China braces for wave of spending from urban middle class

A McKinsey study entitled “Serving the new Chinese Consumer,” reported by Diana Farrell, Ulrich A. Gersch and Elizabeth Stephenson, focuses on the needs of the Chinese consumer and the change in household wealth in the next 20 years.

As China’s economy has soared at consistently astonishing rates many global companies have focused on serving the country’s most affluent urban customers. But research by the McKinsey Global Institute highlights the emergence of a far larger, more complex segment - the urban middle class, whose spending power will soon redefine the Chinese market.

Consumers in China’s urban-affluent segment earn more than 100,000 renminbi (about $12,500) a year and command 500 billion renminbi, nearly 10 percent of urban disposable income, despite accounting for just 1 percent of the total population.

They consume globally-branded luxury goods voraciously, allowing many companies to succeed in China without significantly modifying their product offerings or the business systems behind them. And since this segment is currently concentrated in the biggest cities, it’s easy to serve, both for companies now entering the Chinese market and for old hands seeking a steady revenue stream.

However, companies that fixate on the urban-affluent consumer could fail to capitalize on the dramatic changes that lie ahead as China’s economic growth improves the livelihoods of hundreds of millions of its citizens, argues the study.

Over the next 20 years more people will migrate to China’s cities for higher-paying jobs. These working consumers, once the country’s poorest, will steadily climb the income ladder, creating a new and massive middle class.

The rising economy in China will lift hundreds of millions of households out of poverty. Today 77 percent of urban Chinese households live on less than 25,000 renminbi a year; by 2025 that figure will drop to 10 percent, says the study. By then, urban households in China will make up one of the largest consumer markets in the world, spending about 20 trillion renminbi annually. Since these estimates were calculated at today’s tightly-managed exchange rates, they may significantly underestimate China’s future consumer purchasing power.
As this economic tide rises, the authors anticipate two phases of steep growth in the middle class, with waves of consumers in distinct income brackets emerging and receding at specific points. The first wave, in 2010, will be the lower-middle class. A decade later, the upper-middle class will follow.

When accounting for purchasing-power parity, a household income of 100,000 renminbi, for instance, buys a lifestyle in China similar to that of a household earning $40,000 in the United States.

Two features of China’s emerging middle class are already particularly notable.

  • It will be unusually young. In the United States income generally peaks between the ages of 45 to 54. Since higher-paying jobs require a higher level of education and training, the Chinese government currently makes substantial investments in higher education for the younger cohorts, meaning that the country’s wealthiest consumers will be from 25 to 44 years old.
  • The urban middle class will dwarf the current urban-affluent segment in both size and total spending power. The biggest opportunity for companies selling mass-consumer goods and services will be the newly-empowered middle class. To serve these households successfully, companies will need to understand how the saving and spending patterns of consumers change as their incomes increase.

China is evolving from a relatively monolithic, poor country into a vibrant marketplace with complex and rapidly developing consumer segments, concludes the report. Instead of focusing mostly on urban-affluent customers, who are just the tip of the consumer iceberg, more companies should adjust their strategies to include the emerging middle class as a core customer segment. This approach poses many challenges, but for companies that anticipate the changes that lie ahead, the opportunities will be as vast as the country itself. For more information visit www.mckinsey.com/mgi/

Grocers, online search engines earn high marks for their work

This year’s annual Harris Poll ranking industries on how well they serve consumers finds that the supermarket industry does the best job according to U.S. adults. Fully 92 percent of adults think supermarkets generally do a good job, and only 8 percent think they do a bad job, giving them a net positive score of 84 percentage points. At the bottom of the list, only 26 percent think tobacco companies do a good job, while one-third (33 percent) believe oil companies do a good job.

Other industries that receive high net scores are: online search engines (77 points positive); computer hardware companies (64 points positive); computer software companies (61 points positive); hospitals (58 points positive); banks (56 points positive); and packaged food companies (55 points positive).

At the other end of the spectrum, the industries with the worst net scores are: tobacco companies (46 points negative); oil companies (33 points negative); health insurance companies (21 points negative); managed care companies, such as HMOs (20 points negative); and cable companies (1 point negative).

These are some of the results of a nationwide telephone survey conducted by Harris Interactive, Rochester, N.Y., among 1,010 U.S. adults between July 10 and 16, 2007. However, only about half of these adults were asked about each industry.

Other industries that were measured include: online retailers (48 points positive), car manufacturers (46 points positive), Internet service providers (46 points positive), investment and brokerage firms (45 points positive), electric and gas utilities (42 points positive), telephone companies (35 points positive), airlines (26 points positive), pharmaceutical companies (21 points positive) and life insurance companies (18 points positive).

There have been substantial changes since last year, with two-thirds of the industries trending downward. Six industries showed improvements this year, while 14 industries went down, many by double digits (one, computer hardware companies, stayed the same). This survey shows what has changed and by how much, but of course it does not explain why these changes have occurred. Possible explanations (which cannot be validated or invalidated) for these changes are discussed below.

Some of those with the greatest changes from last year are:

  • Cable companies dropped 29 points from 28 points positive in 2006 to 1 point negative this year. With more and more competition and with cable companies now offering more services, being spread so thin may be hurting them in the customer service department.
  • Tobacco companies have dropped to their lowest levels since this question was first asked in 1997 and dropped from 25 points negative last year to 46 points negative this year. After a few years of slightly positive media about how the industry is trying to adapt, this may be a case of people no longer believing that media coverage.
  • Managed care companies, such as HMOs and health insurance companies, have both seen large decreases this year. Managed care companies dropped 17 points and health insurance companies dropped 18 points. Michael Moore’s recent film Sicko did focus on this industry and this could be one cause of their decline.
  • Airlines have dropped 16 points since last year, but have dropped 36 points in just two years. Much of this decrease is most likely due to the constant media barrage of flight delays and passengers sitting on runways for hours on end.
  • Car manufacturers are one of the shining industries this year as they have increased 15 points, from 31 points positive to 46 points positive. As the U.S. auto industry has tried to adapt to meet the challenges from foreign companies, and the foreign companies have subsequently responded, the changes have been met with a warm response in the eyes of the consumer.

    Harris Interactive started asking these questions in 1997 and in 10 years there have been many changes. But, in looking across the decade, of the 13 industries on the list in 1997, only three have seen an increase (banks, car manufacturers and hospitals) and these increases are all less than five points. Ten industries, however, have declined, with airlines and oil companies dropping the most (40 points and 57 points respectively). For more information visit www.harrisinteractive.com.

Green positioning still up for grabs in tech industry

Green or environmentally-sensitive tech products and practices are emerging as a new element of tech brand positioning and consumer consideration, according to survey results released by New York research firm Ipsos.

The survey asked a broad spectrum of online Americans about the importance they place on a half-dozen different green tech practices, and the degree to which they view each in a long list of tech brands as environmentally sensitive in their approach to business. Taken together, the results indicate that while green factors are emerging as a critical-mass consumer consideration, the potential to claim a green leadership position is much more fragmented across the tech brandscape.

When consumers were asked to rate the importance of each of six green practices in influencing their tech purchase preferences, over half (57 percent) rated the presence of the Energy Star label as influential.

Following closely behind in purchase influence were manufacturer commitment to discarding older tech products in an environmentally-friendly manner (48 percent) and meeting EPA standards for these product disposals (45 percent). At least one-third of the respondents rated each of the other three factors as influential as well, including green energy inputs to production, manufacturing that incorporates recycled components and contributions to environmental causes.

 “As these green issues emerge as more mainstream considerations, what’s striking is their overall consistency regardless of age, gender, income or where people live,” says Todd Board, senior vice president of Ipsos Insight’s media, entertainment and technology practice. “However, it is interesting to note that college-educated Americans place more value on each of these factors, except contributions to environmental causes, than other Americans do. We also see more importance placed on the Energy Star rating among Americans with incomes over $50,000. So the influence of these environmentally-friendly purchase factors is a bit more prominent among more socially influential consumers.”

In the survey’s other main finding, respondents were presented with a long list of leading tech brands and asked which (if any) they would associate with having green or environmentally-friendly business practices. The first tier were all brands - Dell, HP, Microsoft and Apple - that consumers encounter regularly, either in their personal lives, at work or in the news. A second tier included venerable tech brands reflecting very different fortunes in recent years: Kodak, Sony, Gateway, IBM and Motorola. “To some extent the rank order of these brand mentions seems to mirror their prominence in the tech landscape, if you factor in Apple’s increased exposure in recent years,” says Board. “At the same time, it’s something of a ‘halo index,’ in that there’s precious little information available to consumers for them to really assess how green one tech firm is versus another. So when we see a Kodak, Sony or IBM emerge here, to some extent we’re seeing more generalized brand affinity being transferred to this green dimension. Of all the brands here who might see an unexpected opportunity, Gateway may be the most intriguing.

“These results, along with other data we see, convince me that at least for American consumers this is emerging as a key issue - probably not a universal factor any time soon, but important enough to enough Americans to matter to tech firms. The interesting paradox for the market leaders, or those who would be, is that this may rapidly become a table-stakes expectation for many consumers - ‘Of course, I expect Prominent Brand X to care about the environment and act accordingly.’ However, while this is emerging as a cost-of-entry issue, it isn’t clear that any one tech firm can carve out sustainable differentiation around green behaviors and positioning. Our data suggest a bit more skepticism about tech brand commitments to green issues among younger Americans than among those age 55-plus.

 “One last point is that while American consumers use tech products from brands based all over the world, brands that are headquartered in the U.S. dominate the more prominent green mentions - Japan-based Sony is the only exception. These U.S.-based brands have manufacturing and R&D facilities deployed globally, dealing with a highly variable patchwork of local expectations regarding environmentally-friendly practices. This suggests that as American consumers increasingly value green tech practices, and have related expectations for U.S.-based tech brands, it’s increasingly important for these brands to monitor their environmentally-oriented practices worldwide. When that article inevitably hits the newswires about their manufacturing in a faraway place, they want it to be good news.” For more information visit www.ipsosinsight.com.

Slots and eats are biggest casino draws

Research from Baltimore-based Vertis Communications found that 78 percent of adults reported playing slot machines and dining at restaurants in the casinos they visited in the past year. Shopping followed in popularity according to 42 percent of respondents. Surprisingly, only 9 percent of adults reported participating in sports or race betting, according to results of Vertis’s 2007 Customer Focus Casino/Gaming study.

“In 2006 it was estimated that 29 percent of adults surveyed would visit a casino; however, predictions were surpassed with adult visitation reaching 37 percent. A cause for the continued growth is the extensive experiences casinos offer with new entertainment and dining options,” says Jim Litwin, vice president of market insights at Vertis Communications. “If casinos want to continue attracting a wider audience beyond those who enjoy gambling, it is important to create personalized communication that reflects additional entertainment offerings.”

Although consumers are already visiting casinos, there are a few factors that influence their decisions as to which location to frequent. Fifty-nine percent of casino visitors said services/ambiance is most important. Ambiance is described as a clean, friendly, comfortable, family-oriented and fun environment. Meanwhile, 40 percent of adults are swayed by activities such as a swimming pool and dining options. Games and casino locations (as related to weather, distance and size) were only important to 33 and 20 percent of respondents, respectively. Interestingly, overall caliber of the casino was the least important factor, as only 3 percent of participants identified this as a deciding factor.

The study, which surveyed 2,000 consumers via telephone, also revealed the following:

  • Women 50-64 were the largest group to play slot machines at the casinos they visited, according to 85 percent of respondents.
  • Dining at casinos was equally popular among men 50-64 and women 50-64, both 84 percent.
  • Although it was not surprising that 53 percent of women 35-49 shopped at casinos, 44 percent of men 18-24 and men 25-34 also participated in this activity in the last 12 months.
  • 58 percent of men 25-34 and 53 percent of men 18-24 were the largest groups playing table games.
  • Meanwhile, 40 percent of men 35-49 and 50-64 and 37 percent of women 18-24 attended a show during their casino visit.
  • For 65 percent of adults with a household income of $100,000 or more, service is the most important factor when selecting a casino.
  • Activities such as concerts, dining and swimming pools were also determining factors for 44 percent of adults with a $100,000 or higher income, while only 38 percent of adults with a $50,000-$75,000 income listed these activities as the most important.
  • Gaming options, including winning percentages, selection and gambling limits were most important to 35 percent of adults with a $50,000-$75,000 income.
  • For 33 percent of adults with an income of $75,000-$100,000, location (convenience, size and weather) was most important when deciding which casino to visit; however, this was only a factor for 25 percent of adults with an income under $50,000.
  • Of all the age groups surveyed, 32 percent of women 50-64 have visited their local casino one or more times in the past 12 months, followed closely by 30 percent of men 35-49 and 50-64.
  • Men 35-49 and 50-64 have visited their local casino three or more times according to 15 percent of respondents; women 35-49 were the smallest group with only 6 percent claiming they have frequented a casino on three or more occasions.
  • 28 percent of men 50-64 claimed they have visited a major casino destination such as Las Vegas or Atlantic City more than once in the past year, leading the category for men.
  • Similarly, 22 percent of women 18-24 have visited a destination casino more than once in the past 12 months.
  • Of the adults who visited a major casino destination more than three times, men 65 and older took the lead by 11 percent. For more information visit www.vertis.com.

Researchers see more online studies in their future

Market researchers worldwide are expecting their companies’ use of online data providers and online access panels to increase in the next 12 months, according to the Online Research Barometer, a survey conducted by Greenfield Online-Ciao Surveys. Study results indicate that 82 percent of market researchers surveyed in North America and 87 percent in Europe are predicting their use of online respondent providers will increase in the next 12 months. This compares with 76 percent and 85 percent, respectively, when Greenfield Online-Ciao Surveys completed its last Online Research Barometer in November 2005.

The two most important reasons for conducting market research online remained time, mentioned by 81 percent of North American market researchers and 78 percent of Europeans, and competitive pricing (76 percent and 75 percent, respectively). North Americans were particularly interested in access to complex target sample groups (62 percent). Europeans are particularly interested in the ability to access respondents internationally (57 percent). However across North America and Europe, the ability to recruit large sample groups, as well as the ability to use multimedia elements in questionnaires were also cited as important considerations for the use of online research.

The study also revealed differences in online research by industry sector. As in previous Barometer studies, consumer goods continues to be the industry most using online research worldwide (83 percent in North America, 71 percent Europe). In North America, consulting, banking/finance/insurance and construction are also important markets. In Europe, researchers are more likely to be conducting online studies for the banking/finance/insurance, telecommunications or technology industries.

The survey was conducted by Greenfield Online-Ciao Surveys among 289 market researchers globally during the period July 31-August 24, 2007. The margin of error for a sample this size is approximately +/-5.8 percent. For more information visit www.greenfield.com.