Why Winning the Wallets of China's Consumers Is Harder than You Think

September 2007

In 1995, executives at a major US appliance manufacturer thought they had China all figured out. Appliances were one of that nation's best-selling consumer products. For its part, the company had one of the world's strongest white-goods brands, and its managers knew more than a thing or two about sales and manufacturing excellence.

But just three years after setting up shop in China, the company's joint ventures in air conditioners and refrigerators had unraveled, while the brand's market share remained minuscule. The US giant found itself puzzling over what gave Chinese brands the upper hand.

The root of the problem? The company had brought an American mindset, American business methods and American managers to consumer markets that were uniquely Chinese—and anything but monolithic.

This was not the first non-Chinese company to learn the hard way about the subtleties of China's consumer markets. There are many similar stories, such as the European automaker that stumbled badly by attempting to sell an outdated light-truck model when Chinese drivers were looking for something more modern.

Indeed, many multinational businesses—US and European, yes, but Asian companies too—continue to trip up in China by relying on simplistic or outdated ideas of how to do business there. They don't realize how strong many of their Chinese competitors are. They underestimate consumers' appetites for high-end products, working from old assumptions about consumption patterns in less developed nations. Conversely, there are others who see the very contemporary buyers on Shanghai or Beijing streets as new "global shoppers" who think and behave just like their counterparts in Chicago or Berlin.

The result: Those marketers fail to understand the array of factors that the nation's new consumers truly value.

The lessons can be costly when measured in terms of wasted resources and, for some, soured relationships with Chinese partners. But what hurts the most are the lost opportunities of capturing early market share and profits in one of the world's most attractive consumer markets.

Microsegments
With those challenges in mind, in late 2006 Accenture launched a worldwide research program to gain insight into how international brands can succeed in China (see "About the research"). By polling China's current class of leading-edge consumers—the largely urban group on whom the next waves of new consumers will model their buying behavior—Accenture's study uncovered a pressing need for international marketers to identify distinct subsets in that country: the Chinese customers who are most receptive to what a company offers.¹

The study makes it abundantly clear that the Chinese consumer market is, in fact, a matrix of microsegments that can be broken down according to differences in consumer tastes that often vary by geography, product category, buyer segment and more, and to a degree that regularly catches companies by surprise.

At a minimum, success in any Chinese market sector calls for the absolute mastery of marketing's fundamentals, exploiting the profession's elementary tools with a speed and facility that few companies have had to deliver for some time. Then new levels of marketing diligence must be employed to correctly identify the challenges in competing with successful Chinese brands and to pinpoint the factors—pricing or geography or product category, for instance—that can strongly sway Chinese consumers' openness to international brands.

The best-performing companies, regardless of their national origins, are correctly gauging their buyers' needs and values—price, product style, ease of use and so on—at each stage of the marketing funnel. And they are paying close attention to the transitions between stages—for example, learning what convinces customers to purchase a product they have become aware of, and what compels those who buy to recommend the product or brand to others. The companies that are succeeding in China understand not only the size and growth rates of the microsegments that matter to them but also the spending power and buyer values in each segment.

Consider the automotive sector, in which the high-end category is especially active. General Motors Corp., a stellar performer in China through its joint venture with Shanghai Automotive Industry Corporation (SAIC), has established Buick as a premium brand, leveraging the fact that China's last emperor owned a Buick. At its Pan Asia Technical Automotive Center in Shanghai, GM has added plenty of glamour to the design of the new Shanghai-made LaCrosse model, to make the car appealing to the country's younger and more status-conscious buyers.

Know Your Customer
However, getting to that level of understanding of buyer values is no easy task. Simply asking Chinese consumers what they want will not lead to success. There is often misalignment between what consumers say they value and what our research shows truly influences their actual buying behavior—their buyer values.

Measuring the alignment of a company's offerings and value proposition with the buyer values of intended customers will frequently yield unexpected results. For some, the market opportunity will be much smaller than imagined because the product is not well suited to their targets' buyer values and cannot easily be changed to match those values. Some companies that find themselves in this position may need to pay more attention to such factors as making contributions to a local community—perhaps by creating local jobs or supporting important social issues—to bring their image in line with customer values.

Indeed, Accenture's research shows that, on average, a brand's perceived contribution to the community and its perceived harmony with the buyer's personal values influence purchase decisions even more than pricing and perceived value for money. While brands obviously need to be competitive on price and value, these attributes are generally not going to be the key avenues for differentiating a brand. The finding is relatively consistent across all product categories and underscores the vital need to get to know the modern Chinese customer.

One area of customer knowledge marketers need to understand is the extent to which buyer behavior in China is influenced by a brand's national origin. For instance, German and French brands had relatively low awareness on average across categories in our research, but high levels of consideration, possibly suggesting national reputations for engineering precision and luxury goods, respectively. Japanese brands, on the other hand, enjoy very high awareness in China but, with some notable exceptions, have not been able to translate that into high levels of consideration from buyers, a fact some Japanese marketers should pursue in more depth. The lesson is that companies entering China have to be aware of the impact of their own nationality while recognizing that this factor isn't set in stone.

In short, aligning your value proposition with your Chinese prospects' buying values requires that you assess everything that is relevant to the customer about your company—including its global reputation, its nationality, the reputation of its products and, of course, the value inherent in the products themselves.

In a sense, success in China's consumer sectors means going back to the basics of marketing. Obvious? No argument. But at many companies, the marketing fundamentals are cobwebbed and weakened by shortcuts. What's needed—what top marketers in China practice diligently right now—is a recommitment to, and an emphasis on, each stage of the marketing funnel.

This starts with an examination of current awareness of the product among targeted customers, including the drivers of this awareness. The process continues with intense scrutiny of what moves the conversation from one stage to the next, going beyond purchase to refine brand-promoting behaviors that build emotional connections with buyers. The marketing funnel is itself only a basic tool, of course, but it is useful for turning more of China's newly affluent into buyers—and even into brand loyalists.

Accenture's research reveals surprises at each stage of the marketing funnel.

Awareness: What's Mandarin for "friend"?
With preparations well under way for the 2008 Olympics in Beijing, a consumer marketer's reflex might be to go for a mass-media sponsorship deal akin to practices for such mega-sporting events as the World Cup or the Super Bowl. While such initiatives will clearly be useful in many consumer categories—McDonald's, Samsung, Panasonic, Adidas and China's Lenovo are among the scores of big-name brands already listed as sponsors—such sponsorships must not sideline other mechanisms for building awareness.

In fact, China's consumers rely on a wider range of inputs for information about products than their counterparts in other markets, as shown by the high number of information sources for which usage is more than 50 percent. The sources are different from what many marketers might assume: Direct mail, which works well elsewhere, isn't used much, whereas multimedia kiosks and video boards have a big impact on China's new spenders. Video screens have become very popular on street billboards and in elevators, for instance.

Although such marketing vehicles are most common in China's more affluent cities, our studies suggest that they will remain influential in building awareness among all Chinese consumers. However, marketers have to stay alert to shifts in consumers' attitudes; already there are hints that video messaging, viewed as intrusive in the United States and Europe, may soon meet resistance from consumers in China too.

Our study demonstrates why it is essential for marketers to do much more due diligence in China: Specifically, awareness of a brand varies greatly with its national origin and with its product category. That Chinese brands have 98 percent awareness in the country should astonish no one. But it is surprising that the new urban consumers show quite different recognition of some other nations' brands. Just 57 percent of Chinese consumers say they can name a French brand, measuring across all six product or service categories in the survey. That is not likely to worry Louis Vuitton or Cartier, but it is something of a challenge for lesser-known French companies.

By slicing brand awareness according to nation of origin and then product, other nuances become clear. For example, consider the case of German brands. Despite modest awareness of German brands in general—albeit not as low as for French products—the nation's automakers have 96 percent recognition among those surveyed. Conversely, Germany's financial services giants, like their counterparts from the United States and the United Kingdom, face an uphill struggle in China: Awareness of their offerings is just 38 percent—even though leading names such as Deutsche Bank and insurer Allianz are making good progress in China.

Consideration: Beware of Crouching Tigers
For multinationals trying to sell into China, the "crouching tigers" are strong Chinese companies—from appliance powerhouse Haier Co. and computer maker Lenovo (which purchased IBM's personal computer business in 2005) to White Rabbit milk candy and Wong Lo Kat herbal tea. Fully 95 percent of the country's consumers who are aware of these and other Chinese brands actively consider buying them, according to Accenture's study.

What should be more worrying, perhaps, for China's own companies is Accenture's finding that the country's modern consumers are very open to overseas brands—albeit without being infatuated with them.

Accenture's study found that large proportions of spenders say they enjoy trying foreign brands (see chart above). That finding is supported by The Gallup Organization's long-term studies, which point out "that a 'Made in China' label doesn't guarantee protection against newer, more exciting, and perhaps more relevant foreign competitors."²

But openness to brands from overseas is not universally applicable across product and service categories. Foreign automobiles may be warmly received, but financial brands face higher hurdles.

It's fair to say that Chinese consumers get satisfaction with little risk to reputation or resources if they buy, say, a BMW. However, when it comes to banking and other financial services, they put more emphasis on familiarity and word-of-mouth endorsement—as is true of Americans and Europeans, of course. The importance of a deeper dive into the data is also evident in the low 65 percent "consideration" conversion rate in China for Japanese brands overall: It hides quite a warm reception for electronics products such as Panasonic and Canon, for instance.

Analysis of the implied drivers of buyer behavior is even more critical at the consideration stage than when trying to gauge awareness. For example, a marketer who simply polled Chinese consumers about product attributes would miss the importance of "familiarity," because the respondents say it is well down their lists of important buying factors. Yet their behavior says otherwise; familiarity is in fact the foremost consideration, averaged across several products, according to Accenture's research.

Shop: Shopping Starts with Shipping
Last year, GM's sales in Chengdu—a provincial city 1,000 miles inland from Shanghai—grew about 40 percent, twice as fast as its sales in Beijing. UPS and FedEx are rapidly building express-parcel networks across the country. But just because some well-known multinationals are making headway reaching customers farther from China's ports and major air hubs doesn't mean it's a simple matter to get products to where shoppers can experience them firsthand—and buy them.

Supply chain effectiveness in China is especially challenging for US and European companies. Tracking the conversion from "consider" to "shopped," Accenture's study shows that US providers of consumer goods and services find that less than two-thirds of the Chinese who consider their brands are actually shopping for them. French and German companies record even lower numbers—just 56 percent and 58 percent.

When it comes to getting products on shelves, Japanese brands have more success than their American counterparts. Ninety-one percent of Chinese consumers were able to shop for the Japanese consumer packaged goods they considered, compared with just 77 percent for US brands—a reminder, again, of the importance of drilling down into the unique characteristics of China's markets.

There is an interesting comparison here between Japanese and US brands: Japanese companies that do transcend low "consider" rates for their country's brands typically have solid enough distribution to ensure that Chinese customers can buy their brands, whereas US companies, even those with favorable "consideration" numbers, often are unable to surmount China's ferocious supply chain challenges.

China continues to be dogged by tremendous logistics challenges. Logistics costs are up to three times as high as those in the United States, the United Kingdom or Japan. Demand vastly outstrips supply on all fronts: road, rail, ports, air and rivers. To be sure, port development in China is impressive, but rail—the main transportation option in the old communist model—has not yet adapted to the new Chinese economy. Despite intense investment in new track and in electrification, the rail system is primarily geared to moving bulk commodities—notably coal—over long distances. In theory, it should also be good for moving containers from ports to inland cities. However, intermodal services are limited too.

The road infrastructure is also less than world class—massive road-building programs and Shanghai's superhighways notwithstanding.

The development of pan-China road transportation services is also limited by the many internal barriers to movement across regions and cities imposed by local governments, magnifying the economic isolation of the main regions from one another. (For more on China's transport infrastructure and logistics industry, see "The infrastructure imperative," Outlook, May 2007.)

Purchase: No Sales Staff Needed? The conversion from "shopped" to "purchase" is perhaps the most complex transition in business, one that often defies easy understanding (see chart above). A high level of purchasing after shopping for a particular brand may reflect that brand's vigor. But it may also stem from high transaction costs involved in shopping (getting to the store, for example) and from a lack of competitive options—circumstances that may change as the nature and ubiquity of retail options changes.

Accenture's study reveals a smooth shift from "shopped" to "purchased" for products and services. In other words, once the product is in the store and China's new consumers have considered it, they're very likely to purchase it.

At first glance, price does not come across as a big factor in buying decisions in China. Although Chinese consumers may say that "affordably priced" is the fourth-highest product attribute, their behavior contradicts that statement. Averaged across all types of purchases, affordable price barely rates as a differentiator of whether a brand will be considered or not.

Recommend, Prefer: Locking in Loyalty In a market that is becoming more "brand mature," customer loyalty is fast becoming a major issue for any company selling to Chinese consumers. It is already a big headache for traditional (wireline) phone service providers such as China Telecom Corp.; mobile providers like China Mobile and China Unicom are using their strong brand position to take an increasing share of voice traffic. It is also a worry for domestic suppliers of consumer packaged goods: The typical supermarket in a big urban area already stocks far more products than its counterparts in the United States or Japan, and there is increasing competition for shelf space from powerful and alluring international brands, including Nescafé, Gillette and Marlboro.

However, there is encouragement in the high conversion rates from the "purchased" to the "recommend" and "prefer" stages of the marketing funnel. Accenture found that in the case of products from most countries, more than 80 percent of Chinese consumers who purchased those products would recommend them to others.

Given the high reliance on word-of-mouth marketing with this group of eager consumers, it's easy to see the opportunity to set up a virtuous marketing cycle in which strong recommendations drive further sales. Again, a deeper dive into the data reveals useful information. For example, word of mouth is especially important among young people when it comes to fashion and among China's older shoppers when it comes to financial services and consumer packaged goods.

But word-of-mouth marketing is not without its sting: If a recommended product later disappoints the buyer, the recommender and buyer both lose face—a more serious matter in China than in the United States, say, where the "buyer beware" mindset puts the onus on the purchaser.

Segmentation of customers and markets has long been part of the marketer's stock-in-trade. But the sheer size and volatility of China's consumer markets puts segmentation on a different plane. It is not simply that customers in northern Liaoning province are a cultural world away from their counterparts in Guangdong in the south—it's a frothy mix of factors that includes soaring consumer expectations, Chinese companies that are globalizing quickly, road and river links that are improving by the day, and much more.

Isolating and winning over China's consumers is far from easy, as business leaders at plenty of companies can attest. It demands extra levels of market research and analysis to correctly gauge the size and scope of the market opportunities in the first place, along with a back-to-basics concentration on what drives conversions at each stage of the marketing funnel. There is no shortcut to the customization of the marketing approach; what works for BMW will not necessarily work for Honda, and what is effective for Citigroup may not help Credit Suisse.

But China is the 21st century's land of opportunity. And in China, more so perhaps than anywhere else, there is the chance to spin a fast sales cycle thanks to the strength of word-of-mouth marketing among the new spending class.

As the nation's economic wealth trickles down, legions of Chinese customers are joining the newly affluent every week. The opportunities will be even greater tomorrow than they are today. That's great news—but only for the companies that can quickly pinpoint the factors that matter most to the customers they've determined they want to reach.

About the Authors
Shanghai-based Lay Lim Teo, a senior executive in the Accenture Customer Relationship Management service line, leads the company's CRM work in the Asia Pacific region. In this role, she helps organizations to plan, design and execute CRM capabilities across a wide range of industries, including government, financial services, electronics and high tech, and consumer products.

Susan A. Piotroski, a Boston-based senior executive in the Accenture Customer Relationship Management service line, heads Accenture's Marketing & Customer Strategy practice. Her primary areas of focus are related to brand positioning and strategy, brand and customer experience design, and market strategy development for leading companies across a broad range of industries.

Paul F. Nunes is an executive research fellow at the Accenture Institute for High Performance Business in Wellesley, Massachusetts, where he directs studies of business and marketing strategy. In addition, he is Outlook's senior contributing editor. His work has regularly appeared in Harvard Business Review and other publications. His most recent book is Mass Affluence: Seven New Rules of Marketing to Today's Consumers (Harvard Business School Press, 2004).

SohieX. Wang, a Beijing-based senior executive in the Accenture Customer Relationship Management service line, and Michael J. Malinoski, a Boston-based manager in the Accenture Customer Relationship Management service line, contributed to this article .

"China Branding: Understanding the Market for International Brands in China and Opportunities for Chinese Brands Abroad," Accenture, 2007. ² “Inside the Mind of the Chinese Consumer," Harvard Business Review, March 2006.

Sidebar
About the research

In late 2006, Accenture set out to learn more about what drives consumers' buying decisions in China and to understand how Chinese brands are received in other countries. With those twin objectives in mind, we launched a large-scale online research program spanning 19 countries and some 4,600 respondents—more than 1,000 of them in China.

In China, we sought answers to questions such as these: How do Chinese consumers become aware of brands? What issues are most important in consumer decision making there? How do Chinese consumers view foreign entrants' performance against key buying factors? Which product categories might present tougher challenges for international brands and why? Which foreign countries' brands are most successful within China?

The research involved 20- to 25-minute surveys aimed at consumers of six categories of products and services: automobiles, appliances, consumer packaged goods, financial services, high-tech products and apparel. The surveys were conducted online in native languages with the primary household decision maker who had recently purchased or was planning to purchase a consumer product.

Consumers chosen for the China part of the study were generally younger and wealthier than the typical Chinese consumer—a reflection of the Internet population, certainly, but important to international companies because the survey sample is a reasonable proxy for the initial target audiences for international brands attempting to master China. While the sample is oriented toward younger, higher-income, Internet-savvy consumers in urban areas—71 percent have undergraduate or graduate degrees and more than half have DSL Internet connections at home—those with families are well represented. Almost half are married, and 37 percent have children under 18 living at home.

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