accenture young chinese in the hinterlands

8/2/2019 Accenture Young Chinese in the Hinterlands

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Young Chinesein the HinterlandHow to Tap This Blossoming Market


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While Chinas huge consumermarkets continue to getbigger, two important yet

underappreciated sea-changesare occurring. First, the nexus ofspending power is shifting fromwealthy middle-aged residentsto younger generations. Andsecond, as consumer markets incoastal cities such as Shanghaiand Guangzhou become saturated,the strongest economic growthis shifting to inland cities.

But marketing to the youngergenerations in the hinterlandrequires different strategies

than those used for coastal areas.Several companiesby movingquickly, knowing customerpreferences, and developingcreative marketing tacticsarepointing the way to success inChinas hinterland.

2 | Young Chinese in the Hinterland

Introduction

Setting the stage

Inland economies on the rise

Targeting little emperors

Get creative with distribution

Popularity follows close on trust

Internet sales a latent opportunity

Think engagement

Conclusion

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3

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6

8

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Table of contents


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Already the worlds second largestcountry in gross domestic product (GDP),China is poised to have the worldslargest private final consumptionexpenditurethe market value of all

household purchases of goods andservicesby 2020. It is currently sixthin private final consumption expenditure,and rising rapidly (see Figure 1).

Recent history illustrates this meteoricrise to the top: In 2010, with morethan 800 million mobile phone users,China became the largest cell phoneconsumer market worldwide (1.2billion subscribers in May 2011). Itsautomotive market rose to the top

in 2009, and its beer market, whicheclipsed the United States in 2003,is still expanding. Its television andpersonal computer markets are forecastto become the worlds largest in thenear future. In 2009 China had 384million Internet users1.6 times asmany as in the United States (seeFigure 2)and this number, along withInternet sales, is steadily growing.

Setting the stage

Country Amount Annual Growth

USA 9,180 -1.2%

Japan 2,575 -1.0%Germany 1,676 -0.2%

UK 1,498 -3.3%

France 1,297 0.6%

China 1,239 9.1%

Italy 1,047 -1.7%

Canada 705 0.4%

Spain 669 -4.2%

Brazil 661 4.1%

India 646 4.3%

Mexico 584 -7.4%Korea 508 0.2%

Russia 492 -7.6%

Australia 485 2.9%

Country User (million) Diffusion/population

China 384.0 28.5%

USA 239.9 76.2%

Japan 99.1 76.8%

Brazil 75.9 39.2%

Germany 65.1 79.3%

India 61.3 5.1%

Russia 59.7 42.4%

UK 51.4 83.6%

France 44.6 71.6%

Nigeria 44.0 28.4%

Korea 39.4 81.6%Italy 29.2 48.8%

Mexico 28.4 26.0%

Spain 28.1 62.6%

Figure 1. Private final consumption expenditure 2009 (US$ billion)

Figure 2. Internet penetration by country, 2009

Source: United Nations Statistics Division

Source: International Telecommunication Union


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GDP per capita

>=$4,000 $2,500-4,000 < $2,500

GDP growth rate

> =13% 1113% < 11%

Figure 3. Rising inner cities

Source: National Bureau of Statistics of China 2010


Until recently, Chinas economic growthhas been driven largely by coastalcities. But while coastal areas arerecovering from the global financialcrisis and economic downturn, they

are unlikely to return to their previouslevels of growth. For one thing, Chinascentral government aims to acceleratethe growth of the inland economy by

Inland economies on the risesteering infrastructure investmentssuch as railways and roads to thehinterland. Cities there, previouslyless relevant to the global economy,are now expected to show double-digit

GDP growth, with natural resources andenergy, agriculture, and manufacturingfor domestic demand playing prominentroles (see Figure 3).


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A large gap still exists between the percapita GDP of Chinas coastal areasand that of the inland areas. But theaverage personal after-tax incomeper month in Chengdu, Chongqing,and Xian, which comprise the westerntriangle development zone plannedby the central government, was 6300RMB in 2008almost the same as thatof the major coastal cities of Shanghai,Guangzhou, and Shenzhen in 2006(see Figure 4). And because the costof living in the hinterland cities ismuch lower than in coastal cities,purchasing power there can go fartherand potentially grow faster.

These cities are growingChinasurbanization rate, only 20 percentin 1978, rose to 46 percent in 2008with more than 400 million peoplemigrating to cities from rural areasin the past 33 years. Some analystspredict the urbanization rate willexceed 70 percent by 2030, with anadditional 500 million people migratingfrom rural areas. This level of large-scale and high-speed urbanization isunprecedentedthe United States,for example, took 90 years to reacha 70 percent urbanization rate, with250 million people migrating to urbanareas from 1860 to 1950.

Xian

5,695

4,0633,714

Chengdu

6,535

5,378

4,487

Chongqing

6,687

5,011

3,900

Shenzhen

8,687

11,235

Guangzhou

7,0347,045

5,383

Shanghai

9,754

7,491 7,554

5,816

2006 20082007

Coastal 2006average: 6,251

Hinterland2008 average:

6,306

Figure 4. Average personal after tax income per month by city

Sources: Credit Suisse Annual Chinese Consumer Study, Accenture Research analysis

In todays market, contrary to pastexperience, a multinational companymight consider avoiding first-tier citiessuch as Shanghai and Beijing wherecompetition is fierce, and targetinstead the lower-tier cities. Marketcompetition for consumer goodsmanufacturers in China will expandnot only in first- and second-tiercities such as the capitals of provincesand direct-controlled municipalitiescities that have a status equal toprovinces and are controlled directlyby the Chinese governmentbut alsoto third- and fourth-tier cities. Accordingto the China City Statistical Yearbook2009, there are 25 second-tier cities,24 third-tier cities, and 18 fourth-tiercities in China. The fourth-tier citieshave populations of more than 20

million people.


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The past several decades have seenextraordinary changes in Chinas social,economic, educational, and workenvironmentsall of which have ledto changes in its consumer market

(see Figure 5). The post-1980s generation(21-30 years old) and the 1990sgeneration (11-20 years old) togethernumber approximately 400 million (seeFigure 6). They are becoming the mainsegments of the Chinese consumermarket, and they differ from othergenerations in many respects. Theseoffspring of Chinas one-child policyconstitute the first large cohorts

in China to grow up in affluentcircumstances with comfortablechildhoods, enjoying six pocketswith both parents and grandparentswilling to spend money on those they

fondly call their little emperors. Withmuch-improved educations, theseyoung consumers have been exposedto competition in school and in theworkplace. They long for the lifestylein coastal cities and Western countries,glimpsed on TV and the Internet, aresensitive to fashion and other consumertrends in Western countries, and manyof them consider consumption a virtue.

Targeting little emperors

Consumergroups by age

Born in 1950sand 1960s

Born in 1970s Born in 1980s Born in 1990s

Social/politicalexperience

Education inter-rupted by CulturalRevolution

Experienced some hard-ship in childhood, receivededucation after culturalRevolution, benefit fromeconomic reforms

Little Emperors, firstgeneration to grew upunder the one-child policy

Born in the economicbooms and opening era

Psychological/

social profile

Frugal, some levelof resistance of

westernizingenvironment

Self perceived as hardworking and want to be

recognized for their efforts,feeing the stress of growingold

Self confident, proneto western culture and

merchandize, pressuredto establish themselves incareer

Optimistic and confident,follower of westernized

culture

Financial status Benefited from thebooming economybut not as much asyounger generations

Major beneficiary ofeconomic reforms andbetter-off than their olderbrothers and sisters

In addition to incomeof their own, enjoy thefinancial support fromtheir doting parents

Significant purchasingpower based on generosityof parents and relatives

Pressure in

employment

Low Moderate pressure: Established status and

level Concerns about thejob security and futuregrowth ceiling

High pressure: expansion ofhigher education enrollmentand resulting competitivejob market for junior talents

Start entering job market,pressure for inexperiencededucated talents

Consumingbehavior

Spend conservatively,high sense of crisis

Major driver for trade up onhome decor, appliances andfinancial services. Willingto spend for their childrensfuture

In pursuit of style andfashion, spending on theirfirst homes

Eager to try new brands,(in big cities) increas-ingly tech savvy (mobile,internet, digital products),heavily spending onclothes, snacks, etc.

Figure 5. Consumer group distinctions among different age groups

Sources: Analyst reports, Accenture research analysis


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Figure 6. China population structure in 2010*

*Source: United Nations World Population Prospects, The 2008 Revision Population Database

100+

95-99

90-94

85-89

80-84

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0-4

0 20 40 60 80 100 120 140

80s

90s

People (in millions)

Figure 7. Age composition of consumers of foreign brand perfume

Sources: MasterCard Global Consumer Confidence Index Report, Sino Monitor Consumer Goods Market Tracking 2009

15-24

25-34

35-44

45-54

55-64

AuspreAvonChanel Lancom CD

26.6%29.8%

32.5%

27.0% 26.4%

1.7%2.6%0.9% 0.9% 3.0%

33.9%

34.4%34.4%

35.9%

41.6%

26.8%24.3%24.7% 29.0% 23.1%

11.0%9.0%7.5% 7.2%

5.9%

The 1980s generation in urban areashas become known for the impulsivelifestyle calledYue Guang Zu (thosewho spend all disposable incomeand have no savings). This generationspends freely on premium brands, andsees these expenditures as investmentsfor themselves: 60 percent of Chinesewho buy foreign premium brandperfume such as Chanel and ChristianDior are under the age of 35, and morethan 25 percent are under the age of24 (see Figure 7).

Although they are restricted frommoving freely, young hinterland Chinesehave rising incomes, and they haveonly just begun to gain access to theproducts that represent the lifestylethey covet, as large retail chains

penetrate nearby urban areas.

Some local Chinese companies andmultinational companies have begunto successfully target the young Chinesein hinterland cities. Heres how.


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Simply wholesaling products topowerful retail chains and distributors/dealers as they have in coastal citieshasnt worked for multinationals

in the hinterland; instead they aredeveloping creative ways to directlyaccess inland consumers. Here aresome instructive examples:

Nokia, the Finnish mobile phonemanufacturer, worked with a fulfillmentdistributor in addition to its existingdistribution agents, in order to get itsproducts to retailers throughout China.By building a comprehensive distributionnetwork, Nokia has retained its leading

market share position in the fiercelycompetitive Chinese market.

Shiseido, the Japanese cosmeticsmanufacturer, entered China in 1991,establishing its main distributionchannel in department stores in

coastal cities such as Shanghai. In2004, the company expanded its storenetwork to hinterland cities. In 2006,Shiseido launched Urara, a brandlimited to specialty stores. Shiseidolends Point-Of-Sale systems to theseboutiques and regularly dispatchessupervisors to provide thorough trainingon Japanese-style service skills andmake-up techniques. It has expandedits specialty store network to morethan 5,000 stores, and has sales of 6

billion RMB in China, just behind salesof LOral.

Get creative with distributionPigeon, a Japanese childcare andmaternity product manufacturerthat faced a competitive challengein coastal cities, has focused since

2005 on improving its sales networkin Chinas hinterland areas. It signedcontracts with three primary channelsretailers specializing in baby products,department stores, and mass retailerssuch as supermarkets. And it hasdeveloped 33 secondary distributionagents for the specialized stores.Pigeon trades with all distributingagents using a deposit system thateliminates accounts receivable risks.There are more than 7,000 retailers in

Pigeons network, which cover everyprovince in China. The companys 2009sales in China were 550 million RMB,an increase of 53 percent over theprevious year. Sixty percent of salescame from outside coastal cities.


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Popularity follows close on trustGoods and services of foreign ormultinational companies that arepopular elsewhere in the world arenot necessarily so in China. For

example, in Chinas Internet searchmarket, Google has only 20 percentmarket share while Baidu has a marketshare of 75.5 percent (Q4 2010). Othermarket leaders in China are Taobaovs. eBay, Renren vs. Facebook, andMeituan vs. Groupon.

When a foreign company entersChinas hinterland, the companysbrand will initially be completelyunknown. So entering the market by

simply translating content into Chinesewill likely have little impact. Thus,educating people on the value of thecompanys products is an essential firststep. And it is most important to localizethe companys content and makecreative efforts to gain popularityand trust from local young people.

Benesse, a leading Japanese remoteeducation provider, is targeting middleclass Chinese people keen on investingin their childrens education, They

send education materials specific toa childs age to families on a monthlybasis. Although their service is morethan $10 per monthrelatively highfor Chinese peoplethe service hasbecome popular throughout China andthe annual contract update rate hasreached 85 percent.

When Benesse entered the Chinesemarket in 2006, parents knew nothingof their service. Rather than using

mass media advertising, the companyposted advertisements at events inshopping malls. In conjunction withlocal education organizations andmedia in each area, offered promotionson their website, and provided freesample education materials. The

proportion of consumer-members whojoined immediately after trying a freesample reached 25 percent. Additionally,the company has 200 telephone sales

representatives who call families, listento their concerns about education, andexplain the companys service. Some40 percent of the companys consumer-members signed a contract in thisway. Also, 25 percent of all consumer-members joined through hearing aboutBenesse from existing members andother people. From 2006 to January2011, 300,000 people became members;Benesse is targeting 1 million newmembers by 2015.


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Internet sales a latent opportunityThe Internet is an effective channelfor building sales in hinterland areas.Roughly 70 percent of the 400 millionInternet users in China were born inthe 1980s or 90s, and they play a

major role in Internet culture. Whilethe current rate of Internet penetrationis higher in coastal areas, the numberof Internet users in hinterland areasis steadily increasing (see Figure 8).But here, too, trust is an issue: ManyChinese Internet shopping sites arefraudulent, and even legitimate siteshave frequent problems with delaysor damages during delivery. Internetsales, therefore, present anotherimportant opportunity to buildcustomer trust.

These two companies are leadingthe way:

Taobao is a Chinese language web sitefor online auction and online shopping,similar to eBay. Taobao drasticallyexpanded its market share using Alipay,a very popular third party assured

settlement account, which facilitatessecure payment both for stores andInternet users. Taobao expanded itsshare by becoming a site trusted byboth shops and users.

VANCL, a Chinese apparel manu-facturer and Specialty store retailerof Private label Apparel (SPA) since2007, focused on Internet sales andoutsourced manufacturing of basicfashion items for young people, toreduce costs and offer products at areasonable price.

VANCL also made efforts to easeconcerns among consumers and buildtrust by appointing overseas designersfor product design and by investing inpublic relations. The company is now

the second-largest online advertiserin China.

After two years in business, VANCL hada market share of nearly 30 percent inthe Chinese apparel retail market, withsales of 700 million RMB. The totalmarket for retail apparel is approximately2.4 billion RMB.

>=50 million people

3050 million people

=30%

2030%

=40%

3040%


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Think engagementAs future competition will be fierce inhinterland cities, outstanding brandpositioning is a critical strategy inaddition to building effective channelsand developing trust. Creating

differentiated, engaging, and valuableexperiences for customers is key.

Take IKEA, the renowned furniture andhome goods company, which enteredChina in 1988 and opened eight storesin eight cities in 2009. In 2010, itsChinese sales reached 3.72 billionRMB, and it achieved the top marketshare (0.9 percent) in the furnitureretail market.

IKEA targets the middle class in China,rolling out stores which provide well-designed furniture at a reasonableprice, as they do in other countries.

The power of the IKEA brand comesfrom its focus on offering a lifestyleand a customer experience ratherthan from simply selling products.For example, IKEA stores dont displaysingle items on their own, but rather

show a whole room and the lifestylethat could occur there. The Companyscatchphrase in Chinese TV advertise-ments is Better Life with IKEA andits catalogs are edited by room style,as opposed to product category. Itswebsite also is also structured to helpconsumers design their lifestyle. TheCompany has a Do-It-Yourself roomdesign function, where consumerssimulate the positioning of furnitureand colors in various rooms. And it also

has an online community, IKEA FamilyClub, in which customers share theirideas and experiences.

A different approach, rolled out byMeters/Bonwe, consists of creativepositioning and providing customerexperiences on the Internet. Thecompany, established in 1994, is an

apparel manufacturer targeting youngChinese. It owns two brandsMeters/Bonwe, which targets ages 16 to 25,and Me & City, targeting ages 22 to35and it outsources its manufacturingand retail so that it can focus ondesigning and branding. Its flagshipstores are expanding in second-,third- and fourth- tier cities, and itssales grew to $770 million in 2009 (5bRMB), a compound annual growth rateof 55.4 percent from 2005.

Unlike IKEA, which is positioned asan advocate, Meters/Bonwe positionsitself as a friend or adviser to youngpeople. It targets students, holds events,and advertises outdoors. And it isworking particularly hard to providecustomer experiences on the Internet.For example, the company has openedstores at major Business-to-ConsumerInternet malls, such as Taobao and

Paipai, it provides customers withthe opportunity to dress their onlinegame characters in the companysclothes, and it offers a fashion adviserservice that explains fashion trends onits website.


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Five tips to guide your effort

Based on our experience and theexamples of leading players in China,weve distilled five factors that willraise the odds of success in thisup-and-coming market:

Move quickly. First-mover advantagecomes into play here, as it can takeyears to build a trusted brand.

Learn your customers priorities.

Balance a global brand and operationswith a willingness to learn aboutand understand the needs anddesires of this varied group of

consumers. Choose distribution channels

carefully. Hinterland cities requirecreative approaches, such as developingnew brands for specific channels,using fulfillment distributors, ormanaging a network of both primaryand secondary channels.

Engage customers rather than just

transacting. Create a consumerexperience that is personal andengaging and speaks to young

consumers hopes and fears. Theonline channel in particular can beused not only for transactions, butas a way to build trust.

Experiment with marketing tactics.Play to young consumers enthusiasmfor new experiences, through suchmethods as embedding ads in onlinegames and sponsoring events.

ConclusionYoung, educated inland Chinese, who value consumptionand have increased spending power now comprise arelatively open consumer market, poised to grow substantiallyin coming decades. Agile companies willing to explore new

territory with innovative marketing approaches have a goodchance of success if they forgo market-saturated coastalcities, and instead set their sights on Chinas hinterlandyouth. Companies can look to examples set by others thathave been successful thus far.



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Masamichi Ohhara is a senior

executive in our Strategy service

line based in Tokyo. He has over 16

years of experience consulting clients

mainly in Electronics & High-Tech

sector on strategy, organic growth,

and emerging market expansion, and

leads Accentures Growth Strategy

area in Asia Pacific.

[email protected]

Wayne Borchardt is a senior executive

in Accentures corporate strategy

group and the global lead for our

Strategic Planning & Growth practice.Wayne brings over 17 years of experience

consulting with clients on strategic

planning, growth strategy, pre-deal

and post-deal M&A, shared services,

and broad transformation programs.

Most of his consulting experience has

been in the Consumer Goods, Retail,

Pharmaceutical, Healthcare, and

Infrastructure sectors. He is based in

Kuala Lumpur, Malaysia.

[email protected]

Jill Dailey is a senior executive in

Accentures Management Consulting

practice and leads our Strategic

Planning and Growth Offering in

North America. Jill brings over 12

years of experience consulting with

global clients on strategy, new growth

opportunities, international expansion,and mergers and acquisitions,

especially in the Health industry.

She is based in Florham Park, New Jersey.

[email protected]

About the authors


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About Accenture

Accenture is a global managementconsulting, technology services

and outsourcing company, withmore than 223,000 people servingclients in more than 120 countries.Combining unparalleled experience,comprehensive capabilities across allindustries and business functions,and extensive research on the worldsmost successful companies, Accenturecollaborates with clients to help thembecome high-performance businessesand governments. The companygenerated net revenues of US$21.6

billion for the fiscal year endedAug. 31, 2010. Its home page iswww.accenture.com.

About AccentureManagement Consulting

Accenture is a leading provider of

management consulting servicesworldwide. Drawing on the extensiveexperience of its 13,000 managementconsultants globally, AccentureManagement Consulting helpsclients move from issue to outcome,with pace, certainty and strategicagility. We enable companiesand governments to achieve highperformance by combining broad

and deep industry and functionalofferings and capabilities across sevenservice lines: Customer RelationshipManagement, Finance & Performance

Management, Process & InnovationPerformance, Risk Management, Talent& Organization Performance, Strategy,and Supply Chain Management.Accenture Strategy consulting serviceshelp clients develop and implementpractical strategies focused ontangible business outcomes that createenduring value and consistently deliverhigh performance with greater speedand reduced risk.

accenture young chinese in the hinterlands

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