The elusive Chinese Consumer

Can it be that the fabled Chinese consumer, whose arrival has been awaited vainly for decades, is finally starting to emerge? Two surveys released Tuesday say they are. But that is something that has been hoped for and predicted for a long time. The lure of selling 1.3 billion refrigerators (or tractors or pairs of shoes, etc) has transfixed western manufacturers for the better part of a century, to their eternal disappointment.

The United States government in particular, has demanded that China, with trade and current account surpluses that reached an unprecedented 10 percent of GDP at their peak, boost domestic consumption to seek to rebalance the deficit. China now has foreign exchange reserves exceeding US$3 trillion.

Central bank Governor Zhou Xiaochuan, however, said recently that boosting the nation’s consumer spending to redress global imbalances is “easier said than done.”

But, according to a study released today by Synovate Global Market Research, an increasingly sophisticated consumer class is emerging in China that is beginning to adopt foreign tastes. The study quotes Chinese Customs statistics that show that in the first five months of 2011, China's food import and export values totaled USS35.09 billion, up 36.2 percent year-on-year. China, the study says, is now forecast to be the top market for US agricultural exports by the end of 2011 at US$ 20 billion, surpassing Canada at US$ 18.5 billion.

A second study, by McKinsey & Co., says that “The Chinese have taken to consumerism with ease, embracing thousands of new products, services, and brands.” Even in the face of rising inflation, the study says, Chinese consumers are more confident this year than in 2010 about their financial prospects although among urban consumers, the number of first-time buyers—a group that has been a major driver of category growth in China—is declining.

Although neither of the studies mentions it, it is probably cars where the west has scored its biggest success. As of 2009, foreign car companies held 85 percent of the Chinese car market, with General Motors the No. 1 auto maker, selling a record 1.83 million units in 2009, more than it sold in its own US domestic market. GM was followed by Volkswagen at No. 2. Mercedes-Benz, Ford, General Motors, Suzuki, Daihatsu, Honda, Subaru, Citroen and Toyota all have plants in China. The majority are forced into partnerships with one of China's "Big Three” automakers.

There is no letup in the influence of brands on Chinese consumers’ buying decisions, the McKinsey report says, “But neither does it indicate strong signs of increasing loyalty to any single brand.” The survey shows the extent to which consumers value brands more than price or channel, largely because they believe that branded products are safer, of higher quality, and more reliable than non-branded ones.

Within the general trend of rising consumerism, according to Synovate, “is the increasing consumption of western food and drink products by Chinese consumers. This is driven in part by the increasingly easy access to imported food and drink products, often via internationally branded supermarkets and groceries. Wal-Mart as of May had 338 outlets in 124 Chinese cities, with 90,000 employees and annual sales of some US$7 billion.

Continuing issues over food safety have played a role, with consumers suspicious of domestic products in the wake of the melamine scandal of 2008, in which some of the country’s biggest milk producers added melamine to milk and infant formula, claiming an estimated 300,000 victims, with at least six children dying of kidney stones and other kidney damage. In a separate incident four years earlier, watered-down milk resulted in 13 infant deaths from malnutrition.

(Wal-Mart, however, didn’t help its own case when in October it had to own up to the fact that it was forced to pay 1.60 million yuan because 10 of its Chongqing stores were fraudulently selling ordinary pork as organic pork. Wal-Mart, according to the government, has been punished 21 times since 2006 for exaggerated advertising and selling expired or substandard food.)

Consumers, according to the Synovate study, also seem to be more willing to “put their money where their mouth is - as long as the taste component is acceptable - to spend more for healthier alternatives.” It quotes a survey by Global Intelligence Alliance among 67 Asian consumer and retail industry professionals in China, India and Southeast Asia in November 2010, 70 percent of whom said consumers in China have become more willing to pay more for better quality food and beverage over the last 12-18 months. While some speculation ensued that the temporary shock in demand would subside, two years after the infant formula melamine scandal, consumer preferences seem to have permanently switched to international and premium local brands over cheaper local options.

Western fast food brands, particularly the KFC fried chicken chain, which opened first in Beijing in 1987, followed shortly by McDonald's, have been thriving. Although local fast food brands like Kungfu, Yonghe King, Da Niang Dumpling, etc still dominate the sector with 70 percent market share, western brands are catching up. By the end of 2010, KFC operated over 3,000 restaurants in China compared to only 400 for Kungfu. McDonald's announced that it would open 1,000 new restaurants in China by 2013.

The fast food brands are rapidly expanding beyond the so-called Tier 1 cities of Beijing, Shanghai and Guangzhou to second and third-tier areas, “bringing western tastes to Chinese palates on an unprecedented scale. They are aided in their efforts by the profusion of American and European food and drink manufacturers, who are also getting a much broader range of tastes and flavors within easy reach of Chinese consumers.”

Dangerously, Chinese sugar consumption has risen by 48 percent over the last decade, according to the US Department of Agriculture, with sweet beverages a significant and growing source of sugar consumption.

“Data from Swire Pacific, a major soft drink distributor, show that soft drink sales in its sales areas rose five-fold on average between 1999 and 2009 compared to 7 percent growth in the US over the same period.”

They have also become formidable wine drinkers, and rather quickly. According to Synovate, a recent study conducted by VisaCard Worldwide based on a survey of 1,800 respondents with an annual income exceeding US$16,000 in Beijing, Shanghai and Guangzhou, found that 80.7 percent prefer French wine, followed by Italian, then Chinese brands ahead of Spanish, Australian and German ones. The study quotes Meininger’s Wine Business International, which predicts that Chinese wine consumption overall will increase by 70 percent by the end of this year, making China the eighth biggest consumer of wine in the world by 2012. Domestic wine sales have seen an average increase of 20 percent over the past years, against an international growth rate of just 1~2 percent.

China's demand for coffee is growing an estimated 15 to 20 percent a year (the world average is around 2 percent), and is expected to reach 300,000 metric tons annually by 2020. Coffee sales currently account for a little over 20 percent of the hot drinks market in China, compared to around 70 percent for tea.14 According to Synovate's Media Atlas China survey, nearly 1 in 10 Chinese consumers in Tier 1 cities have visited a coffee shop at least once a month or more. From its first store in 1999, Starbucks now operates 450 stores and plans to triple that number to 1,500 by 2015. The demand is causing tea planters in China’s southwest to switch to growing coffee beans.

No doubt reflecting this confidence, the McKinsey survey shows that the number of respondents who choose to spend more—buying in greater quantities, more frequently, or more expensive items in a given category—is holding firm. Whereas last year’s survey showed that consumers offset higher spending in some categories by spending less in others, this year there appears to be much less rebalancing.

Also noteworthy is how consumers who spent more in 2010 than in 2009 account for their higher spending. On average across categories, some 50 percent of the survey participants identified inflation as the main reason. But of the remainder, 35 percent said they were trading up (buying more expensive goods in a given category), an increase from 26 percent in last year’s survey. Sixty percent said that buying in larger quantities or more frequently was the main reason for their higher spending, compared with 54 percent in last year’s survey.

But only 5 percent of consumers said they were spending more because they were first-time buyers in certain product categories—down from 20 percent in last year’s survey—an indication of the growing maturity of many such categories.