It started off innocently enough.  Back in the 1980’s when the first Special Economic Zones were established there were only a handful of places you even dared talk about as “consumer markets” in China.

As a modicum of affluence appeared in Shenzhen, Guangzhou, Shanghai and Beijing, companies began making more concerted marketing efforts on a market by market basis.

Deng Xiaoping’s “Southern Tour” in the fall of 1992  unleashed (or ratified) individual efforts across China focused on the pursuit of wealth.  Soon, some people were talking about more markets than they could count on two hands.  Impressive.

Somewhere along the line in the run up to the turn of the century, discussion of “Tiers” emerged to facilitate sharing of information and depth of market penetration.  Where you only spending media in Tier 1?  Was your product showing up in Tier 3?  This was merely shorthand for talking about the big four markets, the other provincial capitals, and the rest.

The problem is that the rest is actually some amalgam of 361 official cities, 2,811 couties, and 34,171 townships.  Over the first decade of this century, some MNC’s were actually seeing their brands reach every corner of the country.  Others were managing points of sale across hundreds of cities.

Despite the blunt tool, business executives were stuck with tiers to discuss their market coverage.  These conversations could be quite frustrating.  We might all agree on Tier 1, and maybe had an 80% overlap for Tier 2, but then your Tier 3 was different from mine.  You had a tier 4, I had a tier 5.

The reocognized disconnect was that each company’s “Tier” definition was different.  And if I needed to create a market expansion plan to grow from 30 markets to 100 markets, which 70 were supposed to be my priority.   Some efforts started to appear that attempted to index all the markets in China by certain economic statistics, but if you’ve ever worked with Chinese economic statistics you know how you felt about that.

Well, I think the new decade is finally bringing around some sound thinking about how to talk about China market coverage without putting up a list of 600 cities:  Clusters.  Most recently advanced rather publicly by McKinsey, the concept was already in practice as executives looked at the total market and preceived newly defined regions that did not adhere to provincial boundries or other traditional market maps.

The cluster approach won’t surprise any practioner.  Afterall, who would ignore a neigboring market that absorbed your media, was easy to distribute to, and spoke the same dialect as your sales team?  Just because it was indexed 40 spots lower?

Talk of Clusters recognized not the indexing of cities, but the interconnectedness of markets that emerged in the wake of rapid infrastructure development, personal car ownership, and the reach of the internet.  Manageable in number (less than 30) these geographicly defined areas offer scalabilty and reach to brands that need efficiency.  Tackling 31 provincial capitals at the same time offers none.

With Clusters, executives can dismiss with talk of cities.  They can focus on reachable populations within defined geographies.  The market becomes manageable again – almost intuitive.  Distribution centers, media spend, and trade marketing investments scale up better.  Focusing on three or four clusters is naturally simpler than focusing on 50 or 75 markets.

Clearly, I’m a fan of clusters.  I recommend you adopt it in China.  Like all good ideas, this one isn’t new, but it sure feels good when you use it in a new location for the first time.

CAN CHINA MANAGE “QUALTY GROWTH” IN 2012?

The start of the year always presents an opportunity to step back from the day-to-day news cycle and take stock of annual China market prognostications.  This year, I attended a forum put on by the National Committee for US-China Relations at the NYSE to gaze into the future.

With prominent economists and academicians visting from research institutions in Beijing, I welcomed the opportunity to hear subjective interpretations from individuals who actually advise the government & the Party.  Some of what was said was for market consumption, but I’m also aware that being right matters to individuals who seek to influence the direction of their country’s development.

GROWTH IN THE CONTEXT OF STABILITY

Amidst discussion of the housing market, local government finances, RMB valuation, and other topics, each of the economists found a way to mention the phrase “manageable problem” in the context of the dissappointing economic trends.  This optimism is mainly founded on the recognition that China has a significant amount of money to save its bankers, bail out politicians, or distribute funds to the poor.

And though I found myself wondering if China could handle a perfect storm, I recognized that those discussions weren’t new, China is keely aware of them, and there actually is a window within which they might course correct and avoid facing any financial turmoil.  So I merely noted the expressed confidence and set these issues aside for the day.

What I did keep returning to in my mind, however, was the rationale behind slow(er) growth targets.  China used to seek growth targets of 8 to 9 percent in order to absorb its ever increasing labor supply.  Now, even 7% growth in GDP appears tolerable.  Not only has the labor market tightened, but higher growth rates appear to stimulate even faster rates of environmental degredation.  A lower rate of growth is not only acceptable, but the economists felt it enables the government & the Party to address quality of life concerns widely held by the emerging middle class.

There is an important subtext to this dynamic – political stability.  If the middle class believes in a better future, and the poor believe in that same future while having access to social services in the present, then stability will largely reign across the country.  As stability equates to leadership continuity, it is not a surprise that dealing with the satsifaction of the majority of its citizenry is a higher priority for the Party than whether or not someone needs a bailout.

As we enter this election year in the US, it is worth remembering that it is also a transition year for China – only the second formal leadership transition since the founding of the PRC.  In the year leading up to it, and for the year afterward as power consolidates around the new General Secretary/President, matters of internal stability will take precedence.   In the interim, I wouldn’t expect radical economic policy changes unless the Party was supremely confident in the outcome.

QUOTES & MATERIALS FROM THE FORUM

I’ve offered up some quotes of note from the day.  You can see some of presenters materials here.

“Our accepted estimates of national debt as a % of GDP is 50%. Outside pessimists place it at 60%. But that would still make us a good EU Member if our application was accepted [jokingly said]. Frankly, as a policy we are more concerned with income inequality than our current debt management.”

- Professor WU Ho-Mou Exec Dean of National School of Development at Peking Univ.

“Our estimates by quantile for Household Income show a that the top 10% earn 93 times what the bottom 10% earn. An income range of 613RMB-19,000 covers 90% of the population. An average of 30,000RMB covers the next 5% and an average of 75,000 RMB covers the final 5%. Overall, the top 20% account for almost all the savings.”

- Prof. YAO Yang, National School for Development at Peking Univ.

“Current inventory of unsold residential property estimated at 14 months. Therefore slight softening of housing prices predicted in first half of 2012. M&A among developers likely. Building (starts/re-starts) likely to pick-up in second half.”

- Prof. ZUO Xiaolei , Advisor to the President, China Galaxy Securities

“Economic stress test conducted: if a total of 15% of outstanding developer loans become non-performing & 7.5% of personal mortgages default, the GDP CAR impact would be about 1% point. “Manageable”.”

- Prof. ZUO Xiaolei , Advisor to the President, China Galaxy Securities

“Remember, home ownership in China is at 90%, but the majority of that was housing allocated to citizens during the reform of State-Owned-Enterprises. So the majority of Chinese seek to upgrade from existing “owned” homes.”

- Prof. HUANG Yiping, China Center for Economic Research (former Chief Economist for Citigroup, Asia)

“We expect to see / want to see Real Estate drop below and stay below 10% of GDP (9.9% last quarter). We are watching for an overall price correction of about 20% to trigger consumer demand and stabilize price drop, but we don’t know what the bottom will be.”

- Prof. YU Yongding, Chinese Academy of Social Sciences

“As for purchases of homes, the new requirements of 60% down-payment makes us feel better about consumer defaults because the banks won’t lose principal. But you might ask how does a person earning on average $5,000 a year afford a home. Refer back to hidden income speculation.”

- Prof. YU Yongding, Chinese Academy of Social Sciences

“Systemic under-reporting in the National Statistics – especially at the high end with one estimate showing 90% under-reporting in the top decile.”

- Prof HUANG Yiping, China Center for Economic Research (former Chief Economist for Citigroup, Asia)

“Retail sales under-report consumption because of system errors and neglect of service sector. Household Survey reports 13 Trillion (RMB) in income, but National Accounts show 18 Trillion (RMB) – maybe as high as 23 Trillion by some estimates if other off book income is considered.”

- Prof. HUANG Yiping, China Center for Economic Research (former Chief Economist for Citigroup, Asia)

Marketers confronting the back-to-school landscape in the coming weeks might encounter a few ugly truths about demand: according to a recent study from Deloitte, which concentrates on food purchases, consumers are responding to perceived price hikes by cutting down on consumption and turning to lower-cost options like private label brands. But embedded in that study is an interesting nugget: among the responses to budget crunches that consumers could choose from, the least popular response was “purchasing fewer organic products”.

Think about that: consumers, when budget-constrained and given the choice between buying less food and buying food that clashes with their values, chose the former. It’s evidence for our assertion that shared values are among the most important differentiation and loyalty drivers available to brands – aligning your brand with higher-order needs is a great strategy to insulate your products from budget cutbacks.

But what are those values and higher-order needs, and how do they play into household decision-making process? To answer that question, we’re hosting a webinar next week that will dive into the evolving American family and present highlights from brands that have done the best job of engaging the modern family in recent months.

MLC members, for more, please register for the webinar or check out our research into accelerating loyalty with the use of shared values.

For a decade now — since the rise of the global economy — political pundits from Mumbai to Madrid, Hamburg to Honolulu have argued about “American exceptionalism”: the idea that the US is unique and can hold itself to different standards than all other nations. When it comes to love and war, you can argue both sides. But when it comes to the hard facts of economics, not so much. Last week Standard & Poor’s downgraded US creditworthiness from a top rating of AAA to a less-than-top AA+. That’s the first downgrade in America’s credit rating since credit rating began, early in the last century (WashingtonPost.com, 8 August 2011). It also puts the US behind many of its European allies, not to mention Canada. (Canada!) Read More »

Summer, for most of us, is a time to recharge our batteries, to relax, to enjoy some calm before the demands of life pick up again.  Unfortunately, investors have made that a good deal harder recently as they collectively removed over a trillion dollars in value from financial markets over the course of a few days.

Why the sudden volatility?  Consumers haven’t suddenly changed spending behaviors, nor have business customers. And suppliers look healthier than in some time, beating earnings estimates and sitting on plenty of cash. Credit availability has drastically improved. Inflation is hardly threatening.

The answer seems to lie in the health of developed economies. While many appeared to be on the mend for the past year (albeit slowly), it’s become clear the recovery is far more fragile than was thought, especially in the US.  We’re not in a recession, but we’re also not in a recovery that is self-sustaining.

In such an unstable place, most signals (economic data) are too weak or confusing for investors to proceed with confidence.  Even small pieces of information have outsized impact and prices gyrate.  Markets, after all, are just groups of people trying to discern future value and in this case they are struggling.

So, what are executives doing in the face of this volatility?  Some are being tougher on discretionary spending.  Many are revisiting assumptions for 2012 planning.  But the executives we’ve spoken with are not deviating from the strategies and tactics they put in place following the recession.

There is one thing all executives should be doing right now – getting used to operating in an uncertain environment.  Fortunately, that doesn’t require telling the future.  It does require, however, a structured exploration of what could be, and flexibility to respond regardless what becomes.

Most companies can stand to improve in this area.  Want to learn more? Join your peers in our upcoming webinar, Taming Uncertainty, on 25 August at 11:00 am EDT.  We’ll clarify why volatility has become “normal” and how the best companies are working around it.

Whither the U.S. consumer? If that’s not the question on all marketers’ minds, it should be: for B2C companies, the amount of consumer dollars available is the most important driver of revenues and profits; for B2B marketers, consumer spending accounts for around 70% of the American economy, and indirectly drives business investment and purchasing.

What’s more, we’ve observed that consumers typically retain habits they form in bad times for a significant period of time after the economic situation improves. The longer this goes on, the longer consumers will remain austere.

So what’s the outlook? We don’t pretend to have a crystal ball, but I think it’s fair to say that the prognosis is mediocre at best. A number of indicators of consumer health are trending up, but others suggest some risk of problems in the mid to long term. In all, the data suggest that, at best, the consumer spending pie is growing very, very slowly, and may in fact be stagnant or shrinking.

Brands can grow in a recession or consumer spending downturn, but it’s generally zero-sum growth, coming at the expense of other brands. Making product and brand messaging as simple as possible is one way to maintain share of wallet during downturns, and we’ve also got some thoughts on resource allocation and optimization during recessions, as well as some ideas on how coupons and incentives in particular can shore up market share in bad times.

Here are three indicators that suggest consumers might be holding their own, as well as two that suggest trouble ahead: Read More »

Widespread overspending by consumers contributed, in part, to the credit crisis and subsequent recession – and a number of recent studies shed light on what drives us to spend when we don’t have the money.

One academic paper, The Plastic Trap: Self-Threat Drives Credit Usage and Status Consumption, offers some interesting insights. The authors – professors at London Business School and Cornell – set out to explain why people on a low income spend a proportionally larger amount of their earnings on status goods than those with a higher income. The traditional explanation – that “individuals conspicuously consume to signal their wealth” – only seemed like part of the picture. The study found that status purchases aren’t just about impressing others, but also about making ourselves feel better when we’re down – or, more specifically, about repairing bruised egos. Read More »

As the 2010 Census figures revealed, there are over 50 million reasons marketers need to pay attention to the U.S. Latino market. Latinos make up 16.3% of the total U.S. population, accounting for more than half of the total U.S. population growth from 2000 to 2010. And while this rapidly expanding market continues to influence and make contributions into all areas of American life, we’re also seeing significant transformation happening within the market itself.

On June 21, Iconoculture will host a deep-dive into the U.S. Latino landscape, using observational and psychographic insights to dimensionalize the shifts transforming the Latino experience. During the session, we’ll analyze the increasingly complex Latino identity paradigm by exploring changing cultural tendencies and interpretations, as well as the role of technology in addressing unique cultural needs and aspirations.

One of the shifts we’ll cover: as Latinos endeavor to balance their American and Latino cultures, we’ve been tracking a new trend emerging in 2011 that we call Contextualizing Culture. Latinos embracing this trend are peeling back the layers on tradition and heritage in order to create meaningful and relevant cultural connections between their roots and modern U.S. Latino culture.

In addition to exploring the trends shaping Latino behavior, we’ll share cultural implications that will help brands adapt to the demographic reality. We’ll also look at best practices for ensuring cultural relevancy and examples from brands that are successfully connecting with Latino consumers.  Council members can register to join the conversation on June 21 by clicking here and read more about recent trends and observations of Latino consumer behavior on the North American Trends page.

Where are consumers headed next? It’s a question almost all of us have asked.  Brands that get the answer right often win, and brands that get it wrong find themselves playing catch up.  In recent months, Iconoculture has developed a series of roadmaps to help marketers shine a little light on where their target consumers are going.  To get there, we look at the challenge from a couple of different angles:

Categories: How will consumer behavior change in a given category?  What are consumers migrating away from?  Where is their attention (and wallet) headed next? (think media, technology, home, health, food, finance, etcetera)

Segments: How are the needs, motivations, and behaviors of specific demographic and lifestyle groups changing?  What do demographic groups have in common?  What makes them unique? (think Moms, Millennials, Xers, and so on)

Based on these perspectives, we’ve laid out where we see consumers headed in a series of “state of the union” summaries organized around the two lenses, categories and segments.  We call these overviews Consumer Outlooks—our one-page stories of where consumers are headed next.  For Council members, we’re providing a selection of these outlooks on our site to inform your strategy setting and hopefully spark a few new ideas.  Check out the Consumer Outlooks for North America here:  Segments, Categories; and get a preview of our new global Consumer Outlooks here: Global. Read More »

Is a spring thaw coming in consumer purchase behavior?

Not really, it turns out.  In MLC’s recent Consumer Purchase Behavior survey, we specifically tested for changes in buying behaviors to see if consumers are returning to pre-recession patterns.  Spring thaw isn’t quite right—a better metaphor would be something like “dead cat bounce”.

For our global readership not familiar with this grim idiom, the gist is that dead animals don’t bounce very high when dropped.  From pretty much any height.  I should state at this point that no animals, living or dead, were harmed in the production of this blog post. Read More »