Shifting Preferences of Chinese Consumers Create Opportunities for Local Brands
As Chinese consumers continue to seek higher-quality products, they are expressing rising confidence in Chinese brands and are increasingly choosing home-grown products. A recent Global Times survey found that, for food, apparel, household appliances and mobile phones, a majority of Chinese consumers believe Chinese brands can displace foreign ones.
The survey, conducted by the Global Times Research Centre, collected 1,281 responses from 107 cities, including Beijing, Shanghai, Xiamen, and Shenzhen. The survey found that more than 75 percent of respondents agree that domestic branded products can fully or partially replace products offered by international brands.1 This finding is also reflected in Euromonitor data on the increasing market share of domestic brands in China (see Figure 1) and the higher growth rates of domestic brands in China versus their international peers (see Figure 2).
Figure 1 : Market Share of Chinese Domestic Brands in Six Consumer Sub-sectors (infant milk formula, colour cosmetics, snacks, condiments, skincare, and soft drinks)
Figure 2 : Growth Rate of Chinese Domestic Brands versus International Peers (% growth; revenues in RMB)
Importance of Quality
We believe the changing brand preference toward locals is, first and foremost, the result of the much improved quality of Chinese-branded products in recent years. Chinese brands started to gain acceptance about a decade ago, reflecting demonstrated expertise in manufacturing and supply chain management while representing value for money. Many Chinese firms gained valuable experience when serving as original equipment manufacturers (OEMs) for foreign brands, and many have since evolved to start their own brands – a natural progression as companies seek to move up the value chain. We saw Korean and Japanese brands follow a similar path as their countries developed and as their citizens wielded increased spending power.
The Chinese brands’ advantage became more evident during 2020, when the operational rhythm of some international peers were disrupted by the pandemic, which helped local brands gain further recognition. We expect Chinese enterprises to maintain this competitive advantage as they pursue strategic priorities that include R&D and product innovation, manufacturing and distribution, and brand building.
The Chinese Consumer
In recent years Chinese consumers have become much more sophisticated in understanding product quality and pricing. The consumer market is getting deeper and more transparent, and there are many similar products to compare. The rise of e-commerce platforms like JD and Tmall makes comparison among brands extremely easy. Gone are the days where consumers would blindly chase after foreign brands and pay a huge premium for a level of quality that is being offered by a local brand. Sophisticated consumers are increasingly paying more attention to practical aspects such as technology content, customer service, and value for money – areas where foreign brands may not have an advantage in the Chinese market.
The other driver of the boom in Chinese brands is the rise of Generation Z.2 These consumers were born and raised in the era of China enjoying the fruits of market reforms; they personally witnessed the nation's rapid progress on the international stage. Gen Z consumers do not hold the same prejudice against domestic brands that their parents did. Many were the only child in their family, with parents and grandparents willing to indulge their needs and desires from a young age. As such, this group’s appetite for discretionary spending is much greater than previous generations’. Statistics from Chinese online shopping platform Tmall show that the post-90s generation ranks first3 in per-capita consumption of domestic products4 despite being relatively young.
Marketing and Advertising
Local celebrities are replacing Western faces in advertisements and are even ousting once-popular Korean stars. This shift is a function of both demand and supply, in our view. Emerging social media, TV, movie, live-streaming, and short-form-video channels have created their own generation of popular recognizable celebrities and key opinion leaders. And as China becomes increasingly important on the international stage, consumers have found connection with home-grown fashion icons, sports stars, and even business leaders, i.e., with countrymen whom they want to represent them. And local brands are reaping the benefits of their endorsements. We have also observed that, as the consumer market becomes more mature, there is a greater desire by local brands to define and project what it means to be Chinese. This is leading to a growing desire to communicate individualism, personal identity, and cultural heritage.
With so much interest in the Chinese market as it grows in size, domestic brands are tapping every advantage they have. Some have hired marketing managers and designers who previously worked at international brands, thereby gaining accelerated access to branding best practices. Others have hired foreign designers to create their collections, thereby keeping in touch with international trends. For example, in the automobile industry many chief designers of local brands previously worked for top global auto marques.
Consumer Access and Services
Perhaps most importantly, Chinese brands have intimate access to their consumer base, which is one that they know very well. The result? Greater agility and relevance than foreign brands; greater ability to cater to the needs of customers. This is evident in quick responses to customer service complaints and quick rectification of product issues. In addition, the booming e-commerce market in China has played a huge role in changing the competitive landscape in favor of the home-grown. Local players so far have better used the massive internet ecosystems to get their messages and products across – providing services that foreign rivals might have difficulty matching.
The US-China tensions of late have also impacted consumer sentiment. The rivalry, whether on the trade or tech front, has prompted a deep sense of nationalistic pride within local consumers. And the recent Xinjiang cotton incident has given the Chinese state media an opportunity to highlight the rift between Western brands and Chinese consumers. Swedish brand H&M was criticized publicly, and international brands including Nike and Adidas, which expressed concerns about Xinjiang cotton, also faced consumer boycotts. Chinese celebrities dropped their endorsements for these brands in support of the government’s agenda, and also out of fear of a public backlash. Not surprisingly, during the sale events on Tmall in March, purchases of H&M, Nike, and Adidas plummeted, while those of domestic brands like Anta Sports and Li-Ning spiked.
This change in consumer behavior is also consistent with the Chinese government’s “dual circulation” strategy that prioritizes domestic consumption ("internal circulation") while remaining open to international trade and investment ("external circulation"). It is hoped that internal consumption can step up to fill the gaps of an uncertain export outlook, and that consumers will increasingly spend locally to help domestic brands and enterprises. To some extent, the global pandemic, which made outbound tourism difficult in 2020, has also helped drive domestic consumption and helped support local brands.
Across a variety of consumer sub-sectors, Chinese home-grown brands are expanding their market share. We believe this is a long-term trend, and that we will likely see more Chinese brands achieve dominance in their respective spaces down the road. Some may even build off of their home success to compete and win internationally, though this is not critical to their success due to the size, depth, and growth trajectory of the domestic China market. Many will achieve a much stronger market position in the process, and we will closely follow the progress of these companies.
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1Similar observations of this trend have also made by Credit Suisse and Bank of America. 2Born after 1995. 3Compared with the post-70s, post-80s, and post-00s generations. 4RMB5,307.
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