2018 China GDP September quarter was reported at 6.5% growth rate, significantly slower than the average rate of the past 30 years. Retail shopping has slowed with it. The stock market is slumping. China’s currency has lost some of its value. The trade war launched by US President Trump has left many Chinese feeling less optimistic than before. Anxiety, aging issues, sky-high housing prices are among the frequently referenced terms.
Welcome to China’s “consumption downgrade”, a potentially worrisome development for Beijing and the world. For years, the conversations in China were about “consumption upgrades”. As the economy took off, China’s middle class — now more than 400 million strong and still growing — spent those bigger paychecks. It traded up from local brands to Nikes, from cheap phones to iPhones, from tea to $5 Starbucks lattes. Not to mention those security guarded long queues in front of Chanel Louis Vuitton and Gucci stores in Hongkong, Europe, and Australia.
Multiple aspects of consumption downgrade
There isn’t a universally agreed definition about the term among Chinese media and business landscape. There are indeed some aspects of consumers behavior change.
Buy cheap to save money. Consumers choose the products with cheap price and average quality. Taking a comparative example here in Australia, A mum may be more inclined to take one dollar bottle water Woolworth’s brand water off the supermarket shelf than two-dollar Mount Franklin bottled water. In this scenario, the quality level drops as prices drop.
Be selective on what to spend what not. Economic conditions are not ideal, people have to be more diligent on living expenditure, choose cut consumption items, or be selective on what to and what not to. For example, those “monthly emptiness”, referring the people running out their money before their next salary pay, may not turn up at a friend gathering of spending over 150RMB, 30 dollars. In this scenario, experience level drops as prices drop.
Consuming concept changes. Some consumers are no longer have the strong willing to pay a premium price for premium brands. Interestingly, this kind of mindset shift occurs after the increase of living standard. Initially, consumers are not used to or have not purchased those premium brand products, they believed the pricier the better. Until they realized that quality of premium priced product and mid-level priced product are not much different. Therefore they changed their mindset and are more inclined to make purchases of higher quality-price ratio. Coach bags have gained much more growth comparing with Chanel bags in China for the last 24 months.
Consumers buy in different ways. Consumers would buy in group purchase model to gain an advantage of low price thanks to the mobile app technology which is making the group purchase with anonymous people a no-brainer task.
Winners of Consumer Downgrade
Consumption downgrade is a change in the buying structure, habit and shopping concept for some consumers not for everyone. However, it is not that scary as it may sound to brands and manufacturers. It occurs at the same time while some customers are upgrading.
On the flip side, consumption downgrade creates massive commercial opportunities, especially for China’s hugely populated market. Who are the winners in the wave of consumption downgrade?
Pin Duo Duo, a group buy APP.
Pinduoduo is a group buy App, users can launch group buys with friends, families, workmates or neighbors or even the people unknown, to buy stuff at cheaper prices. Pinduoduo’s daily active users, daily transactions surpassed JD.com, becoming the 2nd largest Chinese eCommerce platform next to Alibaba.
65% of Pinduoduo sales come from regional areas and 3rd tiered cities and below where 50% JD.com’s sales come from 1st and 2nd tier cities.
To most city dwellers, it is a comprised action to cope with ever-increasing economic pressure by shopping on Pinduoduo. While those consumers in rural areas have benefited from gaining cheap, affordable access to a variety of products offered across the country which would have been impossible without Pinduoduo’s group buy model.
MINISO fast fashion store chain. While you probably like shopping in 2 dollar stores in Australia for Halloween, Christmas or birthday party gigs, China’s counterparts have gone far massive scales. MINISO is known to sell a majority of its products priced at 10 RMB. The brand expanded to 2000 stores in China within 3 years, sales reaching 10 billion RMB, 2 billion Australian dollars. It is a legendary record in the retail industry. 50% of their 5000 categories of product are priced under 10 RMB.
Many companies are trying to grab the commercial opportunities driven by so-called “ the era of consumption downgrade”.
Chinese consumers are now away from a single-minded direction. It can be complicated, it can be a mix both consumer upgrade and consumption downgrade, and even in different dimensions.
We have heard optimistic comments made by marketing peers and some Australia brands that that mid-class, residents in tier 1 and tier 2 cities and post 90, and post 2000, they are in the process of consumer upgrade, so they are going to welcome foreign goods, particularly Australian consumers goods are highly appreciated. This insight is only partially true, idealism and romantic. Simply putting up a shingle and yelling your brand offers Australian premium made product hoping to have people lined up to pay a higher price, has become a naive imagination.
Australian businesses need to put in more effort to dig further about Chinese consumers behaviors and reconsider the core of business: to provide value, scalable and affordable product and services to your customers. We, WeChat Apply team are the specialized experts who know what’s happening in China with first-hand insights, feel free to get in touch with us.
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