Doors are open to China's home-improvement market

But the conventional furniture market is changing

As China's middle class continues to expand, its demand for high-end home improvement is soaring. There is a consensus among industry observers that international brands offer the value that Chinese middle-class and high- net-worth homeowners seek when planning to furnish their homes. Moreover, after a decade of relentless residential expansion in the country, homeowners may be expected to shift from refurbishing their homes entirely to working on them room by room. In the near term, homeowners are already looking to social media and online tools for home improvement ideas and advice. These channels open new doors to China's home-improvement market for foreign brands.

The market prospects are attractive for overseas manufacturers, with ready demand at the high end. Foreign brands in the handcrafted furniture market, as opposed to cheap disposable furniture made in automated factories, have no choice but to aim upmarket due to their home labor market pressure. These goods are expensive to make overseas. Chinese workshops can build furnishings in similar styles with some variance in quality, but much more cheaply.

While overseas brands are likely to be trusted for their quality and recognized by their names, personal tastes and preferences of upper middle-class and more affluent buyers indicate where the best opportunities lie for foreign brands. Demand is style-driven, and partly brand-driven, but not origin-driven - that is, it does not seem to matter whether the products are made overseas or not.

For now, pricing is also a factor for the middle class, if not for high-net-worth homeowners. There are three aspects to design of one's home: identity, desire, and personality, and the weighting among them is different. Newly wealthy people in China want their homes to reflect their identity.

As this identity is defined by one's status in terms of wealth or social position, people do not mind spending more to furnish their homes. However, brands that invest sufficiently in China to offer warranty service and other customer support can expect added returns.

With the influence of Western culture and lifestyles, there is increasing preference for Western-style design and decor among the middle class. Classic American-style furnishings and spacious open kitchens are in fashion, even though ranges and ovens are not needed for Chinese home cooking.

There is a narrow market of wealthier customers with a preference for traditional Chinese furniture made of hongmu, or Chinese rosewood. Yet most people do not have a historical view on the context of furniture.

More often Chinese homeowners prefer styles from overseas: Northern European, American, French - usually Western styles, with less interest in traditional Chinese styles of furniture. Middle-class Chinese are willing to order goods from halfway around the world to furnish their homes. Homeowners in first-tier cities would not mind shopping online and paying high shipping rates to buy their furniture and home decor accessories from overseas.

There is strong demand for products made wholly of genuine, natural materials rather than plastic. Chinese buyers at the high end do not like plastic, preferring the feel and pattern of real wood.

For those home decorators with something very specific in mind, China hosts an extensive market of "copy-and-customize" furniture builders who can reproduce furnishing designs produced by overseas brands. Through the online market Taobao, consumers can easily find hundreds of small workshops that offer furniture tailor-made for their new home. But this demand is constrained by other factors: first, the inconvenience of seeking out and selecting from different vendors for different items; and second, the risk of bringing home items made of materials that are unsafe for the indoor environment.

Heads of household among the emerging middle class in first-tier cities, especially in Shanghai, are increasingly attentive to the environmental safety of the home construction materials and furniture they choose. They are willing to pay a premium for more environmentally safe products, such as low-formaldehyde paint and solid wooden furniture. Chinese care very much about the safety of their children and families, and this is the cause for their diligence, rather than socially motivated concern for the broader environment.

Despite notoriously crowded conditions in China's cities, per capita space within the typical home is increasing, so that even in the urban core more spacious apartments are being built. This would suggest that homes in China are getting larger everywhere, not just in the outer urban developments around the first-tier cities.

At present, Chinese home improvements are more transformational than the room-by-room projects often seen in North America.

When homeowners move into a new space they start off with an empty apartment or home and decorate it from top to bottom; or if they have bought an existing home they will hire contractors to strip out the existing decor and remodel it. Each neighborhood in every big city in China has a pool of skilled and semi-skilled tradesmen available to redecorate a home.

As for the cost, it is common to see homeowners spend between 500,000 yuan ($80,200; 58,800 euros) and 800,000 yuan to refurbish a property valued at 2 to 3 million yuan.

However, this pattern may be about to change. The Chinese government now encourages developers to decorate their new home projects before final sale, putting them in charge of decoration decisions for their projects. Moreover, restrictions on issuing mortgages will keep homeowners in one place for longer periods, during which owners' changing preferences and daily wear-and-tear are likely to drive homeowners to make piecemeal changes to their homes.

As the cumulative costs of room-by-room changes are often greater than those of a complete renovation, home-furnishing makers stand to benefit by preparing now for this generational shift in home-improvement phasing.

Compared with high-net-worth homeowners, the purchasing behavior of the rising middle class regarding home improvement is more sophisticated. Wealthier homeowners will go to a store and just present the staff with a budget to fill, lacking confidence that they themselves have the good taste to decide what is appropriate for their home.

In contrast, middle-class homeowners are inclined to choose, compare, and select materials and furniture by themselves based on information collected from different sources, including social media. Younger and upper middle-class homeowners are more interested in viewing online showcases and sharing knowledge with others who are going through the process or have done so before. For these consumers, word of mouth is the most important channel when deciding what or where to buy.

"Word of mouth" among homeowners is being complemented and extended by the entrance of social media sites that allow people to showcase their home decoration and remodeling projects all the way through the process. This observation indicates a shift away from the conventional marketing channel for home furnishings: the furniture showroom. In China, the online showcase and other social media are becoming the consumer's first point of contact with the brand. The use of social media and online presence will be a key factor in foreign brands' success in China. Brands such as Ikea are already adept at using online media to tell prospective buyers about their products' features and functionality. In a premium market such as China's first-tier cities, everyone walking into a store or showroom has a smartphone, and they do not trust the salespeople. Buyers can and will know what they are looking for before visiting the showroom.

In the end, the value of the physical store and its showroom has decreased, as people share pictures, knowledge, and ideas with each other by posting them online. With their ability to create and nurture online communities of enthusiastic customers, international brands are best positioned to take advantage of this market turn.

Wakeman Gao is a director in Deloitte's Commercial Strategy and Research practice. Crystal Wang is an associate director in the practice. William Hillis of Deloitte also contributed to this article. The views do not necessarily reflect those of China Daily.

(China Daily 02/08/2013 page10)