How Brands Can Attract Cost-Savvy Customers
Emerging Global Consumers
Foreign brands in China are expensive. This is not just in relation to China’s lower income level: due to a mixture of duties, taxes, logistics costs, and price positioning, the price of foreign brands in China typically ranges from 30 to 80 percent more expensive than in their home markets.
Among China’s sophisticated consumers, the price gap between China and the rest of the world has become common knowledge—especially among the aspirational and affluent white-collar workers who are expected to drive growth in the premium and luxury segments.
These consumers are increasingly global and savvy in their purchasing behavior, have the opportunity to shop abroad, and are increasingly doing so. In an ongoing SmithStreet study of Chinese luxury customers in Europe, for example, every single respondent has essentially stopped buying luxury goods in mainland China, citing price as the primary (and typically solitary) reason.
The shopping behavior of sophisticated consumers is evolving to one dominated by overseas purchases, as consumers leverage three key channels for shopping abroad:
Personal Travel: With 83 million trips abroad last year, more and more members of China’s middle and upper classes have the opportunity to travel abroad. These trips are utilized to take care of the majority of consumers’ planned premium and luxury purchases, even among consumers who are only traveling abroad once or twice a year, with total overseas spending exceeding $100 billion, including approximately 60 percent of the luxury purchases made globally by Chinese nationals.
Personal Networks: Most Chinese tourists carry extensive, detailed shopping lists—not only for themselves but also for friends, coworkers, and family. Likewise, the large number of Chinese students studying abroad are a key channel, either carrying items home or regularly making shipments to their friends back in China. If consumers are not traveling abroad themselves, having a friend buy something on their behalf is the next best option, and one that has become integrated into the social expectations of the traveling, middle class.
Shopping Agents: A quick search on Taobao will identify dozens, if not hundreds of shopping agents for any given brand. These agents, typically small operations set up by individual Chinese living abroad, buy items abroad and ship them back to China, making a profit on the price difference between the two markets. While facing some trust issues and a slightly higher price than if items are bought abroad directly, this channel provides overseas access to more aspirational customers who cannot afford to travel abroad themselves.
Why Buy in China?
If consumers can easily purchase items abroad for a significant discount, then in what situations would they buy luxury goods in China?
When price doesn’t matter: China’s very wealthy, or consumers for whom money comes easily (think government connections) will continue to purchase in China for the convenience, regardless of price.
When the need is urgent: Urgent purchases, especially gifting, will continue to have relatively inelastic demand domestically, as there is often not sufficient time to obtain items from abroad before a key business meeting or special event.
When consumers don’t know their options: Typically less sophisticated consumers, either buying luxury or premium brands for the first time or coming from less developed cities with fewer options and information sources.
When China products are exclusive: Limited edition and/or items designed specifically for the China market can’t be purchased abroad and don’t face cheaper overseas completion.
When the absolute cost difference is minimal: For less expensive items, consumers may choose to buy locally for convenience since the cost savings is relatively low; this cut-off is different for each brand and group of consumers.
How Brands Can Win
Brands that are relying on the rising, sophisticated Chinese consumer to drive the growth of their China businesses may be in for a rude surprise, although they should benefit from this customer globally.
In order emerge as winners in an environment where the most sophisticated Chinese consumers opt to purchase abroad, brands need to be proactive in engaging with their global customers, while at the same time optimizing their presence in China to the needs of those customers who are continuing to purchase domestically:
Brands need to understand their global Chinese customer base—this may go far beyond who is actually making purchases in their China stores—and find ways to influence how this customer makes purchases abroad.
Store locations may need to be reevaluated, as customers in developed cities increasingly treat them as showrooms for overseas purchases.
Store assortment and experience in China should be tailored to the needs of those customers who continue to make purchases domestically—either to focus on specific customer groups, or the drivers of local purchasing behavior.
In the long term, brands should look for and leverage opportunities to bring China pricing more in line with global norms. Brands that are coming into the market for the first time need to pay extra attention to setting the right price—the precedent set by existing competitors may not be an accurate reflection of consumer willingness to pay.
James Button is a Senior Manager at SmithStreetSolutions, a growth consultancy based in Shanghai, where he works with a number of premium and luxury brands on their China entry, growth, and e-commerce strategies. Follow James and SmithStreetSolutions on Twitter.