Survey Background
The American Chamber of Commerce in Shanghai and Strategy& are pleased to present
results from the fourth annual Business Response to Trends in China’s Consumer Market
Survey.
The survey seeks inputs from executives of consumer-facing companies operating in China,
including Western MNCs and Chinese/other Asian companies. The survey aims to provide an
understanding of how companies are responding to key trends in China’s growing consumer
market. With many companies seeing challenges of slower growth, rising costs and lower
margins, what are company executives thinking and what actions they are taking to compete?
This year’s survey was launched to seek answers to these questions.
The rise of “digitization” - e-commerce, online video, social media and social communication
- has been identified in previous surveys as a key issue driving business strategy. This year
the survey included a special section evaluating companies’ digital capabilities and how
companies are responding to the rising digitization in China.
Contributors: Stefanie Myers, Karen Pu, Steven Veldhoen, Bryan Virasami, Adam Xu, Leo Chiang
Design: Mickey Zhou
Digital commerce has taken firm root in China,
and the migration of consumer attention and
engagement into the digital realm has emerged
as a top issue for business. Companies,
especially home-grown Chinese companies,
have grown more sophisticated in their
approach to digital commerce, turning their
focus from simply recognizing the pervasive
and disruptive power of digital business to
harnessing its power to win in a dynamic
marketplace. In the process, they’re blazing a
trail for the rest of the world to follow.
Several recent developments highlight the
key issues shaping the market for both
multinational companies (MNCs) and Chinese
companies operating in the consumer space.
These issues include:
Health and the environment. Amid
several well-publicized incidents of
alarming levels of air pollution in
China’s largest cities, health and the
environment have emerged as top-of-
mind concerns for consumer-facing
companies in China The digital commerce boom. The
initial public offerings of China Internet
companies, such as Weibo.com and
Alibaba, have raised awareness
of China’s fast-expanding digital
landscape. The rise of a new generation. Young
people born in the 1980s and 1990s,
with greater purchasing power and very
different consumption habits than their
parents’ generation, are increasingly
the focal point for consumer-facing
companies in China. Engaging with this
new generation poses a challenge for
established brands—and a potential
disruptive opportunity for newcomers. Intensifying competition. China, for
all its promise, has proved a challenge
even for brands that are mainstays in
developed markets. Revlon and Garnier,
for example, have retreated from China,
citing rising competition and costs.
The challenge has grown more acute as
growth in many sectors has slowed.
These developments confront consumer-
facing companies with two urgent questions:
Which consumer trends are of
overriding importance? What are the key steps that Chinese
companies and multinational
corporations (MNCs) must take to win
in this evolving environment?
To gauge the business responses to these
questions, The American Chamber of
Commerce in Shanghai (AmCham Shanghai)
and Strategy& (formerly Booz & Company)
have since 2011 conducted an annual survey
of Chinese companies and MNCs. For the 2014
edition we gathered input from 80 companies,
including 53 MNCs and 27 local companies
engaged in a wide spread of consumer-
facing sectors, including food and beverage,
automotive, apparel, luxury, home care, and
personal care.
The survey asked executives from these
companies to rank the importance of eight
specific trends related to changes in consumer
attitudes, changes in technology and the
external environment, and demographics.
They are:
The demand for more transparency The growing importance of health and
wellness Changing perceptions of value Increasing importance of the shopping
experience Increasing connectivity among different-
tier cities Explosive growth of consumer choice The rise of digital commerce, or
“digitization” Evolution of the family unit
Key findings
Digitization Remains Topic Number One
Since the inception of the survey, both local
Busin
ess
Res
pons
e to
Tre
nds
in C
hina
’s C
onsu
mer
Mar
ket
2014
2
MNCs and Chinese Companies Agree: The “Rise of Digitization” Is a Top Consumer Trend
Exhibit 1
How would you rank these eight key trends in terms of their importance for your industry?Average Rank of the 8 Trends (most important = 1)
MNCsN=53
Chinese CompaniesN=27
Changing Perception of Value
Rise of "Digitization"
Rising Importance of Health & Wellness
Exponential Growth of Consumer Choices
Increasing Connectivity Among Different City Tiers
Consumer Demand for More Transparency
Rise of Importance of Shopping Experience
Evolution of the Family Unit
1
2
3
4
5
6
7
8
4
1
6
2
8
7
3
5
4.2
3.6
4.8
3.9
5.9
4.9
4.1
4.5
3.7
3.8
3.9
4.3
4.8
5.0
5.0
5.5
companies and MNCs have ranked the rise of
digitization as one of the top trends in the
consumer marketplace (See Exhibit 1.).
Yet a significant proportion of both local
players and MNCs are not fully confident
in their readiness to respond to the trend
successfully. A far greater percentage of
Chinese respondents to this year’s survey
(25 percent, compared with 17 percent in
2013) report that they are “fully prepared” to
respond to the digitization trend, compared
with just 6 percent of MNCs, down from 29
percent in 2013.
Companies understand that digitization
represents a major disruption of the Chinese
consumer market, but many are unsure how
to turn that disruption to their advantage.
MNCs, in particular, have been slow to enter
business areas where digitization is creating
the greatest value, possibly because many
are enjoying success in the bricks-and-mortar
marketplace and are reluctant to invest heavily
in digital, where success is uncertain.
Chinese companies, by contrast, are investing
heavily in developing their digital businesses,
devoting an average 25 percent of their
budgets to digital initiatives and online
channel development, compared with 12
percent for MNCs.
Both MNCs and domestic companies say they
lack a clear overall plan to develop and deploy
the capabilities needed to support a successful
digital business. Many local companies
and MNCs aren’t sure which capabilities to
prioritize and develop first.
Despite this uncertainty, Chinese companies
are energetically experimenting with
Busin
ess
Res
pons
e to
Tre
nds
in C
hina
’s C
onsu
mer
Mar
ket
2014
3
“…the pace and volume of digital innovation has captured the business world’s attention…”
opportunities arising from the expanding
digital channel. These experiments take many
forms, and inevitably, many will fall short of
their objectives. Yet the pace and volume of
digital innovation has captured the business
world’s attention and may well produce widely
adopted business models and practices.
China Emerges as a Digital Innovation Hub
Most companies responding to this year’s
survey agree that a few capabilities are crucial.
As they did last year, both Chinese and
MNC respondents to the survey singled out
segmentation and needs assessment as
the top capability need for success in the
digital marketplace. In a new development,
respondents also identified three other
“activation-related” capabilities as increasingly
important to digital success. (See Exhibit 2.)
They are:
Innovation Social influence and advocacy The omni-channel experience
In addition, both MNCs and domestic Chinese
companies also agreed that two key obstacles
inhibit full realization of their digital potential.
(See Exhibit 3.) They are:
Structures or processes that do not
support full development of digital
capabilities Human resources challenges that
inhibit progress in digital capabilities
development—specifically, the ability
to attract entrepreneurial people eager
to conduct high-risk, high-reward
Busin
ess
Res
pons
e to
Tre
nds
in C
hina
’s C
onsu
mer
Mar
ket
2014
4
The Importance of “Activation-Related” Capabilities is Increasing
Exhibit 2
Importance of the CapabilitiesNormalized % of the respondents who prioritize each capability as the first or
second most important for their company
Segmentation & needs assessment
Innovation
Personalization & targeting
Social influence & advocacy
Real-time decision-making
Omni-channel experience
Measurement
Optimized content
2013 2014
100 97
62 100
42 34
13 23
39 29
1 26
7 7
10 1Platforms & Activation
Insights & Analytics
experiments with new ways of doing
business
To overcome these challenges, consumer
facing companies in China will need to find
new ways of attracting and rewarding people
and new ways of organizing work.
Chinese consumer-facing companies are
racing to develop key digital capabilities and
remodel their organizations to develop those
crucial capabilities to their full potential. They
are exploring uncharted territory, finding their
way through trial and error. What follows is a
sampling of some of their experimental forays
into the digital realm. If successful, these
experiments might one day be recognized
as the first manifestations of truly disruptive
innovation. These digital explorers include:
Three Squirrels. This snacks company
has pioneered a direct-to-consumer
model that is creating new value for a
specifically targeted consumer segment
– the young, female Chinese netizen Joyoung. This kitchen home appliance
company is attempting to build a
consumer-to-business model, sourcing
product ideas from consumers and
precisely gauging demand through pre-
sales Huangtaiji. This quick-service
restaurant chain is building brand
equity from scratch by engaging with
consumers through social networks HSTYLE. This fashion apparel
company, part of the Taobao cluster of
companies, has broken down traditional
functional silos and replaced them with
“mini buyer groups”—cross-functional
merchandising teams that operate like
startups. Encouraged to take risks, they
Busin
ess
Res
pons
e to
Tre
nds
in C
hina
’s C
onsu
mer
Mar
ket
2014
5
Human Resources, Organization, and Process Are the Key Barriers
Exhibit 3
Key barriers to the full realization of the potential of the digital trend in China (% of respondents)
MNCs % Chinese Companies %
Existing structures or processes do not support the trend
Human resource challenges
Conflicts between new and existing channels
Demands of the current core business limit resource availability
Technological challenges
Lack of R&D to assess trends
Concerns about intellectual property protection
Challenges in reaching agreement with headquarters on digital strategy
Rising input costs
Challenges in making partnerships work
55 85
43 74
30 56
30 59
26
21
21
15
15
13
48
33
15
7
33
26
“Consumers interact with customer service through a dialogue box featuring a customer-service squirrel”
run their sub-brands with full autonomy
and are rewarded or penalized based
on business results
Segmentation and needs assessment:
Three Squirrels Targets Young Women
Three Squirrels, which launched its first online
store in 2012, is an online-only manufacturer
and marketer of nut products, which it sells
through the Tmall, an electronic business-
to-consumer marketplace, and other e-tailer
websites such as Jingdong. After focusing
on consumer segmentation and needs
assessment, it devised a marketing strategy
aimed squarely at young female consumers,
a key segment in Chinese e-commerce. These
affluent and aspirational young shoppers
consume most of their media online, via both
personal computers and, to an increasing
extent, mobile devices. Three Squirrels’
marketing is designed with their online habits
and preferences in mind. It aims to deliver an
end-to-end brand experience with maximum
impact at two key “moments of truth”—the
moment the consumer lands on the website,
and the moment she receives her order.
The company’s strategy depends on detailed
mapping of the customer experience. The
experience begins with cartoon characters
representing the three squirrels in the
company name, who greet visitors to a
colorful, kinetic website. Consumers interact
with customer service through a dialogue box
featuring a customer-service “squirrel” who
answers questions and offers guidance to its
“master”—that is, the shopper.
Busin
ess
Res
pons
e to
Tre
nds
in C
hina
’s C
onsu
mer
Mar
ket
2014
6
Product delivery offers the second “moment
of truth” brand-building opportunity. The
specially designed Three Squirrels delivery
box includes a free box opener packaged
with a letter, addressed to “Dear Master,” that
thanks the consumer for her purchase. The
nut products arrive in vacuum-sealed bags
rather than the conventional cans and boxes
that consumers would find on store shelves.
Along with easy-to-use return forms, the order
includes a free clip for resealing the bag in
case the nuts aren’t consumed in a single
sitting, as well as tissues for cleaning the
hands after eating and a small trash bag for
disposing waste.
The company’s online-only, direct-to-consumer
business model has also given Three Squirrels
the opportunity to restructure the value chain.
Selling exclusively through online channels
simplifies distribution and lowers associated
costs, while the shorter value chain means
the nuts are fresher when they arrive at the
consumer. They also cost less than brands
and products sold through offline channels,
bolstering Three Squirrels’ consumer value
proposition.
Only time will tell if the experiment succeeds,
but it’s already clear that its digital, direct-
to-consumer model has reconfigured the
experience of shopping for a packaged food
product, creating new consumer value through
product freshness and price competitiveness.
The consumers that Three Squirrels is
targeting today are largely limited to digitally
savvy young female consumers. As the digital
generation comes of age, however, Three
Squirrels’ business model could spread to
other segments and disrupt the fast-moving
consumer goods space.
innovation:
Joyoung Crowd-Sources Product Design
Joyoung, a maker and marketer of kitchen
appliances, has approximately 4,000
employees. One-quarter of them work in
innovation and development. Joyoung is the
first Chinese consumer appliance maker to
borrow a page from the playbook of Xiaomi,
the Chinese telephone handset maker
that solicits online feedback to design its
products. It has quickly grown into one of the
country’s major players in smartphone sales.
Like Xiaomi, Joyoung is a product innovator,
enlisting its customers to help design its
flagship product, a one-cup soy milk machine
modeled on single-serving coffee and tea
dispensers.
In December 2013, Joyoung released the beta
model of the dispenser to a select group of
enthusiastic company loyalists and solicited
their feedback to refine it. It then gathered
online orders for the upgraded version of the
dispensers. Only when those orders passed
a predetermined threshold did Joyoung give
its manufacturing vendor the go-ahead to
produce it.
This reversal of the typical manufactured-
goods value chain, achieved by leveraging
the online channel, enabled the company to
start production only when it could do so at
scale. And with pre-orders in hand, Joyoung
did not have to tie up capital in inventory—
Busin
ess
Res
pons
e to
Tre
nds
in C
hina
’s C
onsu
mer
Mar
ket
2014
7
IMA
GIN
ECH
INA
instead, it sold virtually every unit before it
was produced.
It is an open question whether a new
model of product innovation and supply
chain like Joyoung’s will succeed in the
marketplace. After launching its beta model
end of 2013, Joyoung has reported that
sales have fallen somewhat short of its
original high expectations. The reasons for
the disappointing results are unclear, but
the reversed consumer-to-business model is
potentially disruptive. In the future we could
see other companies base new products on
instant and early consumer inputs and reshape
the supply-demand curve through pre-sales.
Social Influence and Advocacy:
Huangtaiji Goes Online to Build Excitement
Huangtaiji, a new player in the quick-service
restaurant space, is making creative use of
social media to build interest and excitement
Busin
ess
Res
pons
e to
Tre
nds
in C
hina
’s C
onsu
mer
Mar
ket
2014
8
around its menu of traditional Chinese
pancakes and other breakfast foods. It was
founded in 2012 by He Chang, who earlier in
his career worked at Baidu, travel site Qunaer,
and Google.
With ambitions to rival quick-service giants
such as KFC and McDonalds, Huangtaiji has
thrown out the traditional marketing textbook,
opting instead to build its brand using social
media such as Weibo, Wechat, and Dazhong
Dianping. With 110,000 followers on Weibo
alone, Huangtaiji has conducted offbeat social-
media campaigns to generate excitement for
its products and services. To promote its home-
delivery service, for example, it staged an event
in which Huangtaiji’s pancakes were delivered
by Tesla electric sports cars—all of it covered on
social media, complete with video clips.
Huangtaiji’s most audacious marketing
initiative, however, may be its promotion
of its management team, which takes as its
model the hyping of a new pop-music group.
The company encourages its social-media
Busin
ess
Res
pons
e to
Tre
nds
in C
hina
’s C
onsu
mer
Mar
ket
2014
9
followers to choose their favorite Huangtaiji
executive and cheer him on against other
executives.
The initial success of Huangtaiji is a wake-
up call for established brands that used
their scale and dominance of one-way
media channels such as television to speak
to consumers. In today’s environment of
ubiquitous social media, brand-building has
become far more competitive and less reliant
on sheer scale to establish advantage. Content
marketing is becoming more critical. Whoever
can identify, create, and stimulate the spread
of relevant content and associate it with a
specific brand will emerge the winner.
organizational innovation:
At HSTYLE, Small is Beautiful
In addition to focusing on activation-related
digital capabilities (segmentation and needs
analysis, innovation, social influence and
advocacy, and the omni-channel experience),
consumer-facing companies in China are also
reorganizing themselves for the digital world
to address the organizational challenges,
especially the challenge of attracting top-
notch talent. They are prototyping nimble,
entrepreneurial organizations that remove
barriers to innovation and push decision-
making and P&L responsibility down to front-
line employees.
HSTYLE is one of these cutting-edge
innovators. The Shandong-based apparel
retailer, founded in 2008 and now with
roughly 2,300 employees, courts fashion-
conscious consumers with brands such as
AMH, MiniZaru, NANADAY, Soneed, Forqueens,
Dequanna, niBBuns, Souline, and ZIGU.
One of HSTYLE’s organizational experiments
is its designer-to-consumer model, anchored
by “mini-buyer organizations.” Each mini-
buyer group competes with each other group
for budget allocations. The teams typically
consist of five employees, who own P&L and
are responsible for style selection, design,
marketing and sales. As of 2013, about 130
mini-buyer groups were operating at HSTYLE.
Each team operates like a small startup within
the larger organization, with responsibility for
designing or selecting apparel sourced from
South Korea. They all operate under the same
basic ground rules, with their startup capital
and monthly budgets governed by strict
limits. The three top mini-buyer teams (based
on their six-month sales records) are awarded
a budget bonus. The three teams with the
IMA
GIN
ECH
INA
Busin
ess
Res
pons
e to
Tre
nds
in C
hina
’s C
onsu
mer
Mar
ket
2014
10
lowest six-month sales are disbanded.
The teams subcontract many business
functions to shared service providers within
the organization. A central warehouse
operation, for example, provides logistics
and inventory support, while a central HSTYLE
call center handles customer inquiries.
Another central group handles photographic
work. These central service organizations
are themselves set up as profit centers,
negotiating contracts with their internal
customers, the mini-buyer teams, and
competing with each other for resources and
rewards.
An organizational model centered around
many small startup teams that share resources
is not entirely new. For years, information
and technology business such as software
development and professional services
firms such as consultancies have embraced
a similar model. But the rising importance
of digital agility in both the marketplace
and the workplace could lead companies in
historically information-light industries such
as manufacturing to adopt the flat and flexible
design of software and professional services
organizations.
The Next World Capital of Innovation?
Chinese e-tailers have made an aggressive bet
on their digital potential. Chinese companies
are beginning to differentiate themselves
from their MNC rivals, according to the 2014
survey. They are investing more intensively
than MNCs to develop the online channel and
to install governance mechanisms tailored to
digital strategies. (See Exhibit 4.)
Exhibit 4
Chinese companies Are Investing More Aggressively to
Develop the Online Channel
Average share of sales from online channels
Average share of budget dedicated to digital initiatives and online channel development
2014 2020(expected)
11%
20%
24%
37%
2014 2020(expected)
12%
25%
22%
35%
Chinese Companies
MNCs
Note: the expected figures for 2020 are self-reported in the 2014 survey by respondents
Busin
ess
Res
pons
e to
Tre
nds
in C
hina
’s C
onsu
mer
Mar
ket
2014
11
Note: the expected figures for 2020 are self-
reported in the 2014 survey by respondents
As a result of these moves, a growing
proportion of Chinese companies have been
designated “leaders” by Strategy&’s “Digital
Profiler” tool, which categorizes companies
as leaders, scholars, pioneers, or novices,
depending on the extent and intensity of their
digital activities. (See Exhibit 5.) In 2104, 44
percent of the Chinese companies responding
to the survey qualify as leaders, up from 26
percent in 2013. By comparison, 34 of MNCs
responding to the survey in 2014 are classed
as leaders, up from 21 percent in 2013.
By virtue of their rapid development of key
digital capabilities, Chinese companies are
emerging as leaders of the new global digital
economy. No longer content with copying the
developed world’s digital business models,
they are innovating their own, while Chinese
venture financiers are funding startups in
digital hotspots such as Silicon Valley and Tel
Aviv.
A growing number of cutting-edge Chinese
companies have developed innovative
organizational models to address a highly
connected marketplace. In a shift from the
days when Chinese digital enterprises copied
Chinese Companies Continue to Outperform MNCs as Digital Leaders
Exhibit 5
89 53
58
80 27
31
China 2013 China 2014
Digital Profiler Comparison2013 vs. 2014
MNCs vs. Chinese CompaniesYear 2014
Year 2013
MNCs
MNCs
Chinese Companies
Chinese Companies
22%
38%
13%
10%
40%
6%
7%
65%
34%
21% 26%
65%66%
44%
52%
19%
13%
34%
4% 0%
3% 6%9%5%
Leaders Pioneers
Scholars Novice
Busin
ess
Res
pons
e to
Tre
nds
in C
hina
’s C
onsu
mer
Mar
ket
2014
13
U.S. companies such as Google and Amazon,
digital entrepreneurs in the U.S. are now
borrowing concepts and models from Chinese
companies—often with funding from Chinese
or China-connected sources. This development
might well turn out to be early evidence of
China’s transformation from a production
center to an innovation center.
Will China become a net exporter of
innovation in digital practices? Will its digital
innovations produce the next world-beating
global company? It’s starting to look that way.
Over the past decade, Chinese companies
such as Alibaba and Taobao have emerged
onto the global stage thanks in large part to
their relentless innovation, which is one of
the top priorities of Chinese executives with
international ambitions for their organizations.
The upshot: many of the digital innovations
coming on the scene in China today may well
spread to the global marketplace tomorrow,
challenging MNCs in their own proverbial
backyards.
Such is the nature of competition in the
digitally driven 21st century. With computing
power ubiquitous and ever less costly, barriers
to entry have crumbled away. The idea of
sustainable competitive advantage begins to
appear almost quaint in an environment when
competition can spring up out of nowhere,
virtually overnight.
Much of that competition is sure to emerge
from China. Because of the unique way that
China’s demand economy has developed,
the marketplace is something of a blank
canvas, where entrepreneurs can devise
new models unburdened by legacy forms of
doing business. As a result, China’s digital
marketplace is an arena where big risks and
bold experiments are the order of the day and
entrepreneurs are culture heroes. The energy,
skill, and resilience of these pioneers may
well transform China into the global capital of
digital innovation.
SHU
TT
ERST
OC
K
About The American Chamber of Commerce in ShanghaiThe American Chamber of Commerce in Shanghai (AmCham Shanghai), known as the “Voice of
American Business in China,” is the largest and fastest growing American Chamber in the Asia
Pacific region. Founded in 1915, AmCham Shanghai was the third American Chamber established
outside the United States. As a non-profit, non-partisan business organization, AmCham
Shanghai is committed to the principles of free trade, open markets, private enterprise and the
unrestricted flow of information.
For more information, please visit: www.amcham-shanghai.org.
About Strategy&Strategy& is a global team of practical strategists committed to helping you seize essential
advantage.
We do that by working alongside you to solve your toughest problems and helping you
capture your greatest opportunities. We bring 100 years of strategy consulting experience and
the unrivaled industry and functional capabilities of the PwC network to the task.
We are a member of the PwC network of firms in 157 countries with more than 195,000
people committed to delivering quality in assurance, tax, and advisory services.