The inexorable rise of the Chinese middle class cannot be denied. Starting with the market liberalizations put forward by former leader Deng Xiaoping in the late ‘70s and early ‘80s China has been transformed. Deng’s policies started the process that changed China from an impoverished nation rife with political chaos to a country that now has the biggest middle class in the world.
550 million middle class consumers by 2023
According to a McKinsey analysis, the Chinese middle class could reach 550 million by 2023. Some might quibble with that assessment, citing the fact that there can be different definitions of what ‘middle class’ means. According to the site ChinaPower, about 29% of the country is ‘lower middle class,’ meaning they spend between $10 and $20 a day. Another 9.7% is ‘upper middle class,’ which spends from $20 to $50 a day. About 0.8% of the country can afford to spend more that $50 a day. However you draw the boundaries, this is a huge market of people who can afford to spend on dietary supplements and other consumers goods.
Walmart is one US company that has bet hard on China. The company has been doing business in the country for more than 20 years, but recently doubled down on its investment and reportedly plans to build an additional 14 Sams Club membership stores there by 2022, bringing its total to 45. Walmart reportedly spent more than $45 million on its Chinese operations in the 12 months leading up to September 2019.
Domestic Chinese brands are competing well in some segments. For example, according to CNBC, homegrown sneaker company Huili is posting far greater sales growth than foreign competitors Adidas and Nike.
Made in USA supplements in demand
But in the dietary supplement realm, ‘made in USA’ is still a powerful brand statement. The hangover from the 2008 melamine scandal shows now sign of dissipating, and the US made products enjoy a halo of healthfulness and trustworthiness vis a vis their Chinese made competitors.
While that shows no signs of changing in the immediate future, the internal market dynamics are shifting in a way that is unfavorable for some US-based firms.
Getting shelf space in China for products like dietary supplements is complicated by a gifting culture within the society. In this, consumers buy products to give to business associates, friends and family members that are packaged in elaborate boxes which take up a lot more shelf space than the lone bottle would.
One of the way this slack has been taken up is in the sale of dietary supplements via variants of the multi level marketing platform that has been so successful elsewhere. Herbalife, Amway, NuSkin and Usana are among the leading US-based MLMs that have significant business in China.
These companies enjoyed steady and rapid sales growth until the government started to turn up the regulatory pressure on the sector in 2017. In early 2019 the government instituted a ‘100-day’ review of the sector.
Market in flux
Since then, the market has been in flux for companies selling via this model. According to Charles Diao, regulatory manager at the US-China Health Products Association, consumer confidence in the direct selling model has slipped.
The biggest market for dietary supplements worldwide is still in North America. But MLM sales numbers have been decline here for a number of years for a variety of reasons, including increased competition from other, lower cost sales platforms for supplements and a tight labor market which sees fewer people looking for second income opportunities. In light that development, many MLMs that sell supplements have been banking on China as the future growth engine.
The recent regulatory challenges have led to the rise of alternative models. These include cross border commerce and the so-called SOSO mode (sales offshore service onshore) in which distributors earn single commissions on sales and additional service fees in a compensation structure that somewhat approximates a traditional MLM.
For the reasons stated above the middle class and therefore the overall market for dietary supplements is sure to grow. But whether the big MLMs, saddled with associations with a somewhat discredited business model, will figure into that growth as much as they have in the past is no longer as sure as it once was.