Young Chinese in the Hinterland

How to Tap This Blossoming Market

But marketing to the younger generations in the hinterland requires different strategies than those used for coastal areas. knowing customer preferences.Table of contents Introduction Setting the stage Inland economies on the rise Targeting “little emperors” Get creative with distribution Popularity follows close on trust Internet sales a latent opportunity Think engagement Conclusion 2 3 4 6 8 9 10 11 12 While China’s huge consumer markets continue to get bigger. Several companies—by moving quickly. First. the nexus of spending power is shifting from wealthy middle-aged residents to younger generations. And second. 2 | Young Chinese in the Hinterland . two important yet underappreciated sea-changes are occurring. and developing creative marketing tactics—are pointing the way to success in China’s hinterland. as consumer markets in coastal cities such as Shanghai and Guangzhou become saturated. the strongest economic growth is shifting to inland cities.

9% Source: United Nations Statistics Division Figure 2.0 39.2% -7. China became the largest cell phone consumer market worldwide (1. Figure 1.8% 26. In 2009 China had 384 million Internet users—1.1% 4.1% 42.047 705 669 661 646 584 508 492 485 Annual Growth -1.1 61.2 billion subscribers in May 2011).3 59. and its beer market.2% -3.4% 83.7% 0.9 65.6% 48.4 29.2% 4.3% 5.4% -4.9 99. Internet penetration by country.2% 76.2 28. 2009 Country China USA Japan Brazil Germany India Russia UK France Nigeria Korea Italy Mexico Spain User (million) 384. with more than 800 million mobile phone users. which eclipsed the United States in 2003.0% -0. along with Internet sales.6 times as many as in the United States (see Figure 2)—and this number.180 2. Recent history illustrates this meteoric rise to the top: In 2010.676 1.3% 0.0 239.0% 62.6% 28.2% 79.1 Diffusion/population 28. Its television and personal computer markets are forecast to become the world’s largest in the near future.8% 39.6% 9.297 1.4% 81.498 1.Setting the stage Already the world’s second largest country in gross domestic product (GDP). Its automotive market rose to the top in 2009.1 75.575 1.4 28.6% 71. and rising rapidly (see Figure 1).4 44.2% -1. Private final consumption expenditure 2009 (US$ billion) Country USA Japan Germany UK France China Italy Canada Spain Brazil India Mexico Korea Russia Australia Amount 9.1% -1.6% Source: International Telecommunication Union 3 .6% 2.5% 76.7 51.6 44. China is poised to have the world’s largest private final consumption expenditure—the market value of all household purchases of goods and services—by 2020. It is currently sixth in private final consumption expenditure. is still expanding.3% -7. is steadily growing.4% 0.239 1.

China’s central government aims to accelerate the growth of the inland economy by steering infrastructure investments such as railways and roads to the hinterland. Rising inner cities GDP per capita GDP growth rate >=$4.000 $2.Inland economies on the rise Until recently. Cities there. with natural resources and energy.500-4. are now expected to show double-digit GDP growth. Figure 3. they are unlikely to return to their previous levels of growth. agriculture. For one thing. China’s economic growth has been driven largely by coastal cities.000 < $2. But while coastal areas are recovering from the global financial crisis and economic downturn.500 > =13% 11–13% < 11% Source: National Bureau of Statistics of China 2010 4 | Young Chinese in the Hinterland . and manufacturing for domestic demand playing prominent roles (see Figure 3). previously less relevant to the global economy.

and target instead the lower-tier cities.383 3.900 7.063 6.687 7. But the average personal after-tax income per month in Chengdu.045 7.011 5.816 5. The fourth-tier cities have populations of more than 20 million people.714 4. and 18 fourth-tier cities in China. Guangzhou. purchasing power there can go farther and potentially grow faster.306 Shanghai 2006 2007 Guangzhou 2008 Shenzhen Chongqing Chengdu Xi’an Sources: Credit Suisse Annual Chinese Consumer Study.034 7. for example.695 11.754 8. there are 25 second-tier cities.235 Hinterland 2008 average: 6. with an additional 500 million people migrating from rural areas.491 5. These cities are growing—China’s urbanization rate. contrary to past experience.487 3. This level of largescale and high-speed urbanization is unprecedented—the United States. Market competition for consumer goods manufacturers in China will expand not only in first. Accenture Research analysis 5 . was 6300 RMB in 2008—almost the same as that of the major coastal cities of Shanghai. According to the China City Statistical Yearbook 2009. a multinational company might consider avoiding first-tier cities such as Shanghai and Beijing where competition is fierce.535 5. Average personal after tax income per month by city Coastal 2006 average: 6. which comprise the western triangle development zone planned by the central government. and Shenzhen in 2006 (see Figure 4). rose to 46 percent in 2008 with more than 400 million people migrating to cities from rural areas in the past 33 years. Figure 4.554 6.378 4. In today’s market. took 90 years to reach a 70 percent urbanization rate.A large gap still exists between the per capita GDP of China’s coastal areas and that of the inland areas. Some analysts predict the urbanization rate will exceed 70 percent by 2030.and second-tier cities such as the capitals of provinces and direct-controlled municipalities— cities that have a status equal to provinces and are controlled directly by the Chinese government—but also to third. 24 third-tier cities. with 250 million people migrating to urban areas from 1860 to 1950.and fourth-tier cities.251 9. And because the cost of living in the hinterland cities is much lower than in coastal cities.687 5. only 20 percent in 1978. Chongqing. and Xian.

(in big cities) increasingly tech savvy (mobile. appliances and financial services. prone to western culture and merchandize. received education after cultural Revolution. Accenture research analysis 6 | Young Chinese in the Hinterland . Figure 5. high sense of crisis Major driver for trade up on home decor.” With much-improved educations. enjoy the financial support from their doting parents High pressure: expansion of higher education enrollment and resulting competitive job market for junior talents Optimistic and confident. snacks. heavily spending on clothes. glimpsed on TV and the Internet. benefit from economic reforms Self perceived as hard working and want to be recognized for their efforts. first generation to grew up under the one-child policy Born in 1990s Born in the economic booms and opening era Psychological/ social profile Frugal. educational. Willing to spend for their children’s future In pursuit of style and fashion. and work environments—all of which have led to changes in its consumer market (see Figure 5). these young consumers have been exposed to competition in school and in the workplace. They long for the lifestyle in coastal cities and Western countries. The post-1980s generation (21-30 years old) and the 1990s generation (11-20 years old) together number approximately 400 million (see Figure 6). follower of westernized culture Financial status Significant purchasing power based on generosity of parents and relatives Start entering job market. pressure for inexperienced educated talents Pressure in employment level • Concerns about the job security and future growth ceiling Consuming behavior Spend conservatively. Consumer group distinctions among different age groups Consumer groups by age Social/political experience Born in 1950s and 1960s Education interrupted by Cultural Revolution Born in 1970s Experienced some hardship in childhood. internet. etc. They are becoming the main segments of the Chinese consumer market. feeing the stress of growing old Major beneficiary of economic reforms and better-off than their older brothers and sisters Moderate pressure: • Established status and Born in 1980s ‘Little Emperors’. spending on their first homes Eager to try new brands. some level of resistance of westernizing environment Benefited from the booming economy but not as much as younger generations Low Self confident. economic. digital products).Targeting “little emperors” The past several decades have seen extraordinary changes in China’s social. Sources: Analyst reports. enjoying “six pockets”— with both parents and grandparents willing to spend money on those they fondly call their “little emperors. These offspring of China’s one-child policy constitute the first large cohorts in China to grow up in affluent circumstances with comfortable childhoods. are sensitive to fashion and other consumer trends in Western countries. and many of them consider consumption a virtue. pressured to establish themselves in career In addition to income of their own. and they differ from other generations in many respects.

Figure 6.8% 55-64 45-54 35-44 25-34 15-24 34. China population structure in 2010* 100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 0 20 40 60 80 100 120 People (in millions) *Source: United Nations “ World Population Prospects.0% 24.5% 24.8% 26. The 2008 Revision Population Database” The 1980s generation in urban areas has become known for the impulsive lifestyle called Yue Guang Zu (those who spend all disposable income and have no savings).0% 26. Sino Monitor Consumer Goods Market Tracking 2009 7 .4% 41.9% 7.7% 11.4% 29.6% 9.9% 32. and more than 25 percent are under the age of 24 (see Figure 7).3% 1.9% 23.1% 2. This generation spends freely on premium brands.2% 29.9% 7. as large retail chains penetrate nearby urban areas. 140 80s 90s Figure 7.9% 34.7% 0. and they have only just begun to gain access to the products that represent the lifestyle they covet. Although they are restricted from moving freely. Age composition of consumers of foreign brand perfume 0.6% 35.6% Chanel Lancom CD Avon Auspre Sources: MasterCard Global Consumer Confidence Index Report.0% 26. and sees these expenditures as investments for themselves: 60 percent of Chinese who buy foreign premium brand perfume such as Chanel and Christian Dior are under the age of 35. young hinterland Chinese have rising incomes. Here’s how.0% 3.0% 5.5% 27. Some local Chinese companies and multinational companies have begun to successfully target the young Chinese in hinterland cities.4% 33.

And it has developed 33 secondary distribution agents for the specialized stores. an increase of 53 percent over the previous year. a brand limited to specialty stores. just behind sales of L’Oréal.000 stores. In 2004. Shiseido lends Point-Of-Sale systems to these boutiques and regularly dispatches supervisors to provide thorough training on Japanese-style service skills and make-up techniques. the Finnish mobile phone manufacturer.Get creative with distribution Simply wholesaling products to powerful retail chains and distributors/ dealers as they have in coastal cities hasn’t worked for multinationals in the hinterland.000 retailers in Pigeon’s network. Nokia has retained its leading market share position in the fiercely competitive Chinese market. 8 | Young Chinese in the Hinterland . establishing its main distribution channel in department stores in coastal cities such as Shanghai. worked with a fulfillment distributor in addition to its existing distribution agents. has focused since 2005 on improving its sales network in China’s hinterland areas. instead they are developing creative ways to directly access inland consumers. It signed contracts with three primary channels— retailers specializing in baby products. The company’s 2009 sales in China were 550 million RMB. Pigeon trades with all distributing agents using a deposit system that eliminates accounts receivable risks. department stores. Pigeon. a Japanese childcare and maternity product manufacturer that faced a competitive challenge in coastal cities. Shiseido launched Urara. By building a comprehensive distribution network. entered China in 1991. It has expanded its specialty store network to more than 5. which cover every province in China. Here are some instructive examples: Nokia. Sixty percent of sales came from outside coastal cities. There are more than 7. Shiseido. and has sales of 6 billion RMB in China. and mass retailers such as supermarkets. the Japanese cosmetics manufacturer. the company expanded its store network to hinterland cities. in order to get its products to retailers throughout China. In 2006.

When a foreign company enters China’s hinterland. And it is most important to localize the company’s content and make creative efforts to gain popularity and trust from local young people.Popularity follows close on trust Goods and services of foreign or multinational companies that are popular elsewhere in the world are not necessarily so in China. and provided free sample education materials. educating people on the value of the company’s products is an essential first step. in China’s Internet search market. For example. Google has only 20 percent market share while Baidu has a market share of 75. The proportion of consumer-members who joined immediately after trying a free sample reached 25 percent. the company’s brand will initially be completely unknown. and explain the company’s service. 9 . 300. Thus. is targeting middle class Chinese people keen on investing in their children’s education. Rather than using mass media advertising. Although their service is more than $10 per month—relatively high for Chinese people—the service has become popular throughout China and the annual contract update rate has reached 85 percent. offered promotions on their website. In conjunction with local education organizations and media in each area. and Meituan vs. Also. They send education materials specific to a child’s age to families on a monthly basis.000 people became members. Additionally.5 percent (Q4 2010). When Benesse entered the Chinese market in 2006. From 2006 to January 2011. Benesse is targeting 1 million new members by 2015. Some 40 percent of the company’s consumermembers signed a contract in this way. listen to their concerns about education. a leading Japanese remote education provider. Facebook. 25 percent of all consumermembers joined through hearing about Benesse from existing members and other people. eBay. the company has 200 telephone sales representatives who call families. Renren vs. the company posted advertisements at events in shopping malls. Groupon. So entering the market by simply translating content into Chinese will likely have little impact. parents knew nothing of their service. Benesse. Other market leaders in China are Taobao vs.

Internet sales a latent opportunity The Internet is an effective channel for building sales in hinterland areas. with sales of 700 million RMB. the number of Internet users in hinterland areas is steadily increasing (see Figure 8). Taobao drastically expanded its market share using Alipay. VANCL had a market share of nearly 30 percent in the Chinese apparel retail market. similar to eBay. The total market for retail apparel is approximately 2. VANCL also made efforts to ease concerns among consumers and build trust by appointing overseas designers for product design and by investing in public relations. While the current rate of Internet penetration is higher in coastal areas. present another important opportunity to build customer trust. VANCL. therefore. to reduce costs and offer products at a reasonable price. These two companies are leading the way: Taobao is a Chinese language web site for online auction and online shopping. a very popular third party assured settlement account. trust is an issue: Many Chinese Internet shopping sites are fraudulent. and even legitimate sites have frequent problems with delays or damages during delivery. and they play a major role in Internet culture. But here. The company is now the second-largest online advertiser in China. Inner city opportunities Population distribution1 Internet penetration rate by region2 Internet user growth rate by region2 >=50 million people 30–50 million people <30 million people 1National 2CNNIC >=30% 20–30% <20% >=40% 30–40% <20% Bureau of Statistics of China “ Statistical Survey Report on Internet Development in China” (2010) 10 | Young Chinese in the Hinterland . a Chinese apparel manufacturer and Specialty store retailer of Private label Apparel (SPA) since 2007. Taobao expanded its share by becoming a site trusted by both shops and users. After two years in business.4 billion RMB. Internet sales. focused on Internet sales and outsourced manufacturing of basic fashion items for young people. which facilitates secure payment both for stores and Internet users. Roughly 70 percent of the 400 million Internet users in China were born in the 1980s or ‘90s. too. Figure 8.

the company has opened stores at major Business-to-Consumer Internet malls. The Company’s catchphrase in Chinese TV advertisements is “Better Life with IKEA” and its catalogs are edited by room style. a compound annual growth rate of 55.4 percent from 2005. as opposed to product category. Take IKEA. IKEA stores don’t display single items on their own. And it is working particularly hard to provide customer experiences on the Internet. is an apparel manufacturer targeting young Chinese. and it offers a fashion adviser service that explains fashion trends on its website. the renowned furniture and home goods company. Meters/Bonwe positions itself as a friend or adviser to young people. Unlike IKEA. rolling out stores which provide welldesigned furniture at a reasonable price. but rather show a whole room and the lifestyle that could occur there. It owns two brands—Meters/ Bonwe. Creating differentiated.and fourth. and Me & City. engaging. such as Taobao and Paipai. Its flagship stores are expanding in second-. And it also has an online community. The Company has a Do-It-Yourself room design function. The company. which targets ages 16 to 25. A different approach. targeting ages 22 to 35—and it outsources its manufacturing and retail so that it can focus on designing and branding. For example. outstanding brand positioning is a critical strategy in addition to building effective channels and developing trust.Think engagement As future competition will be fierce in hinterland cities. Its website also is also structured to help consumers design their lifestyle. consists of creative positioning and providing customer experiences on the Internet. For example. which entered China in 1988 and opened eight stores in eight cities in 2009. where consumers simulate the positioning of furniture and colors in various rooms. which is positioned as an advocate. The power of the IKEA brand comes from its focus on offering a lifestyle and a customer experience rather than from simply selling products. established in 1994. In 2010. holds events. and valuable experiences for customers is key. rolled out by Meters/Bonwe.9 percent) in the furniture retail market. in which customers share their ideas and experiences. as they do in other countries. and its sales grew to $770 million in 2009 (5b RMB). 11 .72 billion RMB. It targets students. third.tier cities. IKEA targets the middle class in China. and it achieved the top market share (0. its Chinese sales reached 3. IKEA Family Club. it provides customers with the opportunity to dress their online game characters in the company’s clothes. and advertises outdoors.

12 | Young Chinese in the Hinterland . Five tips to guide your effort Based on our experience and the examples of leading players in China. Balance a global brand and operations with a willingness to learn about and understand the needs and desires of this varied group of consumers.Conclusion Young. The online channel in particular can be used not only for transactions. • Engage customers rather than just transacting. who value consumption and have increased spending power now comprise a relatively open consumer market. as it can take years to build a trusted brand. and instead set their sights on China’s hinterland youth. educated inland Chinese. Hinterland cities require creative approaches. • Choose distribution channels carefully. • Experiment with marketing tactics. Companies can look to examples set by others that have been successful thus far. First-mover advantage comes into play here. • Learn your customers’ priorities. we’ve distilled five factors that will raise the odds of success in this up-and-coming market: • Move quickly. Create a consumer experience that is personal and engaging and speaks to young consumers’ hopes and fears. but as a way to build trust. or managing a network of both primary and secondary channels. through such methods as embedding ads in online games and sponsoring events. such as developing new brands for specific channels. using fulfillment distributors. Agile companies willing to explore new territory with innovative marketing approaches have a good chance of success if they forgo market-saturated coastal cities. poised to grow substantially in coming decades. Play to young consumers’ enthusiasm for new experiences.

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ohhara@accenture.g. and Infrastructure sectors. and leads Accenture’s Growth Strategy area in Asia Pacific. pre-deal and post-deal M&A. shared services.com Wayne Borchardt is a senior executive in Accenture’s corporate strategy group and the global lead for our Strategic Planning & Growth practice. wayne. Malaysia.s. and emerging market expansion.borchardt@accenture. Wayne brings over 17 years of experience consulting with clients on strategic planning. and mergers and acquisitions. Pharmaceutical.dailey@accenture.com 14 | Young Chinese in the Hinterland . He has over 16 years of experience consulting clients mainly in Electronics & High-Tech sector on strategy. Most of his consulting experience has been in the Consumer Goods. organic growth. Healthcare. new growth opportunities. He is based in Kuala Lumpur. international expansion.About the authors Masamichi Ohhara is a senior executive in our Strategy service line based in Tokyo. masamichi.com Jill Dailey is a senior executive in Accenture’s Management Consulting practice and leads our Strategic Planning and Growth Offering in North America. New Jersey. Jill brings over 12 years of experience consulting with global clients on strategy. and broad transformation programs. jill. She is based in Florham Park. growth strategy. Retail. especially in the Health industry.

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