Survival of the hippest

Multinationals need to adapt to the ever-changing Chinese consumer to succeed, says Nielsen China managing director

Multinationals face a different market landscape in China from five years ago and they need to adapt to the changing taste of consumers to stay competitive, says Patrick Dodd, managing director of Nielsen China.

Nielsen is a global information company that tracks consumer behaviors, including what people watch on TV and what they buy. Over the last few years, Dodd says, Chinese brands have been beating multinationals to capture a larger share of the consumer market in the country, though in the personal care sector, such as shampoos and conditioners, multinationals continue to perform well.

To make matters worse for multinationals, the consumer market in China has recently been trending downward.

"A few years ago, everybody was enjoying double-digit growth in China, but over the last three quarters this year, the average growth rate has dropped to below 5 percent, be it local brands or multinational brands," he says.

While multinationals have the edge in personal care products, Chinese companies are enjoying overwhelming success in the food and beverage industry, according to Nielsen research.

"Local brands understand local consumer tastes, particularly the differences between regions and provinces, and they have better distribution networks," Dodd says.

He predicts that the primary competitors for multinationals in the future will be brands that have been historical favorites in China. "Imagine a brand that your grandparents and your parents all use: It is something that multinationals in China lack."

The main reason for the need to adapt is that Chinese consumers are evolving - they are wealthier, more educated and are moving from social recognition to self-identity. There is a growing need, Dodd says, to stand out from the crowd.

"Multinationals should do precision-marketing across various regions in China to catch up with changing consumers."

A useful way of attracting the ever-changing consumer in China is to play up to their need for greater "health and wellness", he says.

"Wealth and income used to be the most desirable thing in China, but now we are amazed to see how high health and wellness are on people's agendas. Some local Chinese brands are doing a great job in marketing their Chinese medicine ingredient in their products."

Still, there is a nuanced understanding of health and nutrition in China depending on region and province, placing the onus on multinationals to cater to local tastes and preferences, he adds.

What is certain, however, is that there is a growing willingness to try new brands, especially among the rising Chinese middle class, Dodd says.

In second-tier and third-tier cities, for instance, most consumers gain their first exposure to multinational brands not through brick-and-mortar stores but through e-commerce outlets, social networks and trips either to first-tier cities or abroad.

"There is still growth in first-tier cities, but there will be explosive growth in tier-two and tier-three cities. If you want long-term success in China, you need to rapidly establish (a presence) in these cities," he says.

In recent years, e-commerce has developed dramatically in China. According to Nielsen research, e-commerce now covers a range of goods, from electronics and baby products, to imports like chocolate.

"Many companies have figured out this is a good channel to reach out to target consumers, and multinationals really need to focus a little bit more on this platform," Dodd says.

More consumers in China are veering toward a brand's online store or to online department stores such as Taobao or JD.com because it is convenient, Dodd says.

"And in China with the explosive development of smartphones, e-commerce is growing even faster.

"Through our research, we see that Chinese brands are putting more of an effort into this area than multinationals, so multinationals need to focus more on this area by really understanding the online and offline world."

Dodd advises all companies in China to double their efforts in developing an e-commerce presence, especially in the mobile Internet sector, to better engage consumers. Partnering up with the so-called online department stores, such as Tmall, could be a step in the right direction.

"Or they can build their own site. Play all fields in order to get a wider distribution."

A recent Nielsen report shows that consumers in China are highly interested in e-commerce sites that sell luxury items. The report said 77 percent of respondents are aware of websites that market luxury goods, while 45 percent of those polled said they have purchased luxury items online.

More than half (56 percent) of the respondents said quality was an important factor in why they visited the sites for high-end goods, while 46 percent pinned it on the "fine design" of the products.

Quality is in fact the key driver among Chinese mainland travelers (45 percent) in explaining their motivation for buying luxury goods and 42 percent of the respondents said they equate luxury goods with a refined sense of taste and uniqueness.

As the consumer landscape evolves, Dodd says it is important to constantly come up with new products.

"In Shanghai, there is little growth in the traditional ready-to-drink tea sector, but products that introduce new flavors can charge prices that are two to three times greater than the price for traditional drinks."

He says he finds that some personal care companies focus too much on a small range of established brands, which often results in a slump in sales.

"It's not an easy thing to keep innovating, especially when business is slowing down, but in China you need to have plenty of innovative products in the pipeline every year. It is beneficial both to consumers and to trading partners," Dodd says.

In other words, innovation begets better margins. Nielsen research shows that delivering products of premium quality is trending upward in China.

To win both lower-tier and higher-tier markets, some multinationals have two separate brands in China, which can work if the company creates a strategy of multiple, unconnected brands, Dodd says. But if a company prices their products higher than they would in their home country, a tactic that Coach and Levi's uses, Chinese consumers will catch onto that quickly.

"If consumers admit that a company's premium status can dictate prices, it's a great thing and you can continue with the strategy; but if that doesn't work, you need to change it up. If your pricing goes in the wrong direction, consumers will choose other options, which are so many now in China."

wangchao@chinadaily.com.cn

(China Daily European Weekly 11/21/2014 page22)