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Jun242015

China Consumer Market: Asian Perspective Helps

Wednesday, June 24, 2015 at 12:02PM

The rise of China since 1989 has been the most remarkable development story of our times. The number of people lifted out of poverty is historically unprecedented: 65 percent of Chinese people lived below the poverty line in 1981; in 2007 it was 4 percent (World Bank).

Many commentators have focused on China’s astonishing work ethic, vast labour resources and ability to export great quantities of products. But while China has been busy meeting the needs of the world economy, domestic Chinese consumption has received less attention.

Yet, with the Chinese firmly established as keen savers and very ambitious to improve their living standards, a vast new opportunity has emerged: the Chinese consumer market. But it will be a tricky market to tap. Chinese consumers are notorious bargain hunters and prefer to save and invest rather than consume. Poor rural families earning less than US $200 per person a year still are able to save 18 percent of their income.

This makes a lot of sense: social supports have been stripped away as China’s economy embraced the market system. If you do not save and invest, then you will not have the resources to meet the costs of education and health care, for example. China has also seen a dramatic move to urban areas, with over 43 percent of the population now urban.

China, despite all the hype, is still a marketplace that is difficult to easily enter for Western brands and businesses. And this makes for an opportunity for local brands to raise their game.

In order to compete in the consumer market, businesses need to do more than compete on price: they need to also offer something more and that usually involves building a strong brand.

The Chinese urban consumer market could grow from around US $570 billion in 2005 to around US $4.7 trillion by 2025 (PWC) (http://www.pwc.co.uk). Fast growth will be seen in discretionary spending, things other than food, clothing and utilities.

While Chinese businesses have focused on export markets and meeting the needs of the global marketplace – a focus which has been very successful and led to remarkable wealth gains – the Chinese consumer has come lower down the list of priorities.

Growing the domestic consumer market offers a substantial wealth-creating opportunity. Since the global economic crisis erupted in 2008, it has become apparent that the old model of exporting vast quantities of products to Western consumers alone will not be enough to keep living standards rising. Western economies are highly indebted and will take many years to recover from the mistakes and debts from the boom years and the economic crisis.

This is an opportunity for South-South trade, which made up 20 percent of global exports by 2010. Foreign direct investment to developing economies rose by 10 percent in 2010 due to a rapid economic recovery and increasing South-South flows.

One company successfully targeting this market is the Singapore-based Banyan Tree Hotels and Resorts brand (www.banyantree.com), which bills itself as specializing in luxury sanctuaries to rejuvenate the body, mind and soul. It is notable for deliberately not competing on price but on its brand reputation and for tailoring its offering explicitly to Asian tastes. The company claims its resorts are “naturally-luxurious, ecologically sensitive, culture-aware experiences for the discerning, responsible traveller.”

The first Banyan Tree resort was built in Phuket, Thailand in 1987. It now employs 8,200 people from 50 nationalities in 26 resorts. Founder and executive chairman Ho Kwon Ping focused from the start on the business’s brand as critical to driving the growth of the company.

He told INSEAD Knowledge: “The difference between us and some others is that, for many other companies having a strong brand is a reward for being successful in many things that you do but it’s sort of coincidental. It comes afterward; it’s a reward for success in other areas. For us, we’ve always said from the very beginning – having a strong brand is imperative for our survival.”

Banyan Tree has also eschewed quick-growth models, instead trying to do as little environmental damage as possible and to include community development and environmental projects at each resort.

Its Banyan Tree Ringha resort in China’s Yunnan province tries to bring the atmosphere of the fictional earthly paradise of Shangri-La to China. Ringha Valley sits near the Temple of the Five Wisdom Buddhas, 3,600 meters above sea level. The resort has 15 one-bedroom suites, 11 two-bedroom lodges, and six spa suites, decorated in a Tibetan style. The area is home to the Naxi people who trace their origins to nearby Tibet (http://en.wikipedia.org/wiki/Naxi_people).

The accommodation is rustic and the resort is located in the middle of a village. Visitors can see farmers at work right from the resort. Overlooked by Tibetan mountains and settled in a lush, fertile valley the sight was picked for its tranquillity and isolation. The appeal of the area to tourists is clear: mountain peaks, deep canyons, rivers, valleys, streams and tranquil lakes. And in polluted urban China, it is an area free from pollution.

The resort is built from transplanted Tibetan farm houses and offers hikes, mountain lakes, hot springs, gorges, forests. There are Asian touches like a welcome at the resort of Tibetan horns, songs and a tea ceremony.

Tourism is transforming the area. Towns and villages have been renovated to showcase traditional architecture.

The hotel and resort chain gets its name from the tradition of ancient merchants gathering under the branches of the banyan tree to conduct business in the cool shade.

“The 21st century is really going to be the age of Asia – both India and China,” said Ho Kwon Ping. “The huge consumer markets are going to be Asian … Now there’s a real opportunity for people of Asian origin, who have an instinctive cultural feel for where their consumers are moving towards, to come out and create a brand which can be primarily rooted in their own Asian context, but have a global relevance.”

By David South, Development Challenges, South-South Solutions

Published: March 2011

Development Challenges, South-South Solutions was launched as an e-newsletter in 2006 by UNDP's South-South Cooperation Unit (now the United Nations Office for South-South Cooperation) based in New York, USA. It led on profiling the rise of the global South as an economic powerhouse and was one of the first regular publications to champion the global South's innovators, entrepreneurs, and pioneers. It tracked the key trends that are now so profoundly reshaping how development is seen and done. This includes the rapid take-up of mobile phones and information technology in the global South (as profiled in the first issue of magazine Southern Innovator), the move to becoming a majority urban world, a growing global innovator culture, and the plethora of solutions being developed in the global South to tackle its problems and improve living conditions and boost human development. The success of the e-newsletter led to the launch of the magazine Southern Innovator.

Follow @SouthSouth1

Google Books: https://books.google.co.uk/books?id=-k6YBgAAQBAJ&dq=development+challenges+march+2011&source=gbs_navlinks_s

Slideshare: http://www.slideshare.net/DavidSouth1/development-challengessouthsouthsolutionsmarch2011issue

Southern Innovator Issue 1: https://books.google.co.uk/books?id=Q1O54YSE2BgC&dq=southern+innovator&source=gbs_navlinks_s

Southern Innovator Issue 2: https://books.google.co.uk/books?id=Ty0N969dcssC&dq=southern+innovator&source=gbs_navlinks_s

Southern Innovator Issue 3: https://books.google.co.uk/books?id=AQNt4YmhZagC&dq=southern+innovator&source=gbs_navlinks_s

Southern Innovator Issue 4: https://books.google.co.uk/books?id=9T_n2tA7l4EC&dq=southern+innovator&source=gbs_navlinks_s

Southern Innovator Issue 5: https://books.google.co.uk/books?id=6ILdAgAAQBAJ&dq=southern+innovator&source=gbs_navlinks_s

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Africa’s Consumer Market in Spotlight for 2011

Wednesday, June 24, 2015 at 11:48AM

While other parts of the world will spend 2011 worrying about their debt levels and how to spur economic growth, many factors are pointing to Africa potentially following a different story. A frenzy of activity has been building around Africa’s market opportunities and its growing middle class consumer population. Years of steady growth rates up to 2008 and the vast, untapped opportunities on the continent have sparked interest from investors and businesses alike.

Foreign direct investment (FDI) to developing economies rose by 10 percent in 2010 due to fast economic recovery and increasing South-South flows. Africa peaked in 2008 because of the resource boom and fell by 14 percent to US $50 billion in 2010 (UNCTAD). Rising FDI from Asia and Latin America has still yet to match the decline from developed countries – still the majority of FDI to Africa.

However, foreign direct investment to Africa had risen sixfold to US $58.56 billion between 2000 and 2009 (UNCTAD). The amount going to manufacturing and services has been growing, despite the slow down in 2009 because of the global economic downturn. Africa’s 11 largest economies are now being seen as the next to match Brazil and Russia, economic stars of the last few years.

The continent as a whole forms the 10th largest economy in the world. Of Africa’s more than 1 billion people, 900 million can be classified as part of the consumer economy. Out of this group, there is a third – approximately 300 million people – who make modest sums by Western standards, about US $200 a month, but have spare cash to buy things like mobile phones, DVDs and new clothes, or pay for better schools. They are the population that is overlooked when attention is focused only on the very poor living on less than US $2 a day.

This vast group is captured in the book Africa Rising by University of Texas professor Vijay Mahajan, which details the phenomenon of Africa’s middle class consumer society. He calls this group of middle class consumers “Africa 2,” with the desperately poor called Africa 3s, and the extremely rich Africa 1s.

This new group has expanded far beyond ruling elites and government workers. Many of its members work in the private sector, as secretaries, computer entrepreneurs, merchants and others who have benefited from consistent growth rates in many African countries.

The portion of African households with discretionary spending power rose from 35 percent in 2000 to 43 percent in 2008. The challenge will be to turn this wealth to the benefit of made-in-Africa businesses and to create stable, high-quality jobs to ensure this wealth effect lasts.

The new wealth effect can give Africa the tools needed to tackle its long-standing development challenges and lift more and more people out of poverty and misery while reducing dependence on foreign aid. And this can add rocket fuel to the surge toward meeting the Millennium Development Goals deadline in 2015 (http://mdgs.un.org/unsd/mdg/Default.aspx).

The rapidly rising profile of Africa is reflected by the prestigious business newspaper the Wall Street Journal recently running a series titled “Africa’s Growing Consumer Class Lures Multinationals” (http://online.wsj.com/article/SB10001424052748704720804576009672053184168.html).

Consulting firm McKinsey (http://www.mckinsey.com/) believes Africa’s billion citizens should be seen as consumers and says the continent’s growing number of middle-income consumers now outstrips India’s. It boldly claims consumer spending will reach US $1.4 trillion in Africa by 2020, up from US $860 billion in 2008. Consumer spending rose by 16 percent a year from 2005 to 2008 before the global economic crisis.

It is forecast that 220 million Africans now frozen out of this consumer wave will become consumers by 2015 if current trends continue.

The IMF believes the steady growth will continue, with 5.5 percent growth for the 47 sub-Saharan countries this year.

That’s the good news. But many African countries still rank at the bottom in the World Bank’s Ease of Doing Business survey (http://www.doingbusiness.org/rankings). Africa remains a logistical nightmare for companies. Poor quality roads, inadequate harbours and inefficient rail systems, all make it difficult to move goods around the continent and across borders.

This makes distribution in Africa costly. Companies also often have to import building supplies and equipment to construct factories and plants. Then there is the unreliable electricity supply. Unable to trust local power supplies, many companies use their own electricity generators.

If handled right, new brands and companies are set to join African global success stories like Mo Ibrahim (http://en.wikipedia.org/wiki/Mo_Ibrahim), who founded the mobile telecommunications company Celtel.

Some of the new success stories include African companies pairing up with global firms as they seek local knowledge and experience. This will be a substantial opportunity for companies wise enough to organise themselves for global competition. In 2010, Sweden’s Electrolux – one of the world’s largest makers of home appliances – bought Egypt’s Olympic Group (http://www.ameinfo.com/145039.html), a North African powerhouse for household goods.

In the Ivory Coast, Nouvelle Parfumerie Gandour (http://www.npgandour.com/english/index.html) – makers of perfume, cologne, cosmetics and talcs – is an African cross-border success story. It has factories in Ivory Coast, Senegal, Morocco and Cameroon. Thirty percent of its profits come from exports, some of which are to the United States and Europe.

Sonatrach (http://www.sonatrach-dz.com/NEW/) in Algeria is the largest oil and gas company in Algeria and Africa. Is using its base in oil and gas exploration, production, pipeline transportation and marketing of hydrocarbons and by products, to move into other areas. It is increasing its investments in power generation, new and renewable energies, water desalination, and mining exploration and exploitation. Looking to grow its business with 30 percent coming from exports by 2015, it has spread across Africa ( Mali , Niger , Libya , Egypt ), to Spain , Italy , Portugal , United Kingdom , Peru and the United States.

Marwa (http://www.marwa.es/) from Casablanca, Morocco, is an African fashion success story. The brand started by Karim Tazi in 2003 began with just two stores in Casablanca and Rabat. It identified the niche of very fashionable but good quality and inexpensive clothing. It blends international trends with subtle influences from Moroccan tradition. Its prices hover between six euros for a t-shirt and 100 euros for a coat. It has successfully created a Moroccan high-street fashion look that can be exported. It has opened a branch in Zaragoza, Spain and is expanding to Riyadh, Saudi Arabia, Paris, France, Beirut, Lebanon and Istanbul, Turkey.

A survey by consultants AT Kearney (http://www.atkearney.com) found eight out of nine West African subsidiaries of global consumer goods companies discovered quicker revenue growth than their parent companies.

All this new wealth and growth provides substantial opportunities to African brands to build their businesses and markets. The big issue will be who will rise to the occasion and who will be clever enough to learn from existing African brands that are already thriving and have shown the way.

Two trends will also power this growth: urbanization and large youth populations. Africa’s youthful, urban population has already been reached by the telecoms sector through the rapid growth of mobile phones. More than 500 million subscribers have been signed up since 2000 (Informa Telecom and Media), a user base greater than the entire US population.

“By 2040, the continent will be home to one in five of the planet’s young people and will have the world’s largest working-age population,” according to Charles Roxburgh and Susan Lund, authors of a study for the McKinsey Global Institute.

“If Africa can give its young people sufficient education and skills, they could be a substantial source of consumption and production in years ahead.”