• by Aaron Baar , February 7, 2008

With consumer disposable income expected to rise at three to five times the rate of the rest of the developed world, China is expected to be the world's third-largest consumer market by 2010 and the second-largest by 2015. But marketers expecting to make sales by merely showing up are sadly underestimating the Chinese consumer, according to new research from the Boston Consulting Group.

"Overseas companies are treating China as a generic untapped consumer market," said BCG senior partner and study author Hubert Hsu, in a statement. "They're throwing so many promises and products at consumers, who respond by quickly abandoning one brand to try another. Companies need to shift their focus from footprint expansion to much more detailed strategies--based on real understanding of the massive changes in China and their impact on consumers--that ensure lasting brand loyalty."

As an in-depth look at the market, BCG surveyed more than 4,000 consumers in 13 Chinese cities, and supplemented those results with focus group interviews, home visits and shop-along trips. The findings revealed that Chinese consumers are more cautious and less brand-loyal than their Western counterparts, and have very different shopping habits than their Western counterparts.

According to the survey, nearly half of Chinese consumers--48%--expected to increase discretionary spending over the next 12 months, but by less than 20% over the previous period. Another 32% said they anticipated no change in spending, while 11% said they expected to increase spending by more than 20%.

Spurring the slower-than-expected spending is a holdover of pressure and insecurity stemming from the Cultural Revolution, particularly for people in their 40s. Younger consumers were concerned about aging and work/life balance, while the youngest generation--those in their 20s--were feeling pressured to start life and marriages on solid financial ground. As a result, overall savings levels are high.

When the Chinese consumer spends, however, he or she expects to "trade up" to higher-quality items. But they're looking to trade up in different ways than their Western counterparts. Where U.S. consumers look to get better home appliances, and Europeans look for better fashions, 66% of the Chinese respondents said they wanted to get better consumer electronics (which ranks fourth and sixth, respectively, for the U.S. and Europe).

While Western marketers tend to think in terms of categories (like food or packaged goods), Chinese consumers tend to think more along the lines of specific items, according to the survey. While trading up for food and beverages ranked tenth out of 10 categories, more than half of the respondents said they would buy higher-quality baby food and dairy items, citing family and safety concerns.

To make up for trading up on certain items, Chinese consumers showed an interest in bargain hunting by shopping online, buying knockoffs and tapping wholesale markets. But they are also more likely to negotiate better prices by shopping with friends and negotiating group discounts, and through a unique distribution system that allows for prices from different distributors to be offered at wildly different rates. "The Chinese shop for the thrill of the hunt and are very skillful hunters," according to the report.

When it comes to brand names, Chinese consumers are attracted to them, but are not necessarily brand-loyal. According to the survey, a brand is a mark of quality, but does not carry an emotional appeal, and word-of-mouth recommendations--from peers and professionals--carries more weight than a traditional sales pitch. More than half of the respondents--54%--said they were interested in meaningful technical differences between products, and 49% said they wanted products that "give better results."

As a result, marketers in China should ensure their claims are tangible and delivered credibly, according to BCG. Word-of-mouth brand ambassadors count for more than celebrities, and an umbrella brand can convey quality over a wide range of products. Sales pitches should focus on innovation and improvement, not just price. And because of the unique distribution systems, brands should be built region by region, as opposed to a one-size-fits-all category.