a financial signal of a man’s commitment. Trust is another key issue in a country where so many consumer products are faked. Chinese mothers, for example, will pay 30 per cent more for safe baby milk – and this should favour foreign brands.
But foreign retailers and manufacturers have to cope with vast regional differences in demographics, language and culture that make it hard to plan a single marketing strategy – indeed treating China like a single country is usually a mistake. Natives of Zhejiang on the east coast like “toilet roll as rough as sandpaper”, the former head of Wal-Mart China liked to observe, a penchant thankfully absent elsewhere. Atsmon points out that cities even an hour apart can be entirely different: in southern Shenzhen, more than four-fifths of the population consists of migrant workers, mostly under the age of 35, who speak Mandarin and drink in bars. In nearby Guangzhou, migrants number just over a quarter, more people are older, enjoy watching Cantonese TV and go out to restaurants to drink with family members. Adequately addressing such niches requires an army of local suppliers, costly infrastructure and several layers of wholesalers and intermediaries. Even then, success may remain as elusive as it always has been: “No matter what you may be selling, your business in China should be enormous, if the Chinese who should buy your goods would only do so,” lamented Carl Crow, an advertising executive in Shanghai and author of the original book on how to sell to the Chinese … more than 70 years ago.
Sameena Ahmad is a business writer for The Economist
Copyright The Financial Times Limited 2009