Winning in a Transitional China
various authors

As China pivots toward a new kind of economy and a new kind of consumer marketplace, is your company prepared for the mega-transitions to come? This annual study examines how China’s consumer markets are evolving, and identifies the digital capabilities that will be essential for success.



Show transcript

2013 China Consumer Market Strategies

About The American Chamber of Commerce in Shanghai
The American Chamber of Commerce in Shanghai (AmCham Shanghai), known as the “Voice of American Business in China,” is the largest and fastest growing American Chamber in the Asia Pacific region. Founded in 1915, AmCham Shanghai was the third American Chamber established outside the United States. As a non-profit, non-partisan business organization, AmCham Shanghai is committed to the principles of free trade, open markets, private enterprise and the unrestricted flow of information. For more information, please visit: www.amcham-shanghai.org.

About Booz & Company
Booz & Company is a leading global management consulting firm focused on serving and shaping the senior agenda of the world’s leading institutions. Our founder, Edwin Booz, launched the profession when he established the first management consulting firm in Chicago in 1914. Today, as we approach our 100th anniversary, we operate globally with more than 3,000 people in 57 offices around the world. We believe passionately that essential advantage lies within and that a few differentiating capabilities drive any organization’s identity and success. We work with our clients to discover and build those capabilities that give them the right to win in their chosen markets. We are a firm of practical strategists known for our functional expertise, industry foresight, and “sleeves rolled up” approach to working with our clients. To learn more about Booz & Company or to access our thought leadership, visit booz.com. Our award-winning management magazine, strategy+business, is available at strategy-business.com.

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2O13 EDIT I ON

Winning in a Transitional China

T

HESE ARE TIMES of high uncertainty in the global economy, and though the United States’ economy appears to be strengthening, it is growing relatively

slowly and is still vulnerable to external shocks. Europe’s growth rate remains subdued at best, and there are signs that growth in the United States is faltering as the Federal Reserve prepares to wind down its monetary stimulus. Even China is experiencing a slowdown in its growth rate (though it remains strong relative to most other national economies), and concern is mounting among observers outside China that the country’s extraordinary long-term economic expansion is unsustainable.
Amid this turbulent environment, the Chinese government, under the leadership of new president Xi Jinping, has reaffirmed its determination to pivot away from the investment- and export-led growth that powered its economic rise toward a more consumption-driven economy that delivers more equal growth in per capita income. This transition presents consumer-facing companies in China with an array of challenges and opportunities. How, in the view of these companies, is China’s consumer market evolving, and how are companies responding to the evolution? In the pages that follow you will find an intimate, ground-level perspective on the large-scale changes now under way in China, a consumer market that by 2015 is likely to become the world’s second largest – just behind the United States – with enough economic firepower to acquire 14 percent of the world’s products.



Chinese consumers have embraced social media and are doing an increasing amount of their shopping online. E-commerce is in the midst of an explosive growth phase.”

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Keeping Up With the Chinese Consumer
ONE OF THE MOST significant drivers of change is the evolution in the behavior of Chinese consumers. More affluent, more digitally savvy, with more purchasing options than ever before, a significant share of Chinese consumers has come to regard the Internet as integral to the shopping experience and to view value as a crucial differentiator among products and services. Willing to pay up for the quality, features and product integrity they seek, these leading-edge consumers are increasingly loyal to the brands they know and trust. They’re also fully prepared to turn their backs on lowerpriced brands and products that fall short of their rapidly rising expectations. And in many cases, they show a marked preference for American and other foreign brands. The combination of burgeoning wealth and growing digital sophistication makes the vast Chinese market an irresistible target for consumer-facing companies, both domestic and multinational. But as China’s economic growth moderates, how must these companies change their approach to the market? Must they alter their appeal and value proposition to win over Chinese consumers, and if so, are they prepared to execute on their plans? These are the fundamental questions underlying the third annual “Business Response to Trends in the Chinese Consumer Market” survey of Chinese and multinational companies (MNCs), undertaken by The American Chamber of Commerce in Shanghai (AmCham Shanghai), in cooperation with Booz & Company, a leading global
A Nike store in China.
IMAGINECHINA

management consulting firm. Participants included nearly 90 companies from a broad span of consumer-facing sectors, including consumer goods, automotive, healthcare, financial services and education. To help focus the discussion and bring key issues to the surface, AmCham Shanghai and Booz & Company singled out the seven major trends most likely to shape Chinese consumer behavior in the short to medium term (see Exhibit 1). The companies participating in the survey were then asked to rank the trends in order of the potential impact on their business strategies.

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EXHIBIT 1

Seven Consumer Market Trends Tested in the Survey

Evolution of the Family Unit

An increasingly dispersed and ageing demographic will impact purchasing decisions—both the what and the how

Increasing Exposure to Foreign Products

The tastes and expectations of consumers will be influenced by their exposure to norms and lifestyles of geographic markets outside of China

Rising Importance of Health & Wellness

Increased awareness of health and wellness will influence decisions on both product selection and lifestyle

Value as a Differentiator

Increased importance placed on “value for money” (no longer just low price but also reliability, functionality, safety, etc.) will change how consumers evaluate their choices and buy

Increasing Connectivity Among Different City

Major investments in infrastructure (train, road, etc.) across China are creating more flexibility around where people can choose to live, work, and shop; the historical hard lines separating city tiers are blurring, allowing for ‘reverse migration’ of workers from T1 to lower tier cities

Exponential Growth of Consumer Choice

Consumers are being offered an increasing number of competing products/product choices that are being made available at an accelerating pace, with expanded price points and purchasing channels

Rise of “Digitization”

Rising e-commerce penetration and increasing integration of social media into the day-to-day lives of the consumers dramatically impact the interaction between companies/brands and consumers

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EXHIBIT 2

Top Three Trends Chosen by Respondents

How would you rank these seven key trends in terms of their importance for your industry? % of respondents ranked the trend as one of the top 3 trends (N=89)
MNCs (N=58) Chinese Companies (N=31)

Value as a Differentiator

69%

55%

The rankings reinforce the finding in our 2012 report that the views of Chinese companies and MNCs are rapidly converging. With every passing year, MNCs and Chinese companies have come into closer alignment on major trends, especially on the overriding importance of value as a differentiator and the rise of digitization (see Exhibit 2). Yet, even as the views of Chinese companies and MNCs grow more similar, sharp differences in company performance are increasingly apparent. The implications of these developments will be explored in greater depth later in this report.

Rise of “Digitization”

Value as a Differentiator
55% 58%

Increasing Exposure to Foreign Products

62%

32%

Rising Importance of Health & Wellness Exponential Growth of Consumer

47%

45%

40%

42%

FOR THE SECOND consecutive year, a leading trend is the growing perception among Chinese consumers of value as a crucial differentiator. As the 2012 edition of this report discussed, a growing number of consumers now have a greater range of purchasing options, and they are responding by seeking out higher-quality goods. Rather than simply opting for the lowest-priced items, value-minded consumers are increasingly basing their choices on reliability, consistency and product integrity, with price a secondary consideration. Developments in the yogurt market illustrate the power of this trend. The market has been galvanized by the emergence of premium brands that differentiate themselves by product quality. One of the fastest-growing brands is Ru Shi, a new premium yogurt introduced by Shanghai’s Guangming Dairy, a leading yogurt producer. With its emphasis on purity, freshness and natural ingredients with no artificial additives, Ru Shi has been a hit

Increasing Connectivity Among Different City Tiers Evolution of the Family Unit

16%

39%

12%

29%

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with consumers in Shanghai, who have snapped it up despite a price that is almost double the price of other premium yogurt products. Ru Shi has thus single-handedly created a “superpremium” yogurt segment. A similar phenomenon is at work in the hair-care market, where high-end products from Germany’s Schwarzkopf and other premium brands are taking share from Procter & Gamble and other mass-priced brands. It’s no coincidence that Shanghai is the setting for Ru Shi’s successful introduction. Consumers who differentiate among products by their value are primarily residents of Tier-1 and Tier-2 cities. In their prime earning years – their ages range from 21 to 50, with the largest cohort aged 31 to 40 – these con-

sumers command monthly incomes of RMB5,000 to RMB50,000 (US$814 to US$8,135). They are eager to spend their money on products that reflect their needs, values and aspirations (see Exhibits 3A and 3B). The view of value as a differentiator is not entirely confined to China’s largest cities. It is spreading rapidly among the most affluent consumers in Tier-3 and Tier-4 cities. As consumers in the lowertier cities grow wealthier and encounter a greater number of choices, their shopping behavior will likely come to resemble that of affluent consumers in larger cities. As one senior executive from a leading multinational food and beverage company said, “The China market is complex and dynamic.

EXHIBIT 3A

Impact of “Value as a Differentiator”

Which consumers do you think will be most impacted by this consumer trend? % of respondents ranked the trend as one of the top 3 trends

City Tiers
100% 55% 15%
Key cities and Tier-1 Tier-2 Tier-3 and beyond

Age Group
50% 15%
Younger than 21 21-30

75% 40% 5%
31-40 41-50 51-65

0%
Rural

0%
Older than 65

Gender
70% 75%

Income Range (monthly household income, RMB)
65% 30% 5%
Male Female <5 K 5K - 10K 10K-25K 25K-50K 50K-100K

45%

35%

30%
>100K

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EXHIBIT 3B

Impact of “Value as a Differentiator”

Which consumers do you think will be most impacted by this consumer trend? % of respondents ranked the trend as one of the top 3 trends

It offers two categories of growth opportunities: going deep in Tier-1 and Tier-2 cities by offering better-value products, and going broad in lowertier and even rural markets. Companies competing in China need to strike the right balance between both growth opportunities. That’s a constant challenge for decision makers at consumer products companies in China.”

Brand Loyalty
Reduced consumer loyalty to specific brands Increased brand loyalty to specific brands Increased brand loyalty to Chinese brands No changes 25%

The Rise of Digitization
DIGITIZATION IS A MUST for consumer-facing companies, given the spread of e-commerce and the increasing integration of social media into the day-to-day lives of Chinese consumers. Chinese consumers have embraced social media and are doing an increasing amount of their shopping online. E-commerce is in the midst of an explosive growth phase, increasing 66.5 percent from 2010 to 2011 alone and rising to 6.1 percent of total retail activity. Recognizing the opportunity to intensify the relationship between brand and consumer, get a better view of the market and develop a powerful new sales channel, both Chinese and multinational companies singled out the rise of digitization as one of the top two trends of 2013. Yet, a majority of companies, both foreign and domestic, expressed doubts about their readiness to convert Chinese enthusiasm for online interactions into a sales advantage. Still, both MNCs and Chinese companies give themselves fairly high marks for grasping the implications of the digital revolution in China and responding to it, with 86 percent of MNCs and 71 percent of Chinese companies saying they have made “some preparation” or are “fully prepared” for the rise of digitization (see Exhibit 4). Yet, at the same time they admit their

70%

15%

5%

Willingness to Pay
Willingness to pay more for higher quality products or services Expectation to pay less for similar quality products or services Increased consumption of products or services No changes 0% 30% 85%

45%

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EXHIBIT 4

Readiness to Address “Digitization” and “Value”
MNCs Chinese Companies

To what extent is your company responding to this key trend? % of respondents who answered “some preparation” & “fully prepared”

“Rise of Digitization”
% of respondents

“Changing Perception of Value”
% of respondents

100% 88%

100% 88%

94% 86% 80%

86% 80% 71%

80%

75% 64% 57%

60%

60%

40%

40%

20%

20%

0% 2011 2012 2013

0% 2012 2013

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response has in some ways been inadequate. In particular, companies place high importance on making operational improvements keyed to the Internet, yet believe that they have not taken the actions needed to achieve those improvements. They also are dissatisfied with the actions they have taken to integrate the digital dimension into their branding and product development. The reward for such integration is high. Chinese consumers have embraced the Internet in their daily lives to a degree seen in few other countries. According the Mary Meeker 2013 Global Internet Trend report, Chinese consumers spend more time online every day than American consumers – who are themselves hardly slackers in their use of the Internet – and almost twice as much time on their mobile devices. And they are increasingly likely to use the Internet not just to gather information about brands and products but to shop as well. Despite accounting for a relatively small share of total retail sales, e-commerce is already a US$200 billion (RMB1.2 trillion) market in China. That’s nearly level with the size of the U.S. market, with far more headroom for growth.



A second challenge facing companies looking to improve their digitization performance is the execution of digital strategy.”
In the apparel industry, for example, Nike’s sales revenue in China has grown at a 21 percent compound annual rate, thanks to excellent in-store layout, assortment and service of its retail stores, which provide shoppers with a memorable experience. At the same time, two local champions in the sports apparel and equipment industry have faltered. Li-Ning, China’s third-ranked sports apparel brand, fell victim to over-aggressive expansion. As the brand grew in China, Li-Ning attempted to enter overseas markets at the same time it stepped up its challenge to China market leaders Nike and Adidas. But that effort has floundered in recent years as Li-Ning has encountered major inventory problems. As a result, its revenues declined 16 percent in 2012. Another major local sportswear company, ANTA, has run across similar, though less severe, obstacles. Its revenues grew only 1 percent in 2012. Similar divergences in performance are apparent in the retail industry, although in this case the

A Meeting of the Minds, a Divergence of Performance
AS NOTED EARLIER, the views of MNCs and Chinese companies are growing closer by the year, with increasing agreement on the relative importance of various consumer trends (see Exhibit 5). At the same time, however, the performance differences between leading companies and lagging rivals are growing wider.

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leaders are Chinese companies and the laggards are MNCs. Sun Art Retail, China’s largest and fastest-growing operator of hypermarkets, opened 44 stores in 2012. Three leading MNCs, Walmart, Carrefour, and Tesco, are growing at a far more subdued rate: Walmart opened 25 stores in 2012, Carrefour 16 and Tesco 8. What accounts for the marked differences in performance – that is, what are the leaders doing that the laggards are not? It isn’t that the leaders are executing brilliantly in every dimension. That’s simply impossible in a market as diverse, dynamic and fast-

moving as China. Rather, the leaders have focused on developing a coherent set of key capabilities – go-tomarket, branding, marketing and product development. By deploying these capabilities in a concerted, self-reinforcing fashion, the leaders in China’s consumer market have differentiated themselves from the competition. Indeed, by cultivating an interlocking system of capabilities rather than building each capability individually, the leaders have fashioned a competitive advantage that is difficult to duplicate. In particular, the leaders have outpaced their rivals in delivering a branded consumer experience that

EXHIBIT 5

Comparison of 2013, 2011 and 2012
2013 Survey 2012 Survey
Chinese
2 1 7 3 5 4

2011 Survey
Chinese
1 2 3 5 7 4 8 6 9

Trends
Value Digitization External Exposure Choice Health & Wellness Evolution of Family Unit Connectivity of Cities

MNCs
1 2 3 4 5 6

Trends
Value Choice Health & Wellness Connectivity of Cities e-Commerce Evolution of Family Unit Social Media External Exposure Work-Life Balance

MNCs
1 2 6 5 3 9 4 7 8

Trends Information Technology Connectivity of Cities External Exposure Work-Life Balance Health & Wellness Evolution of Family Unit

MNCs 3

Chinese 1

2

3

1

5

4

2

5

6

7

6

6

4

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builds loyalty. Their coordinated capabilities give them an edge in responding nimbly to shifts in consumer tastes and desires, creating a bond between brand and consumer that lasts longer than any individual transaction.

Digitization’s Leaders and Laggards
NO SET OF CAPABILITIES, no matter how well-honed and well-coordinated, are sufficient to ensure success in the Chinese market. To keep pace with the rapid changes in Chinese consumer behavior, consumerfacing companies must also cultivate a deep and comprehensive set of digital capabilities. How much progress are Chinese companies and MNCs making in this effort? To help assess how well companies are addressing digital trends, respondents to this year’s survey were asked to complete the Digital Capability Profiler, a unique self-assessment tool developed by Booz & Company. It enables companies to grade their capabilities for true digital customer-centricity along several dimensions. The self-assessment measures a company’s capabilities for generating insights and analytics as well as the robustness of its digital platforms and activation (see Exhibit 6). Companies were ranked and segmented according to their self-assessment scores, with those scores determining whether companies were digitization “leaders,” “scholars,” “pioneers” or “novices.” The overall results of the digital capability self-assessment resembled in many respects the global results that were used as a basis of comparison. Sharp

polarization was apparent both among companies operating in China and within the global control group. That is, a large majority of companies in both groups consider themselves digitization novices, and a much smaller percentage regard themselves as leaders (see Exhibit 7). Interestingly, though, the percentage of Chinese companies and MNCs that assessed themselves as leaders was notably higher than the global benchmark, possibly because their long experience in the market and their success relative to their peers have boosted their confidence. Digitization leaders are marked by their use of data as a strategic asset and the priority they place as an organization on developing their digital capabilities. They are organized to integrate what they’ve learned from one digital project into subsequent projects, and they are internally aligned across functions to exploit their digital resources. Somewhat surprisingly, 22 percent of MNCs and 27 percent of Chinese companies ranked themselves as leaders. Both percentages are significantly higher than the global benchmark of 16 percent. Scholars, as their designation implies, take an analytic approach, emphasizing consistent measurement to sharpen their focus on customer-centricity. The percentage of companies operating in China that consider themselves scholars – 6 percent of MNCs and 8 percent of Chinese companies – is consistent with the global benchmark of 6 percent. Pioneers take an experimental approach to digitization. Biased toward action, they seek to reach customers with digital innovations. While this approach can produce spectacular successes, pioneers also risk over-investing in dead-end projects. On

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EXHIBIT 6

Digital Capability Profiler Introduction
Insights & Analytics Measurement Real-Time Decision Making Personalization & Targeting

Segmentation & Needs Assessment

• Use broad set of digital research tools for advertising, promotions, in-store messaging and innovation effectiveness • Develop deep insights on consumers’ pain points related to how they purchase and use products • Continuously evolve approaches to segmentation that leverage data sources beyond transaction data (e.g., social, web analytics) • Develop shopper insights across full path to purchase (i.e. at home, on the go, in-store) as a part of brand planning process

• Use a well defined learning agenda for developing and applying insights using pilot tests that drive measurable results • Measure consumer engagement using metrics across paid, owned and earned media • Consistently measure ROI across digital marketing programs • Consistent set of metrics across the full path to purchase (i.e. at home, on the go, in-store)

• Regularly monitor social sentiment and brand health • Short cycle time to plan and execute a digital campaign • Take correction action during campaigns based on dashboard metrics

• Integrate multiple data sources to build a more robust consumer profile and enable segmentation (e.g. household data, shopping behavior, mobile data, web analytics) • Leverage social data to develop deep insights (e.g. social graph, ratings and reviews) • Build singular view of consumers across brands, sales channels and digital touch-points • Leverage shopper loyalty data to better target content and offers to specific retailers’ shoppers

Platforms & Activation Optimized Content Innovation Social Influence & Advocacy Omni-channel Experience

• Thematic content on own direct-to-consumer websites, optimized for search and navigation • Leverage branded content across multiple platforms (website, mobile, social) • Investment in content, community, and call to action (e.g., deals, contests) to drive opt-in registration and desired shopping behaviors • Develop engaging content for select retail partners around shopper solutions (e.g. meal solutions, health and wellness solutions, multi-cultural solutions)

• Enhanced effectiveness via innovative ad formats (e.g. offer ads, embed reviews) • Leverage social media to support market research and consumer insight into product development • Drive innovation in overall customer experience leveraging digital beyond marketing (e.g., customer service, relevant benefits provided beyond core product)

• Encourage consumers to create and share content within their social networks about brands • Engage social media opinion shapers to drive social influence and viral activity for other consumers • Leverage social media engagement to build additional data about consumers’ profiles • Drive consumers to create user generated content to syndicate to retailers’ digital assets

• Develop relevant content across channels (e.g. paid media, web, mobile, social) for specific usage and purchase occasions Invest in talent and analytics for e-Commerce across company and third party channels • Deploy IT supporting seamless mobile, social experiences to enable commerce where most convenient for consumers • Develop Specific strategies for key retail partners to address key drivers of mutual success (e.g. analytics, advertising, content, promotions) • Integrate shopper marketing programs effectively with broader media and trade promotion strategies for specific retailers

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par with the global benchmark, 9 percent of MNCs in China consider themselves pioneers. By contrast, only 4 percent of Chinese companies award themselves the same designation. The novice category, where the majority of survey respondents placed themselves, is populated with companies whose approach to digitization is fragmented and incoherent, marked with smallstakes strategic bets that produce limited market insights. Globally, 69 percent of companies call themselves novices, not far from the percentage of Chinese companies and MNCs in China with that designation. Specifically, 63 percent of MNCs in China and 62 percent of Chinese companies assess themselves as novices.

Some Digital Capabilities Are More Important Than Others
IN BUILDING UP THEIR digital capabilities, China’s leading digital consumer-centric players have two main priorities: innovation and the omni-channel brand experience. More than twothirds of the self-described leaders – 70 percent – named innovation as one of the top three capabilities they plan to invest in, compared with only 38 percent of non-leaders. And 45 percent of leaders, compared with 29 percent of nonleaders, ranked the omni-channel experience as one of their top three investment priorities (see Exhibit 8).

EXHIBIT 7

Digital Capability Profiler Result

Digital Capability Profiler – Result Comparison China vs. Global 249
16% 6% 9%

MNCs vs. Chinese Companies 80
100%

54
Leaders Scholars Pioneers 22% 6% 9%

26
100%

24% 6% 8%

27% 8% 4%

Leaders Scholars Pioneers

69%

63%

Novice

63%

62%

Novice

Global

China

MNCs

Chinese Companies

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To see what sort of returns can be generated from investment in the omni-channel experience, consider smartphone maker Xiaomi Tech. Founded in 2010, the company vaulted into prominence when it introduced its first smartphone in 2011, a move that won it extensive media coverage. Boasting an Androidbased custom firmware called MIUI, the phone’s performance characteristics resemble those of the Samsung Galaxy S3 and the Apple iPhone, the two leading smartphone brands, yet it costs only half as much. Digitization is integral to Xiaomi’s success in the marketplace. For product development, it relies on a community of supporters that provides suggestions for new features and improvements. It also sells most of its products online through a variety of channels, including its own product website, electronic malls and the sites of its telecom partners. To gauge its manufacturing capacity, Xiaomi sells most of its phones through preorders and intentionally holds down the size of production runs. For example, it limited production of its popular MI-Two smartphone to 300,000 units, virtually eliminating production surpluses while using the device’s scarcity value to stoke consumer interest. Such tactics enabled the company to sell an estimated 12 million phones through 2012. Another brand on the forefront of digitization is Durex, a line of condoms made by Reckitt Benckeser, a fast-growing global consumer health, hygiene and home care company. It has made savvy, imaginative use of social media to build brand awareness and cultivate a large following of users. At the heart of Durex’s social media strategy is the Sina Weibo microblogging service, where the company’s professional agents regularly post on sex education and a variety of other topics. The posts have proved so effective at attracting attention and user interaction that the Durex Weibo

EXHIBIT 8

Where Digital Leaders Focus

Top Three Capabilities Your Company is Likely to Invest in over Next 12 Months
% of respondents ranked it as one of the top 3 capabilities to be invested

Leaders (N=20)
Innovation Omni-Channel Experience Personalization & Targeting Optimized Content Segmentation & Needs Assessment Measurement Social Influence & Advocacy Real-Time Decision Making

Non-Leaders (N=69) 70% 38% 29% 42% 36% 52% 29% 30% 35%

45% 40% 35% 30% 30% 25% 20%

now boasts more than 360,000 official followers – 10 times more than any competing brand. Indeed, much of the credit for Durex’s recent sales gains in China – a 30 percent increase in 2011 alone – goes to the size and enthusiasm of Durex’s Weibo following. Durex now commands 30 percent of the RMB5 billion (US$810 million) Chinese condom market, with revenue of RMB1.5 billion (US$240 million). Some of Durex’s most popular Weibo posts are those pegged to current events. In June 2011, for example, massive rainfall struck Beijing, flooding subway stations and snarling transit. Less than an hour after the first reports of flooded subways hit the news, Durex’s marketing team had posted a message saying, “Torrential rains are flooding Beijing today. Lucky me – I

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have two Durex in my pocket!” The post was accompanied by photos of sneakers sheathed in condoms to keep them dry. Less than an hour after the posting went live, “Durex” vaulted to the top of Weibo’s hourly list of hot topics, and by the end of the day, more than 60,000 people had forwarded the posting to friends. Reckitt Benckeser also has been very active in digital marketing for its other brands. For example, its campaign for the Dettol brand asks consumers to shoot videos of their own stories, post them online and engage with other users on Weibo. The growing market share of Reckitt Benckeser’s brands underscores why both Chinese companies and MNCs regard digitization as a major market trend. “Although television advertising is still the dominant media spend for most consumer-facing companies,” said a managing director for a leading global media group, “a significant portion of that spend has shifted toward digital in the past few years, especially when it comes to reaching young consumers in China.”

EXHIBIT 9

Importance of Each Digital Capability Criteria

Importance of Digital Capabilities Normalized % of the respondents who prioritize it as top 3

China
Segmentation & Needs Assessment Innovation Personalization & Targeting Real-Time Decision Making Social Influence & Advocacy Optimized Content Measurement Omni-Channel Experience

100 62 42 39 13 10 7 1

Global Benchmark
Segmentation & Needs Assessment Measurement Personalization & Targeting Innovation Real-Time Decision Making Omni-Channel Experience Social Influence & Advocacy

100 43 37 26 13 13 7 1

Key Digitization Challenges
CONSUMER-FACING COMPANIES in China – both Chinese companies and MNCs – face several challenges in their efforts to get ahead of the digitization curve. The chief challenges, if the experience of the global control group is any guide, are measurement, organizational alignment and harnessing global capabilities. It is telling that few respondents to the China market survey – 7 percent – cited measurement as one of their top three most important digital capabilities. For most players in China, the key digital capabilities are

Optimized Content

segmentation and needs assessment, innovation and real-time decision-making. By contrast, measurement is the second most important capability of the global control group (see Exhibit 9). It is uncertain what accounts for the discrepancy in the two rankings. One possibility is that the market data currently available from public and private sources is not yet of a sufficiently high standard to generate reliable measurements. But some executives see it differently. They argue that the market in China is evolv-

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ing so quickly that backward-looking measurements have nothing useful to say about what is to come next. A senior executive in charge of China business at a leading global sportswear company observed that although the company was a digitization leader in the U.S. and other developed markets, China’s digital landscape has been changing too fast to formulate a grand plan and measure its return on investment. When it comes to China, he said, the company has opted to focus instead on developing a digital vision, while keeping a fairly open mind about the precise strategic steps toward that vision. Whatever the reason, it is likely that in time, consumerfacing companies in China will move closer to the global benchmark in their views of the relative importance of the capabilities mentioned in the survey, in particular, the need for measurement. Such a development would bode well for consumer-facing companies in China. Improved measurement would allow for better product-development and investment decisions and enable companies to determine more quickly whether strategic investments are generating expected returns. A second challenge facing companies looking to improve their digitization performance is the execution of digital strategy. It is telling that 89 percent of leaders agree that they have a governance mechanism in place to coordinate digitization activities in different parts of the organizations. Only 65 percent of non-leaders share their confidence. Leaders also have gone to greater lengths to build company-level digital assets, such as internal access tools, databases and predictive analytics, for use across the organization. And perhaps most significantly, leaders are far more likely than non-leaders to say they have established consistent measurement criteria for digital marketing programs throughout the organization.

Xiaomi sells most of its phones online.

IMAGINECHINA

The final challenge – that of leveraging the global capabilities of the organization – applies primarily to MNCs in China. A full 92 percent of leaders say they have leveraged their organization’s global capabilities to build the digital capabilities of their China organization. The MNCs that win in China may well be those that are most adept at bringing their global capabilities to bear on the Chinese market.

An Agenda for a Market in Transition
IF THIS REPORT HAS a single overarching message, it is that China – and China’s consumer marketplace – is in the midst of a dramatic transition. This transition will play out for years, with consequences that cannot be fully anticipated. Judging from the results of this year’s survey, however, we feel confident in spelling out how some trends now under way will develop over the short to medium term: Consumers in developed cities and regions will continue to trade up. The shift in consumer focus –

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2013 China Consumer Market Strategies

from price alone to an emphasis on quality and the consumer experience – will continue. The increasing importance of value as a differentiator presents companies with opportunities to improve their products and brands. To do so, however, companies will need to strengthen their capabilities in innovation and branding. Towns and villages are the next frontier. As companies expand their reach beyond Tier-1 and Tier-2 cities, towns and villages, with their more traditional retail outlets, represent a crucial growth opportunity. Like consumers elsewhere in China, residents of towns and villages now have a greater selection of goods to choose among. The challenge for consumer-facing companies is to meet the needs and wishes of this important market segment. Doing so requires that they build firstclass go-to-market capabilities, extending and finetuning their sales and distribution networks to ensure effective coverage of towns and rural markets. China is the ultimate digital marketplace. Like nowhere else in the world, China is at the forefront of

the digital revolution, and the digital domain is becoming a disruptive trend across markets, consumer segments and channels. The most forward-looking companies are leveraging digital channels and platforms to incubate new business models. The winners will be those companies that design omni-channel models and adapt and innovate quickly in the face of continued change. The nature of competition is changing. The era of land grabs and easy wins in China is rapidly coming to an end. As consumers grow more sophisticated and the views of Chinese companies and MNCs converge, success increasingly hinges on the development of coherent capabilities that suit the changing marketplace and are aligned with the company’s competitive strategy. China Consumer Market Strategies 2013 is, in effect, a portrait of a country pivoting toward a new kind of economy, and a new kind of consumer marketplace. Is your company prepared for the mega-transitions to come?

Survey Background

T

he American Chamber of Commerce in Shanghai and Booz & Company are pleased to present the third annual Business Response to Trends in China’s Consumer Market Survey. This annual survey seeks inputs from executives of consumerfacing companies operating in China, including Western MNCs and Chinese/other Asian companies. The survey provides a good understanding of how companies are responding to key trends in China’s growing consumer market. We launched first survey in 2011 and this is the third year’s survey. Many companies have seen the challenges of slower growth,

rising cost and lower margin since last year. In an environment with rising uncertainties, what company executives are thinking and what actions they are taking? This year’s survey was launched to seek answers to these questions. The rise of “digitization” - e-commerce, online video, social media and social communication - has been identified among the top three trends each of the past two years. This year we have included a special section on evaluating companies’ digital capabilities and how companies respond the rising digitization in China. Contributors: Ryan Balis, David Basmajian, Stefanie Myers, Karen Pu, Steven Veldhoen, Bryan Virasami, Adam Xu, Julie Zhu Design: Bridget O’Donnell

18 18The The American Chamber of Commerce in Shanghai | Booz & Company

The American Chamber of Commerce in Shanghai Suite 568, Shanghai Centre 1376 Nanjing Road West Shanghai 200040 China

Booz & Company Suite 2511, One Corporate Avenue 222 Hu Bin Road Shanghai 200021 China

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博斯公司 中国上海湖滨路 222 号 企业天地 25 楼 2511 室
200021 Tel +8621 2327 9800 Fax +8621 2327 9833 www.booz.com/cn

 

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