McKinsey’s latest China Consumer Report explains the many faces of today’s Chinese consumer and helps pinpoint the opportunities that exist for exporters worldwide.
2019 may have delivered a slowing GDP and a trade dispute with the US, but there’s plenty of evidence to suggest that, despite struggling investment, exports and manufacturing in China’s powerhouse economy, there’s still confidence and remarkable diversity within the country’s vast consumer base. As McKinsey’s China Consumer Report 2020 (“The Many Faces of the Chinese Consumer”) points out, China’s Consumer Confidence Index hit a ten-year high in early 2019.
That confidence remained high through the year – demonstrated best by the record-breaking ‘Double 11’ spend-up (up 31 percent at RMB410 billion) in November.
As the report states: “the overall pace at which Chinese consumption has grown is almost hard to imagine: Just a decade ago, most urban Chinese had enough money to cover basic needs like food, clothes, and housing (92 percent had annual household disposable incomes of RMB140,000 or less).
“Today, half are living in relatively well-to-do households (annual disposable incomes of RMB140,000- 300,000) where they have ample funds for perks like regular meals out, beauty products, flat screen TVs, and holiday travel.”
Chinese consumers have now split into two main segments – those in lower tier cities still spending as if there is no tomorrow; and those in mostly large, expensive tier-one cities such as Beijing, Shanghai and Guangzhou who have adjusted their spending in line with China’s economic slowdown.
The 2020 McKinsey report identifies five key consumer trends that exporters targeting the China market must understand to help formulate export strategies and keep on top of their game in one of the world’s most dynamic marketplaces.
They are summarised below.
Young free spenders
The young, free-spending category of consumers is largely responsible for China’s continued consumer spending surge. Living in mostly tier 2, 3 or 4 cities, where living costs are lower, they have the disposable income, optimisim, and spend their money easily on items such as tech devices, overseas trips or high-end skincare. They eat-out often, follow the latest trends and buy products to enhance their lifestyle and social status.
While the segment accounted for just a quarter of the report’s survey population, it is responsible for almost 60 percent of 2018’s total spending growth over 2017. The Report highlights the fact that the number of middle and upper middle-class consumers in smaller, lower-profile tier 3 and 4 cities has risen rapidly.
“The number of households with annual disposable income of RMB140,000-300,000 in tier 3 and 4 cities increased by 38 percent CAGR from 2010 to 2018, greater than the 23 percent growth seen in tier 1 and 2 cities.
“These relatively affluent households now account for more than 34 percent of the population in tier 3 and 4 cities, nearly the proportion found in high-tier cities five years ago.”
Young Free Spenders may be immune to China’s economic slowdown, but the majority of Chinese consumers are not, and are therefore showing caution in their spending.
These cautious and discerning consumers are generally busy, affluent, middle aged Chinese who, unlike their free spending counterparts, don’t have much free time for entertainment and want to trade up to more expensive products mainly for the quality, not to attain social status.
The report found that ‘Discerning Consumers’ increased their spending in 23 out of 25 categories and accounted for 23 percent of 2018’s spending growth.
Also under the Cautious category are ‘Savvy Shoppers’ who want the quality goods, but aren’t necessarily willing to pay for them. In fact, they are known for trading down to less expensive products. They prefer to conduct careful product evaluations to source better, more durable products without paying more. They also are likely to be married, middle-aged, female, and living in expensive tier 1 cities.
‘Frugal Consumers’ also come under this category, and account for around ten percent of the Survey population. Generally on lower incomes than the other consumer segments, and mostly young and single, their spending is down across the board.
China’s frugal consumers are reasonably confident about the future, however this optimism does not always translate into spending more money on a daily basis; they prefer to spend on important moments in life.
The health conscious movement in China is now entrenched. The Report highlights that health conscious consumers are paying more attention to their food choices, in a way that goes beyond simply ensuring food safety.
“Sixty percent of consumers in large cities said they always check the ingredient labels for packaged food and will not buy a product if it doesn’t seem healthy. Two product categories that have benefited from this are fresh milk and yogurt, both of which have health halos.”
With 72 percent of urban consumers saying they are actively seeking a healthier lifestyle, many brands have an enormous opportunity to proactively shape perceptions about what it means to be healthy. In the vitamins and supplements category, for example, companies could emphasize their products as ‘herbal’ and ‘natural’ and highlight their value in preventative care. In addition to selling products, companies will also want to emphasize how experiential offerings can contribute to a healthy lifestyle.
Travel has become a popular experience for more Chinese is recent times. According to the McKinsey Report spending by urban Chinese on travel between 2014 and 2018 outpaced China’s GDP growth, increasing by 14 percent CAGR versus seven percent. Furthermore, these consumers are becoming more sophisticated and discerning about how they plan their trips.
Tier 1 city travellers are more likely than lower tier travellers to venture outside of China and take longer trips. When it comes to outbound travel, Chinese travellers still favour Greater China (Hong Kong, Taiwan, Macau) and Asian destinations (Japan, Korea and Southeast Asian countries), but long-haul (e.g. Europe, North America) and niche destinations are also on the rise.
The rise of high-end Chinese brands
There was a time when Chinese shoppers perceived Chinese brands as inferior and Western brands the mark of a comfortable, middle-class lifestyle. Today many Chinese producers have upgraded the quality, performance and value of their offerings. In the McKinsey survey respondents revealed a clear preference for Chinese brands over foreign ones in 13 out of 19 categories. These include basic items like tissue paper, home cleaning products, milk, and fresh food, as well as products more connected to identity and lifestyle, such as phones, computer tablets, beer, and household appliances like refrigerators. Between 33 and 57 percent of Chinese consumers say they prefer local brands in these categories.
“Consumers are also now likely to pick local brands for more expensive premium products. China is one of the top countries of origin for higher end digital devices, skincare, cosmetics, and red wine. Consumers are even developing a taste for Chinese fashion – not generic knock offs but carefully crafted and branded clothes by Chinese designers.
“At the same time, Chinese consumers remain confused about where brands originate. Many believe that global brands with a longstanding presence in China are local brands. Half of all consumers say 7-Up is a Chinese brand and 49 percent think the same of Yakult drinks, which hail from Japan.
“On the other hand, Chinese brands that have packaged themselves as international are often mistaken as foreign. Le Conte chocolate and BeingMate infant milk powder are thought to be foreign brands by 42 percent of respondents.”
Implications for brands
The Report shares some great insights for New Zealand companies looking to export to China. The advice is to spend more time getting to understand the key buying factors of the ‘Young Free Spenders’ and then developing a plan to reach them.
“Developing premium and aspirational products that are going to appeal to these consumers and focusing on the route to market and distribution in lower tier cities will be key. Companies will need to carefully consider their omnichannel strategies, since many Young Free Spenders enjoy shopping in trendy malls, as well as spending time online.
“Consumers in tier 3 and 4 cities are more motivated by social engagement and product exclusivity than shoppers in tier 1 and 2 cities. As a result, parties and exhibitions may be more valuable in reaching Young Free Spenders than traditional marketing campaigns. Product offers that feel unique to them are also likely to have appeal, as are creative uses of social media.”
Companies will need to decide if their strategy should include Savvy and Frugal consumers as target segments too. Together, these two groups comprise 31 percent of China’s urban population and reside primarily in higher tier cities. Brands that decide to target these consumers should look at pursuing strategic partnerships with e-commerce platforms.
The Report notes that Chinese consumers are now seeking not just high value products or services but novel experiences. Some retail brands have responded by creating immersive experiences for consumers – for example, Nike personalizes a customer’s interaction with the brand and offers tailored shoes through its Nike by You program.
There’s advice on how to be smart when it comes to incorporating Chinese elements into your products too. “Thanks to the government’s campaign to boost national pride and the ongoing trade dispute with the US, Chinese consumers have plenty of reasons to be patriotic with their spending.
“Multinational companies should respond to the desire for Chinese products with innovation, introducing Chinese elements to their products and their branding in ways that feel sophisticated and authentic. For example, L’Oreal collaborated with the National Museum to offer five limited edition lipsticks that reflect China’s artistic heritage. Each container features an image inspired by the classical elegance of five historic Chinese beauties.”
“To allow for this kind of innovation, multinational companies should give greater freedom and flexibility to local teams.”
McKinsey’s 2020 China Consumer Report concludes by saying that China’s consumers remain confident, despite the country’s economic uncertainty and slowdown in growth. They will collectively represent an economic powerhouse for the foreseeable future.
For a full PDF of McKinsey & Co’s China Consumer Report 2020 go to www.mckinsey.com/china-consumer-2020