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Lesson 6 - Premiumization

Lesson 6 // Premiumization

Quality-of-life aspirations drive premiumization

Trend crosses most categories and demographics

Between 1981 and 2015, China’s poverty rate declined from 88 percent to less than 1 percent, according to the World Bank. During that period, most people went from rationing even basic items because of scarcity to having sufficient material possessions.

Materially well-off Chinese today want higher quality merchandise and feel entitled to it. Consumer attention is also shifting to higher-order needs, such as quality of life, identity and self-expression, and self-actualization. These changes drive premiumization.

Around 70 percent of Chinese believe that buying better products is a way to improve quality of life, which includes good health, a sense of value and achievement, and refreshing experiences, according to Wavemaker. When Chinese consumers upgrade to better products, these are among the categories that receive priority: digital devices, food and drinks, electrical appliances, and household items.

Premiumization crosses categories, as illustrated by technology brands. Once perceived as more affordable smartphone alternatives, certain Huawei and Xiaomi smartphone models now command a premium and compete head-to-head with Apple. Huawei collaborates with Leica on camera quality. Huawei scores 124 on the BrandZ™ Premium Index. An average score is 100.

Chinese interest in health and wellness has driven premiumization in categories such as personal care, according to Kantar’s Worldpanel division, even while penetration and purchase frequency growth has slowed other FMCG consumption.

Premiumization has also created opportunities for Chinese brands in categories that have been dominated by international brands. Even as French brands cultivate vineyards in China, China’s oldest wine brand, ChangYu, is expanding its premium range. Chinese beer brands like Tsingtao Beer and Harbin Beer are among the brands driving premiumization in the beer category.

Baijiu brands have commanded a premium since long before premiumization became a trend. Chinese give the traditional white alcohol as prestige gift and consume it at celebratory occasions. Moutai, the most valuable baijiu brand in the BrandZ™ ranking, has the highest market capitalization of the world’s distillers.

In the 2020 BrandZ™ China Top 100, Moutai rose two places to become the No. 3 most valuable Chinese brand. Factors responsible for its success include strong brand equity and premium pricing. Moutai scores 116 on the BrandZ™ Premium Index. The average score is 100.

Premiumization and improvement in product quality drive market share and revenue in China, and also better position brands for greater consumer acceptance overseas. To command and sustain a premium, according to Kantar research, brands need push beyond improved quality to excellence and uniqueness.

Diverse brand cues can signal premium

Premiumization is not simply about raising prices and enhancing margins. Those are the outcomes that potentially flow from an attitude about creating quality products and services and surrounding them with all the cues that evoke respect and desire. These cues— opportunities for brand communication—include:

Heritage Heritage is not simply about age, the decades or centuries since a brand was established. It is about what the brand has accomplished, the impact it has made, what it stands for, how it wants to be thought of. It is another reason why people are willing to pay more for it.

Values A repertoire of brands is like a community of friends. People select brands are reliable, comfortable, perhaps exceptional in some ways, brands that one would be proud to be seen with. Brands whose values they share.

Refinements Discerning customers look for refinements and are willing to pay more for the elegant stitching that distinguishes premium from mass. It says something about the garment and the person wearing it. That attention to detail can extend to all aspects of brand communication.

Participation Intrinsic quality is enhanced when the product or service is adopted by select devotees. These can be young people coveting the same athletic shoe or car owners loyal to the same luxury brand. Individuals draw a sense of identity from the brand and the brand potentially benefits from the group’s influence.

Stories The more we fill our lives with industrially made products, the more we appreciate any indication that another human being was involved in making the products we use. Knowing where a product came from and who made it adds connection and value. These are important stories.

Gifts Now that more Chinese are materially well-off, more Chinese are time impoverished. Making life easier, simplifying the shopping and user experience, enabling people to enjoy their friends and family, these are gifts of time. And they earn a premium.

Key Takeaways // Premiumization

Brand Building for Future Growth

  1. Improve quality of life 

Premiumization is one of the China’s great opportunities. The trend crosses most categories and demographic groups. It is obvious in top tier cities and rapidly becoming evident in lower tier cities. Older consumers who remember austere times welcome the opportunity to live more materially well-off. For young consumers, particularly those of the one-child generation, premium products and services are a medium for self-expression.

  1. Learn category nuances

Not all premiumization is the same. In FMCG, Kantar’s Worldpanel division has determined that some categories use premiumization to compensate for limited penetration potential (shampoo); other categories are experiencing revenue growth because of both penetration and premiumization (makeup); while a third group of categories is able to command super premium pricing (infant formula). It is important to understand how premiumization can vary by category. In a category-specific way, discover what added functionality or experience would command a premium.

  1. Communicate quality

The improved quality of Chinese products over the past decade has enabled Chinese brands to charge more. It has also raised expectations, meaning quality alone may not earn a premium—quality needs to be communicated. Creating the perception of quality is delicate. It depends on achieving—and communicating—the quality of function, design, and overall experience. Problems with one of these factors can quickly erode the perception of quality, however. Protect and reinforce the perception of quality at all touchpoints.

  1. Leverage global glow

After investing to be perceived as being a premium brand in China, brand can enjoy an ROI dividend. If the brand anticipates overseas expansion it will need to achieve premium status anyway. Conversely, because acceptance by overseas audiences signals high quality and confers status, brands that have succeed overseas enjoy a premium in China.