We are witnessing the first time in history a Chinese middle class of broad scale has faced a global economic shock. Marketers hoping to counteract weakness elsewhere in the world by relying on mainland consumers are bound to be disappointed as, despite Beijing’s best efforts, spending pulls back.
The next several months will be bumpy, but the sky is not falling in. The scale of wealth generated by economic reform has been colossal and the vast majority of Chinese retain faith in the government’s ability to manage macroeconomic affairs. Once the mainland shopper reorients himself on the emerging landscape, he will re-open his wallet.
It is important to understand that, even in boom times, China’s middle class – approximately 125 million strong – has never been spendthrift. Any non-essential item has always been scrutinized for functional or emotional "value." Savings rates are high, around 25%, and consumers rely on cash rather than credit. Newly wealthy individuals do not assume their money is safe: They have limited experience managing investments and they are not represented by the political establishment.
So, what does this all mean? In a nutshell, the uncertainty unleashed by the global economic crisis will significantly impact Chinese buying behavior over the medium-term.
Big ticket purchases suspended. The middle class is unsure how the global recession will impact China in terms of job stability, not to mention the prospect of lower prices in the future. Until the outlook becomes clearer, they will be conservative. Auto sales have already driven off a cliff and real estate purchases are sliding for the simple reason that it is not the right time to buy. Foreign travel destinations will be hard hit as well.
On the bright side, transaction suspension will be temporary. To the Chinese, homes and Audis are prized markers of success. They qualify as entry into the ranks of the economically – and, therefore, socially – empowered. Therefore, we expect to see an equally-dramatic spike in sales some time down the road as the country’s economic stimulus package kicks in and the waves settle.
Limited switching to local brands. There will be only modest switching between multinational, high-priced brands and cheaper local options. As discussed above, premium priced items tend to be bought as status symbols. This means consumers will be less apt to scale back within categories that allow status projection.
In China, the golden rule of marketing is that buyers will pay a high price for goods used in public but save ruthlessly in privately-consumed categories. A Shanghai yuppie wouldn’t be caught dead using a Ningbo Bird mobile phone or driving a Chery car, cheap price be damned.
Squeezing, not choking, within premium segments. Although consumers will still buy publicly-consumed "show-off" items, they will limit risk exposure by "trading down" to lower-price tiers. In fashion, a man on his way up will buy Hugo Boss rather than Gucci. Or he might opt for lower-priced sub-brands, shifting from Armani to Emporio Armani.
In spirits, the deal might be sealed with Johnny Walker Red, not Blue. Drinkers may even trade down from cognac to premium beer, but only when the status sacrifice isn’t severe enough to preclude landing the prize, be it a second date or a business contract.
In mobile phones, the purchase cycle might increase from six to nine months, but upwardly mobile professionals will still want to impress colleagues so they won’t put off purchase of a new model for an extended period of time.
Similarly, new generation types will still go to Starbucks to project cool, but they will sip on an Americano rather than a vanilla latte.
Although underlying trends will remain the same and there will be no rush to cheaper local brands, the deferment of big-ticket purchases and the squeezing of value within premium segments will lead to a protracted slowdown in sales growth for most multinationals.
Expectations of long-term opportunities will, however, sustain advertising and promotion spending. And, given the skittishness of most marketers, brands that continue to invest in strengthening equity – perhaps with messages rooted in "reassurance" – will emerge from the crisis with a clear competitive advantage.