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Cracking the Chinese Consumer Code
Knowing your customer is one of the priorities of all of our readers, this is why we at TextileFuture provide in our today’s Newsletter the Euromonitor publication “Cracking the Chinese Consumer Code” to help you understand, how the Chinese Consumer ticks today. We feel sure that you will discover some unexpected conclusions by the Euromonitor experts
Thanks to growing household income in China, consumers’ pursuit of better quality products is still on the rise. The increasing popularity of premium products has been seen especially in beauty products, packaged food, alcoholic drinks and home appliances.
Distributors from all channels are making efforts to enhance the shopping experience to win over consumers’ hearts on a daily basis. Rapid development of e-commerce and delivery service in China has been another crucial contributor to the value growth pick-up in China’s overall retailing market in 2017.
In China, the luxury goods market in 2017 outperformed 2016, reflecting a move from outbound to inbound consumption. The consumer profile of Chinese tourists, who still buy luxury internationally, such as in France, is evolving: they are becoming more demanding and selective with a noticeable increasing number of millennials.
Gen Z is another significant consumer demographic besides millennials. China has the world’s second biggest Gen Z population. While it is a smaller group with a relatively low actual income, their purchasing power should not be underestimated.
While today’s global consumers are constantly looking for products, that are better for themselves, they are also seeking a more positive impact on the environment. In China there is a significant difference in ethical interest across income levels.
In addition to Chinese consumers’ growing disposable incomes, improved infrastructure and internet technology are fast-forwarding China’s travel industry.
Premiumisation vs. Personalisation
With growing household income in China, consumers’ pursuit of quality products, such as premium beauty and personal care, premium alcoholic drinks and smart home appliances, is expected to continue.
Premium colour cosmetics registered the strongest value growth in 2017, due to the stellar performance of premium lip products. Lip products, the easiest to use among all colour cosmetics products is a growing must-have item for most female consumers in China. Premium colour cosmetics is forecasted to see dynamic value growth, driven by rising disposable incomes and consumers upgrading in personal grooming to quality colour cosmetics. Premium lip products is expected to continue to lead the way in terms of growth momentum.
Premium pharma beauty and personal care recorded dynamic value growth in 2017 in China. Some pharma brands are quite active in beauty and personal care, represented by Avène, La Roche-Posay and Vichy, ranked in the top three places among all pharma brands in China. Local pharma brands are also emerging, represented by Winona. Pharma beauty and personal care is projected to remain strong in terms of value growth momentum, fuelled by consumers’ rising pursuit of functional and medical products able to achieve apparent efficacy, such as whitening and anti-ageing. However, competition is also expected to intensify with the entry of new domestic brands.
A new, more globally-minded generation born after the mid-1980s is exercising strong influence on the market. They are willing to choose more expensive options for higher quality and are demanding unique and individual experiences. To capture share and grow sales, manufacturers attract these consumers with high-end or personalised products. For instance, China Resources Beer (Holdings) Co brews a new premium lager called Gai Nian. The new offering uses selected unhusked rice as well as imported yeast and hopes to offer consumers a fresher taste.
In addition to product innovation, there is also the need for continuous creativity in packaging. Niulanshan Distillery Co launched a new product under the Bei Er Niu brand. The packaging is printed in Beijing dialect and expresses a cordial and positive attitude, which emotionally connects to the Pekingese, especially the younger generation. Another example is Budweiser Wuhan International Brewing Co, which invited brand ambassador Eason Chan to design packaging for its beer. Consumers welcomed this product, as it is a limited and special edition.
With the economic recovery in Hong Kong, consumers have begun spending more freely. As a result, the premiumisation trend is once again fuelling the growth of alcoholic drinks. Hong Kong is a highly competitive society with many leading busy and hectic lifestyles. Increasing disposable incomes in Hong Kong are resulting in higher spending power and people are purchasing quality alcoholic drinks to balance their busy lives and as a way to treat themselves. The premiumisation trend will increasingly be driven by “treat-seeking”, with premium brands that market themselves to consumers as a treat, or for a special occasion.
This has caused consumers to actively seek out more information about the beverages they are consuming. For example, more wine-tasting classes and new products launches with specific detailsare becoming available. Products today provide information such as the number of junipers used in a product, how many times it has been distilled, the origin of the water, down to the specific, unique, sometimes functional and health benefits of every tiny component of the drink. The growing interest among consumers who want to know more about the products they drink has led to a growing preference for premium and high-quality products.
According to Euromonitor International’s socioeconomic data, China is anticipated to record a GDP growth of 9.6 % in 2018, which is slightly weaker than the growth seen in 2017. Categories such as computers and peripherals are expected to be adversely impacted by the slowing economy, as consumers are tending to lengthen the replacement rate, and switching to the smartphone as an all-in-one device.
Consumers are not only seeking high quality sound when enjoying music, but are also looking for more- realistic audio effects when watching content and playing games. Both TVs and laptops are being equipped with an advanced speaker system. For example, in the mid-priced range, Xiaomi’s latest gaming laptop is equipped with a high-quality Dolby panorama sound system. Within the premium segment, the Hisense L6 laser TV comes with a premium sound system from Harman Kardon.
Personalisation of accessory products has gained ground as younger consumers, especially those born in the 1980s and 1990s, tend to favour trendily designed products that suit specific needs and pursuits. Themed personal accessories also gained popularity—products designed to be given as gifts on special occasions such as parties for new babies, weddings or traditional holiday celebrations. Examples
introduced in 2018 include Swarovski’s Latisha Mother’s Day range and Chow Sang Sang’s La Pelle Akoya pearl range. The ongoing health and wellness trend contributes to greater interest in sports-themed products, such as Patek Philippe’s Nautilus watch range that can be worn during exercise.
Serving the Increasing Speed of Life
The overall retailing market in China saw a pick-up in current value growth in 2017, driven by the rebound in value growth in supermarkets, hypermarkets, traditional grocery retailers and home shopping compared with 2016, in addition to the continued robust double-digit value growth in internet retailing. Chained supermarket players made efforts, such as offering free home delivery, to promote sales and boost shoppers’ experience in small- and medium-sized outlets located in neighbourhoods. Home shopping recovered from decline by catering to consumers’ on-the-go purchases via smartphone apps launched by players in this channel.
Consumer foodservice maintained solid growth momentum in outlets, transactions and value sales in 2017, driven by the increasing need for dining out amid accelerating lifestyles and reduced time to cook. The steady growth was also supported by rising disposable incomes in China.
Purchase, pay, deliver
Although grocery retailers still held the leading position in the retail distribution of fresh food in 2017, internet retailing registered explosive volume growth in China. Thanks to improved cold chain logistics, frozen and chilled food can be sold at reasonable prices via internet retailing. Hence, internet retailing of fresh food has rapidly penetrated from high-tier cities to middle-tier cities. Also, the fast delivery of internet retailing platforms such as JD.com offers consumers a more convenient shopping experience than visiting store-based retail channels.
Cash and cards are the primary payment methods amongst Chinese consumers, with cash payment being increasingly eroded by mobile payment using Alipay and WeChat Wallet. Card payment is more popular in modern retail channels, represented by department stores and electronics and appliance specialist retailers. Cash payment is more widely adopted for transactions with small value, such as in traditional grocery retailers.
Mobile payment registered explosive growth in China in 2017, due to its convenience, security and efficiency. In top-tier cities, average consumers can make purchases without cash or card, thanks to the prevalence of Alipay and WeChat Wallet. These cashless payment methods are also rapidly penetrating lower-tier cities and even rural areas. According to Euromonitor International, mobile digital purchases have experienced an annual growth of 39% to reach RMB6,640 billion by 2017.
Alongside the dynamic growth of internet retailing and mobile payment, delivery and logistics in China has also experienced robust growth, particularly cold chain management to ensure online sales of fresh food. ExFresh, for instance, doubled its cold chain storage area to 24 bases, boasting a total of 280,000 sq m in 2017. To enhance its delivery service standard, instead of relying on third parties, JD.com set up its own JD Logistics unit in 2017. The company plans to further boost logistics automation to enhance efficiency by improving automated warehouses and introducing drone deliveries.
Hong Kong is one of the most densely populated areas in the world with extensive networks of physical stores, high computer literacy and easy access to the internet. E-commerce has continued to progress with the support of various electronic payment methods, myriad delivery options and wide product ranges of increasing online marketplaces. Store-based retailers have been moving online and pure internet players are emerging and developing. Neither has blindly poured resources into just expanding marketplaces in the virtual word; instead they actively built omnichannels to deliver convenience to the city’s busy consumers. They are now trying hard to overcome the challenges of tracking sales, data analytics, inventory management and providing same-day delivery and pick-up services. Many of them do not stay with their original selling channels but pragmatically travel between electronic platforms and bricks-and- mortar stores taking the respective advantages of both, leading to channel blurring and strategic agility as well as advancements in diverse e-commerce options.
Due to expanded choices in Chinese cuisine, consumer foodservice is highly fragmented, with the leading 10 players accounting for single-digit combined value share in 2017. International players hold the leading positions in the fragmented landscape in 2017, led by Yum! Restaurants China, McDonald’s China and Starbucks Corp. These leading multinational players, strong in fast food and specialist coffee shops, opened new-concept outlets to entice local consumers with improved in-store experience amid fiercer competition, including KPro by KFC, Future 2.0 store by McDonald’s and Reserved Roastery by Starbucks. Domestic companies are strong in bubble tea, under street stalls / kiosks, as well as hot pot restaurants, under full-service restaurants.
Cooperating with an extensive range of full-service restaurants, third party online ordering / delivery services offered by the large O2O service providers (online to offline), such as Ele.me and Meituan.com, have successfully attracted a solid base of loyal consumers, for their wide range of choices, from mass to premium dishes, as well as convenient home delivery service. As a result, 100% home delivery / takeaway, dominated by pizza 100% home delivery / takeaway in China, was greatly affected with slowing growth in value and transactions.
Moreover, third party online ordering / delivery service platforms consistently run aggressive promotions, such as free drinks with a meal and free cash voucher, making it more attractive to price- sensitive consumers. In addition, designated delivery times decided by consumers also provide greater convenience. With advanced technology and an established delivery team, leading third party online ordering / delivery service providers can send ordered dishes to consumers within 30 minutes. Such convenience and competitive pricing with heavy promotions eroded the growth momentum of 100 % home delivery / takeaway, leading to the drastically decelerating growth in value sales, outlets and transactions in 2017. This slowdown is expected to continue.
Luxury vs. Middle-Class Millennials
Overall, luxury goods in China outperformed the previous year in 2017, demonstrating the fastest growth momentum in retail current value terms. The recovery trend reflected a move from outbound to inbound consumption in the context of luxury goods. The devaluation of the Chinese yuan meant that goods abroad expensive for Chinese consumers, reducing the price difference for luxury goods between China and international markets. In addition, fears of terrorist attacks and the escalation of THAAD kept many Chinese consumers away from certain cities and countries, including Paris, London and South Korea.
The recovery of the domestic market was also propelled by government policies, such as the new import tax system in 2016, which adjusted the tariff from 30 % to 60 % on high-end timepieces priced above CNY10,000, that are either bought abroad, and personally brought into the country or purchased online and shipped into China, thus weakening the price advantage in overseas markets. Overall, amidst the improving economic environment in the local market in 2017, luxury goods in China saw its performance pick up, and is expected to see double-digit growth in value terms at constant 2017 prices in the forecast period.
Luxury goods in China
Sales of luxury goods in China to see continuous growth, driven by the rising number of middle- and upper-middle-class consumers, the trading up trend, as well as the pursuit of fashionable and fun lifestyles. Increasing purchasing power will contribute to stronger sales of luxury cars and luxury hotel stays. The strong growth momentum in super premium beauty and personal care will boost the performance of luxury goods, especially thanks to their popularity amongst younger generations.
Moreover, there is a noticeable premiumisation trend in China across cars, holidays and leather goods, as well as beauty and personal care. The demand for high-quality purchases and consumption experiences is growing, leading to the increasing consumption of luxury goods. Thanks to further collaborations with key influencers via social media and the contribution of e-commerce, the luxury goods market in China is expected to grow at a compound annual growth rate of 10 % during 2018–2022 to reach RMB 2,748 billion.
The Chinese luxury goods market is embracing ever-younger consumer groups, as the domestic wealthy consumers become younger, supported by the burgeoning millennial generation due to the high birth rate between 1985 and 1995 in China. In the face of the rising number of middle-class consumers in China, luxury goods producers endeavoured to enrich their product lines, in particular eyeing younger consumers, many of whom know what they want, but have comparatively limited purchasing power. Sales of personalised and affordable luxury goods are therefore on the rise, catering to individual needs and tastes. In particular, in the context of luxury cars, players in the local automobile market released more entry-level models eyeing young consumers; for example, in 2017 the Audi Q3 model and new BMW 1 sport sedan were launched. According to Euromonitor International, luxury car sales reached RMB1094 billion in 2017, with 18% year on year growth compared to that in 2016. Similar trends were evident in luxury costume jewellery. For instance, the brand Swarovski, with affordable prices and trendy designs, gained prevalence and outperformed luxury real jewellery amongst local young consumers. Other luxury brands, such as Gucci from Kering, also adopted innovative marketing campaigns to reach a wider range of young consumers.
For luxury leather goods, after years of exposure to and rising knowledge about luxury brands, Chinese consumers prefer stylish designs rather than classic styles, especially the traditional top brands. The classic styles of luxury leather goods, such as traditional designs or those with obvious logos, are no longer as attractive to local consumers, especially millennials and middle-class consumers, who have changing tastes. One successful transition was Gucci. Led by the new director, this brand showed a totally different design style, compared with previous series, and saw good performance. Moreover, another traditional top brand, Louis Vuitton, also generated sales by providing innovative designs; it cooperated with street fashion brand Supreme, which attracted a huge number of younger consumers in China.
Luxury goods in Hong Kong
In Hong Kong, luxury goods managed to rebound to positive value growth in 2017. This is due to the recovery in mainland Chinese tourist arrivals and their willingness to spend on luxury goods as the impact of the anti-corruption campaign started to wane. The improvement in Hong Kong’s 2017 GDP growth compared to 2016 also resulted in local consumers regaining their confidence in spending, including that of luxury goods. However, the recovery in luxury goods was slow as consumers, both Hong Kong people and Mainland Chinese flocked to European destinations for purchases given the foreign currency fluctuations and more updated collections’ offerings. Millennial consumers emerged as an attractive target for luxury goods players during 2017, as they possess high disposable incomes, sophistication and image consciousness with a strong desire for individualism. This prompted them to be more selective in luxury goods, with a strong desire for niche brands offering unique designs that can accentuate their styles instead of being common as the mainstream luxury brands.
Standalone boutiques remained the key purchasing channel for luxury goods in Hong Kong in 2017. The high price tag of luxury goods resulted in consumers wanting to be in the boutiques to enjoy the entire brand and shopping experience, while able to see what is available in store as well as gain the advice from the salesperson. Department stores was the second leading channel for many luxury goods categories during 2017, as some consumers preferred the one-stop shopping convenience and department stores offer occasional attractive rewards. Consequently, internet retailing has made small headway in luxury goods. Product authenticity remained the biggest concern for consumers in usage of internet retailing, though some consumers chose to purchase from the website of an existing bricks-and-mortar retailer with which they were familiar. Millennial consumers’ demand for niche brands in luxury leather goods, designer apparel and footwear amongst others was another supporting factor for internet retailing in 2017, as they utilised this channel to source unique brands that were not physically available in Hong Kong.
Some seasoned consumers of luxury goods also turned to the internet by purchasing from trustworthy sites such as net-a-porter.com to source competitive prices for the luxury goods they wanted to buy.
Luxury goods in France
When it comes to buying luxury products in France, the profile of consumers of luxury goods is changing: Chinese tourists no longer simply purchase a branded product with a logo from French department stores by default, and there is the noticeable emergence of millennials. This consumer base is less loyal to traditional luxury brands, is over-connected to social networks, favours experience, comfort and wellbeing instead of appearance and is more politicised than the previous generation.
This has resulted in the success of a rather unisex style in luxury apparel and “digital native” brands in super premium beauty and personal care, which arouses the interest of mainstream players. To reach this new target, LVMH put in place 24sevres.com, in mid-2017. This new generation platform is easier to use on a mobile phone than a computer and mixes prestigious luxury brands from the department store Le Bon Marché with non-luxury apparel such as Nike in its offering.
Generation Z Drives Future Consumerism
Generation Z is the youngest generation cohort, but they represent the largest consumer base through to 2030. As Gen Zers become increasingly influential, businesses need to be prepared for this next generation and make them part of their business strategy.
China’s Gen Zers are the second generation after Millennials of China’s one-child policy during 1979– 2016. The country has the second-largest Gen Z market globally, but it is a smaller demographic group in China and its number is falling. This is mainly due to a rising emigration trend among wealthy Chinese families to North America and Western Europe for better living and education quality.
Chinese Gen Zers’ average gross income is remarkably higher, than their Indian counterparts, while their spending power will rise significantly across their lifespan. Meanwhile, Chinese tweens and teens are often a pervasive force in the household decision making process, as parents and grandparents are prepared to buy the best that they can afford for their only child.
Gen Zers’ income today is lower than other generations, but their purchasing power should not be underestimated. Tweens, teens and young adults are often a spending priority for families, while they also have significant influence on family purchase decisions. While Millennials grew up with computers in their homes, Gen Z is the first generation born into a digital world. With their digital prowess, Gen Z expects brands to act digitally native too, creating a seamless and unified experience across in-store, digital and mobile.
Born in a time of economic recession and financial turmoil, Gen Zers are pragmatic and cautious consumers. They prefer products that offer values and reflect real life. Gen Zers are interested in innovation and entrepreneurship, and look for products to empower them and help them express their individuality. They are a diverse, adaptive, open-minded and socially responsible generation who wants to make the world a better place. To gain their respect and loyalty brands need to show their commitments and create a business model that is built on sustainability, equality and acceptance.
Better for You, Better for the Planet
Largely due to its image of health and wellness in the mind of Chinese consumers, sales of yoghurt have witnessed rapid development. In fact, reduced fat dairy-based yoghurt registered the most dynamic retail value growth in better for you packaged food in China in 2017. Considering the increasing consumer desire to keep fit, reduced fat yoghurt was popular as an aid to both digestive health and weight management.
These trends are set to continue over the forecast period, maintaining the strong growth of the category. Better for you packaged food is expected to record a 12% retail value compound annual growth rate at constant 2017 prices over the forecast period to reach CNY13.9 billion in 2022.
Hong Kong consumers continued to favor reduced fat or reduced sugar products in dairy, as well as in confectionery where they are increasingly opting for better for you alternatives. Manufacturers, however, have been neglecting staple food categories such as ready meals and shelf stable meat, in which better for you options are practically non-existent or their unit price is too high, thus deterring consumers.
Better for you packaged food
As a main side effect brought about by the consistent growth of income levels, obesity has become an increasing health concern. Directly associated with the prevalence of food containing high salt, sugar and fat levels, such as fried chicken, barbeques and hot pots, obesity exposed the unhealthy diets of most Chinese consumers, the young generation in particular, who generally prefer fast food to match their rapid pace of life. This led consumers to gradually recognise the importance of a healthy diet. Demand for better for you packaged food benefited from these concerns, with consumers looking to better control their weight and blood glucose by consuming packaged food with lower salt, sugar and fat contents.
Consumers access health information online and nutrition professionals also share their insights on health and nutritional diets via official accounts on social media platforms such as Weibo and Wechat. This has improved education on the significance of a balanced diet and provoked greater interest in better for you packaged food. In addition, as consumers directly share and circulate their knowledge of food and nutrition on social media platforms by re-posts and comments with their families and friends, coverage is therefore widened, further contributing to the awareness and acceptance of better for you packaged food by consumers.
In order to support sales of their better for you products, manufacturers are increasingly declaring the origins of their ingredients. Some consumers favour ingredients from certain countries; for example, low fat milk from New Zealand, Australia and Japan is generally perceived as superior due to these countries’ clean image and good reputations for quality control. This trend is particularly prevalent in the dairy and confectionery categories.
More consumers in Hong Kong are becoming aware of better for you products as the range of available offerings expands and labelling becomes clearer. Indeed, the Hong Kong government has initiated a voluntary system encouraging manufacturers to reduce the amount of salt and sugar in their packaged foods. The aim of this programme is to enable consumers to compare the nutritional content of different products so as to make a more informed purchasing decision. The government is encouraging consumers to align their daily consumption of salt and sugar with World Health Organization standards of less than 5g of salt per day and sugar accounting for less than 10% of total energy intake.
Businesses are benefiting from offering solutions that respond to consumer concerns about the negative impacts of air pollution. Rising sales of products such as air purifiers, anti-pollution cosmetics and pollution masks prove the commercial potential of product innovations tackling the consequences of air pollution head on. Lucrative innovation does not only lie in new product development. Business initiatives and partnerships kick-starting green innovation— particularly in cleaner energy—are boosting profits by impressing customers and shareholders.
In recent years, air purifier sales have soared driven by worsening air pollution. Between 2018–2022, volume sales of air purifiers, which remove airborne particles such as pollen and mould spores, are expected to rise by 18.9 % globally, and by 21.7 % in Asia Pacific, according to Euromonitor International.
In addition to education and parental status, income is another important factor in consumer behaviour and mindful consumerism in China. Across all markets, the lowest income brackets show the least interest in ethical consumption. Awareness is steadily rising in line with income up to the middle-income bands at which point it stays similar across all brackets. In China there is a significant difference in ethical interest across income levels.
The challenge for the industry lies with the fact that the majority of ethical brands are targeting a young, highly educated, digitally engaged and high income audience but to be successful they need to expand their reach.
Growing disposable incomes, improved transport infrastructure and prosperity of internet technology has led the China travel industry to develop rapidly. As inbound and outbound tourism experienced a steady growth, domestic tourism posted robust volume sales increase in 2017, which reflects the increased desire to travel from Chinese residents and the positive outcome of an integrated tourism policy encouraged by Ministry of Culture and Tourism of China.
Hong Kong, a long standing international hub in Asia, is well positioned to showcase its standing as a world tourism destination. With a varied collection of natural scenarios, shopping centres, culture attractions, and entertainment parks, Hong Kong has long been a popular destination for leisure travel and MICEs. Recent completion of the Zhuhai-Macau-Hong Kong bridge and the Greater Bay Area initiatives are expected to further boost travel development. While relying on the mainland China market could potentially expose the travel industry in Hong Kong to regulations imposed on mainland China’s tourism, Hong Kong travel has also been benefiting from rising visitor arrivals from the mainland. To further diversify the source of visitor arrivals, authorities have been promoting Hong Kong as a city of culture and international centre of MICE. Nevertheless, the Chinese mainland is expected to remain the main pillar.
The lodging industry implemented innovation to differentiate from other brands and bring unique cultural experiences to their clients. In 2017, Marriott collaborated with Alibaba group to open its Future Hotel 2.0. BTH hotel group started its first technology driven social hotel to offer a youthful and diverse hotel accommodation experience. Xiaozhu, a leading short-term rental player in China, announced Lanzu Society, a new subsidiary to operate in a new business model as a short-term rental platform. It provides a one-stop management solutions for landlords. To lower barriers of entry for landlords, it covers everything from design, decoration, cleaning, IoT and smart management.
The increase in consumer desires for ownership and control over their trip has led to the emergence of new business models such as Klook, a Hong Kong startup that offers discounted deals and local tour packages that delivers consumer satisfaction by providing personalized and flexible destination travel services. Airbnb has also been transferring their platform from a short-term rental site into a travel platform focused on offering localized experience tours such as food trips and photography trips with local flavour.
The Hong Kong government has been determined in promoting Hong Kong as a regional cruise hub. Since the commissioning of the Kai Tak Cruise Terminal in 2013, cruise travel has gained traction in Hong Kong. During the end of 2017, the luxurious cruise ship World Dream was christened from the Kai Tak Cruise Terminal. Three days, two night packages have been very popular among travellers for their first taste of cruise travel.
Exploration travel cruise operator Hurtigruten is opening their office in Hong Kong, introducing Norway’s “Northern Lights Promise” winter cruise and “Antarctica–Highlights of the Frozen Continent”, catering to the rising preference for exotic and experience travel. Demonstrating a double-digit growth rate in sales, cruise tours are usually marketed through travel agencies for a better market education and fly cruise package arrangement.
Euromonitor International is a global market research company providing strategic intelligence on industries, companies, economies and consumers around the world. Comprehensive international coverage and insights across consumer goods, business-to-business and service industries make our research an essential resource for businesses of all sizes.