Shoppers make smarter, more rational decisions
Premium remains an option when justified
Recent economic realities, abetted by greater consumer sophistication and access to product knowledge, has fostered a new shopping rationality. People are stratifying their needs: trading up when product efficiency or a lifestyle desire merit a higher price; and trading down when a need can be satisfied with an acceptable product at a lower price.
This stratified spending, identified by Kantar Worldpanel, has impacted the Chinese market in many ways, including the emergence of Pinduoduo, China’s third-largest e-commerce platform, after Alibaba and JD. The site, which completed an IPO during 2018, offers price-competitive products and incentivizes customers to purchase with friends and earn volume discounts.
Similarly, Starbucks, which has opened over 3000 stores in China since entering the market almost 20 years ago, now faces stiff competition from a new Chinese entry, Luckin Coffee, which sells its coffee at around half the Starbucks price, and has around 2,000 outlets. And, consistent with the Chinese phenomenon of extreme convenience, Luckin Coffee promotes rapid delivery.
Where Starbucks created, and premiumized, the “third space” between home and office, a place to experience a cup of coffee and a respite from the day’s stress, Luckin Coffee has identified a complementary need for times when people desire just a good cup of coffee at a fair price, delivered quickly, to home or office. The chain’s physical locations vary, from small and convenient to larger and more experience-oriented.
The ways Pinduoduo and Luckin Coffee illustrate stratified spending can be complicated. Some consumers may be trading down when they select Luckin Coffee, but other consumers may be trading up, or they may be traditional tea drinkers trying coffee for the first time, a development that would potentially expand the coffee market. Similarly, Pinduoduo can be an on-ramp for new consumers, especially from lower tier markets.
These competitive developments also drive incumbent brands to improve. Starbucks continues its traditional positioning in China. Its Shanghai Roastery is an enormous destination location with an immersive experience that attracts lines of visitors. At the same time, Starbucks has partnered with Alibaba for the necessary online/offline logistics to offer delivery.
The partnership includes some delivery from Hema stores, the Alibaba supermarket known for its fresh products, which serve as both a retail store and distribution center. Starbucks has recently introduced coffee delivery in the US, its home market, an illustration of how developments in China, in this case the redefinition of convenience, can find expression in other global markets.
Young people illustrate a way that Chinese consumers stratify their spending. These internet citizens are part of the same global village as their peers in North America and Europe. They see the same fashions and lifestyle trends and are willing to pay a premium for them. Young Chinese consumers also will try a less expensive local brand if the brand offers something valuable.
For young consumers, the reputation of Chinese brands has improved tremendously in their lifetimes. And local brands communicate effectively on social media. Chinese brands can be interesting to young people. And by educating consumers about the ingredients or components of their products, local brands facilitate rational buying decisions.