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Tom Doctoroff Marketing

The enduring rules of selling to china’s middle class

China’s middle and upper-middle class, a modern force with timeless cultural imperatives, is reshaping the world. Yes, China’s economic landscape is shifting. It’s more unstable than any point in recent history. That said, the middle class – and China’s economy as a whole — has achieved critical mass. It’s big. In 2016, it accounted for more than 50% of total luxury sales. Since 2012, the People’s Republic of China has been the world’s largest auto market.

This demographic isn’t going to evaporate unless the bottom falls out of China’s growth model, and no one, save the ultra-pessimistic 1%, is predicting that too-awful-to-imagine outcome.

But to harness its spending power, marketers must keep cultural and motivational fundamentals front and center in their strategic plans. They must realize that while Chinese consumers are becoming modern and international, they are becoming “Western.” Chinese consumers exhibit a unique combination of motivations and conflicts that remain constant over time, independent of growth rates and degree of economic anxiety.

Shifting Sands?

A bit of background. The middle classes as a demographic only really came about at the turn of the twenty-first century. Although Deng Xiaoping’s 1992 Southern Tour effectively legitimized private wealth–and gave his economic reforms a much-needed fillip–the impact on people’s lives was not really felt until the late 1990s. The sheer scale and magnitude of this transformation marks a spectacular inflection point for China–yet nobody has really come up with a suitable definition of the middle class.

Household earning of RMB10,000 per month (around $2,800 on an adjusted purchasing-power parity [PPP] basis) is considered by some the lower edges of the middle class. The core middle class starts from RMB20,000 a month ($5,700 on an adjusted PPP basis). There are around 150 million people in this category–basically, anyone who is not struggling for day-to-day survival.

According to Euromonitor International, a London-based market research firm, the middle class in China is defined as households with an annual income between RMB60,000-500,000; it estimates there will be more than 700 million people in this category by 2020. It is certainly a fallacy that this class exists in the primary cities only; it is to be found in every urban area in China, as can be seen in the growth of car ownership across all the cities.

As Xi Jinping brusquely consolidates power at the expense of fundamental structural reform, confidence in the resilience of China’s economic model could be waning. Those at the tip of the socioeconomic pyramid are already hedging their bets. This is why so many of China’s wealthiest citizens are busy securing foreign passports as “insurance” against future instability. Nearly half of Chinese with assets worth more than 10 million yuan, or $1.7 million, are considering moving abroad, according to a 2016 survey by the Hurun Report, a compilation of the PRC’s richest individuals. The US and Canada, countries perceived to offer robust rule of law, are the most popular destinations. The main reasons given are better education and asset security, and a less polluted environment.

But middle class Chinese have no choice but to keep the faith; no other political model beckons. Fingers are crossed that it will be years before the basic current structures of power reach a critical contradiction, giving the CCP enough time to articulate a believably concrete incremental reform agenda. That’s why people are still will to pay increasingly stratospheric prices for real estate in all city tiers. And that’s why the underlying marketing imperatives have remained relatively constant over the past decade and a half.

Constant: Promoting Social Advancement

While China’s middle class is becoming more modern and international, it is not becoming more Western. A brand’s success is rooted in an appreciation of people’s fundamental motivations–and in China this means that a premium-priced product must be a tool for social advancement. That said, the range of product categories perceived to achieve this objective has expanded signficiantly.

DeBeers. In the twenty years since DeBeers entered the market, the penetration of diamond engagement rings has risen from 8 percent to 80 percent. The company achieved this by understanding that marriage is perceived differently among Chinese compared to Westerners. While the latter like to believe that passion and romance last forever, the former see commitment as persistent, not love as such. De Beers gave [JS4] the Chinese man a tool to demonstrate his reliability.

SK-II. Upper mid-tier skin care products such as P&G’s SKII are achieving critical mass. The desire of middle class women to leverage youthful beauty as a professional competitive advantage, has resulted in the reduction of the “white space” between extremely expensive luxury brands such as Estee Lauder and Dior and local mass market products.

Starbucks. In one of the great Houdini acts of marketing, Starbucks has profitably opened five hundred – plus coffee shops in a land that does not like coffee. In 2016, the chain operates more than 2,000 stores. How in heaven’s name did Starbucks accomplish this in China’s “tea culture”? First, Howard Schultz, the company’s CEO, had the foresight to delegate major strategic decisions to Maxim Caterers, Starbucks’ Hong Kong – based joint venture partner and fast-food operator. (In 2011, Starbucks started buying back shares with the intention of eventually becoming sole owner.) Second, from the outset, Starbucks did not try to persuade mainlanders to love expensive coffee. The “perfect blend” was deployed to reinforce international clout and quality standards, both fundamental in reinforcing a premium image. But Starbucks brilliantly established its stores as upscale public destinations. Isolated plush chairs were replaced with long tables large enough to seat professional groups eager to project new generation affiliation in a public context and willing to pay for the privilege. Extensive tea options were brought in, sandwich and snack menus were broadened, and logo-emblazoned accessories–mugs, travel cups, even knapsacks–were introduced. And a successful office delivery service was introduced. Today, any commercial building without a Starbucks is grade B. Unilever, meanwhile, struggles to covert tea drinkers from green to black. Neither Nestle nor Kraft has made inroads with roast and ground coffee. Three-in-ones, presweetened instant coffee packets, sometimes called “the candy of coffee,” dominate cupboards.

Siemens. Most Chinese consumers are still loath to purchase expensive foreign appliances because they are used only at home and the quality of local brands is acceptable. However, products that have “high visibility” or can be “displayed” have made great strides. Siemens, despite an average price premium of 40% versus Haier, is the second largest refrigerator brand after Haier.

Constant: A Unifying Conflict — Projection versus Protection

It’s not only go-go status-seeking that defines middle class desires. There is a pervasive Confucian conflict, directly or indirectly, affects all marketing strategy when targeting the middle class. Brands that help consumers simultaneously project status and protect individual interests have the greatest appeal. A tension between upward mobility and fear-based conservatism shows up everywhere – hence sky-high savings rates that equal more than 35% of China’s GDP.

Members of the middle class sees their journey as a continuous struggle upward, and there is an acute awareness that all could be lost in the blink of an eye. There is a need to demonstrate how high you have climbed, but also to protect that ascent. Insecurity abounds. Stability, a ho hum urge that occupies lower rungs of Maslow’s hierarchy in the West, is a sublime desire in China. No one takes it for granted. Civic institutions are unreliable; there is no political representation; wealth is not protected institutionally; the safety net, particularly health insurance, is still incomplete despite year of bureaucratic fiddling. China’s Post-90s “young” middle class often say all they want is to be happy and “make the most of now” but, when push comes to shove, they understand this ideal is not truly practical for them, especially when the pressures of providing for a family comes into the picture. The political and bureaucratic system – viewed as increasingly, and disappointingly, sclerotic, under the leadership of Xi Jinping who recented assumed the recidivistic title of “core” of the Communist Party — is too firmly entrenched to buck against.

The Chinese are suspicious shoppers because China’s economic and industrial landscape remains “dangerous,” with limited protection of individual physical and economic interests. As a rule, they do not trust local manufacturers or take quality for granted. Reassurance in terms of product quality and affordability is critical.

  • Consumers cotton to megabrands and conglomerates, entities such as Procter & Gamble or COFCO, whose swagger signals reliability. (Consumers would accept a Procter & Gamble infant formula, despite the company’s lack of experience in this category.) And the country’s digital landscape is managed by three behemoths – Baidu, Alibaba and TenCent (BAT) – each boasting expansive ecosystems that have been tacitly blessed by the central government.
  • E-commerce volumes – in 2015, Chinese shoppers spent almost twice what Americans spent online ($672 versus $342 billion) — did not achieve critical mass until scaled online retailers such as Alibaba’s Tmall offered delayed payment schemes, risk-free money-back guarantees, and no transaction fees.
  • Given comparable price, international brands are preferred to domestic ones, even in “Chinese” areas such as food, beverages, and over-the-counter pharmaceuticals. The lunge toward foreign infant formula brands is just one example of willingness to be a hefty price premium to ensure bodily safety, especially if a child’s health is in question.

Importantly, safety-seeking transcends physical or economic anxiety. It also encompasses fears of social alienation or lost “face,” the currency of forward advancement. Products that simultaneously project status and protect social interests are beloved.

Back to diamonds. They are popular because their sparkle is conspicuous but, at the same time, elegant and understated. The same goes for Mont Blanc’s six-point star logo. Furthermore, consumers are willing to pay a premium for any product that delivers a public payoff and, hence, “face.” That’s why Nike running shoes, infinitely cooler than domestic competitors, command a 250 percent price markup relative to cost of goods.

It’s worth noting that this “unifying tension” can to be applied to different socioeconomic tiers, albiet with a difference balance between protection and protection, with importance placed on the latter. In lower-tier markets, definitions of success are more short term, more inextricably linked to the home. We also tend to emphasize protection because non-middle-class consumers–those who have benefited less from waves of economic reform–are less convinced that the world is safe. Likewise, brands are less familiar in tier-three, -four and -five cities, so communications must be simpler and more direct than in primary markets, and the role of in-store experience and reassurance is vital.

In conclusion, despite the uncertainty surrounding China’s economy, the country’s middle class is robust and will not spin off its axis if the country’s economic model continues to deliver reasonable growth. Furthermore, consumption motivations remain remarkably consistent. Newly-affluent consumers continue to be driven by trenchant socio-economic advancement, and a tension between a desire to protect status and protect economic and social interests.