Chinese middle class key for brands

Warc, 31 January 2013

BEIJING: The scale of the economic changes in China over the next eight years will have major implications for business, a new study has argued.

Higher incomes, lower savings and wider prosperity will mean more people buying more products and companies will need to adjust their strategy accordingly, says a report from McKinsey China, the consultancy.

The new middle class is expected to provide the greatest long-term potential and McKinsey suggests that businesses need to seek out this group early on and build loyalty through product design, branding and marketing strategies.

Discretionary spending has already increased, as the proportion of income spent on food declines, from 37% in 2005 to 27% in 2012. Consequently, several sectors can be identified as having growth potential.

These include service- and leisure-related industries, such as dining out, films and theatre. Other areas the study expects to grow include travel and beauty products.

McKinsey anticipates that smaller cities will be an important factor in future growth: those with populations of less than 1.5m are projected to contribute 40% of the total increase in urban GDP.

Cities with populations between 1.5m and 5m will contribute a further 25% and existing megacities the remainder.

And within cities, the richest quarter of urban households could account for half of all urban consumption by 2030, with spending shifting towards personal items, recreation and culture.

An area that the Chinese government is keen to address is the difference in quality between the brands of multinationals and those of domestic firms.

Chinese companies have several options, according to the report. These include acquiring multinational brands, acquiring technology, launching joint ventures and partnering with specialized companies.

Multinationals, on the other hand, have an opportunity to establish joint ventures with Chinese companies, as a way of building brand awareness locally, improving distribution and building closer relationships with local government to better understand relevant policies.

Risk can be minimised, suggests McKinsey, "by first obtaining a robust understanding of the local brand and the value-proposition or aspiration match with their partner and then managing culture differences". 

Data sourced from McKinsey; additional content by Warc staff