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By: An Hodgson

With decades of economic growth, rising incomes, over 1.3 billion consumers and a surging middle class with an insatiable appetite for Western brands, the allure of the Chinese consumer market – the world’s second largest – is obvious. But, as many consumer goods companies have recognised at their own cost, China is a tough market to enter, compete and survive in, let alone prosper. Yet, in the face of moderating growth and rising costs, the challenges facing international consumer goods businesses in China will not get easier in the long term.

Annual Real GDP Growth and Household Annual Disposable Income Growth in China: 2008-2020

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), World Economic Outlook (WEO)

Note: Data for 2014-2020 are forecasts. 

1. Uneven income distribution

Income inequality inhibits the growth of the middle class (which is expanding healthily but not at its full potential) and restricts purchasing power to a relatively small segment of high earners at the top. As a result, many consumer goods businesses in China operate on a low profit margin in a market made up of mainly low-income and price-conscious consumers. Income inequality in China manifests itself in the large income gaps among different income deciles as well as between urban, coastal cities and rural, interior areas. In 2013, the average household annual disposable income was US$22,884 in the first-tier city of Guangzhou, US$8,958 in the second-tier city of Lanzhou and was lagging much further in third- and fourth-tier cities and rural areas.

In the long term, thanks to a wide range of socio-economic policies aimed at creating a “harmonious society”, income inequality will somewhat decline. Euromonitor International forecasts that the richest 10.0% of households (decile 10) in China will see their share of the nation’s total annual disposable fall from 36.2% in 2014 to 35.0% in 2030, with the slice received by the poorest 10.0% of households (decile 1) improving from 1.4% to 1.5% over the same period.

Share of Total Annual Disposable Income by Decile in China: 2013

Source: Euromonitor International from national statistics

2. Vast and diverse market makes it difficult to establish a strong presence and expand 

The Chinese market is celebrated for its vastness and seemingly unlimited opportunities, but its vastness and diversity also present a major challenge. Many international consumer goods companies have soon realised it is difficult to enter and navigate the Chinese market, which almost requires them to approach each region as a country with bespoke business plans and strategies. Although many companies have already set up regional offices in their efforts to expand their footprints in China, their regional offices often operate in a linear structure, executing instructions from a local head office. In our view, however, the model that works best for consumer-focused businesses in China is a localised one, in which regional differences in terms of language, purchasing power and consumer needs and preferences are taken into account, and regional offices are accountable for their own strategic planning, consumer research, marketing, distribution channels, and ultimately their own profit and loss.

Consumer Expenditure per Household by Region: 2013

Chinachallenges3

Source: Euromonitor International from national statistics

3. Intense and unfair competition

As well as being a vast and diverse market, China is also a crowded market where brands may find it hard to stand out. To international businesses, competition in China is intense and comes not only from other foreign brands and Chinese companies, but also from street vendors and manufacturers of counterfeit goods. While international companies generally contend with foreign competitors, they often find restrictions on foreign investment as well as import duty and taxes can give local Chinese businesses some unfair advantages. Similarly, street vendors pay neither taxes nor shop floor rent and can thus offer low prices and a certain kind of convenience to consumers. In such a tough operating environment, Wal-Mart closed three stores in 2013, and aims to close another 15-30 stores in 2014-2015, while Tesco has sold its business in China.

 

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