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GLOBAL 2016: Consumers continue spending despite economic slowdown

Local market-driven brands increase strength

Despite slowing GDP growth and stock market fluctuations, Chinese consumers continued to spend across most categories. Confident that the government could sustain prosperity, people still expected to achieve a better life for themselves and their families, a goal that the government articulated in 2014 as the Chinese Dream.

BrandZ™ research conducted soon after the stock market declines revealed that consumers might postpone, but not cancel, big-ticket purchases such as homes, cars, and vacations, and planned to continue spending on necessities. An earlier study of 26 FMCG categories by Kantar Worldpanel found that consumers were even willing to pay a premium for certain products, such as those related to health and well-being, while they looked for bargains on products considered commodities.
For the first time, market-driven brands, rather than state-owned brands, produced over half the total value of the BrandZ™ China Top 100, and five of the Top 10 brands were market-driven. Just two years ago only two of the Top 10 brands were market-driven.
In addition, Chinese brands achieved parity with multinational brands in Brand Power, a BrandZ™ measurement of brand equity. Brand Power parity means that overall, Chinese brands are perceived as favorably as multinational brands; being “foreign” is no longer such a strong differentiator for multinationals.
Improved Chinese brands
The improvement in Chinese brands, in part relates to associations they have formed with international brands. With these connections, Chinese brands have increased access to industry global best practices, while overseas brands gain access to the Chinese market. Smithfield, the U.S. meat processor acquired by the Chinese meat producer Shuanghui a few years ago, opened a U.S.-style plant in China.
Dairy brand Mengniu worked to improve food safety with its partners, France’s Danone and Denmark’s Arla Foods. China’s Bright Dairy prepared to purchase a raw milk supplier as part of the effort to ensure food safety by controlling the entire supply chain. In another move to enhance its food technology and add premium products, Bright Dairy prepared to purchase Tnuva, Israel’s largest food producer, from corporate parent Bright Foods.
And Chinese brands rapidly innovated, sometimes out of necessity. The difficulty of transacting business at traditional banks, for example, helped inspire Chinese Internet leaders to develop mobile payment apps. It is likely that over the next few years, the search engine Baidu, e-commerce giants Alibaba and JD.com, and Internet portal Tencent will create more complete financial services platforms.
Alibaba gained access to innovation through its investments with Indian online marketplaces Paytm and Snapdeal. Similarly, China’s taxi-hailing brand Didi Kuaidi invested in two similar operations, Ola in India and Lyft, Uber’s main competitor in the USA. Tencent, invested in Indian healthcare start-up Practo.

Going global
These relationships fit with the Chinese government agenda to help Chinese brands compete more competitively with multinationals at home or abroad. The government’s “One Belt, One Road” program aims to create a modern trading network that emulates China’s economic preeminence during the period of the Silk Road.
In certain categories, technology and appliances in particular, Chinese companies are rapidly transitioning from original equipment manufacturers (OEMs), making products marketed by others, to well-established global brands. Lenovo, the world’s largest PC maker, continued to grow its PC, mobile and enterprise businesses outside of China and gained 68 percent of total revenue from overseas business in 2015.
Huawei, originally a maker of telecommunications equipment, built its smartphone business by offering quality products at more affordable prices than Apple or Samsung. The brand shipped over 100 million smartphones in 2015, a 44-percent year-on-year improvement. Haier, the home appliances brand, is expected to become firmly established in the U.S. with the acquisition of General Electric’s appliance division.
Tencent exported its online games, trying to build a large and revenue-driving global audience. In contrast, some Chinese brands first establish overseas and then return to China with greater credibility, a strategy followed by OnePlus, which sells smartphones in around 40 countries and regions.
Multinational challenges
With only a few category exceptions, being an international brand is no longer a sufficient advantage in China. Following safety issues, Chinese consumers preferred to purchase safer powdered milk for infants from multinationals. But local brands now offer imported milk products. International car brands dominate the market in China’s major cities, but the vehicles often are locally produced.
To stimulate domestic consumption, the government introduced cross-border e-commerce zones with lower tariffs on imported merchandise. As a result, Chinese consumers enjoyed lower online prices and faster delivery for imported goods. The first cross-border e-commerce zone was established in March 2015 in Hangzhou. The government planned to set up zones in Shanghai, Guangzhou and 10 other cities.
Multinationals gained wider access to China, especially to its smaller cities and rural markets. High-volume goods like diapers and other baby care items have easier access. In these categories, the lower import tariffs have enabled entries from South Korea and Japan to be price competitive with premium multinational brands made in China. International wellness and cosmetics brands are enjoying easier access to the Chinese market.
About half of all e-commerce in China happened on mobile devices, compared with just over a fifth in the U.S. and around a third in the UK. The implication for brands is clear: consumers are on smartphones at least two hours a day, according to GroupM, and mobile is the place to engage them. Internet users in China totaled 668 million in June 2015, and 549 million of those users, almost 90 percent, accessed the Internet on a mobile device.
In other words, the number of Internet users in China is more than twice the population of the U.S. and almost equal to the population of Europe, and most of those Internet users are walking around with smartphones. These numbers alone would appeal to any brand marketer, but there is more.
The total number of Internet users still represents less than half of China’s population of over 1.3 billion. And penetration is lower in rural China. A big brand opportunity is about to become bigger.

Brand Building Action Points

1. Be different.
As local Chinese brands improve in quality, multinational brands are pressured to be more Chinese - to add something meaningfully different to the lives of Chinese consumers and Chinese society. Conversely, Chinese brands expanding abroad, having developed their distinctiveness in the context of Chinese society, now must find relevance in their new country markets.
2. Prepare for a new reality.
Brands entering China will encounter unfamiliar ways of conducting business. The extensive use of digital and social networks enables a high level of one-to-one marketing, which requires developing the right technology, determining the most effective platforms, and creating relevant messages. Social media ecosystems are less collaborative than in other markets. Brands unprepared for China may find themselves disadvantaged.
3. Gain insight.
It is one thing to know that China is a nation of 1.3 billion people and it is another thing to translate that dry demographic fact into useful insights about that population, particularly the individuals living in China’s smaller cities and rural countryside.

4. Localize offerings.
The next question is whether or not to convert those insights into actions that make a global brand more locally relevant, and whether or not to devote the distribution and operational investment behind a strategy that may include a portfolio of brands that differs from tier to tier.
5. Balance media mix.
Mass-market brands face the difficult challenge of needing one clear piece of communication that both reaches the moms doing family shopping in lower-tier cities, and remains relevant in first-tier cities. The message needs to reach a broad audience with traditional media, while at the same time, young opinion leaders might be reached through digital engagement strategies. For the lower tiers, shopper-marketing engagement strategies might be used.

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