Download - Chinese consumer report

ROLAND BERGER STRATEGY CONSULTANTS

In depth knowledge for decision makers

CHINESE CONSUMER REPORT 2012

2

Foreword

Significance of Roland Berger's consumer survey

Developing trends in China's consumer market

Tackling the challenges facing companies

3

Foreword

China, after ratcheting up three decades of spectacular growth, is now the second-largest economy in the world. Its growth over the past 30 years is unprecedented in the modern era. The emergence of this new economic superpower brings with it a new set of Chinese consumers and global enterprises are seeking to satisfy the demands of this burgeoning and increasingly sophisticated market.

Roland Berger Strategy Consultants, which is the largest strategy consultancy of European origin, was among the earliest international strategy consultancy firms to establish a presence in China. Since 2009 Roland Berger has closely observed the buying habits and trends of Chinese consumers and has published a comprehensive and systematic study annually since then. The survey this year covers 20 Chinese cities, ranging from first-tier through to fourth-tier cities. Some 10,000 consumers with different spending levels were surveyed to monitor their consumer habits in clothing, skin care products, mobile phones, automobiles and luxury goods. As such, the survey provides an up-to-date synopsis for companies that focus on meeting the specific needs of Chinese consumers.

We observed four significant trends relevant to the Chinese consumer market this year. First, consumers born in the 1980s and 1990s are a formidable consumer force, shaking up the retail sector. This generation of consumers is not captive to certain brands. On the contrary, they are easily influenced by advertising and constitute a lucrative market segment for companies that develop innovative products. Second, the purchasing behavior of consumers differs significantly depending on where they live, or more specifically, how big the city in which they live is. Brand loyalty continues to increase for consumers in first-tier and second-tier cities, so too products that answer emotional demands. Third, the monthly household income of 7,000 yuan has become a watershed of purchasing activity. Those with a higher income are more discerning: they gather more information about the products they wish to purchase and pay greater attention to spending on products that satisfy their emotional needs. Fourth, online shopping is witnessing a rapid expansion. However, growth is not uniform across the different consumer groups.

These trends provide both tantalizing opportunities and challenges for consumer goods companies. Based on its deep understanding of this market, Roland Berger recommends companies to develop a three-pronged marketing strategy. First, companies should position their brands in line with consumers' values. Second, the marketing focus and approach adopted by companies should be defined based on the target group's purchasing behavior and it should exploit new marketing strategies such as smart phone and internet marketing. Third, given the fast growing e-commerce environment, companies must consider offering consumers online shopping opportunities and select the right e-commerce business development strategy.

For almost thirty years, it has been Roland Berger’s honor to experience the rapid growth occurring in China as a result of the country's economic reform and opening up to the outside world. Looking to the future, Roland Berger will continue to offer its full commitment to enterprises interested in participating in China's development, providing professional, innovative and localized consulting services for Chinese and international companies.

We look forward to the prospect of making that journey with you.

Member of Global Executive Committee

President, Asia

Roland Berger Strategy Consultants

4

Over the past two years, the Chinese consumer goods market has experienced a series of major changes:

> A major consumer group has emerged from the generation of Chinese born in the 1980s and 1990s who have now reached their twenties and thirties; the Chinese economy has performed outstandingly during the Government's 11th Five-Year Plan; third- and fourth-tier cities have seen a rapid development, with spending power in these cities soaring.

> A large number of advanced foreign brands, technologies and products have entered the Chinese market and are hugely influencing high-income groups in developed areas. The difference in spending attitudes seen in high- and low-income groups is accelerating as a result.

> E-commerce has become a key domain supported by the Chinese government; online shopping has developed into an emerging shopping channel, growing exponentially at a CAGR of 100% over the past three years.

These changes provide new opportunities for Chinese and international brands, distributors and retailers alike. To make the most out of these developments, however, market participants need to recognize and anticipate the behavior of consumers in relevant segments. This will be key to successfully introducing and deploying the most appropriate marketing concepts.

Roland Berger Strategy Consultants has conducted a market survey of Chinese consumers each year since 2009. The in-depth surveys examine purchasing values, level

Sign

ifica

nce

of R

olan

d Be

rger

's c

onsu

mer

sur

vey

5

of activity and purchasing behavior through quantitative and qualitative research. The annual Roland Berger Consumer Report has become a useful reference guide for domestic as well as foreign consumer goods companies that compete in the Chinese market.

The survey's quantitative research is based on a combined telephone and fixed-location approach, covering a total of 10,000 samples in 20 cities, spanning from first-tier to fourth-tier. (See B.1)

Five product categories comprising clothing, skin care products, luxury goods, mobile phones and automobiles were studied. For each category, a fair balance was made in terms of product attributes and coverage of product values.

To achieve a balance of product attributes, the five categories included both those with stylish attributes such as clothing, skin care products and luxury goods as well as those with technological attributes such as mobile phones and automobiles.

To ensure a balanced coverage of product values, the five categories covered a wide range of product values, including low-value products such as clothing and high-value ones such as automobiles and luxury goods.

Our survey respondents were categorized in the following dimensions: age, city tier, monthly household income, shopping channel, etc. Since we also examined the values and activity of consumers for each of these dimensions we can provide enterprises operating in China with additional meaningful insights.

1). The city tiers are categorized according to the city classification methodology and model developed by Roland Berger.

The quantitative research of Roland Berger

Consumer activity level study

Survey methodology > Telephone survey

Consumers’ behavior study

> Fixed-location survey

> All product category representative consumers

> Consumers who bought products from representative product categories over the past six months

> 3076 samples > 6937 samples

20 cities: > First-tier cities: Beijing, Shanghai, Guangzhou and Shenzhen> Second-tier cities: Chengdu, Foshan, Hangzhou, Qingdao, Xiamen,

Shenyang, Shijiazhuang and Changsha> Third-tier cities: Jiujiang, Luoyang, Lanzhou, Zhuzhou and Nanning> Fourth-tier cities: Jinjiang, Maanshan and Meizhou

Target group

Sample size

Cities covered

6

Deve

lopi

ng tr

ends

in

Chin

a's

cons

umer

mar

ket The results of Roland Berger's study show a

Chinese consumer market with four prominent features, namely: the huge potential from young consumers; increasing purchasing activity from consumers in low-tier cities; the substantially improved spending power of high-income consumers; and a rapid uptake in online shopping. Among these features, the following ten observations deserve particular attention:

> Consumers aged between 25 and 34 years are the most active – this was notable in all observed categories. Like their peers in other parts of the world, consumers between 17 and 24 years in age are also active buyers of clothing, skin care products and mobile phones. Consumers in this age bracket were born and grew up in the 1980s and 1990s, a time of unprecedented prosperity in modern-day China.

> Consumers aged between 17 and 24 years have not yet developed their own brand awareness and display relatively impulsive purchasing behavior. Compared with older consumers, they have a lower level of product preference, pay more attention to the visual appearance of products and are easily and significantly swayed by distribution channels.

> Consumers from second-tier cities deserve extra attention, as they are active in the purchase of luxury goods and automobiles. Consumers from low-tier cities are more active in the purchase of daily necessities such as clothing, skin care products and mobile phones, but remain cautious about buying big-ticket items.

> Compared with first-tier and second-tier cities, consumers from low-tier cities have a lower level of product preference. On the one hand, this is certainly due to the limited type of local retail formats on offer. On the other hand, local consumers do not have fixed brand awareness and are more willing to pay

for the partial functionality of products.

> Consumers from first-tier and fourth-tier cities both favor branded products, but for different reasons. Consumers from first-tier cities are more cognizant of brand connotation, while those from fourth-tier cities are swayed by brand popularity.

> The monthly household income of 7,000 yuan is an important watershed of spending power: families with a higher income are more active in the purchase of clothing, skin care products, mobile phones, automobiles and luxury goods.

> Consumers with a monthly household income of over 7,000 yuan have strong product preference. They are usually more active in acquiring brand and product information.

> The higher the city tier, the less important online shopping is to consumers. This might be explained by the wide-range of choice consumers in higher-tier cities have. Consumers in first-tier cities have diverse shopping channels and retail formats at their disposal and do not have to go online. However, it is noteworthy that consumers in first-tier cities that do shop online have the highest purchasing activity level. This merits the attention of enterprises doing business in China.

> Online shopping is less important for consumers with a monthly household income of over 10,000 yuan than it is for middle- and low-income families. However, upper-income households are quite active in buying daily necessities and luxury goods online.

> Online shoppers, when compared to traditional shoppers, have a lower product preference and are less likely to regard the brand as the primary consideration when making purchasing decisions. The main reason for this is that online shopping has reduced the cost of comparing product

7

“The generation born in 1990 is an emerging group that has shown increasingly strong purchase ability. The key is how to acquire these consumers? Lining’s high-profile attempt of transformation now appears to have failed. So what is the most essential difference in terms of spending behavior between the generation born in 1990 and other generations?”

---an executive from a popular domestic casual wear company

“To obtain the young consumers would mean acquiring the future of the Chinese market. But the challenge remains in meeting the strong demand of young people in their twenties in terms of brands and products.”

---an executive from a popular domestic personal electronic products company

performance, price and user evaluations. Meanwhile, the unlimited shelf space of online shopping sites has provided consumers with more choices, further reducing the cost of conversion.

Young consumers have the most active spending behavior

In this study, we conducted quantitative research on consumers' values based on our exclusive RB Profiler tool. On the analytical diagrams shown in C.1, values strongly approved by the consumers are represented as dark blue, while the strongly disapproved values are represented as dark red.

When assessing the spending of different age groups, Roland Berger experts observed significant differences in values between younger and older consumers: younger consumers under 34 years of age have relatively emotional-based values when spending, with a common pursuit of what our tool calls "vitality" and "passion". They do not focus on value for money. This is especially apparent for those aged between 17 and 24, who pay more attention to "carefree" and "thrill" values. On the other hand, consumers aged between 35 and 59 years show a preference for rational-based values. Restrained mainly by income, their values tend to focus on "quality" and "personal efficiency". (See C.1)

The environment consumers grew up in closely relates to differences in values. The younger population, comprising the generations born in the 1980s and 1990s, grew up in an environment of abundance. In sharp contrast to their older peers, the younger population is accustomed to having access to a wide range of information channels. As most of them have not yet assumed family responsibilities, their values when spending are more emotional-based and they pursue self-betterment goals. Those who are over 35 years of age are gradually assuming family responsibilities. This sandwich generation contends with

Comparison of values when spending of different age groups

17 to 24 years old 25 to 34 years old

35 to 44 years old 45 to 59 years old

Source: Roland Berger consumer survey; Roland Berger analysis

social responsibility

nature

passion

purism

vitality

classic

tranquil affinity

security

thrill/entertainment

carefree

trendy·cool

smart shopping

service

quality

trusttotal cost

innovative pro-tech

personal efficiency

customized


nature

passion

purism

vitality

classic

tranquil affinity

security


carefree

trendy·cool

smart shopping

service

quality

trusttotal cost

innovative pro-tech

personal efficiency

customized


nature

passion

purism

vitality

classic

tranquil affinity

security


carefree

trendy·cool

smart shopping

service

quality

trusttotal cost

innovative pro-tech

personal efficiency

customized


nature

passion

purism

vitality

classic

tranquil affinity

security


carefree

trendy·cool

smart shopping

service

quality

trusttotal cost

innovative pro-tech

personal efficiency

customized

8

great financial pressure and a demanding work schedule, which results in precious little leisure time. Consequently, this sandwich generation attaches greater importance to shopping efficiency, rational spending and value for money. These consumers rarely make impulsive purchases.

Due to their financial independence and optimistic perception of spending, people aged between 25 and 34 have become the most active consumers in the Chinese consumer goods market. People aged between 17 and 24 are also active in some categories, particularly high-tech electronic products represented by mobile phones and certain fashion products such as skin care products and clothing. (See C.2)

In terms of spending behavior, people aged between 17 and 24 have less purchase preference and are easily influenced by channels, especially when buying low-value products such as clothing. The purchase preference for people older than 24 years is noticeably higher, as seen in all the product categories. (See C.3)

17 to 24 years old

25 to 34 years old

35 to 44 years old

45 to 59 years old

Comparison of spending intensity2) of different age groupsclothing skin care products mobile phones automobiles luxury goods

2) Spending intensity refers to the difference between the proportion of the number of people in specific groups buying a particular category (proportion 1) and the proportion of the overall number of people buying from this category over the past six months (proportion 2); The formula of spending intensity = (proportion 1/proportion 2) – 100%Source: Roland Berger consumer survey; Roland Berger analysis

17 to 24 years old

25 to 34 years old

35 to 44 years old

45 to 59 years old

Comparison of spending preferences of different age groups

clothing skin care products luxury goods mobile phones automobiles


9

Consumers aged between 17 and 24 have a lower level of preference due to the following two reasons:

> Weak brand awareness: These consumers, including students and those new to the workforce, have not yet completely developed a brand awareness. (See C.4) Despite having a higher budget, they are the most unwilling to initiate a brand upgrade.

> Impulsive spending patterns: Influenced by their consumption values, consumers aged between 17 and 24 are more willing to pay higher amounts for products that are visually appealing, while older consumers attach more importance to value for money, practicality and product brands. Certain marketing strategies such as products displayed in certain channels, trial experiences and promotion by sales persons may influence the purchasing decision of younger groups, especially those between 17 and 24 (See C.5).

To attract young people—the future consuming force of China – companies, especially those in the high-tech, clothing and luxury goods industries, need to get creative. They need to stimulate the purchasing demand of young consumers from various angles, including making their products more visually appealing, better using marketing channels, and striving for more effective brand communication.

17 to 24 years old

25 to 34 years old

35 to 44 years old

45 to 59 years old

Comparison of different age groups and their willingness to upgrade product brand



17 to 24 years old

25 to 34 years old

35 to 44 years old

45 to 59 years old

clothing luxury goods mobile phones automobiles


Comparison of different age groups and their willingness to upgrade product appearance

10

Consumers from different city tiers have significantly different spending behavior

Based on our survey samples from different tiered cities, Roland Berger experts observe that consumers from first-tier and second-tier cities pay more attention to "passion" and "service" values. Particularly first-tier consumers pursue "trendy", "innovative pro-tech" and "personal efficiency" values and use less income restraint when buying goods. Consumers from third-tier and fourth-tier cities lean toward rational spending using higher income restraint. (See C.7)

Consumers in first-tier cities whose expectations go beyond having basic functions satisfied are more likely than other consumers to buy luxury goods and skin care products. They have a higher spending intensity. Consumers from second-tier cities are relatively active in the purchase of luxury items. Brand manufacturers would be wise not to ignore this burgeoning – and potentially lucrative –trend. The leaning of consumers from second-tier cities for automobiles is a finding that deserves special attention. Consumers from second-tier cities display the most active spending pattern for cars. The high market penetration and worsening traffic environment in first-tier cities have restrained consumers' demand for new cars or for upgrading their old ones. (See C.8)

According to the purchasing behavior analysis relating to product preference, the lower the city tier is, the lower the consumers' purchase preference is before going into stores. Consumers from first-tier cities have the strongest purchase preference before going into stores, while consumers from fourth-tier cities have the weakest purchase preference. The gap is most apparent in the high-value categories. (See C.9)

The low purchase preference of consumers from low-tier cities is based on two key drivers:

“The first-tier and second-tier household appliance markets already appeared saturated in 2011, while the third-tier and fourth- tier markets have become the focus. However, consumers from third-tier and fourth-tier cities have an elusive perception and spending behavior. So the experiences of the first-tier and second-tier markets cannot be easily replicated.”

---an executive from a large-sized domestic household appliance retailer

“In the third-tier and fourth-tier markets, channel features have significant differences, and consumers have different purchasing power. A big issue is how to quickly and accurately grasp their spending habits.”

---an executive from a large-sized international household appliance brand manufacturer


nature

passion

purism

vitality

classic

tranquil affinity

security


carefree

trendy·cool

smart shopping

service

quality

trusttotal cost

innovative pro-tech

personal efficiency

customized


nature

passion

purism

vitality

classic

tranquil affinity

security


carefree

trendy·cool

smart shopping

service

quality

trusttotal cost

innovative pro-tech

personal efficiency

customized


nature

passion

purism

vitality

classic

tranquil affinity

security


carefree

trendy·cool

smart shopping

service

quality

trusttotal cost

innovative pro-tech

personal efficiency

customized

First-tier cities

Second-tier cities

Third-tier cities

Fourth-tier cities

clothing skin care products mobile phones automobiles luxury goods

2) Spending intensity refers to the difference between the proportion of the number of people in specific groups buying goods from a particular category (proportion 1) and the proportion of the overall number of people buying goods from this category over the past six months (proportion 2); The formula for spending intensity = (proportion 1/proportion 2) – 100%Source: Roland Berger consumer survey; Roland Berger analysis

Comparison of spending intensity2) of different city tiers

First-tier cities

Second-tier cities

Third-tier and fourth-

tier cities


Spending values of consumers from different city tiers

11

> Brand information is limited by the city infrastructure and environment, including local retail formats. Consumers from low-tier cities receive far less brand information than those from first-tier and second-tier cities, and brand awareness is not yet fully developed.

> Consumers from low-tier cities value the functional features of products such as clothing material, marketing results of skin care products and mobile phone configuration more than appearance, design and craftsmanship. These consumers do not merely pay for the high brand premium.

Another noteworthy phenomenon, revealed in the results of the survey, is that consumers from fourth-tier cities attach greater importance to brands than those from second-tier and third-tier cities. However, their superficial attachment should be differentiated from that of first-tier city consumers. The latter attach greater importance to the intangible elements of a brand and have for example a finer recognition of what a brand stands for. (See C.10)

An increasing number of top brands and large-sized domestic and international retailers are entering third-tier and fourth-tier cities in the hope of seizing the opportunities that are arising there. It is the surge in per capita income in these cities and increasing urbanization that attracts these retailers.

In terms of brand building, Roland Berger suggests interested players should try to improve their brand reputation and awareness in a first step. In a second step they should emphasize their products' high value for money through marketing campaigns.

Moreover, in terms of marketing information channels, companies must be aware that due to media development and network layout, the way consumers from third- and fourth-tier cities get product information

First-tier cities

Second-tier cities

Third-tier cities

Fourth-tier cities



Comparison of purchasing preference of consumers from different tier cities

First-tier cities

Second-tier cities

Third-tier cities

Fourth-tier cities

Among consumers from the same-tier cities, the most important reasons for previous product purchases (brand, %)


Comparison of brand awareness of consumers from different tier cities


Comparison of the main channels used to convey product information to consumers in different tier cities

First-tier cities

Second-tier cities

Third-tier cities

Fourth-tier cities

Peer groups' recommendation

Storefront/display window

Fashion magazines

Entertainment news

TV commercials

Outdoor advertising/billboards

Official brand website

E-commerce websites

Recommendation of professional clothing websites or online channels

User evaluation on the Internet

Word-of-mouth marketing

Terminal marketing

High-altitude marketing

Network media

differs significantly from the channels used by consumers in first- and second-tier cities. Consumers from third- and fourth-tier cities are more influenced by recommendations and endorsements from their peer groups, TV commercials, outdoor advertising/billboards

and recommendations from specialized online channels.

Well-established approaches such as word-of-mouth marketing and outdoor billboards will prevail and continue to be effective. (See C.11)

12


nature

passion

simplicity

vitality

classic

comfort affinity

safety

excitement

freedom

fashion·cool

smart shopping

service

quality

trusttotal cost

innovative technology

personal efficiency

customized

“The Target consumer group's spending ability is the key to companies’ profit, influencing a series of strategic issues such as brand positioning.”

---an executive from a well-known domestic food company

“The consuming habit of the high-income group seems different from that of the low-income group. We are perplexed: what is the most efficient way to convey our brand information to them?”

---an executive from a domestic cosmetics company

A monthly household income of 7,000 yuan is the watershed for purchasing activity

A close analysis of consumers from different income groups shows Roland Berger expertsthat Chinese consumers' values differ significantly, with a monthly household income of 7,000 yuan as the critical point. Restrained by their income, consumers with a lower income lean toward rational purchasing decisions, while consumers with a higher income lean toward more emotional purchasing choices. (See C.12)

While the main consumer groups vary according to the categories of consumer goods looked at, consumers with a monthly household income of over 7,000 yuan have strong spending intensity in all categories. (See C.13)

In terms of purchasing behavior with respect to product selection, consumers with a monthly household income of over 7,000 yuan have significantly stronger product preferences and are relatively unaffected by the channels. (See C.14) This is mainly because their initiativein gaining product information has led them to develop a product preference much earlier than other consumer groups do. (See C.15)

Comparison of purchasing values of consumer groups with different income levels

Monthly household income under 7,000 yuan


Monthly household income over 7,000 yuan

Comparison of spending intensity2) of consumer groups with different income levels

2) Spending intensity refers to the difference between the proportion of the number of people in specific groups buying goods from a particular category (proportion 1) and the proportion of the overall number of people buying goods from this category over the past six months (proportion 2); The formula for spending intensity = (proportion 1/proportion 2) – 100%Source: Roland Berger consumer survey; Roland Berger analysis

clothing skin care products mobile phones automobiles luxury goods


nature

passion

simplicity

vitality

classic

comfort affinity

safety

excitement

freedom

fashion·cool

smart shopping

service

quality

trusttotal cost


personal efficiency

customized

13

Roland Berger experts believe that if companies identify these consumers as their target group, then leveraging their resourcefulness in gathering information could serve as a shortcut. For example, to get information on clothing products, the high-income group (monthly household income of over 7,000 yuan) prefers social and professional networks and paper media, especially professional magazines, official brand websites and professional consumer goods websites. These channels are prompt, professional and interactive. Brands can carry out targeted brand publicity and marketing activity through these channels in order to more accurately convey brand elements and product attributes. (See C.16)

Comparison of purchase preferences of consumer groups with different incomes



Comparison of the initiative of gathering product information of consumer groups with different incomes



Comparison of the channels for consumer groups with different incomes to gather clothing information actively

Peer group's recommendation

Storefront/display window

Professional magazines


Search for the brand’s released information on the Internet

Recommendation of professional clothing websites or channels on the Internet

Search for the branded products on e-commerce websites

Actively search for the user evaluation of the brand on the Internet


Terminal marketing

Paper media

Network media

Middle- and low-income consumers

High-income consumers

14

Experts discovered significant differences in online purchasing activities of each consumer group

By the end of 2011, there were over 150 million Chinese online shoppers, accounting for 35% of Chinese netizens. The rise of Chinese online shopping is the result of three factors: the internet penetration rate has increased steadily every year; there is a greater acceptance of online shopping as purchasing perception changes; and the gradual increase in high value categories of online shopping goods provide a wider range of options than before.

Roland Berger experts observe that online shoppers lean toward emotional-based spending, are more sensitive to price, and pursue "fashion", "excitement" and "vitality" values from their purchases. They are sensitive to new things, love life and enjoy life changes and an uninhibited shopping atmosphere. (See C.17)

In terms of age patterns, the younger the consumer group, the more important online shopping is to them. This is also due to the unique living environment and family backgrounds of the generations born in the 1980s and 1990s. This consumer group grew up with the internet and forms the main body of internet users in China. They prefer online shopping. This new spending pattern has greater relevance to them than it has for the older consumer groups. (See C.18)

“E-commerce is an important part of future retail formats. However, if it operates under traditional retailing methods, a large number of consumers will be lost. We urgently need to figure out the main characteristics of online shoppers.”

---an executive from a large-sized domestic household appliance retailer

“The annually increasing channel profit has led to high costs for companies. E-commerce may become a new source of profit growth, building a platform that fosters close communication between companies and consumers.”

---an executive from a domestic cosmetics company

Comparison of Purchasing values of consumers from different channels


Consumers from traditional channels Online consumers

The importance of online shopping to consumers of different age groups


17 to 24 years old

25 to 34 years old

35 to 44 years old

45 to 59 years old

In the same age group, the proportion of three purchasing channels most frequently used by consumers excluding/including online shopping [%]

Excluding online shopping Including online shopping


nature

passion

simplicity

vitality

classic

comfort affinity

safety

excitement

freedom

fashion·cool

smart shopping

service

quality

trusttotal cost


personal efficiency

customized


nature

passion

simplicity

vitality

classic

comfort affinity

safety

excitement

freedom

fashion·cool

smart shopping

service

quality

trusttotal cost


personal efficiency

customized

15

In terms of city tiers, we observe that online shopping is less important to consumers from high-tier cities than for those from low-tier cities. (See C.19) Consumers from first-tier cities, in particular, have a large number of shopping channels at their disposal owing to the diversified and fully developed retail formats nearby such as shopping centers, department stores, category specialty stores, brand stores, outlet discount stores, hypermarkets, supermarkets, convenience stores, and wholesale markets. Online shopping is less important to them.

On the other hand, online shopping, compared to other channels, is the most active channel among shoppers from first-tier cities, which is evident in many categories, including clothing, skin care products, mobile phones and luxury goods. (See C.20)

In terms of household income, the higher the household income, the less important online shopping is. Presently consumers are attracted to online shopping because of the low prices, which has limited appeal for families with higher purchasing power. (See C.21) However, there is an exception. The group with a monthly household income of over 10,000 yuan is significantly more active in online shopping for skin care products and luxury goods than other groups are. (See C.22)

The importance of online shopping to consumers from different city tiers


In the same city tier, the proportion of three purchasing channels most frequently used by consumers excluding/including online shopping [%]


First-tier cities

Second-tier cities

Third-tier cities

Fourth-tier cities

Comparison of online shopping activity among online shoppers from different city tiers


In the same city tier, compared to other channels used by online shoppers, the intensity of online shopping [%]

clothing skin care products mobile phones luxury goods

First-tier cities

Second-tier cities

Third-tier cities

Fourth-tier cities

Comparison of the importance of online shopping to consumer groups with different incomes


In a group with the same income, the proportion of three purchasing channels most frequently used by consumers excluding/including online shopping [%]


16

Online shoppers have weaker product preference than do consumers purchasing goods through traditional channels, and place less emphasis on the product brand. This is mainly because online shoppers can quickly compare the performance and price of products on different websites. They do not frequent different stores in person, which reduces the cost – time – of shopping around. Moreover, online shopping provides consumers with transparent product information, letting them see the performance of products and its parameters. Moreover, they have access to reviews. That is, they can communicate online in real-time about their user experience with other online shoppers. The distinction and attraction of a particular brand of product is thus diminished.

A greater factor influencing choice is that online shopping, unlike individual stores, is not constrained when displaying goods by the physical space available. Online shopping provides consumers with many replaceable and complementary categories, creating and encouraging spontaneous shopping demand and appealing to consumers' delight in picking products. (See C.23)

The activity of online shopping among consumer groups with different incomes


In a group with the same income, compared to other channels used by online shoppers, the intensity of online shopping [%]

Skin care products luxury goods

Comparison of consumers’ purchase preference of all channels

Purchase preference [%] Primary consideration of purchase activity [brand, %]

Consumers of traditional channelsOnline shoppers

Clothing skin care products

mobile phones


mobile phones

17

Online shoppers have a purchasing ecosystem that is more dependent on networks – both professional and social. They are much more active in gathering information than consumers of traditional channels, and they gain their information mainly from online channels. (See C.24)


mobile phones

The proportion of consumers active in gathering information [%]

Consumers of traditional channelsOnline shoppers

Channels of actively gathered information (taking clothing as an example, %)

Comparison of the channels for consumers of all channels to actively gather information

Others people's recommendation

Brand storefront/display window

Professional magazines


Search for the brand’s released information on the InternetRecommendations of professional clothing websites or channels on the Internet

Search for the branded products on e-commerce websites

Actively search for the user evaluation of the brand on the Internet


Terminal marketing

Paper media

Network media

Online shoppers

Consumers oftraditional channels

18

Tack

ling

the

chal

leng

es

faci

ng c

ompa

nies

Because of the disparity in ages, city tiers and household incomes, there is great divergence among Chinese consumers in terms of purchasing values, intensity and behavior. A blanket approach to marketing does not work well in China. Companies that wish to be successful in China's consumer market should first recognize the diversity of this country's consumer base. The RB Profiler tool highlights just how different the needs and values of different consumer groups are. Only after understanding this can companies develop a strategy to make their advertising and marketing promotion more efficient and effective. At the same time, top brands and retailers must find a way to create synergies between their online and offline business, especially given the quick rise of e-commerce.

Brand management

Differentiated brand positioning is the foundation of brand management. Companies should first fully understand the intrinsic values and purchasing behavior of different consumer groups in China. Products belonging to different categories are also different in terms of functional and emotional demand. Companies should position their brands based on these differences. For example, consumers from low-tier markets still have relatively rational purchasing values and they do not have fixed brand awareness. They are willing to pay for a product's brand-associated partial function. Brands entering low-tier cities thus need to quickly build their brand awareness and highlight the value-for-money feature of their brands and products.

Marketing promotion

Companies should use the strength of brand preference as their guide to determine the focus of their marketing promotion. When addressing consumers that have strong brand and product preference prior to purchasing, companies should highlight the unique value of the brand. The aim of this is to strengthen the consumers' brand identification. When promoting their goods to consumers with lower purchase preference, companies should focus on the price, channel coverage and channel marketing of their products instead of ramping-up brand promotion.

It is important that companies carry out differentiated marketing based on target group values and the preferred information channels. For example, when marketing to consumers that actively gather information, brands should try to leverage the information channels used such as networks and paper media. It might be particularly useful to focus on professional magazines and official brand websites. Similar target groups include online shoppers, who have a purchasing ecosystem that is more network-dependent, and those who are more active in gathering information from online channels such as online shopping websites, official websites and vertical information portals.

The internet and especially mobile internet undoubtedly provide more effective extended channels. They have attracted many brands because of their wide audiences, high value for money and fast speed. But brands have to fully grasp the special features of network marketing especially "content-center" and the "influence of endorsements by social celebrities". Rather than viewing online channels as an extension of their traditional media placement strategy, they need to learn how to maximize the use of network media.

19

Channel strategy

With e-commerce developing at breathtaking speed, knowing how to address online shopping has become a major question mark for companies. Roland Berger believes that market players need to fully assess two dimensions before taking any action: the importance of online shopping to a target consumer group and the activity level of online shoppers. Roland Berger recommends that enterprises consider the following four options when developing an online shopping channel: (See D.1)

> Focus on the group that actively shops online and views online shopping positively; quickly and preemptively seize this market opportunity

> Provide differentiated products specifically to those active in online shopping, while taking the time to develop the online channel

> Gradually promote the "positive cannibalization" of online shopping to physical stores

> Consider introducing an online channel at a later date

Develop online shopping as a key channel. Any hesitation may cause the loss of the market share

Provide differentiated products specifically to those active in online shopping, while taking the time to develop the online channel

Gradually promote the "positive cannibalization" of online shopping to physical stores

The Online channel is not the development focus at the present time

Development strategy of online shopping

High

High Low The importance of online shopping

Activ

ity le

vel o

f on

line

shop

pers

Luxury goods for high-income consumers from first-tier cities

Some categories for 16- to 24-year-old consumers

For people over 45 years old

Consumers from third-tier and fourth-tier cities

Development focus:

Differentiated treatment:

Careful cultivation:

No interference:

Roland Berger Strategy Consultants2012, all rights reserved

Beijing

20/F, Tower A, Gateway Plaza, 18 Xia Guang Li, Dong San Huan North Road, Beijing, China, 100027 Tel :+86 10 8440 0088

Shanghai

23/F, Shanghai Kerry Centre, 1515 West Nanjing Road, Shanghai, China, 200040 Tel: +86 21 5298 6677

Guangzhou

10/F, 8 Linhe Zhong Road, Guangzhou, Guangdong, China, 510620 Tel: +86 20 2831 7508

Hong Kong

16/F, Nexxus Building, 41 Connaught Road, Central, Hong Kong Tel: +852 3757 9480

Taipei

37/F, Taipei 101 Tower, 7 Xinyi Road, Section 5, Taipei, Taiwan, 110 Tel: +886 2875 82835

[email protected]

www.rolandberger.com.cn