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The buying power of the Chinese middle class

David Gura Mar 3, 2015
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The buying power of the Chinese middle class

David Gura Mar 3, 2015
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It’s dinnertime in Shanghai, China, and Ji Shengxian and some friends are eating at Pizza Express.

“It is probably one of the most tasty pizza restaurants I have tried in China,” Ji says. “It instantly surpasses pizzas from Pizza Hut and Papa John’s.”

Ji says she is a big fan of the carpaccio.

“Their raw ingredients are very fresh, and they have pizzas with Chinese elements, such as the roasted Peking duck pizza.” she says.

Pizza Express is a chain, and it does what is called “premium casual” dining. Each restaurant looks modern and airy, and there is an open kitchen. It was founded in London, England, about 50 years ago, and today, there are around 500 restaurants worldwide, including 22 in China.

The plan is for that number to grow — a few months ago, a Beijing-based private equity firm bought the chain for $1.5 billion.

“The private equity industry in China has come of age over the last 20 years, and is now a very substantial component of the economy,” says Tom Manning. For two decades, he did business in Asia; now, he teaches at the University of Chicago.

Last year, private equity deals in China totaled $70 billion — up more than 100 percent from 2013, and a lot of that investment was in consumer products. And now there are big firms financed and run by Chinese executives that are based there, and with that, the focus of private equity investment has started to shift.  

For years, Chinese private equity firms invested millions in mining and manufacturing. For the most part, they weren’t interested in restaurants and retail, but that has started to change. According to Manning, “The consumer products area is a great example, because in many cases, the market is just being built out.”

That is thanks to the size of China’s middle class – how much it has grown recently, and how much it is expected to grow.

“China’s middle-class growth even at a less-than-expected rate on an absolute scale is going to be huge,” says Paul Swinand, a retail analyst at Morningstar. He is talking about half a billion middle-class consumers in China in five years’ time. Just think about that purchasing power. What we are seeing, he says, is a shift. For a long time, the focus was on Ferraris and Fendis.

“Now, other aspirational luxury brands, like Coach, have gotten a lot stronger relative to their, quote, higher-end competitors,” says Swinand. These are brands that are expensive, but not as expensive, that still say something about the person who has bought them.

“Aspirational luxury” is the sweet spot Chinese investors are trying to target, and they are scouring Europe and the United States to identify brands that could appeal to a new class of consumers.

“The people with purchasing power just love to have Western brands,” says Z. John Zhang, a professor of marketing at the University of Pennsylvania’s Wharton School. There are companies that make good money off of cache, licensing Western brands – what he calls “defunct” Western brands – to Chinese manufacturers.

“So, you don’t really see London Fog very much here,” he says. London Fog has been around for almost a century, and a company bought it out of bankruptcy almost a decade ago. “But you go to China, and some manufacturer will buy the particular brand and use the particular brand to sell the product inside of China.”

According to Swinand, sometimes the closer you are to a brand, the more familiar you are with its history and how it is perceived, the uglier it looks. “A brand that maybe needs a little sprucing up or dusting off or repositioning could be really big in China,” he says.

A Chinese conglomerate just bought the American clothing company St. John. It also bought Club Med. The thinking is there will be many millions of middle-class Chinese eager and now able to travel.

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