In the 2018 Prophet Brand Relevance Index™ (BRI), Chinese brands account for two-thirds of the top 50 most relevant brands in China, among which, seven of the top 10 are home-grown. In first-tier cities, Huawei ranks fourth, while Apple ranks only twenty-second. Many people have expressed concerns about a consumption downgrade in China while applauding the remarkable growth of Chinese brands. Whether China is going through a consumption downgrade or an upgrade is a highly debated topic.

Those who see an upgrade cite macroeconomic and consumption data that points to a growing economy, improved spending structure and a large amount of outbound travels. Those concerned about a consumption downgrade focus on a slower growth rate, climbing rent and mortgage prices, the rise of a sharing/second-hand economy, and cases like PinDuoDuo (a Chinese e-commerce platform featuring group buying goods at a cheaper price).

Not a Consumption Downgrade, But an Upgrade in Disguise

Many who believe that China is going through a consumption downgrade find evidence in the rise of copycat brands, such as KFG and Kang Shuai Fu, in fourth and fifth-tier cities, however, this phenomenon is a result of increased purchasing power of low-income groups. Of course, we need to resist counterfeit brands. In first and second-tier cities, the existence (and rise) of copycats themselves is baffling. But for those who used to eat from street vendors or mom-and-pop restaurants, KFG at least represents an upgrade in dining environment and recipe standardization.

The buzz around PinDuoDuo also worries people. It’s only natural for regular customers of Tmall and JD.com, who live in economically developed areas, to have difficulty understanding why there are 100 million people using this “lower quality version of Taobao”. They therefore associate this with consumption downgrading.

The fact is users of PinDuoDuo belong to a different group. Most of them live in rural areas or fourth or fifth-tier cities but manage to get a glimpse of the consumer behaviors and lifestyles of those in first and second-tier cities, thanks to the prevalence of the Internet and smartphones. Their income cannot support such lifestyles, but they create a demand for better products and more choices. What PinDuoDuo is doing is meeting the demand of an underserved market rather than undercutting JD.com or Tmall. To some extent, PinDuoDuo can be regarded as a more down-to-earth version of NetEase YanXuan (YanXuan means ‘strictly selected’ to indicate high product quality).

An upgrade in consumption behavior is behind the rise of e-commerce platforms, such as NetEase YanXuan, which offer high quality products at competitive prices in first and second-tier cities. Chinese consumers used to have blind trust in foreign, famous and expensive brands over small, domestic and cheaper ones. However, as consumers become more affluent and sophisticated, they have a clearer idea of what they want and what each brand stands for, leading to purchases of the “right products” instead of the “expensive ones”.

China is Experiencing a Second Wave of Consumption Upgrade

Looking forward, we simply need to answer one question: will anyone reject a better lifestyle? Although everyone may have different definitions of what “a better lifestyle” means, a negative answer to the question means we are still on the track of consumption upgrade, but it does not necessarily mean buying more expensive things.

China is experiencing a second wave of consumption upgrade, which is demonstrated by an increasingly sophisticated mindset and behavior towards consumption. In other words, China is entering the era of a Consumption Upgrade 2.0.

Past Development and Future Outlook of the Chinese Market

Over the past 30 years, Chinese consumers have experienced a linear evolution from paying for brands to paying for experience and taste. Accordingly, branding strategies have also evolved from focusing on products to emphasizing customer experience and customization.

In the future, consumers will demand better products, better experience and better ways of expressing their personalities. Take Starbucks for example: after years of rapid expansion, it has been transformed from a boutique coffee shop in China to a mainstream beverage seller (at least in first and second-tier cities). While competitors, especially upscale cafes, encroach on its market share. In order to meet the demand of a new generation of consumers, Starbucks Reserve was launched to re-establish relevance by offering premium coffee beans, in-store coffee grinding, and a differentiated retail experience.

Meanwhile, this consumption upgrade will also be segmented among different consumer groups. Consumer needs continue to diverge within first-tier cities and others. Consumption upgrade in second and third-tier cities does not necessarily follow the path of that of first-tier cities and they show different patterns from that of fourth and fifth-tier cities. It will be very difficult to use a single branding strategy to win over consumers in all markets. Different product or brand portfolios tailored to different consumer groups will likely become the new norm.

Final Thoughts

Talking about consumption upgrade and downgrade in broad strokes is a mistake; and associating consumption upgrade with free opportunities for all brands is an even bigger one.

Opportunities brought by consumption upgrade will not be equal. If brands and niche market players fail to sustain an emotional connection with customers, quickly identify and meet their personalized needs, and tap into the newest trends of young consumers, they will lose relevance. On the contrary, a brand will thrive if it is able to focus on a specific consumer group by resonating with their emotion and experience and continuously offering innovations. This is true even for a mass market category such as Baijiu, which has seen the rise of a chic, interesting and slightly more premium brand “JiangXiaoBai”.

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