Changing China’s Cheap, Cheap Chirps.

At the World Retail Congress in 2009 the Chinese Government delegation presented an interesting snapshot of the changes afoot in China. While the external view of the country may for many be that of a cheap source of production based on low wage costs, the reality is that China’s middle class ranks are swelling rapidly. At the time of the presentation, Chinese government statistics showed that the annual growth of China’s middle class was equal to the entire population of Australia (i.e. more than 22 million people per annum).

The middle class of China is projected to be more than 70% of the population within 15 years. That is more than 700 million middle class or more than twice the entire population of the USA – consuming as a middle class.

Recent findings among some retail businesses sourcing from China have begun to relay increasing issues from meeting timeframes to even finding factories that will take the orders at all. Not to mention price rises. Anecdotal evidence cites stories of factory workers finding it more lucrative to work at a Starbucks in Northern China near where their families live than to work at a factory in Southern China for low wages and no quality of life. Factories are moving west and north in China as the shift in the source of low-wage workers gains pace.

A similar story is emerging in India and throughout the Asian region as the tidal shift of global sourcing rapidly grows the economy and livelihood of countries that provide low-cost workers one day and middle class consumers the next. India is projected to have more tertiary educated people than the United States population within this decade.

The global sourcing cycle that picked up steam 20 years ago has become such a well-oiled machine that the seemingly insatiable thirst for cheap goods may indeed burn itself out in the next 20 years due to lack of sourcing capability. The current model in many retail categories of low cost over-powering lack of differentiation will come under increasing pressure as costs are forced upward and customers realign spending behavior. Truth be told, while it will create some challenges, this is great news for customers and retailers alike.

At a time when the internet will increasingly challenge the current distribution paradigm, retail businesses will be forced to embrace uniqueness, value-adding and new sources of supply to provide value for an increasing price. This cycle will even see the reversal of global sourcing in favor of selective domestic manufacturing and the re-discovery of the local artisan. Customers were already showing serious signs of fatigue with the disposable culture that has propagated over the past 30 years and customer trends are signaling a re-discovery of quality and desire for ‘built to last’ not built to a cost or fit for purpose.

With increased margins, retail will once again be able to invest in creativity, originality and risk, knowing that we can price for it in our revenue models. It will allow brand franchises to be more defendable and cheap price to return to its historical reason for being – to genuinely clear old stock, to allow for sampling and market share initiatives and to stimulate sales in a crisis rather than becoming an everyday tool. This will be ‘the inflation we have to have’. It will signal the renaissance of real alternatives for a customer base that is sick and tired of commoditized sameness and cheap price masquerading as choice. Start planning for it.