Affluent hold keys to corporate success
Updated: 2012-12-14 09:36
By Vincent Lui and Youchi Kuo (China Daily)
Great rewards await businesses that can adapt to the dynamics of a new consumer class
China's affluent consumers are different from its middle-class and high-net-worth individuals. Richer than the middle class but not as wealthy as the superrich, China's affluent consumers have spending habits and attitudes that are distinct from both. The affluent are central to the rapid rise of China's consumer market and will be a crucial driver of market growth over the next decade. Companies need new strategies to appeal to this group.
China's affluent consumers have annual household disposable incomes of at least $20,000 (15,400 euros), and the average is nearly $40,000. These consumers are buying premium products and services across a wide variety of categories. Today China's affluent consumers are 120 million strong, and their annual buying power is $590 billion. By 2020 this group will number 280 million, or 20 percent of the country's total population. Their annual buying power will reach $3.1 trillion, which will be equivalent to about 35 percent of China's total consumption and more than 5 percent of global consumption. That will also be nearly as much as Japan's total consumption in 2020, 28 percent more than Germany's and three times more than South Korea's.
Reaching China's affluent consumers is important not only because of their sheer numbers but also because they have the financial resources and willingness to buy premium goods and services. Research by the Boston Consulting Group shows that in China $20,000 in annual household disposable income (which equates to $38,000 in developed countries) is an inflection point at which consumers accelerate trading up in the categories that matter most to them. Companies need to establish lasting relationships with these consumers, and the time to get to know them is now.
Several key attitudes and behaviors characterize China's affluent consumers, setting them apart from the middle class and the superrich.
The affluent trade up for emotional gratification. Bolstered by a greater sense of financial security, they are particularly enthusiastic about shopping for the very best they can afford. They wish to enjoy what life can offer, including less tangible experiences such as excellent customer service. Whereas middle-class consumers tend to seek tangible benefits and concentrate their spending on functional items, affluent consumers attach great importance to the emotional benefits they receive. In affluent consumers' opinion, it is now about how to enjoy life and no longer about merely getting through life.
The affluent seek status and recognition. They want to exhibit their new socioeconomic position by buying brands that were once unaffordable. In addition, China's affluent often feel enormous social and peer pressure to "look good". In fact, 80 percent of trading up is triggered by the need to attend business or social events.
The affluent demonstrate greater sophistication. Compared with middle-class consumers, they have greater exposure to outside influences and higher incomes to support a more sophisticated lifestyle. They are global travelers and have the experience of shopping in other countries. As a result, they have a greater awareness of global lifestyle trends and tend to become early adopters of new concepts in China.
The affluent pay more for convenience. Compared with middle-class consumers, they have much less time to shop or deal with defective merchandise. So they are increasingly opting to pay slightly higher prices on business-to-consumer websites to save time and to have the peace of mind that comes with buying quality products. Consequently, e-commerce is shifting from the still dominant marketplace model to one that is increasingly business-to-consumer.
The affluent buy with a shrewd "investor's" eye. They are not as worry-free as high-net-worth individuals. In fact, many affluent consumers view their spending decisions through a return-on-investment lens. Luxury is an important investment for them. They need to justify their spending and make sure that they are making the "right" purchase. Therefore, the affluent are unwilling to pay more for products that do not generate good returns. They are also unwilling to pay a premium for products that do not meet their definition of luxury.
As the number of China's affluent swells, their characteristics will become more complex and diverse. Four trends are emerging.
First, a greater number of affluent consumers live in lower-tier cities. About 75 percent of future affluent consumers will come from lower-tier cities. Companies will need to have a presence in more than 500 cities to reach a majority of affluent consumers, compared with 280 cities today. With less brand awareness, less exposure to diverse sources of product information, and less availability at local retail stores, affluent consumers from lower-tier cities offer much more headroom for growth.
Second, women are becoming key decision makers, and men are embracing new categories. Gender consumption patterns will change. More specifically, affluent women are more self-confident and independent than ever before. They are pursuing personal taste and style. Women's spending on personal luxury goods has increased from 25 percent in 2010 to 46 percent today. As men cross the affluence threshold, they are generally becoming much more concerned about their appearance. So there is a significant rise in affluent men's consumption in personal-care product categories.
Third, the veteran affluent are pursuing experiences. The consumption patterns of the affluent change over time as they become wealthier and more confident. They are shifting their focus from merely buying products to also enjoying premium experiences, such as travel, entertainment, and spa treatments. This gradual evolution from buying products that symbolize affluence to being affluent can also be seen in the overseas shopping experience. The affluent are looking for the latest merchandise, greater product variety, reliable product quality, and the professional in-store service and product knowledge offered in overseas retail outlets.
Last but not least, the "sugar generation", the children of current affluent consumers, is gaining buying power. This generation now accounts for 10 percent of the affluent class, a number that is expected to grow to more than 30 percent in five years. These young consumers, who have lived privileged lives, are the likely future trend setters with unique attitude and behavior. They view brands as tools for expressing their individuality and tend to seek out products and brands that set them apart from their peers and their parents.
To capture the affluent opportunity that lies ahead, companies need to manage their expansion to reach the affluent in lower-tier cities. They need to continually rethink how they position their brands and how they connect with these evolving consumers. Digital-media and e-commerce strategies must tap into affluent consumers' trust of new media and their increasing preference to shop online. Companies also need to promote and sell to Chinese overseas travelers.
The affluent opportunity promises great rewards for companies that can quickly adapt to this dynamic consumer class and evolve with it. Strategies that companies develop for China will help them succeed in their home markets as well. Consumers worldwide - including the affluent - are facing economic pressures. By mastering the affluent market in China, which appreciates luxury but is also conscious of value, companies will also be better equipped to reach their local affluent consumers.
Vincent Lui is a partner and managing director in the Hong Kong office of the Boston Consulting Group and a core member of BCG's Greater China consumer and retail practice. Youchi Kuo is an expert principal in BCG's Hong Kong office and manages BCG's Center for Consumer and Customer Insight in China. The views do not necessarily reflect those of China Daily.
(China Daily 12/14/2012 page11)