After a decade and a half of ethnographic studies, we are observing the biggest shift in Chinese values we have seen to date. It is reshaping consumption patterns and it is changing competitive dynamics in the country.
In the past, it was commonly believed that incumbent companies in emerging markets (EMs) would struggle against the onslaught of global brands entering those markets. However, our latest ethnographic study conducted in China reveals a different narrative, with Chinese firms rewriting the rulebook and effectively countering global competition through rapid innovation and cost-effective social media campaigns.
The rise of domestic consumption in EMs is intricately linked to urbanization and the transition of individuals from rural to higher productivity urban areas. As people move, their income often experiences a significant increase, empowering them to aspire for better products and a higher quality of life for themselves and their families.
Shifting consumer values creates new consumption patterns
This journey transcends mere geography; it involves a shift in values from collective to individualistic as individuals ascend the social ladder. Those on the path of social mobility prioritize progress through consumption, defining themselves through the products they buy and aspiring to a better lifestyle characterized by status and belonging. While their parents saved most of their money, they spend it.
a new demographic: individuals on a journey of self-improvement, valuing authenticity and uniqueness
Foreign brands historically resonated strongly with these values, benefitting from perceptions of durability and quality, eventually becoming symbols of success for EM consumers. However, our recent observations in China highlight the emergence of a new demographic: individuals on a journey of self-improvement, valuing authenticity and uniqueness. These consumers seek brands and products that align with their individuality, diverging from mainstream preferences; they mark a new and expanding trend.
Take Tao,[1] a 39-year-old professional in the automotive industry, as an example. He embodies the shifting values in Chinese society, prioritizing self-expression and uniqueness. His eagerness for new technology has blended with his love for coffee. Making two coffees a day with his state-of-the-art coffee machine, he has set out to make the perfect coffee.
For Tao and many like-minded people who are looking for ways to express their uniqueness, drinking a coffee at Starbucks no longer has the allure it used to have. Instead, they prefer Chinese boutique coffee stores that compete on creativity. These produce unique signature drinks that mix espresso shots with flavourings, syrups, spices, fruits. One café even added fried chilli and pepper in lattes[2] and has been selling 300 cups a day according to the South China Morning Post.
Local innovation leading the charge: What coffee culture tells us about value shifts in China
Coffee innovation in China, is led not by Starbucks, but by local firms such as M Stand, Manner and Seesaw which leverage social media platforms like Little Red Book and TikTok for marketing. These coffee shops cater to a broader audience through delivery services provided by Alibaba's Ele.me and Meituan.
While this trend is particularly pronounced in Tier 1 cities like Shanghai, where the coffee culture is flourishing, our ethnographic study uncovered thriving coffee scenes as far as in Tier 4 cities. This phenomenon underscores the entrepreneurial spirit of baristas who recognize opportunities and migrate back from the top tier cities to introduce novel concepts to their local markets.
For investors, these shifting consumer values offer valuable insights. Firstly, investing in companies that support the growth of independent coffee shops, from marketing platforms like Tencent's WeChat to delivery services.
Secondly, multinational companies, such as Starbucks, should pay attention to the lessons learned from the Chinese market to stay relevant amidst shifting consumer values that demand continuous innovation. Brand extensions such as Starbucks Reserve will appeal to individuals striving for social advancement, yet they may not capture the interest of those who prioritize authenticity and distinctiveness.
global brands must prioritize innovation to remain competitive in China's dynamic consumer landscape
Finally, global brands must prioritize innovation to remain competitive in China's dynamic consumer landscape. Failure to adapt may result in losing ground to local competitors who possess a deeper understanding of consumers’ needs and preferences.
Our study underscores the importance of adapting and accelerating innovation to match the rising tide of uniqueness-eager EM consumers.
L'Oréal at its 2023 year-end earnings call, highlighted how they are leveraging AI and 10,000 terabytes of data to boost their researchers’ capacity to innovate. By embracing innovation and adapting strategies accordingly, multinational corporations can navigate the evolving Chinese market landscape and secure their relevance in the years to come.
[1] Name has been changed to ensure anonymity.
[2] South China Morning Post: Hot and spicy: China café sells 300 cups of pepper-chilli coffee a day as quirky drinks craze sweeps country (4 February 2024) https://www.scmp.com/news/people-culture/trending-china/article/3249701/hot-and-spicy-china-cafe-sells-300-cups-pepper-chilli-coffee-day-quirky-drinks-craze-sweeps-country
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Trinetra Investment Management LLP and are subject to revision over time. Trinetra is authorised and regulated by the Financial Conduct Authority in the United Kingdom.