Understanding China's Middle Class
Cui, Allison, Song, Kheehong, The China Business Review
Targeting key segments of Chinas diverse and rapidly emerging middle class will be crucial as household incomes rise
Gone are the days when companies looked at China as a monolithic land of 1 billion potential customers. Companies are now focusing on how to capture small segments of China's giant market, and none of these segments is as attractive or as full of potential as the country's rapidly growing-and multifaceted-middle class. As China's economy continues to grow, more people will migrate to China's booming metropolises to find better-paying jobs. These working consumers, once among the country's poorest, will steadily climb the income ladder and join the new middle class. Companies that can effectively understand the composition and needs of this diverse group will be positioned to reap massive rewards.
Why the middle class?
Though many foreign companies have remarked on the importance of China's middle class as a consumer segment, few realize just how dramatic its ascendance is. From 1995 to 2005, the population of China's middle class-defined here as households with annual incomes ranging from $6,000 to $25,000-grew from close to zero in 1995 to an estimated 87 million in 2005, according to MasterCard Worldwide, Asia Pacific. China's middle class will jump to 340 million by 2016 (see Figure 1). The purchasing power-disposable income minus savings-of China's middle class is also growing. In 2006, around 39 percent of urban households were middle class (see Figure 2). By 2016, that percentage will likely rise to 60 percent. At present, the middle class accounts for 27 percent of China's total urban disposable income. By 2015, that percentage is expected to rise to more than 40 percent (see Figure 3). Considering its swelling numbers, purchasing power, and trajectory, China's middle class presents marketing opportunities that companies cannot afford to miss.
What does it mean to be middle class?
Different types of companies have different concepts of exactly what it means to be middle class in China. For example, HSBC Holdings plc and Deutsche Bank AG have used income to differentiate the middle class from the affluent and laboring classes in China. From an investment bank's perspective, using income level as the defining criterion makes sense. But simply judging a group by income is far from sufficient for marketers of consumer goods. Such marketers trying to reach the middle class have to know more than their salaries: They must know what makes middle class consumers tick.
Income plays a powerful role in most purchasing decisions for any consumer segment, but other elements play a role that is sometimes greater than income. When products are relatively inexpensive, income has little influence on a consumer's decisionmaking process. Deciding to buy chocolate, for example, depends significantly more on consumers' emotion and shopping experience-a store's ambience, for example-than it does on how much money they make. Using income as the only indicator of spending habits allows much information to slip through the cracks. In addition, income is a difficult variable to act upon, in part because the data on income in China tends to be either unavailable or unreliable. Thus, companies must find meaningful alternatives to predict what consumers can afford and what they are willing to pay for certain goods and services. Studies by the Monitor Group indicate that scores of non-income-related hooks-including age, the stage in a consumer's career, and location of purchase-influence purchase decisions.
The Chinese badminton industry is a good example. Most Chinese school kids who play badminton do so in an outdoor playground with a group of friends, wear non-professional badminton sportswear, and purchase a relatively inexpensive racket in a sports stadium or shop near school. Professionals and businesspeople, however, usually play badminton in indoor badminton clubs, …
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Publication information: Article title: Understanding China's Middle Class. Contributors: Cui, Allison - Author, Song, Kheehong - Author. Magazine title: The China Business Review. Volume: 36. Issue: 1 Publication date: January/February 2009. Page number: 38+. © U.S.-China Business Council Mar/Apr 2009. Provided by ProQuest LLC. All Rights Reserved.