Letter from China: Where the consumer is queen

August 18, 2010: 9:54 PM ET

Fortune senior editor Jennifer Reingold is filing dispatches from China, where she is traveling with Procter & Gamble CEO Robert McDonald to observe the company's growing emphasis on Asia.

The apartment could be in an wealthy neighborhood in Paris or Manhattan: a gleaming kitchen with coffeemaker, a balcony with a child's bike perched outside, and his and her laptops. Instead, it belongs to an eager representative of China's exploding upper class, a 31-year old bank manager in Shanghai who is watching proudly as Bob McDonald, the CEO of Procter & Gamble (PG), inspects the contents of her bathroom cabinet.

Ms. Xiao, the bank manager, has no idea that the guy checking out her body wash is the head of a $80 billion company. She knows only that a company is conducting market research, and she has taken a day off to let a team of nosy notetakers pile into her flat to look at her laundry detergent (a local Chinese brand), her shampoo (Pantene, owned by P&G)  and her husband's razor (electric, disappointingly for the owners of Gillette). "The bathroom is the real treasure trove," says Shannan Stevenson, president of Greater China for P&G, with a smile. But he's not joking.

Consumer research is not new, of course. But at P&G, it's part of almost every decision the company makes, particularly in China, which McDonald sees as possibly the most important element of the company's future growth. It's not hard to understand why: P&G has been in China since 1988 and reaches 1 billion consumers here already. With the economy now passing Japan to become the second largest in the world, the potential for more is mouthwatering.

That's why McDonald and Stevenson are eagerly sitting on Ms. Xiao's spotless white couch, asking her not just what shampoo she uses, but what her life's desires are. When she is asked what she hopes for in her life, Ms. Xiao, an upwardly mobile member of a two career family making about 60,000 RMB/year (approximately $10,000), wants the same things we all want: good health for her family, a steady and challenging job, a better life for her 16-month old baby than she had.

When it comes to material comforts, at least, her life is light years beyond that of her parents. Ms. Xiao, who P&G categorizes as a "Level 1" customer because of her economic status (in general, the company uses a 1 to 3 scale to divide its customers in every country), carries a Burberry purse and wears a Hermes belt. She has a car, travels internationally, and, although she says she spends only five to seven minutes per day on skincare since having a child, opens a bathroom cabinet to reveal a pile of luxury products including P&G's SK-II—its superpremium brand, Evian misting spray, and Shiseido toner.  She is also wise to trends: When asked whether she uses Pantene's combined shampoo/conditioner, she says, with a slight eye roll: "That's so 10 years ago."

Ms. Xiao is hardly typical for China—only 5% of the country fits her economic profile—but 5% of 1.3 billion is nothing to sneeze at. In fact, for a company like P&G, it is much more likely that her tastes will determine its future than those of the Americans around whom the company was built.

Update: An earlier version of this story referred to China's population as 2 billion. According to the World Bank, it is 1.3 billion.

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