The Rise of China’s Generation-2 Consumers

A new research by McKinsey indicates that a new generation of sophisticated young Chinese consumers are changing the rules for China’s consumer market and the companies that serve it. See the video below:

The image of China as a place to sell only low-cost, unsophisticated mass-market products is changing as dramatically as its demographics. Lifted by a wave of growing middle-class wealth, the country’s economy is undergoing significant shifts in consumption dynamics as a new generation of young, prosperous, and individualistic shoppers moves to the fore. Our latest research suggests that within the burgeoning middle class, the upper middle class is poised to become the principal engine of consumer spending over the next decade.

As that happens, a new, more globally minded generation, born after the mid-1980s, will exercise disproportionate influence in the market. In this video, Yougang Chen, a principal in McKinsey’s Greater China office, explores the rise of these Generation-2 (G2) consumers, their buying preferences, and the impact on Chinese and multinational companies as niche product categories and luxury goods become the hallmarks of China’s consumer evolution.

How Internet Companies Can Succeed in China

Forbes: Helen H. Wang

When a bellman in a Shanghai hotel advised me to get a breakfast coupon from an online group-buying site for less than half the price, I knew that social commerce had gotten into the hearts and minds of Chinese consumers. It’s not surprising that thousands of group-buying websites sprung up in less than a year in China’s chaotic cyberspace. According to JP Morgan, the group buying market grew from zero to more than $150 million in 2010, and is expect to reach half a billion dollars in 2013.

Although crowded with thousands of players, China’s group buying market is dominated by the top 10 companies, with Lashou commanding a 14 percent market share. Other major players include QQ Tuan, Meituan, etc. Gaopeng, Groupon’s China arm, came in last out of 10 in terms of number of deals.

When Groupon first entered China early this year, I really thought it would have a chance to succeed. Group purchasing is a perfect fit for Chinese culture. Even before people in the West knew such a thing as group-buying, Chinese consumers had showed up at some car dealers in groups to demand deep discounts. China’s collective culture makes group purchasing behavior very natural. In addition, many Chinese are good bargainers. They would go out of their way to find a good deal.

The timing was perfect for Groupon, too. China’s Internet population is approaching half a billion and hundreds of millions of new consumers are entering the scene each year.

Yes, China’s Internet market is known as a hard nut to crack because of low barriers to entry and many copycats. Western companies such as eBay, Yahoo, and Google have suffered painful defeats in China. But I thought Groupon could make it if it got it right.

Alas, so far the situation doesn’t look so good for Gaopeng. It has made some of the same mistakes as other Western companies. For example, its early management team was composed mostly of foreigners who have no experience in China. Their insensitive ad during the Super Bowl reflects how poorly Groupon understands China.  Its partnership with Tencent, China’s largest Internet portal, seemed to have a troubled start with internal conflicts. Now Tencent has its own group-buying site, QQ Tuan. Although Ouyang Yun, Gaopeng COO, said QQ Tuan and Gaopeng have complimentary business models, the two companies look more like competitors than partners.

Gaopeng also faces tough competition from Lashou.com and other group-buying sites. Lashou is founded by a seasoned Chinese entrepreneur and backed by U.S. venture capital firms SGR and Milestones – both are experienced in Chinese technology ventures.  Its momentum is strong after raising $110 million in series C funding in April. So far, Lashou seems to have done everything right. It is expanding rapidly to 2nd and 3rd tier cities, setting up call centers and logistics, and enhancing customer services.

Gaopeng certainly has an uphill battle in China. Some analysts have already written it off to a fate similar to eBay, Yahoo, and Google (not in bad company, all world class organizations ;-) ).

However, China’s Internet market is too significant to give up. In less than a decade, China’s Internet users could reach as many as 750 million and China’s consumer market could reach $16 trillion. A burgeoning middle class has fueled a consumption boom. Retail marketplaces are spreading in urban areas like wildfire. E-commerce has been growing 60 percent per year in recent years.

In order to succeed in China, Western Internet companies need to study the China market carefully and understand Chinese culture. Here is some basic advice for companies that want to succeed in China:

  • Try to use local talent who understand the China market well. Ideally, the management team should be a combination of experienced Chinese and Western managers
  • Be flexible with your business model and adapt your products and services to Chinese consumers. The most common mistake that Western companies make is that they transport their business exactly as-is to China. But the China market is very different from that of Western countries. What works in your home country may not work in China. If necessary, you need to re-brand and re-position your products and services. You also have opportunities to create brand new product lines in China.
  • Focus on your competitive advantages and outperform competitors. In the Internet space, oftentimes the only competitive advantage Western companies have is stronger financial support. If you have more money to burn than Chinese competitors, spend it smartly and wisely. Sometimes, your strategy may be to secure a large customer base. Revenue will come later.
  • Train your employees, sales teams, service and support teams. Many Chinese employees don’t have enough skills for the workplace. It’s important to go the extra mile in training. At the end of the day, all things being equal, customers are more likely to return to the website that has superior customer service.
  • In the Internet space, another critical factor is speed of execution. The window of opportunity is only about one or two years. Whoever who can act fast and get there first will be the winner.

It is still not too late for Gaopeng to get back on track and succeed in China if they can implement the right strategies with focus and speed. Someone has to change the game. As Meg Whitman, eBay’s former CEO, said, whoever wins China wins the world.

– Helen Wang is a consultant and author. Her new book The Chinese Dream: The Rise of the World’s Largest Middle Class and What It Means to You is top rated #3 on Amazon. Follow her on Twitter @hhwang

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