China: The neglected bottom of the pyramid

Low income families used to account for 9.6% of total urban China in 2012 but it decreased to 7.6% in 2014.

In Urban China, there are 13 million households (equivalent to the population of Canada) living with monthly income of less than 3000RMB. Given the massive size of this group of consumers, business opportunities can be enormous if marketers are able to capture effectively. Lower income shoppers are underserved even though they also aspire to a better life. As China emerges as one of the fastest growing economies on the planet, purchasing power of the bottom of the pyramid group is rising considerably. Marketers can either act proactively by positioning themselves now, or be forced to play catch up later on. The aim of this article is to provide marketers with an understanding of their current living condition, shopping habits as well as inspiration to develop products to serve their needs.

A Better Life

According to Kantar Worldpanel, low income families used to account for 9.6% of total urban China in 2012 but it decreased to 7.6% in 2014. It doesn’t mean the population is shrinking; instead, it indicates that part of the bottom 10% families have now increased their monthly income above 3000RMB. In the past 5 years, minimum wage in China has increased more than 50%, indicating higher disposable income of low income shoppers. Furthermore, a better social welfare system, including subsidized housing, medical insurance and education, improves their living standard and reduces their financial burden significantly.

Kantar Worldpanel Comtech indicates that 63.3% of low income shoppers use smartphones, which is only 6% less than other income groups. Better internet accessibility and a thriving smartphone market, has led to increasingly online shopping. Kantar Worldpanel has observed that low income families are equally passionate about shopping online, increased spend on e-commerce in 2014 by 37% compared with a year ago. These changes, including stronger purchasing power and modern lifestyles, narrows the gap between them and other consumer groups, providing clear opportunities for FMCG marketers. 

Tackling Low Income Consumers

Even with limited budget, low income shoppers do not necessarily purchase fewer FMCG categories. Kantar Worldpanel reports that in 2014, low income shoppers purchased around 50 FMCG categories, showing a subtle gap compared to the total population. It indicates that low income shoppers have pretty much the same needs as other consumers.

However, there are differences in how low income shoppers make their purchases compared to other shoppers. Reaching more low income consumers is the key for some categories, such as alcohol, confectionery and sanitary products; however, for other categories, a deeper understanding of their motivation behind brand choice is required. The following section aims to help marketers understand how low income purchasing behavior can be differentiated by three different types: Essential, Emerging and Aspirational categories.

Essential Category: Be Pragmatic, Nothing Fancy

Products used by almost every urban Chinese family on daily basis, such as toothpaste or cooking oil, are classified as essential categories. When low income buyers purchase essential category, they show high sensitivity to price. Kantar Worldpanel analysis shows that when low income shoppers choose toothpaste, for instance, mass brands with basic functions are their top choice. They prefer local value brands rather than premium global brands; meanwhile, they tend to choose larger family packs (120g – 179g) or mixed packs (several toothpastes in one pack) which provide better value for money. Cooking oil shows a similar pattern as they purchase larger packs for lower prices.

To win the hearts of low income consumers, marketers in essential categories need to bear two key things in mind. The first one is to be pragmatic as low income consumers are unwilling to pay higher prices for fancy concepts because basic functions have already met their needs. The second is to be highly cost effective, as lower prices are always welcomed.

Emerging Category: Increase Exposure and Lower Entry Barrier

Emerging categories - categories that are relatively underdeveloped in China (Penetration %)

One example is fabric softener: only 22% lower income consumers bought the category in 2014, as opposed to 26% at total market level. Libai is a good example of how to capture consumers’ needs with its flexible price strategy. According to data from Kantar Worldpanel, it attracts low income shoppers successfully with its small pouch pack (500ml) of fabric softener, priced at just RMB 9.9 per unit despite its higher-than-average price per Kg. Bluemoon is another winner thanks to high media exposure through TV contest sponsorship and advertisements built around low income families’ daily lives.

Thus, it’s important for marketers to lower the entry barrier for low income shoppers by having smaller packs with lower price points, as well as to build brand awareness through higher media exposure, e.g. TV, radio, bus advertisement, etc.

Aspiration Category: No Compromise for What They Truly Care About

Aspiration categories are categories that low income buyers are willing to pay for because it’s a product they truly value. The phenomenon is seen in categories related to infants and facial care. When purchasing these products, lower income consumers are not necessarily paying less since they won’t compromise on quality or benefits which they aspire to.

Based on Kantar Worldpanel data, 76% of low income families with babies across tier 1 and 2 cities choose premium international brand infant milk powder instead of local brands, even though local brands offer much more competitive prices. With limited spending power, they don’t tend to favour bundle promotions; instead, they prefer smaller number of packs which they purchase frequently, especially in brick and mortar channels. Facial care is another example. Kantar Worldpanel Usage shows that Chinese low income consumers maintain 3 full steps (i.e. cleanser, lotion and moisturizer) in their skincare regimen, rather than skipping one step as low income consumers do in the UK.

Therefore, to market aspiration categories, price is probably secondary to quality / benefit concerns as low income shoppers do not compromise on what they truly value. To successfully maximize the opportunities, marketers in these categories need to truly understand what low income buyers aspire to.

Kantar Worldpanel POV

No matter how wealthy a country becomes, there will always be a bottom 10% segment of low income shoppers. The bottom of the pyramid in China now presents substantial opportunities to exploit as their purchasing power is rising significantly. According to Kantar Worldpanel’s estimation, while FMCG marketers capture 1% of low income consumers, the value of this 1% exceeds 732 million RMB.

To unlock the potential, regardless of which categories, marketers should interpret the real needs driving these shopping behaviors based on the nature of the category. For essential products, offerings should be pragmatic with large pack sizes and low average price, while low entry level price points are important for emerging categories. Marketers in aspirational categories, where price is not the first concern, should focus more on delivering what these consumers really value.