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In 2012 in the city of Wuhu, Anhui, a former street vendor and motorcycle taxi operator named Liaoyuan Zhang, left his job selling nuts to start his own nut company. In just 65 days, the company – Three Squirrels – became the top selling nuts brand on Tmall and within a couple of years, was said to be the top-selling food brand online. On Singles’ Day last year, it took less than 10 minutes to sell ¥100 million ($14.2 million) worth of snacks. The recently-listed company now has a market cap of close to $3 billion.

Many brands can learn from Zhang’s success and his trio of squirrels. For a start, its DNA is imbedded with three super-cute mascots, tapping into Chinese consumers’ adoration of Japanese-inspired Meng culture, and its cute cartoons such as Pokemon. Their appeal stretches beyond just kids with many urban professionals hooked on all that is cute. This can be observed in some of China’s most aspirational mainstream brands such as Tmall’s cat and JD’s dog.

Yet while many Chinese brands plaster cute mascots over their packaging and promotions, Three Squirrels has always gone deeper incorporating the personalities into everything they do. Videos, stories, games and prizes showcase each squirrel’s personality, providing consumers the experience they so-often seek, and weaving them into a longer narrative. Thoughtful extras that add to the experience include a wet wipe, a bag for shells and often nut crackers with purchases. On its customer service line, consumers are addressed as pet ‘owners’ and purchases are called ‘adoptions. Everything Zhang does keeps his customers at the heart of his business, so much so, that he considers “fans” to be as much a part of Three Squirrels as his employees.

Three Squirrels’ D2C (Direct to Consumer) model bypasses retailers but still manages a notable premium over the sea of competitors that make up China’s massive snacking category. It also taps in to other digital channels such as asking and listening to its social media fanbase about the type of products they want, which has shortened its new product development cycles to a few months.

While the Three Squirrels brand was built on the back of Tmall sales, like many online retailers, lowering ecommerce margins and high customer acquisition costs have led it to focus on channel diversification. Whereas Tmall once accounted for 80% of its sales, now just half of its billion dollar-plus revenue comes from the platform. A nice chunk of this growth has come from the drive for offline ‘experience’ stores, where gross margins exceed 40%, versus sub-30% online.

Unlike it was in 2012, selling online is no longer novel in China. Whilst it remains a vitally important sales and marketing channel, one of the advantages of brick and mortar stores is that it is harder to compare products than simple searches online. In online stores, brands tend to use their best-selling products for promotional purposes and so must discount, resulting in even lower margins. Customers can see how many ratings, and often the number of purchases, which is likely to further distort sales as consumers regularly just go for the bestselling or most reviewed items. In an offline store, hero products are not nearly as obvious and so the distribution of sales is less likely to be skewed towards just a few popular items. This plays better to Three Squirrel’s strategy of product diversification which has seen cakes account for over 20% of its sales, and nuts just over half.

Brick and mortar stores also allow consumers to buy very little at a time, at a much higher frequency, and without added delivery costs. The fixed delivery costs online means each order needs to reach a certain dollar amount in order for it to be financially viable. Offline purchases have no such threshold.

Whereas no one should underestimate the importance of ecommerce in China, China Skinny is increasingly seeing brands focus more on traditional retail as the golden years of high growth and high margin sales through platforms like Tmall and JD appear to be over. Experience-focused physical stores such as New Retail has also given the channel a second wind. Brands are becoming increasingly concerned about being over-reliant on platforms such as Tmall for sales and are also cognisant of ecommerce platforms launching more private label brands, which are somewhat of a conflict of interest. Like many things in China, it is important to understand and assess sales and marketing channels beyond the hype and develop strategies that balance risk with opportunity, such as China Skinny does. Go to Page 2 to see this week’s China news and highlights.

On the surface, Chinese consumers appear to be some of the most environmentally-conscious consumers in the world. For years, high profile studies have praised Chinese consumer’s sustainability habits, such as the National Geographic’s 2014 Greendex which ranked China second globally for its consumers’ environmental behaviour, applauding their high public transport and scooter use, and consumption of locally grown food.

More recently, China’s Electric Vehicle (EV) adoption has been the envy of every environmentally-focused government, accounting for 49.5% of EV sales globally. Yet with annual EV sales growth plummeting from 126% to 2% over the past 12 months, largely due to the reduction of Government incentives, it is fair to say the purchases were more motivated by wallets and license plate quotas than sustainability concerns.

At China Skinny, we’ve been following consumer attitudes towards sustainability for many years now. Whilst there have been some hopeful green-shoots, overall behaviour is still at its nascent stage relative to most Western markets. This is reflected in the 10+ billion plastic-loaded meal deliveries a year, or the nearly three-quarters of residents in top-tier cities who couldn’t identify how to properly sort their rubbish for recycling.

Chai Jing’s raw 2015 documentary Under the Dome showed great hope for educating a population hungry for answers about China’s toxic environment, but its runaway popularity ironically saw every trace of it removed in China less than a week after airing. This stole the opportunity to corral the population into more sustainable behaviour.

On virtually every related research project China Skinny has done, we’ve found consumer responses are supportive of sustainable brands and products at a surface level, yet delving deeper into actual behavioural has found limited individual accountability for environmentally-friendly behaviour. Most consumers have expected Beijing to be the main driver for fixing the environment. As of Monday, we’ve seen the most significant step from Beijing to shift the onus onto consumers to act more sustainably.

From July 1, Shanghai residents must sort their garbage into four classifications – household food or kitchen waste, hazardous waste, recyclable waste and residual waste. Failure to do so will see individuals face fines of up to ¥200 ($29). Businesses face fines of up to ¥50,000 ($7,282). Shanghai has installed more than 13,000 waste stations, so far covering 75% of the city, and has replaced more than 40,000 streetside bins for different types of waste. The city currently generates more than 9 million metric tons of garbage every year – the equivalent of 1.5 million African bush elephants. In its quest to reduce this and make sense of the new recycling rules, it has used gags, memes and events with “performers striking forceful beats on tall garbage cans.”

Following Shanghai, another 45 mainland cities will introduce similar regulations, including Beijing, Shenzhen and Guangzhou. By the end of 2020, the 46 cities will invest ¥21.3 billion ($3.11 billion) to build waste sorting and recycling systems.

We only need to look across the Strait to Taiwan to see what an impact this could have. In the first 10 months of last year, nearly 60% of Taiwan’s waste was recycled. The daily amount of garbage during than period was 0.41kg, down from 1.14kg in 1997. When you’re looking at China’s scale, similar savings won’t just have a massive impact on its cities, but the world as a whole.

Like many things in China, Government-led initiatives are among some of the most persuasive drivers and shapers of behaviour. As consumers are forced to sort and recycle, sustainability will be brought to the forefront of consumers’ consciousness. Expect sustainability to be one of the most talked-about and thought-about factors of consumption in the foreseeable future – something worth factoring into your marketing strategy.

On the topic of trends shaping marketing in China, China Skinny’s Mark Tanner is joining CBBC for the webinar What’s Hot and What’s Not in a Slowing Chinese Economy on 17 July to share insights on trends and categories currently shaping consumer behaviour. Non-CBBC members are welcome to join. More information here. Go to Page 2 to see this week’s China news and highlights.

Remember when you’d see the big tricycles stacked metres high with polystyrene, rubbish and furniture cruising the streets? Or the vividly-coloured Facekinis poolside or on the beach? Or how about the infants with split pants on a cold Beijing day? They were all China novelties that have largely disappeared from the bigger cities. Yet with each disappearing quirk, a new curiosity has arisen to ensure that there is never a dull day in China.

One area that has recently taken on a life of its own is beauty. Fashion, haircuts and even hair colours are becoming more varied and diverse daily. It is not uncommon to see young Chinese spending 40 minutes on a photo editing app polishing their latest selfie, or a young man in a public place diligently applying mascara – not just representing the exponential rise of male makeup, but also that younger Chinese are confidently challenging traditional social norms to be what they want to be, unfazed by state media’s direction on how to behave.

The pursuit of beauty has been important since ancient times in China. In the Tang Dynasty, makeup became a part of everyday culture, with women applying foundation powder, blusher and a dusting of light yellow powder. Bluish black eyebrows, lipstick, painted on dimples and ornamental forehead flourishes were also added. Whilst beauty is a little less novel than it was 11-14 hundred years ago, it is as relevant as ever for Chinese consumers and something that many of us should take note.

China Skinny has compiled numerous pieces of research asking consumers how they would spend extra money if they received it. Beauty always scores highly, often the top way young millennials would spend the windfall. Many Chinese will directly correlate the way they look with their chances of success – in both their personal and professional life.

One of the most poignant illustrations of the importance of beauty in China is the soaring segment of cosmetic surgery. Unlike in the West where patients are older when looking to have work done – more than 75% are over 35 in the US – 54% of Chinese going under the knife are under 28. This is fuelling an industry expected to be worth ¥360 billion ($52 billion) by 2023. Last month’s IPO of plastic surgery app So-Young soared 44% on its first day of trading and has settled to a value of around $1.5 billion. Almost 2 million users are on the app monthly, 79% more than a year ago.

In addition to the obvious beneficiaries of plastic surgery, cosmetics and fashion, many other categories are touched by China’s beauty obsession. For example, health supplement purchasers are often motivated by beauty benefits – even with target markets you may not expect like the 20-year olds buying anti-aging pills. Categories such as food and beverage are heavily influenced by the quest for beauty, with an increase in healthy food demand resulting from how they can improve appearances such as skin and hair. The fast-growing fitness industry is also heavily swayed by the aesthetic outcomes. The good news is that it isn’t just the Pechoins, L’Oreals and J&Js of the world who stand to benefit, with the majority of Chinese consumers showing interest in niche beauty brands.

The free-spending young Chinese in particular often strive to stand out amongst the masses, and looking good is considered a key component of this. When brands are communicating to their target markets, they should bear this in mind wherever plausible. China Skinny can help determine if and how this all fits for your products or services.

In other news, China Skinny has moved its Shanghai HQ to a bigger and better office. We’re still in central Jing’An District, a block from our our office on Jiangning Road. We love visitors, so pop by any time for a coffee, tea or just to say ni hao. You’ll find our address here. Go to Page 2 to see this week’s China news and highlights.

As China’s urban millennials have become the most sought-after consumers on the planet, marketers have been seeking less contested consumer groups to target their wares. The next growth areas that we often hear about are the rural consumers and those with silver hair.

For the rural folk, many expect their latent demand to step up and fill the gap from the city dwellers – those who already have everything from cars to appliances to smartphones. 577 million Chinese lived in rural areas in 2017, and the big tech companies have been all over it. Alibaba and JD are investing in rural fulfilment centres, marketing and even drone delivery. Interestingly, the latest Internet growth data points to a rural population that may not be as enthused about spending up a storm as many had hoped.

China’s heaving Internet population stood at a whopping 829 million at the end of 2018 – 57 million or 7.3% more than the year before. The segment that has the most room for growth – Chinese living in rural areas, grew just 6.2% to 222 million, indicating a widening digital divide between China’s urban dwellers and those in the countryside. That’s not a great sign for consumption in these areas. The Internet represents the most promising channel for rural consumers to buy things – they can’t just pop down to the local IKEA to purchase a new sofa. Another barrier for sales is that rural consumers make less than a third of what urban-dwellers make and are much less likely to spend it on aspirational foreign brands.

The other well-cited growth opportunity – China’s seniors – by sheer numbers along should be one of the greatest opportunities marketers have ever seen. Last year, the number of Chinese over 60 reached 249.5 million to outnumber those under 16 for the first time in history. Since 2010, the demographic has seen an average annual growth of 2.08 million. At the same time, the under-15 brood has been dropping at 2.25 million a year.

If we look to the Baby Boomers in the West – the empty nesters riding on the back of a lifetime of savings and equity gains on their house and other investments – they have been spoiling themselves while their joints still allow it. Yet most of the seniors in China aren’t such free spenders. They have grown up in austere times, and have an inherent necessity to save for a rainy day and be frugal, even more-so than those who were around during The Great Depression in the West. The rising consumer debt in China can almost be solely attributed to the consumption-crazed youth; people between the ages of 24 and 35 account for more than 70% of consumer borrowers in China.

While there will inevitably be increasing opportunities by targeting China’s silver surfers – there will be a half a billion of them by 2050 – they will remain much less likely to pay a premium for better products and services than their younger peers. They also won’t be as easily wooed by foreign lifestyles, products and services.

In short, millennials and the younger post-95s/Gen-Zs remain the most lucrative consumer group in China. Yet the rules to reach and resonate with them are constantly changing. Companies need to dive much deeper in understanding their emotional and functional needs, what influences them, where they research and buy, and how to make advocates out of them. If a brand can understand and serve those needs, there’s still plenty of legs in the contested younger demographics in the city – particularly the lower-tier cities. China Skinny can work with you to ensure you’re there. Go to Page 2 to see this week’s China news and highlights.

‘Tis the season to be jolly. Well maybe not in Langfang, in northern China’s snowy Hebei province where folk can be arrested for selling Christmas apples and Santa suits. The parishioners of the renowned 40-year old Rongguili Church in Guangzhou may not be feeling so festive either after a children’s bible class was raided in the third unregistered Protestant church to be shut down in China this winter. Last year, it was a Chinese university banning Christmas to avoid “corrosive” Western culture that made it into the annual anti-Christmas headlines fuelled by a small brood of emphatic nationalistic types in China.

On a grander scale, the raining down of Christmas tree emojis that have brightened up WeChat message feeds for many Decembers are notably absent this year. Tencent has had a tough year with its stock price almost halving between January and November, and the new cool kid ByteDance eroding its share of screen time and now talking about launching a messaging competitor to WeChat. Perhaps Tencent is trying not to rub Beijing the wrong way by celebrating western holidays, in hope of them lifting the new game ban, but come on Tencent, cheer up!

For those of us who still love the magic of the festive season, fear not. Aside from a few sensational stories and WeChat policy-makers, a stroll down the streets of China appear as Christmasy as ever. Christmas trees that match China’s skyscrapers for architectural pizazz and neon brace the public plazas and shopping malls.

Online, smartphone screens are again filled with countless brands from Starbucks to H&M peddling their Christmas jeer, KOLs sharing their Christmas list ideas, kids showing off their advent calendars, and millions of Christmas paraphernalia bought from the ecommerce platforms, hopefully some of it in sustainable packaging.

For the vast majority of Chinese, Christmas isn’t a time to acknowledge newborns in mangers millennia ago. There remains little understanding of its religious or cultural associations, with most festival-thirsty consumers viewing it as an excuse to party and shop in the void between Singles’ Day and the Year of the Pig.

One thing we’ve noticed this year is how cities outside tier 1 are embracing Christmas. The China Skinny team has been crisscrossing the country on research projects and were out in Chengdu two weeks ago where they noticed more ceremony around Christmas than even in Shanghai this year. Most of the big hotels – Hilton, Waldorf Astoria, Wanda, Kempinski – had a grandiose celebration for the ‘lighting of the tree’, complete with VIPs, children’s choirs, elaborate Santas, and a host of delicate Christmas-themed foods. In the ‘lower’ tier cities – like for many things – celebrating Christmas en scale is a more recent tradition than in Shanghai, and therefore more of a novelty.

This will be the last Skinny for 2018. Thanks for reading this year. To our clients and partners, thanks for working with us – you’re awesome! The Skinny team wishes you the Merriest of Yuletides, Hanukkah, Kwanzaa and New Years. We’ll be back again in 2019. Go to Page 2 to see this week’s China news and highlights.

11.11 or Singles’ ‘Day’ 2018 officially launched last week, with about 500,000 items available for pre-order on Tmall. The world’s biggest shopping festival has long been a yardstick for Chinese consumer sentiment and spending, and this year it will be watched particularly closely. Sales over the 24-hour period will provide some indication of the impact that slowing GDP and the Trade War is having on consumption – the sector that Beijing hopes will keep the economy chugging along. This year will mark the 10th anniversary of 11.11 and will be Jack Ma’s last before he ‘retires’, so there are plenty of reasons Alibaba will be wanting to blow last year’s $25.3 billion in gross merchandise volume out of the water.

Each 11.11 festival is a display of Alibaba’s might, and a signal of its areas of focus for the year ahead. 2014 was all about getting consumers to shop on their mobiles, 2015 drove international products through cross border commerce, 2016 was about blending entertainment with shopping, and 2017 took New Retail and offline integration to a new level. This year will demonstrate the depth of Alibaba across China’s online and offline worlds.

Fancy some caffeine to keep you awake as you find the deals? Starbucks will be delivering discounted coffee through Alibaba’s Ele.me. Or how about a bite to eat, some beauty treatment or a spot of karaoke to provide a break from shopping on your smartphone? 150,000 of Alibaba’s Koubei merchant partners will be offing half price fare. This Singles’ Day will be the first time Alibaba has exhibited full might (almost) of Alibaba’s bricks and mortar investments.

The 11.11 promotions and festivities will be very present on Alibaba’s supermarket chain Hema, its hypermart operator RT-Mart, Intime malls and home improvements chain Easyhome which will all be showcasing New Retail. 200,000 mom-and-pop stores using Alibaba’s LST will provide online sales promotions and augmented reality-based red packets. Partners such as L’Oreal and Hasbro are coming to the party online and in stores.

At the heart of 11.11, Tmall will engage 180,000 Chinese and global brands. Tmall Global will provide 3,700 categories of imported goods from 75 countries and regions. And beyond China, Alibaba’s Lazada will aim to make Singles’ Day as much as an event in Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam, helped along by Google and Line joining together to promote the event. Altogether, Alibaba hopes to break the billion order mark on November 11. Given last year’s orders grew from 657 million to 812 million, and the many new dimensions in 2018, we think this could be conservative.

One of the interesting dynamics for Singles’ Day this year is Pinduoduo entering the mix. Singles’ Day was built around special deals, which no one does better than the Pin. It also has a stronghold in lower tier cities which have been more challenging to reach over previous Singles’ Days. There are reports of Tmall pressuring some brands to choose between its platform and Pinduoduo, so clearly Alibaba feels they will make an impact. One thing for sure is that it will make the day even more interesting.

For our readers who are participating in Singles’ Day, we wish you all the best in building awareness, launching new products or whatever else you are planning to achieve. We hope you are using it as a Trojan Horse to build more sustainable engagement with consumers.

In other news, China Skinny is proud to again be working with Austcham Shanghai and Westpac on the second annual Australian-China Business Sentiment Survey. The previous survey gave rich insights into the health, opportunities and challenges in the Australia-China economic relationship, provided a valuable benchmarking tool for all organisations working with China and strengthened the Chamber’s advocacy efforts to advance Australia-China business relations. Any readers representing Australian organisations connected to China please spend 10-15 minutes to complete the survey – we’ll all be better for it! Take the survey here. Go to Page 2 to see this week’s China news and highlights.

A quick quiz to start this week’s Skinny: What is the most valuable marketing company in the world? Most people probably couldn’t care less, but there are a few folk in the industry who would say WPP. Whilst the company hasn’t had a great year, it remains the largest marketing company in the world measured by billings and revenue. The London-based conglomerate has a market cap of $18.9 billion, putting them ahead of the other well-known marketing companies such as Omnicom at $15.3 billion, Publicis at $12.6 billion and Interpublic at $8.3 billion.

Before using your guess on the familiar marketing giants, you may want to consider the lesser-known companies, like Focus Media. Last week Alibaba acquired a 10.32% stake in the company for $2.23 billion, which as of yesterday had a market cap of ¥162 billion ($23.8 billion). Focus Media is the company behind many of the digital advertising screens in streets, subways and elevators across 300 Chinese cities.

With the acquisition, Alibaba plans to collaborate with Focus to merge offline media and digital marketing, slated as an upgrade to “New Marketing” which will support the growth of New Retail across all sectors. Focus has ambitious plans to soon control 5 million terminals covering 500 Chinese cities and reaching 500 million consumers.

Powering the evolution of Focus’s screens will be Alibaba’s vast banks of consumer data from the more than 550 million online shoppers on its platforms, 520 million AliPay users, and potentially the hundreds of millions watching Youku videos, navigating with AutoNavi maps, taking Didi taxis, browsing on UCWeb, ordering food on Ele.me, cycling on Ofo, using Weibo along with the more than 100 other businesses Alibaba owns a share in. When Alibaba figures out how to truly integrate and harness its massive data, there will be few stones unturned in consumer knowledge that can help direct what gets displayed on advertising screens or whatever they evolve to. Throw that in with their facial recognition technologies and you’ll have Minority Report-type advertising folks!

Alibaba’s investment into Focus Media will support its irrepressible expansion into physical retail and further strengthen its presence across the whole customer journey. What does it mean for companies such as the WPPs and Omnicoms of the world? The continued structural shift in marketing and advertising will force them to evolve beyond their traditional services.

One thing we have found at the Skinny is that while big data is valuable in planning, marketing and product development, it is a complement, rather than a replacement, to human creativity for determining how to best push consumers’ emotional buttons. It is likely to be a while before any machine can do that. Based on the early stage talks involving Alibaba and Tencent to buy a stake in WPP China, the big tech companies may be thinking so too. Go to Page 2 to see this week’s China news and highlights.

Out for a lunchtime stroll in most Chinese cities, you may not get that refreshed feeling you get elsewhere in the world. China’s carbon dioxide emissions have grown almost 150% since 2000. Although growth has flattened out this decade, emissions have crept 17% higher than in 2010 when Chinese power plants emitted as much nitrogen oxide as the rest of the world’s cars combined.

Similarly, there’s a good chance that the water you showered in, washed your clothes with, cleaned the dishes and rinsed your food with was less than pristine with over 70% of the watersheds that supply water to China’s 30 largest cities severely polluted. Then there is the 19.4% of farmland that’s contaminated by organic and inorganic chemical pollutants and by metals such as lead, cadmium and arsenic.

It’s not breaking news that China’s pollution has been responsible for a sharp rise in respiratory diseases such as Asthma, caused cancer rates to soar, and contributed to host of other issues as far reaching as infertility and obesity. Pollution coupled with sedentary lifestyles from more white collar jobs and gaming, poorer diets and even rice consumption has seen 11% of Chinese suffer from diabetes and a further 36% are prediabetic. There are countless other ailments on the rise in China, but you get the point.

With the above factors an everyday reality of living in China, it is unsurprising that the H-word is on almost every Chinese consumer’s lips. Health is something that Chinese have proactively addressed long before microscopic pollution particles blanketed Chinese cities. Use of yin and yang principles have dated back since at least the 3rd century BC. Considering the changes in China just over the past generation, there are more reasons than ever to balance out the yin with the yang.

Virtually every category with a health label in China has been hot over the past five years, resulting in venture capital investments in healthcare growing from $1 billion to $12 billion in China between 2013 and 2017. This has seen some innovative world-leading companies evolve from China, such as Shenzhen-based medical devices company Mindray which invests 10% of its more than one billion dollar annual revenues in research and development – a rate unheard of with Chinese companies not long ago. Mindray is the market leader globally across several segments and is likely to be helped further by Beijing’s streamlining rules for drugs and medical device approvals last October.

One of the most exciting health companies coming out of China is Tencent-backed WeDoctor in Hangzhou. Hoping to become the ‘Amazon of Healthcare’ the $6 billion dollar company already has 160 million registered and 27 million monthly active users by focusing on unclogging bottlenecks in China’s struggling health system. The company is one of many less-traditional channels that health-related companies hoping to ride China’s burgeoning health segment use to sell their products.

Beijing’s three-year action plan on air pollution control released last week is likely to improve China’s air pollution, but many other health issues will continue to plague China for some time yet, accelerated by its ballooning elderly population. Demand for localised and well-marketed health equipment and medicines, healthy food, healthy living and even healthy holidays will continue to soar in China. Agencies such as China Skinny can assist to ensure you make the most of the opportunity. Go to Page 2 to see this week’s China news and highlights.

There are many relatively unknown cities in China with GDPs as large as countries. For example, the city of Zibo has an economy the size of Panama’s and Tangshan’s GDP ranks up there with New Zealand by some measures. These smaller cities are helping drive China’s consumer demand, and by proxy, the global economy. Morgan Stanley forecasts that lower tier cities will account for two-thirds of the increase in consumption between now and 2030.

As China’s biggest cities have become the most crowded and contested markets on the planet, more and more brands are looking to cities like the Zibos and Tangshans where growth is often faster and competition less fierce. We only need to look at FMCG which has been growing 2-3 times faster in lower tier cities than big cities over recent years. In tourism, the 10 fastest growing airports by passenger numbers are all tier 2 cities and below. A third of all Cadillacs sold in China were bought in tier 3 & 4 cities.

Yet while it’s become common to talk about China’s less-competitive lower tier cities, brands shouldn’t just be throwing darts at maps and reviewing GDP figures in determining where to focus. Consumers in many lower tier cities don’t yet have a level of sophistication to demand many products and services.

Before looking to the hinterland, brands should critically assess consumer behaviour and preferences in those cities. Lifestyles, climate and travel habits are often as much of a contributor to demand for a product than GDP per capita. Ecommerce data, although much less developed than tier 1 and 2 cities, can also provide hints into potential demand. Even local government policy can impact consumer demand – just look to Electric Vehicles, where six cities contribute to 40% of sales.

In many cases, the hyper-competitive cities like Shanghai and Beijing can still be the most lucrative markets to target. They have become incredibly wealthy with GDP per capita adjusted for purchasing power now comparable to Switzerland. They have been wealthier longer, were allowed to travel abroad sooner, and as a result, have much more mature and sophisticated tastes. As a result, they are more ready for some Western products and services.

With both cities having more than 20 million people, just focusing on specific demographics or districts can itself produce material sales and a beachhead for further expansion.

A good example is American wholesaler Costco. Four years of testing the water with cross border commerce has given them confidence in demand for their products and formats. This month they announced they will launch two large Costco bricks & mortar stores in Shanghai. Unlike most of the 226 brands who opened their first stores centrally in Shanghai last year, Costco is opening in the outer districts of Minhang and Pudong New Area.

The bulk sales model like Costco hasn’t really taken off in China yet. Consumers have smaller kitchens and less storage than in the US, lower car usage for shopping, and a preference for freshness. However Costco is likely to have evaluated the last 4-years of ecommerce sales data to make informed decisions. If it will work anywhere, Minhang and far-flung Pudong are good bets. They are affluent areas with many large villa residences and a population who is more reliant on driving for daily needs. Costco’s first 33,000 square metre store opening in April 2019 will have 1,000 carparks. One would hope that they are integrating New Retail into their stores to ensure they are relevant and engaging for consumers.

Whether you are Costco, a fashion brand or selling vitamins, there is no consistent answer about which city is best to target. Brands would be wise to analyse different cities and regions before making a call. The cities a brand chooses to target should be an important factor in developing localised marketing strategies, selecting distributors and even lawyers familiar with local laws and regulations. Agencies such as China Skinny can assist with that. Go to Page 2 to see this week’s China news and highlights.

Finding a steaming plate of pad thai or a hearty massaman curry in China is infinitely easier today than it was five years ago. In Shanghai alone, there are now more than 225 Thai restaurants. The snowballing of Thai cuisine is representative of the overall growth of foreign cuisine in China – a product of rising discretionary income and increasingly adventurous diners, but also by the growth of tourism.

9.8 million Chinese tourists visited Thailand last year, almost 600% more than in 2011 – the days before the 2012 hit movie Lost in Thailand brought the country into the spotlight in the mainland. The most interesting driver behind the rise of tourists is the number of Chinese coming from lower tier cities. This has been helped by stress-free visas on arrival, which are typically harder to get in lower tier cities, and the accessibility of the country. Direct flights between cities in China and Thailand grew from 69 to 148 over the past three years.

Although sun-seekers hoping to have Thai beaches to themselves won’t be too delighted, soaring Chinese tourism to Thailand has benefits far beyond Thailand’s touts and business owners. In the years that China Skinny has been tracking Chinese tourists, we have noted a speedy evolution in the way they travel. The first few trips are almost all to locations in close proximity – historically to Hong Kong, Macau and Taiwan but increasingly to Thailand, Japan, South Korea, Singapore, Malaysia and other Southeast Asian countries. This whets their appetite and builds confidence for more exotic, long haul destinations that are more aspirational and build status and street cred from WeChat Moments’ posts.

Evolving travel is good news for well-marketed and China-ready destinations beyond Asia – not just those in the tourism industry, but many sectors exporting to China.  Food exports are an obvious beneficiary: 55% of Chinese overseas travellers claim enjoying food is a key objective when heading abroad according to Nielsen research. Tourism Australia research has found Chinese who visited Australia in 2016 are 40% more likely to rate Australian food and wine as good. Similar research discovered that Chinese tourists to Australia spent 40% more on Australian products after returning to the mainland. It makes sense, when you’ve returned home after spending time in China, you’re probably more likely to seek out dumplings, Sichuan peppers and the like.

The positive flow-on effects go well beyond food. Our research has found similar affinities with Chinese tourists to Nordic countries who are much more likely to purchase and advocate Nordic furniture, fashion and other design, as well as meatballs.

Those tourists from lower tier cities who are filling planes to Thailand are also the next generation of travellers to European, North American and Australasian destinations.

Of the 820 million Chinese who live in urban areas, just 73 million – less than 9% – live in first tier cities. Although almost all of the other 91% have never travelled, they are starting to consider places like Thailand, and then further afield. They will get a taste of foreign products and lifestyles, sharing them with their networks back home, all of whom will be a little more inclined to buy things from afar. They are the 750 million reasons why the China opportunity still has so much upside. Agencies such as China Skinny can ensure you are best placed to tap that opportunity. Go to Page 2 to see this week’s China news and highlights.

In April 2016, pundits were predicting the demise of China’s cross border ecommerce channel after hefty new taxes were suddenly introduced on all online cross border trade. Fortunately, some slick lobbying from Alibaba and JD saw the new tax rates ‘postponed’ the following month and good old cross border was soon back on track.

Shaking off the scare of ’16, eMarketer estimated China’s online consumers spent $100.2 billion on buying products cross border last year. This is more than ten times China’s General Administration of Customs’ value, which announced last month that cross border imports growth rocketed 116.4% in 2017 to ¥59.6 billion ($9.4 billion).

A 2017 Tmall Global Annual Consumers Report published last week (in Chinese) by Tmall Global and CBNData, forecasted the 2017 figure at around $68 billion. Enormous data disparities are not unusual in China, which is why China Skinny typically cross-references a number of sources. From what we’ve seen, the cross border figure is around the $60-75 billion mark. Custom’s low numbers are likely to indicate that many products could be slipping through customs unnoticed, values may be fudged by exporters, or there is some dubious bookkeeping at the borders.

Getting back to Tmall Global’s report, an interesting insight was consumers born in the 1990s are the biggest spenders on cross border products. Last year they accounted for nearly 50% of Tmall Global users and 40% of total sales. The three biggest motivations driving them to buy imported products are trying new things, aspiring to own luxury items and anxiety over aging.

Beauty products, food & supplements and mother and baby products were the top selling categories on Tmall Global, helped by the 60% of households – and almost 70% in high tier cities – who purchased FMCG products online last year.

The top countries selling products on Tmall Global were Japan (baby & beauty products), USA (health, baby, bags), Australia (health, baby, milk powder), Germany (milk powder, dietary & nutrition, cups & kettles) and Korea (beauty).  One positive development is that shoppers are becoming more adventurous, with the purchases from outside the top-3 countries breaking 50% for the first time. In 2017 there were 16,400 products from 68 countries on Tmall Global alone.

Yet behind the pomp and pageantry from ecommerce platforms, not everything smells quite so sweet. Cross border is heralded as providing certainty of authentic products direct from a trusted overseas source, but 40% of cosmetics products purchased from cross border platforms on Singles’ Day were fake according to a consumer association report. The issue is clearly real given Alibaba’s recent announcement to push into Blockchain for the channel.

On the subject of ecommerce, for our Shanghai-based readers China Skinny’s Mark Tanner will be joining an esteemed line-up of speakers at the Clavis Insight 2018 APAC eCommerce Accelerator Summit on March 28. The event is for brands currently selling online in China and looking to up their game, it is a complementary full-day event with limited spaces remaining. More information here. Go to Page 2 to see this week’s China news and highlights.

‘Tis the week before Christmas with not a reindeer in sight,
Yet Chinese streets brim with trees and twinkly light.

Those trees are decorated with the logos of brands,
helping keep shopping atop consumers’ Xmas plans.

Like with many things in China, consumerism trumps all,
With festive themes used by brands local and foreign, big and the small.

For brands, Christmas-themed promotions showcase their international bend,
Big name KOLs similarly, are cashing in on the trend.

In the last month 600,000 Christmas trees bought on Tmall alone,
Over 3 million decorations, socks and hats with a tap on the phone.

Whilst Japanese will be celebrating Christmas with a bucket of KFC,
Chinese will be at Starbucks sipping festive mochas and teas.

Like most offices in the kingdom, we’ll be open Christmas week,
but the Weekly Skinny will be back in January sharing the insights you seek.

Silly rhyming aside, the Skinny team wishes you the Merriest of Yuletides,
Hanukkah, Kwanzaa, New Year, with your loved alongside.

圣诞快乐 – Shèngdàn kuàilè!

Go to Page 2 to see this week’s China news and highlights.

Back in 2012 scouring content for the Skinny, it seemed almost every week there was another article praising KFC’s success in China. It was the Western pin-up brand; finding the much sought-after balance that tempted the masses with its alluring foreignness, but localised its offerings just enough to appeal to Chinese tastes – with the menu sporting old favourites like congee.

For every 10 bucks spent on fast food in China, KFC accounted for 4. It had almost 4,000 restaurants, with another 16,000 planned.  There were movie placements, celebs munching on drumsticks, lovebirds courting one another over buckets … then Bird Flu and a series of scandals happened.

KFC has never really recovered from the dark days of ’13. In 2014 the menu was ‘overhauled’ for the first time in 27 years, there’s been a refresh of some decor, but if you were to go into most KFC restaurants in China they still bear a stark resemblance to the golden years pre-2013.  China, Chinese consumers, and their tastes on the other hand have changed – dramatically. A simple scan of restaurants on Dianping or a stroll through a city mall or restaurant street and it becomes clear that there has been an evolution in China’s hospitality sector. La Liste’s annual ranking of the world’s restaurants noted the big trend is the rise of restaurants in China who are meticulously preparing and presenting food, and charging real money for it.

Contrast KFC with another mega-chain from America – Starbucks. Over recent years, the coffeehouse chain has constantly adapted to Chinese consumers and their ever-shifting expectations for newer, shinier offerings. They have played well to Chinese consumers’ inherent need for status from what they purchase, opening cafes in highly visible spots in city streets and premium office building foyers where they will be seen sipping on their Green Tea Crème Frappuccinos. The look and feel of cafes have also evolved to keep up with changing tastes, with some of the latest cafes having fit outs that wouldn’t look out of place against some of the fine dining establishments on Shanghai’s Bund.

Starbucks has always played to Chinese love of all things digital and typically been an early adopter and innovative user of technology. In the early days of WeChat, it cleverly used the limited functions by encouraging fans to send emoticons reflecting their mood, receiving a short music clip related to that mood. A little later in the game they accepted WeChat Pay with some alluring features such as the ability to gift friends and family a drink or two.

Last week’s launch of Starbuck’s mega reserve roastery in Shanghai is one of its most exciting initiatives yet. In addition to a beautiful fitout, complete with contemporary Chinese elements, the venue plays true to the ‘New Retail’ movement that is fast making its way into the bricks & mortar landscape. Integrating the Taobao app, augmented reality brings Starbuck’s story to life in a format that China’s millennials love. The app also allows them to skip the queue and buy merchandise, which improves both customer experience and the likelihood of increased sales and advocacy purchases.

Much like KFC was before 2013, Starbucks has become a much-cited case study – with good reason. It illustrates how brands can successfully keep up and stay relevant to the ever-changing needs of Chinese consumers through offline and online initiatives and product offerings.  Their lessons don’t just apply in the hospitality trade, but are applicable for any foreign or local brand trading in China.  Go to Page 2 to see this week’s China news and highlights.

Health has been one of the core themes in China’s consumer landscape over the past few years. Anyone who understands Chinese consumers’ approach to health will appreciate the unity based on the opposing and complementary relations of the yin and yang. A pillar of Traditional Chinese Medicine (TCM) beliefs, the yin and yang need to be in harmony – when one aspect is deficient, the other is in excess.

Many consumers’ health, food and lifestyle decisions are based on maintaining this balance – this ensures a normal flow of qi so their body functions well and they can recover from illness more easily. Whilst people are increasingly living longer in China, partially due to advancements in modern medicine, the ancient TCM beliefs still hold significant importance for consumers.  Many factors disrupting that harmony have only become an issue over the past generation.

We only need to look at the scary growth in breast cancer rates in Chinese women to understand how the yin and yang have been knocked off balance. Breast cancer has become the most common cancer among women in China with rates climbing 3.5% annually between 2000 and 2013, versus a 0.4% annual drop in the US. Much of the growth can be attributed to a generation of changes in Chinese lifestyles, such as urbanisation and an increase in professional work. This has led to lower childbearing rates and older mothers at birth, with a subsequent aversion to breastfeeding. Higher stress, less exercise, more unhealthy diets and increased alcohol consumption are also contributing. Each of these factors are common in many countries, but the rate and extremity of change has been much more dramatic in China.

Common household salt has been another factor disrupting the qi flow. On average Chinese eat more than double the recommended intake of salt. This is also a problem in many countries, the difference is 80% of consumption is attributable to Chinese consumers’ own cooking, whereas in the West it mainly comes from processed foods. The list of contributors goes on, as do their differences from other countries.

To help find balance, Chinese are increasingly making conscious decisions to consume healthy food and vitamins, in addition to doing more activities based on healthiness. The most popular of those is jogging. Interestingly, numerous studies have found the negative effects of exercising in pollution outweigh the benefits. This has done little to temper the enthusiasm of joggers in Chinese cities and their paraphernalia.

Many of the factors affecting consumers’ yin and yang balance are attributable to their lifestyle and dietary choices, however a number remain out of control of the average urban dweller. Air pollution may be the most visible, yet the water and soil pollution are often much more damaging to the balance and harder to restore. According to a national soil survey, one-fifth of farmland in China is contaminated by organic and inorganic chemical pollutants and by metals such as lead, cadmium and arsenic, with the most polluted areas concentrated around the wealthy cities where a large share of their food is grown. Unfortunately a paddock growing rice in soil oozing with cadmium seepage and irrigated with toxic water still often looks like a normal green rice paddy, making it harder to manage and resolve. Even the remarkable rise of meal delivery in China is contributing to waste that is affecting the food supply chain and consequent balance.

These influences have been a boon for foreign brands who are often perceived as healthier. Yet every brand trading on health and purity would be wise to understand how the yin and yang, and hot and cold fit into many consumers’ consideration set. Agencies such as China Skinny can assist with your new product development, your brand and positioning to ensure this is considered and relevant to Chinese consumers. Go to Page 2 to see this week’s China news and highlights.

Late last month importation of the soft, creamy and seemingly harmless cow’s-milk cheese Brie was banned in China. The edible mold that helps form Brie’s bloomy rind saw it and a host of other platter favourites including blue, Camembert, Roquefort and goat’s cheese become the latest prohibited foodstuffs in China. They follow a string of fast-growing imports, from chilled beef to kiwifruit, which have been banned and unbanned over the years.

The blacklisting is another reminder of how unpredictable selling into China can be. Even the most prepared cheese exporter would have struggled to foresee and plan for the [hopefully short term] ban. China is well known for its unique regulations – most are a little more predictable, but do require vigilance to ensure you won’t end up with a series of unnecessary fines or even be banned in China.

The changes to China’s Food Safety Law in 2015 are case in point. The amendment removed a clause that required victims to prove personal injury or loss to be eligible for compensation. This has spawned a cottage industry of professional complainers who’ve developed sophisticated operations to challenge food brands and retailers for compensation. Simple labelling mistakes including font sizes being too small or the lack of Chinese translation account for more than two-thirds of the court cases.

On top of keeping up with rules and regulations, brands also need to reinforce their legitimacy with an inherently untrusting Chinese consumer. There are many ways to do this, but the lowest hanging fruit is often gaining trust through your brand’s website.

Imported food brands that are marketed effectively still have a natural trust advantage over domestic players, reinforced with every scandal that goes viral, such as goats dying from eating pesticide-soaked spring onion leaves from an area that supplies vegetables to cities like Shanghai and Beijing. In other recent viral news, it was revealed that Chinese farmland covering an area half the size of California is polluted by a wrap that releases potential carcinogens into the soil and accumulates pesticides and other toxins applied to crops. Would you buy imported food if you could?

Unpredictable changes in China’s regulation can be frustrating or even damaging, yet the opportunities and ever-growing demand for imported foodstuffs will usually outweigh the downsides. This is particularly true for those brands who stay abreast with and understand the regulations, and the market, marketing and sales channel trends – something agencies like China Skinny can assist with. Go to Page 2 to see this week’s China news and highlights.