China’s rising cities the next frontier

<INSERT PRESENTATION TITLE>the
China’s Rising Cities… next
frontier
Lynn Xu
The Nielsen Company

1

Copyright © 2010 The Nielsen Company. Confidential and proprietary. Title of Presentation

Agenda

1. The Growing Consumer Power of Lower Tier Cities

2. How to Win These Consumers?

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Copyright © 2010 The Nielsen Company. Confidential and proprietary.

1. The Growing Consumer
Power of Lower Tier Cities

3
Title of Presentation

Four Past and Current Drivers of Lower Tier Growth…
1. Massive Government infrastructure Investment Into The Hinterland
2. Private companies following the lead, increasing investment in
the Center and West
3. Modern Trade grew 10 times in the growth9 years, expanding
Infrastructure investment past (2004-2008)
%
consumptionNumber of enterprises above designated size
YoY ，% opportunities in lower tier cities and towns
Urban Rural
23 70
4. China’s quick Eastern Central & Western 134,224
recovery from recession makes the economy
21 60
confident. “Driving Domestic Demand” is the new Growth Model
Modern Trade Store Count
19
115,415
50
99,237
17 Global Average US China
40 83,976
15 73,907 109
30 106 65,604 108
104 104
13 100 56,630 101
20 97 98 96
94 95 95 93
11 40,000 92 90
88 86 87 87
10 83 84 84 85
28,000 82 80 82
80 82 81
9 77
0 15,000
711,000
Electricity , Gas & Transport, Storage Inf ormation Water Total
Water Production and Postal Serv ice Transmission, Conserv ancy ,
5
and Supply Computer and Env ironment &
2000 2001 2003-2005 2003
2002 2004 2005 20062006-2008
2007 2008 2009 Projected
Sof tware Utility Mgt 2010
1H 2007 2H 2007 1H 2008 2H 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q32010
Tier 1/2 Tier
Source: China Statistical Yearbook, CICC Research
Source: China Statistical Yearbook, CICC Research
3 Tier 4 Tier 5

Source: Nielsen RetailConsumer Confidence Survey
Source: Nielsen Establishment Survey Consumer Confidence Index 4


Explosive Growth in Urban Demand When Per
Capita Annual Income Reaches RMB 6,000
Ownership of major durable consumer goods per 100 urban households in year end

1999 Urban household
income appliance
consumption exploded Color Television Set
when incomes reached
RMB 6000
Air Conditioner
Refrigerator

Computer

RMB 7506 in
today’s prices

Source: China Statistical Yearbook, CICC Research, Nielsen Research

5
5

Tiers 3 and 4 Have Crossed Threshold
Offering Ready Market for Modern Goods
and Services
25,088 Estimated Annual Income Per Capita- 2009

17,333 Fridge
Color TV
11,782 Computer
Air conditioners
8,416

5,714
RMB 7506

RMB 1196
Food
Basic Needs
Tier 1
Tier 1 Tier22
Tier Tier33
Tier Tier44
Tier Tier 5 5
Tier

Source: GDR, ACMR, Nielsen Research

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The Size of The Prize
161 million Tier 3 and 4 households are the next frontier
Tier 5
169 million
Households

Tier 4
86 million
Households
Tier 3
75 million
Households
Tier 1 Tier 2
16 million 38 million
Households Households

1 trillion 2 trillion 3 trillion 3 trillion 4 trillion
Income Income Income Income Income
Value Value Value Value Value


7


Unmet Needs…Lower Tiers Account for
87% of Population but 64% Retail Sales
City Tier Importance- 2009
(Nielsen Universe)

Source: Nielsen Linx Retail Universe Master- 2009

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Rising Middle Class to Dominate But Don’t Forget
Needs of Those at Top and Bottom
Estimated Income Share By Tiers- 2009

22 17 14 8 Affluent
> 117,000 RMB
30
36
41 Upper Middle
37 52,000- 116,999 RMB

61 Lower Middle
26,000-51,999 RMB
31
26 28 Bottom
< 26,000 RMB

22 14


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Improving the present and investing in the future

Lower Tier
What Are Your Lifetime’s Goals and Priorities?
Upper Tier

Improve my standard of living Lifestyle

Build up my savings Savings

Children's education
Education
Improve my educational skills

Increase income through
investments in stocks/funds
Income Growth
Invest in health products and
services Health
Pay off debts/loans

Source: Nielsen Consumer Survey-2010

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Lifestyle Drivers: Short Term Indulgence, Try
New Things, Upgrade
How Do You Plan to Improve Living Standards?
The next 12 months

Buy New clothes

Try Good quality food
brands

Tours/vacations

Dining out/entertainment

Upgrade household care
products

Mobile phone

Try Good quality personal
care products
Lower Tier
Home improvements Upper Tier

45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95%


11


Lifestyle Drivers: In Long Term, Big Budget
Items Important... Upper Tiers More Ready
For This to Improve Living Standards?
How Do You Plan

Private car

House
The Next Three Years…
Jewelry

Tours/vacations

Fridge

Home improvements

Computer
Lower Tier

Color TV Upper Tier

35% 40% 45% 50% 55% 60%


12


If their aspirations and
wants were to be sized,
what would the
opportunities look like?

13

Copyright © 2010 The Nielsen Company. Confidential and proprietary. Title of Presentation

Financial Products and Commercial Education
could offer the highest potential given their
strong commitment to savings and education
Financial Services Education Health
Opportunity Sizing (% Stating Goals x Estimated no of Households)

Bank Savings Products
147 mn

Commercial Education For Kids
129 mn
Adult Education

118 mn Investment Products
Million Households
(Tiers 3 and 4) 89 mn
108 mn

Health Insurance
Source: GDR, ACMR, Nielsen Research- 2010

14


Fashion, FMCG and Dining industries will be the 3
immediate lifestyle drivers. Buying a car in the
next 3 years tops the high spend list
Opportunity Sizing (% Stating Goals x Estimated no of Households )

Fashion FMCG Leisure Cars Homes Jewelry Consumer Durables
Home Improvement

85 mn Cars
147 mn Apparels
82 mn New Homes
129 mn
FMCG
Jewelry
77 mn
Restaurants
105 mn 60-70 mn Brown and White Goods

Vacation Packages 66 mn Computers
108 mn
61mn Toys
89 mn Mobile Phones

82 mn Home Improvement

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Implications: A vast and varied demand
potential waits to be tapped
“Straddling The Income Pyramid” is one strategy to follow

Tiers 3 and 4

• Invest and innovate in a differentiated
brand portfolio that covers bottom to
top 22 mn HH
Affluent Premium Brands
• As consumers trade-up they will stay
loyal to the brands they are familiar
with

109 mn HH Value for Money Brands
Rising Middle Class

30 mn HH Low Price/ Affordable Brands
Bottom of The Pyramid


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2. How To Win These Consumers?

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Lower Tiers strongly Yet they want a work-
value financial life balance
success

“Achieving Financial Success Is Important To Me” “We Must Have A Balance Between Work and
Leisure”
39 40 32 40
Agree somewhat 36 38 Agree somewhat

51 51 56 51 54
Strongly agree 48
Strongly agree

Tier 1 and 2 Tier 3 Tier 4 Tier 1 and 2 Tier 3 Tier 4

“I would like a Better lifestyle for myself/family than “ I like to Enjoy Time with Friends and Family”
the previous generation”
26 26 21

31
Agree somewhat
Agree somewhat 34 34

70 69 74
56 59 62 Strongly agree
Strongly agree

T ie r 1 a n d 2 Tie r 3 Tie r 4 Tier 1 and 2 Tier 3 Tier 4


18


Family and They are less
maintaining ‘face’ independent than
are important Tiers 1 & 2 and seek
social approval

“ I must take care of my parents’ needs” “Moving to Different Places is Important to
Improve Work and Life Opportunities”
Agree somewhat 47 46 42
Agree somewhat
38 41 37

Strongly agree 32 34 38
22 Strongly agree
18 18


"I like to live life according to my own rules rather
“It is Important to Keep Face Within Your Community” “ I like to live according to my own rules rather
than worry about what society thinks"
than worry about what society thinks”

Agree somewhat 47 49
40 37 Agree somewhat
27 23
Strongly agree 28 28
20 16 13 13
Strongly agree



19


Social vs. Individualism
Driven to Succeed

• Lower tiers are experiencing
the pulls and pushes of a
society in transition
Tier 4
Tier4 • The social context is
important to them in their
journey to success
Tier 1
Tier1
Tier 2
Tier2
Social Acceptance • Brand communication must
Individualism
incorporate social themes
“Making life better for the family”

Tier 3
Tier3 “Family and friend approval of
brands bought”
“Sharing the success of
upgrading lifestyle with family”
Relaxed/enjoy life

20


“Big Brands” matter more than “foreign” or
“local”, even more strongly for lower tiers
“Reputable Brand” Means……

Brands used by many people

Brands with good after sales service

International brands
Visibility
is key Brands people talk about

Brands with a lot of advertising
Lower Tier

Brands advertised on TV/magazines Upper Tier

Brands promoted by famous people

Brands with high prices

10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65%


21


TV and local buzz are key purchase
influencers. Internet is gaining importance
Ranking of Information Sources As Purchase Influencers:
Lower Tiers

Home Mobiles Packaged Personal
Appliances Foods Care

TV Advertising 1 3 1 1

Friends and 2 1 2 2 Media Habits- Average Times Per Week
Family
Upper Lower
4 2 4 3 Tier Tier
Internet
Watch TV 5.48 5.5
4 4 5 5
Print Media
Read Newspapers 4.84 3.89
In-Store 3 5 3 4
Display/ Read Magazines 2.81 2.9
brochures
In-Store 6 6 5 6
Staff


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A Brand on TV builds credibility. Lower degree of
shopping confidence than upper tiers makes them seek
assurance through local and online buzz…
TV Buzz
Friends and Family Online

Awareness Credibility Consideration Purchase

Important “Product Quality Must Be Good
for New if Manufacturer Can Afford TV”
Brands

Mere Presence on TV Sends A
Strong Signal

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While TV may be important now, higher Digital ROI and
increasing internet penetration will open up new
channel mix options
Marketing ROI 2009- China Internet Penetration- China
Million users
450

400 384
Trade 1.82
350
298 107
300 Rural internet
Digital 2.86 users
250 85
210
200
Outdoor 0.7 58 Urban internet
150
277 users
100 213
Print 1.37 152
50

0
TV 1.31
2007 2008 2009

Source: CNNIC Statistical Survey
Source: Nielsen Global ROI Benchmark 2009
Report on Internet Development. January 2009

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Opportunities to recruit younger rural internet users as
future ambassadors for branded foods, beverages and
digital products
Profile of Key Users : Urban Rural Differences

Age Education Income Occupation

29.7% 41.5% 27.4% 27.4%
Below 19 yrs old High School RMB2001-3000 Students
Urban Urban Urban Urban

41.1% 41.1% 32.3% 32.3%
Below 19 yrs old Middle School Below RMB500 Students
Rural Rural Rural Rural

Base: All Urban/Rural Internet Users -2009

Source: CNNIC Statistical Survey Report on Internet Development. January 2009

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When they can up-trade, they will
Value Share (%)- 2009

Premium

Medium

Mass

Shampoo Biscuits

Growth Rate (%) - 2010 vs. 2009
Tier 1 Tier 2 Tier 3 Tier 4 Tier 1 Tier 2 Tier 3 Tier 4

Premium 32 21 27 10 11 -21 24 38

Medium -14 -17 -17 -12 -2 0 2 -1

Mass -11 -4 -7 -2 -17 15 -20 -16

Source: Nielsen Retail Index

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While FMCG Grocery Trade dominates the landscape,
Modern Trade Productivity is 20x higher
Store Count Share FMCG Sales Value Share

Modern Trade
Grocery
Other

Sales Share/Count Share
Grocery Modern Modern/Grocery

Tier 1 and 2 0.59 12.19 21 X
Tier 3 cities 0.59 12.25 21 X
Tier 4 Cities 0.67 14.64 22 X

Data Source: Nielsen Retail Establishment Survey

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Channel Productivity

But… Lower tier cities are dispersed while modern trade
grows in clusters. To optimize distribution costs, first
saturate lower tier cities around a retail hub.

City Tier Footprint Modern Trade Footprint

Modern Trade
Development Index
(based on Modern Trade
City Tier Count and City Size)
Average City Index: 1
Tier 1/2
Level 1 (>21)
Tier 3
Level 2 (10-21)

Tier 4-C Level 3 (3.3-10)

Tier 4 D Level 4 (1-3.3)
& below Level 5 (0.33-1)
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Level 6 (0-0.33) Data Source: Nielsen Retail Establishment
Copyright © 2010 The Nielsen Company. Confidential and proprietary. Survey, China Statistical Yearbook

6 segments of MT Stores count
Nielsen estimates 14 Super and Growing Hubs
based on Modern Trade and GDPdevelopment
9

Growing Super 2
6 Chongqing + Sichuan Shanghai
1 + Zhejiang+ Jiangsu + East Anhui
11
East Hubei + East Hunan 5
7 +North Jiangxi Beijing+Tianjin
2 12
+ Hebei + East Shanxi
8 Henan
4
Center Jilin 3 Guangdong
8
9 + Center Heilongjiang 6
Modern Trade Development Index
(based on Modern Trade Count and City Size) 4 Shandong
10 Fujian
Average City Index: 1 1
11 Level 1 Xinjiang 5 13 Liaoning
(>21): 7
Level 2
East (10-21)
Qinghai + Center Gansu
12 Level 3 Ningxia(3.3-10) Shanxi
+ + South
Level 4 (1-3.3)
10
13 East Yunnan + South Guizhou
Level 5 (0.33-1)
3
29
14 Level 6 Guangxi
(0-0.33
14
Source: Nielsen Retail Measurement Confidential and proprietary.
Copyright © 2010 The Nielsen Company.

Winning Tips For Lower Tiers…..
1 Upper and Lower Tiers priority needs are not that different.
The difference lies in exposure to products and services

2 Build Communication Stories Around Social Themes to
gain acceptance in lower tiers

Foreign or Local brands matter less than Big Brands and
3
Brands that deliver

TV and Word Of Mouth are still important now but start
4 investing in digital media

5 When they can uptrade, they will

6 Optimise FMCG Modern Trade Hubs As a ‘Go To Market’
Strategy
30

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