Chinese consumers trading up FMCG brands, sourcing local for value

04 January 2018 Authored by Consultancy.asia

Chinese consumers are increasingly wealthy, as higher incomes from strong economic growth trickles through the economy. While many Chinese consumers are keen to trade up their FMCG brand, increased focus on value for money, quality products and good after sales service is pushing them to adopt local brands.

The Chinese economy has in recent years sought to shift the focus away from investment and manufacturing and towards consumption led growth. Improvements to the relative wealth of Chinese workers across the spectrum has seen a greater focus on better quality goods. The increasing number of wealthy households in China save an average of 30% of their total income and invest a further 20% across various fronts. Of the wages spent on consumption, holidays within China are the biggest ticket item for households, at 14% of consumption on average, followed by holidays overseas, at 10% of income. Food and drink, personal items, and entertainment average 10%, 8% and 6% of consumption spending, respectively.

The Chinese car market has also seen 20% growth over the past year. Almost 23 million units were sold during 2016, following the removal of sales tax for small vehicle engines. Chinese consumers tend to remain unwedded to particular brands, while increasing individual affluence is enticing larger numbers to trade up to premium rides.

Trading up

A new report has revealed that, in line with this trend, Chinese consumers are increasingly looking to trade up in their purchasing of fast-moving consumer goods (FMCG) – with their rising incomes allowing for higher spending on quality products. The survey shows that around 20% of Chinese respondents plan to trade up, contrasting with the US, where around 8% respectively plan to upscale their brand. The study from McKinsey & Company, titled ‘Double-clicking on the Chinese consumer’, saw the strategy consulting firm survey 10,000 Chinese consumers about their spending plans, as well as their attitudes to luxury spending.

The rise in interest in more prestigious brands, in part reflects wider consumer confidence among Chinese consumers – which hit a ten-year high, exceeding the peak in 2007 – up from 100 points to 115 in August this year. Increased confidence has resulted in increased discretionary spending.

The report notes that, while consumers are keen to switch to better brands, the local market's increased sophistication is shifting consumers in favour of local offerings. This is in part due to localised offerings being able to best understand consumer expectations – as well being able to make the most of an on-the-ground presence – boosting demand for local brands.

More nuanced brand approach

Local fresh food and poultry were significantly preferred to foreign brands, at 59% of respondents, followed by 32% that somewhat prefer local brands. Interestingly, laundry detergents and milk too are preferred from local brands, at 55% and 50% respectively. Infant milk powder remains split with around 27% preferring foreign brands and 27% preferring local brands.

The taste for wine reigns with international brands with 52% preferring foreign labels at least somewhat; however, for beer, few of respondents (15%) are interested in local brands. Cosmetic make-up preferences, the report notes, tend to have higher foreign brand sentiment, while small electronics and apparel and footwear sources are locally preferred. Preferences have impacted the market, with Chinese brands increasingly dominating the personal digital gadgets space, up from 43% of the market in 2012 to 63% in 2017. In personal care, meanwhile, the increase is more subdued, but still significant; up from 61% to 76%.

 Perception miss

However, consumers in China are not always clearly aware whether a brand is local or foreign. A number of brands, such as Olay, Biore, and Danone for instance, are all foreign brands which are perceived as local by between 44% to 48% of respondents. On the flip side, a number of Chinese brands were perceived by large numbers of respondents, given the sample size, as being foreign when they are local.

Regarding the shifting preference of Chinese consumers, the authors concluded; “Both foreign and local brands have opportunities to grow in China providing they can appeal to the increasingly nuanced needs of consumers. MNCs may find it easier to invest in new products and strategies that bridge the gap in areas where local companies are currently preferred, including pricing, quality and service. For local brands, catching up with foreign brands on their attributes - safety and aspirational qualities - will be more challenging. Joint ventures and M&A may support their growth strategies in such cases.”

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