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China’s 400 million-strong middle-income group is the main force driving high-end product consumption.
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The high-end cigarette segment continues to grow with demand also growing for innovative products.
Mencius (Mencius (l. 372-289 BCE, also known as Mang-Tze or Mang-Tzu) was a Confucian philosopher during The Warring States Period in China (c. 481-221 BCE) and is considered the greatest after Confucius himself for his interpretation, formulation, and dissemination of Confucian concepts, said, “The people are the way, and those who have permanent property have perseverance, and those who do not have permanent property have no perseverance.” This means people with stable incomes and fixed property seek a peaceful living environment, and vice versa. This type of group is often referred to as the middle class in foreign countries, and the “middle-income group” in China. Their consumption ability and new concepts have provided many opportunities and markets for the rise of brands.
According to national statistical data, the middle-income group in China has reached 400 million, accounting for nearly one-third of the total population and nearly 50% of the total consumption proportion. The rapid growth of the group has driven the continuous growth of high-end consumption, becoming the main force of high-end product consumption. The most direct impact they have brought to the cigarette market is twofold. Firstly, they have promoted the increasing prosperity of the high-end cigarette market, and secondly, their high demand for products has further promoted the leap of high-end brands in terms of culture and quality.
Booming high-end cigarette market
In 2022, China’s general tier-1 class of cigarettes (retail price at RMB*190-300/carton) continued the good trend of the previous two years, achieving almost double-digit year-on-year growth rate in 2022, providing over 70% of sales and over 60% of growth for tier-1 class cigarettes (retail price above RMB190/carton). Undoubtedly, Chinese cigarette consumption has quietly moved up the mainstream price band in the market. The mainstream consumption price range of cigarettes has gone through multiple price ranges such as RMB60, RMB100, RMB130, RMB170, and RMB200/carton. Nowadays, cigarettes priced at RMB20/pack have almost become regular consumption for smokers, but cigarette prices are still collectively going “upward”. When the main-stream consumption price range of cigarettes was beyond RMB200/carton in 2019, the range from RMB200-400/carton was constantly expanding, becoming the most crowded price range. The best-selling cigarettes have also shifted from conventional cigarettes to increasingly exquisite slim cigarettes, capsule cigarettes, and those with various filters. Cigarette consumption is becoming increasingly diversified, and consumers’ demand for innovation is also increasing.
Due to the price range of RMB200-300/carton has become very common, the “reasonable price + excellent quality” price range of RMB400-600/carton is gradually showing great potential. This price range has both scale potential and can better support new technologies and experiences, new needs, and trends. Therefore, many high-end brands like Yellow Crane Tower, Huangshan, Yuxi, Yunyan, Liqun, and Zhonghwa go in for investing in new products in this price range, receiving good market feedback.
Greatly improved in culture and quality
Although the middle-income group has a decent income, it does not mean they pursue luxury in their consumption. Due to their good cultural literacy, they pay more attention to the internal cultivation and details of products. The decisive factor in choosing a product is not the price, but the combined effect of various factors such as quality, sentiment, philosophy, culture, brand, and experience. They are willing to pay a higher price for products that meet their material and spiritual needs. Therefore, products featuring high technology and elegant cultural style are highly favored, which greatly promote the dual improvement of culture and quality of high-end cigarettes.
In order to adapt to market demand, many cigarette companies under China National Tobacco Corporation (CNTC) generally optimize and upgrade innovative methods to prioritize the application in high-end products.
When it comes to technological innovation, the Chinese cigarette industry has continuously applied some advanced technologies to product practice and received good market feedback. For instance, China Tobacco (Yunnan) Industrial Corporation pioneered the non-burn flavoring theory, sparking a revolution in cigarette flavoring, and applied it in the Dazhongjiu brand. China Tobacco (Anhui) extracts Huoshan Dendrobium and enables it to be the core feature of the Huangshan brand, promoting its rapid development in recent years. Other examples include Nanjing (Yuhuashi, 3mg) which set a new milestone for Chinese slim cigarettes with ultra-low tar; Yellow Crane Tower (Window) which pioneered a triad, transparent hollow filter with vortex fragrance that physically regulates the scent in different stages along with a small window on the cigarette embodying a futuristic sense of technology; and Yunyan (Black Diamond Impression) which pioneered the black-gold color combination, starting a new trend in elevating industrial design to modern minimalist aesthetics. The above three products made technological innovations in quality that meet the preferences of the middle-income group in terms of cigarette harm reduction, flavoring technology, and packing aesthetics.
The following seven high-end cigarette brands of Chunghwa, Liqun, Lotus, Yellow Crane Tower, Furong King, Kuanzhai, and Nanjing have achieved the most market growth by enhancing cultural quality and stimulating emotional resonance. The luxurious Chunghwa, elegant and noble Lotus, calm and cool Liqun, and the refined style of Yellow Crane Tower all highly align with the spiritual world of the middle-income group at the cultural level.
Overall, with the development of the economy, the middle-income group is still expanding, so as their consumption ability and intention. According to national statistics data, it is expected that the proportion of middle-income group will exceed 50% by 2030, contributing nearly 80% of the overall consumption of residents, and becoming the main force of consumption. This indicates that China’s high-end consumption momentum is still strong. For a long time to come, how to innovate and enrich cigarette products in the high-end market and continuing to improve the quality of Chinese cigarette brands will be an important issue faced by the Chinese tobacco industry.
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* US$1.00 = RMB7.05