Is Chinese E-Commerce Moving Down Market?

Are Chinese online consumer preferences moving down market? Call it a consumption downgrade if you prefer, but after years of high growth in the luxury and premium segments there is some evidence that the fastest-growing online segment today is the mass market. How accurate is this and what should be done about it?

There are two trends at work here, the evolution of Chinese consumers and the maturity of Chinese brands.

First, Chinese consumers. The profile of online Chinese consumers has evolved over the past few years because of the ongoing tech empowerment of the middle class and lower middle class. In other words, the early tech adopters in any society tend to be the more educated and the more urban. These demographics formed the bulk of e-commerce shoppers over the past decade and are still the most significant shopping group in China.

But slowly, the less affluent and more remote consumers are learning to love e-commerce as well. They increasingly have smart phones and internet connectivity and they are increasingly comfortable with online lifestyle and purchases, an area originally the home territory for the young and wealthy.

Part of the trend of the emerging tech middle class is reflected in the rapid success of Pinduoduo, China’s fastest growing platform for inexpensive products. So we are seeing a run-up in sales of instant noodles, paper towels, and low-end consumer products.

It is not that the market is moving down, but that a new middle class is more active. The luxury and premium segments continue to grow nicely in China, but the mass-market segment is growing faster.

Second, the maturity of Chinese brands. The country’s manufacturers, retailers, and brand managers are increasingly sophisticated, from merchandising to product design to quality control. They know they cannot go head-to-head with, say, Louis Vuitton, but home-grown heroes such as Xiaomi and Huawei will gladly go up against the likes of Apple and Samsung. The mass market is increasingly dominated by local brands.

Retail guru Tom Doctoroff noted  “Two years ago, 32 of the top 50 brands [in China] were multinational (MNC) brands. Today, 30 are from the mainland.”

But take heart. Chinese consumers still have an appetite for a better life and for the promise offered by the premium brands. McKinsey notes that in the packaged goods area, 20% of Chinese consumers trade up and only 2% trade down. So the aspirational position of premium brands still governs decisions.

It is just that there are more Chinese consumers than ever before and more Chinese brands than ever before. What should international brands do in this evolving landscape?

1. Maintain brand integrity. Do not devalue your brand by chasing market segments traditionally not part of your target market. Smart brands know this, which is why you will not find a down-market version of Nike or Levi’s or Starbucks. These great brands might offer unadorned versions of their products for the starter consumer, but they are not chasing the mass market.
2. Don’t freeze. It is a mistake to chase the market if that means forsaking your brand identity. And the lower you go the more you are competing on price. But that having been said, think about how to experiment in the middle market or how to start a conversation with these new consumers. More pop-up stores? More entry-point pricing? More instructional videos?  Don’t be so indifferent to the middle market that you do not have the capacity to experiment.
3. Refresh your brand. As mass market brands grow in acceptance, it behooves the premium brands to create new expectations, demonstrate their value in distinctive ways, and focus on about additional benefits for consumers. Some people choose to fly economy class and some choose business class. Make sure that the business class experience delivers exceptional value to the consumer.
4. Remember the network. Chinese consumers think digitally and so should you. Your brand story should be as much network-oriented as product-oriented. What celebrities are using your product? Does your loyalty program have meetups in NYC and Shanghai? How can you make your consumer base a fan club? Smart brands actively communicate with their customers to build brand passion. Remember, the appeal of the product goes beyond the product itself to what the product enables the consumer to do.

The bottom line: China is changing and the competitive map is changing with it. You are not going to reach next year’s target numbers with last year’s strategy.

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