Speech by Zhang Lin, Vice President of Nielsen Greater China Edited and compiled from Zhang Lin's keynote speech at the 2017 New Year Forum of Renmin University of China Business School Original content by Huaxia Jishi eInsight. For reprints, please apply for authorization through the Huaxia Jishi eInsight official account. New Distribution has been authorized. Thank you. Today, I will share our understanding of consumption upgrade patterns. In recent years, based on continuous research on consumers, Nielsen has conducted detailed discussions on consumption upgrades. We monitor the Global Consumer Confidence Index annually and use the data to understand consumption trends, consumption drivers, and the direction of consumption upgrades. Moreover, our research on consumption upgrades is not limited to China; we also monitor several global markets. So, we not only focus on China but also compare with global markets. Today, I will present the latest results of our consumption upgrade research, which covers four main aspects. First, macroeconomic transformation, with consumption upgrade becoming a new hotspot. Second, various categories point to consumption upgrades, but premium products must justify their higher prices. In the process of consumption upgrade, where does the money go? Which products or services may see value-added upgrades? Third, successful new products are premiumizing, driving consumption upgrades. What are the drivers of consumption upgrades? Fourth, the post-90s and post-00s generation as the new consumption force. As future consumers, how will the post-90s group consume? Macroeconomic Transformation, Consumption Upgrade Becomes a New Hotspot I. Macroeconomic Transformation and Efficiency Progress Smoothly, Resident Consumption Upgrade Becomes a Hotspot This is not our own research but data from the GDP government report; we mainly monitor the previous quarter. In the third quarter of 2016, China's GDP grew by 6.7%. This growth is mainly driven by the increase in the share of the tertiary industry, which is more dominated by services and some manufacturing. New enterprises saw a 28.5% growth, and new employment opportunities are increasing. People see more new business opportunities, so more young people are starting businesses, which is also why JD Crowdfunding is booming. Meanwhile, consumption expenditure contributed significantly to GDP growth, at 71%, indicating strong consumption willingness. II. Strong Consumer Confidence in Q3, All Indicators Remain Stable We also surveyed the Consumer Confidence Index (as shown above). If the index exceeds 100%, it indicates that consumers in that country are confident and the market will thrive. If it falls below 100%, it suggests public concerns about the market economy and national governance. China's Consumer Confidence Index has been above 100% since 2014. Although there were economic fluctuations in Q3 2014, the figure rebounded to 106% in September-October 2016. This shows that Chinese consumers are currently maintaining a vigorous and positive attitude. At the same time, the global Consumer Confidence Index is 99%, indicating a wait-and-see attitude towards the economy in the overall global environment. We also looked at data from the US and South Korea, where consumer confidence is below 99%, indicating poor expectations for the economy and employment. So, how is this confidence index calculated? There are three important dimensions: First, expectations for employment. How do you think the job market will be next year? Many people have positive expectations. In a good economy, people are not afraid of unemployment or believe companies will raise salaries. Others may think competition will be fiercer next year and they might need to change jobs. Currently, some companies, even internet companies, are not performing well and may face closure or restructuring, which is quite possible. The second indicator is personal financial status, i.e., salary levels. How much did you earn this year? What growth do you expect next year? Currently, the general personal economic situation in China is maintaining positive development. The third is consumption willingness. Whether you have money or not, you still consume; this is an important concept. We found that in consumption willingness, regardless of income, people's willingness is strong. Therefore, we can see that the whole of China, especially since 2015, has been in an era of consumption. It can also be said that everyone is promoting consumption together. We have conducted very detailed research on this, especially in third- and fourth-tier cities. Despite limited income, people have many channels and strong willingness to spend. These three dimensions work together to bring our consumer confidence to 106%. III. Western Region Confidence Continues to Rise, Eastern Region Rebounds to Historical High In this context, you will find which regions are developing well and which are not (as shown above). Divided by east, west, north, and south, the eastern region is on an upward trend, reaching a historical high of 120%, indicating strong confidence in this area. The western region also shows a particularly obvious growth trend. In the past year, the western region has benefited from government support and the Belt and Road Initiative, which have effectively promoted economic development. However, the northern and southern regions have seen some pullback. What causes this? A simple analysis: the western region has attracted foreign investment, government policy adjustments, support, and investment, including free trade zones, which are very strong and bring greater assurance and vitality to the western region's economic development. Consumption willingness in the east and west has risen significantly. Where is this consumption happening? Are there different choices compared to other regions? As shown in the figure, people in the western region may be willing to consume, but more for basic daily necessities. In general perception, the economic advantage of the western region may come from good welfare and abundant supplies. Meanwhile, the eastern region's economic development is mainly driven by price advantages and a rich variety of products, making shopping more convenient. The southeast coast is a prosperous area for trade and import/export, which greatly promotes the material and price advantages of the eastern region. As mentioned, consumer spending in the western region is life-based, mainly on daily necessities, utilities, food, and beverages. In contrast, the eastern region focuses on enjoyment and culture, including dining out, which accounts for a large proportion—51% of people have the habit of dining out. There are also demands for clothing, leisure, and vacations, which are very obvious. What do these differences indicate? They show that the western region places more emphasis on improving the current living conditions, while the eastern region has moved to another level, shifting from meeting basic needs to pursuing a high-quality life. Therefore, consumption upgrade is reflected in improving the quality of life. IV. Northern Region Silver Economy: Demographic Changes, Elderly Product Categories Lead Growth Data also shows a decline in confidence in the northern region. What caused the economic slowdown and consumer confidence setback in the entire northern region? First, the northern region suffers from severe brain drain. Especially in the northeast, many young and middle-aged people choose not to start businesses in their hometowns. Second, aging is severe. Third, the impact of low birth rates. You can see that the northern region has the most offline consumption, with elderly products being prominent. Including adult diapers and adult milk powder, these consumptions have increased. But this does not mean the market is hopeless; it is just a relative number. We want to remind everyone that the demographic structure in the northern region has changed, and the product categories and sales in the entire consumer market have correspondingly changed. V. Confidence Divergence: First-Tier Cities Rebound, Second-Tier Cities Lead Growth Then, consumer confidence among different city tiers, i.e., first-, second-, third-, and fourth-tier cities, has also diverged. First, first-tier cities have always been in the leading position. Township enterprises saw an uptick in Q2, but by Q4, consumer confidence fell. When we conducted the Q3 2016 data survey, we believed this change was related to economic affordability and economic conditions. But by the end of 2016, when everyone was making summaries, it was found that people's income was quite different from previous expectations and did not reach ideal levels. In a previous survey, we also found that people in the southern region like to save money. After they have money, they are less willing to consume. And people in the northern region may engage in pre-consumption. That is, in Q3, there was a trend of early consumption. But by the end of the year, affected by the overall annual economy, you can see that first- and third-tier cities have obvious growth. Currently, townships and fourth-tier cities have experienced a significant drop. So, we cannot say that the internet has brought all people together; in fact, the gap between cities cannot be ignored. Earlier, we also mentioned that people have good expectations for employment and income. From GDP data, investment in most second-tier cities in China is faster than the average. But at the township level, we may need to consider not only GDP but also economic capacity. We also found that consumer willingness, except for townships, is basically stable or rising in other cities. Actually, you can also review your own consumption compared to last year—are you spending more? Buying more? Personally, I am, because of various holiday promotions, I bought a lot of useless things. In second- and third-tier cities, which products sell well? As shown above, in first-tier cities, consumption of mortgages, digital products, clothing, and beauty products is relatively obvious, especially personal digital products, which are of great interest. Third-tier cities also have relatively high consumption of clothing, cosmetics, and personal digital products. So, for clothing companies, your "battlefield" is not necessarily concentrated in first-tier cities. Where Does the Money Go in the Process of Consumption Upgrade? I. The State Council Encourages You to Consume We also find that when it comes to consumption upgrade, where should the upgrade happen? We know the government is also encouraging residents to consume. So where should consumption be? Besides policy-driven development of elderly care, education, and sports industries, we can see that tourism is a huge sector. A very obvious phenomenon is that most consumers, after having money, choose tourism as a first choice. We surveyed first-, second-, and third-tier cities, asking about holiday preferences, and 90% of people said they would choose to take leave and travel, leaving their city, whether domestic or international, as a holiday goal. Leisure and fitness have also become a trend, whether going to gyms or joining various sports groups; this group has increased significantly compared to before. On a certain day in 2015, 134 marathons were held simultaneously across China, a very large number. So many people running at the same time was rarely seen before. In addition to the Consumer Confidence Index, let's look at consumption growth. Where has the money "grown" to? Online shopping is a major driving force. It must be said that online shopping is a huge driver of the economy. But when we combine online and offline consumption, online is growing, which poses some danger to offline. As you know, physical stores are currently struggling, greatly impacted by online. II. Premium Products Justify Their Price: Consumers Prefer Healthy, Safe, Convenient, and Professional Products If we buy expensive things, what are consumers willing to pay more for? What products meet consumer needs? Of course, safety, health, convenience, and professionalism are very important indicators. What does this show? It shows that consumers are willing to pay more for convenience and professionalism. III. Successful New Products Show Premiumization Trend, Driving Category Consumption Upgrade The so-called convenience not only means ease of use but also speed, enabling consumers to get what they want more conveniently and quickly. Although there is an expectation for premium products in consumer demand, they will not pay extra just for the premium element alone. So, our product colleagues should think carefully about what premium means and how to communicate the concept of premium. IV. Non-Food Innovation Upgrade: Add or Subtract While Ensuring Existing Efficacy In the field of innovation and new products, there is also data. For the FMCG sector, 89% of companies have innovated rapidly in the past two years, especially in non-food categories, which account for 74% of innovations. What can innovation bring? Innovation brings sales. Innovative products can increase price or sales volume by 1.2 times. However, innovation is important, but survival is very difficult. Although innovative products can command higher prices, their survival rate is very low. Only 5% of innovative products survive more than a year in the market. We made a case study of non-food innovation upgrades (as shown below). If we want to innovate, where should innovation be? We talked about convenience, ease, safety, and comfort, but how should we communicate? Also, we need to "add value with a method." If we make a toothpaste, what aspects should we focus on? I think it should not just be basic cleaning, care, and whitening, but more about efficacy, technology, and even raw materials. According to our statistics, if companies can innovate in promotion, create differentiation, novelty, and uniqueness, they can increase sales price by 1.3 times and average sales price by 1.5 times. Products that achieved the highest growth through promotional innovation include makeup remover, which can increase sales volume by 29%. Of course, this is just a concept; how to implement it requires case-by-case analysis. What I want to say is that if we can achieve innovation in promotion, it will help sales volume and sales revenue. This is just a basic case to help us analyze how to drive consumer innovation index and truly innovate products. As Mr. Gao mentioned earlier, each company has a different understanding of innovation. For us, providing such case services will help you analyze what innovative elements you can communicate with consumers. The Post-90s and Post-00s: Future Consumer Groups This year, Nielsen has been focusing on the millennial generation, i.e., consumers born from 1990 to 2000. They are tomorrow's consumers. Only by better understanding this consumer group can we make market predictions in advance. I. Post-90s Confidence Leads Now we all know that China's Consumer Confidence Index is 106%, which is relatively high. But from the data, the post-90s consumption index is even higher, reaching 110%. What does this mean? It means the post-90s group has a stronger desire to spend and a stronger impulse to consume. Through our understanding of the post-90s around us, can we understand this? II. More Optimistic Attitudes Towards Employment, Income, and Consumption The post-90s group is clearly optimistic about employment, income, and consumption, possibly more positive than the post-80s and post-70s. Recently, society faces many youth employment issues; they are unwilling to work at big-name companies, which is a dilemma for us but an opportunity for young people. We must accept the role changes and transitions that this era brings. III. Unique Personality and Demands What characteristics do the post-90s have? On one hand, they generally value personal space, are self-centered, and have judgmental openness. On the other hand, they are very individualistic and also seek products with personality. In another study, we found that post-90s are willing to pay twice the price for innovative and personalized products. Third, they seek resonance, a feeling of "alone but not lonely." The post-90s group has a good habit of labeling themselves. So, suitable products are needed to impress these people. Mr. Gao mentioned the circle culture; "circles" provide a space to better understand this group's characteristics and are a platform that can promote consumption impulse and willingness. IV. Open Attitude, Strong Willingness for New Products and Consumption Upgrades The post-90s have an open attitude and a stronger willingness for new products and consumption upgrades. They want to try more new products. So, after so many new products are launched, who buys them? The post-90s. They are willing to be "guinea pigs" to test whether a product is good. A simple example: there was a drink called "Xiaoming Classmate." Its biggest feature is its conceptual marketing, promoting communication with post-90s and even post-00s. Its packaging features different emojis, under the banner of "fun," hoping to create an interesting environment through exchange among classmates. This marketing approach was well received by many high school and even college students, making it a successful product launch case. This clearly shows that these young people don't really care about what they drink; they care about the social experience. V. More Accustomed to and Dependent on Online Shopping Let's talk about online shoppers. Data shows that 73% of post-90s have online shopping behavior, with a very high penetration rate. In the past three months, 93% of post-90s have shopped online, and 71% of them have the intention to shop online again. This shows their habit of using the internet. Post-90s and post-00s were born in the internet age; they belong to the online world. To win over this group, an important technique is to "win on the palm" and "win online." Communicating anytime, anywhere, and staying connected with them at all times is a crucial concept. VI. Declining Brand Loyalty The post-90s have another characteristic. Including those born from 1986 to 2000, their brand loyalty has weakened. For example, post-00s and post-90s buy phones online differently than we do. We might search directly for iPhone 6s, with our own preferences. But we find that these young people do not have brand preferences; they may search based on the functions they care about. I just returned from Europe last week, and I learned that post-90s in other countries feel that brands are not so persuasive. Now all products give people a similar impression; only when a product provides a different experience will they choose that brand. This consumption motivation brings great opportunities for Chinese brands, making it easy for Chinese brands to go global. In other countries, people don't necessarily buy iPhones; they have more choices, including Samsung, Huawei, and Xiaomi. In this regard, we believe post-90s do not particularly care about branding but value the differentiation and unique value that a brand brings. VII. Diverse Interests Led by Idols and Anime Why do post-90s like to label themselves? We conducted a deeper understanding of post-90s and post-00s. Here, post-00s refers to those born from 1996 to 2005. Interestingly, this group likes to pay for their interests. If anything is related to their interests, they are willing to spend money. In our statistics, 16% of post-00s are fans of two-dimensional culture, and 30% have the habit of following stars. Hence, the fan economy and internet celebrity phenomenon. Their liking is not just talk; they spend real money. Many post-00s send flowers and gifts to their favorite stars, even if they have never met them, they buy virtual gifts online. In contrast, the post-80s and post-70s might hesitate even to buy a poster. Today, I mainly shared the growth of China's Consumer Confidence Index, with the western and eastern regions maintaining growth. The western region benefits from national policy support, while the eastern region and southeast coast have good acceptance of consumption openness. The new normal of consumption is that consumers have strong willingness to consume and a more open mindset to try innovative products. Innovation, in essence, is also to welcome the future post-90s and post-00s consumers. I hope this small sharing gives you an overall understanding. Thank you for listening. 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