That’s according to a study by The Boston Consulting Group and AliResearch, the research arm of Alibaba Group. But while consumer demand will still be growing, what seems to be gone are the days when demand in China was for virtually anything that was available for sale. If the new report is correct, consumers are becoming more discerning about what they want. And that means that companies seeking to do business in China need to fine-tune their targets as the new generation of consumers will take its spending power and shift it to new product categories. That in turn will warrant new branding strategies for firms seeking to sell their products in China.
According to the study’s report — “The New China Playbook: Young, Affluent, E-savvy Consumers Will Fuel Growth” — the three forces impacting the consumer market are: the rise of the upper and middle class, as well as affluent households, driving consumer growth; a new generation of freer spending, sophisticated consumers, and the growing role of e-commerce. The study also noted that even if annual real GDP growth cools in China to 5.5 percent, below the government’s official growth target last month of 6.5 percent, “incremental growth of $2.3 trillion alone over the next five years would be comparable to adding a consumer market 1.3 times larger than that of today’s Germany or [the] U.K.”
The report also noted that through 2020, about 81 percent of consumption growth will be from households with annual income of more than $24,000. Further, the number of upper and middle class and affluent households is projected to double to 100 million, or 30 percent of all urban householders versus the 17 percent level today. In the study, upper-middle-class households are defined as having annual disposable income between $24,001 to $46,000, while affluent households have annual disposable income of more than $46,000. The study also said that consumers ages 35 and younger will account for 65 percent of the growth, with the segment currently growing at an annual rate of 14 percent. The study noted that incomes continue to rise in China, with per capital income “increasing at an 11 percent annual pace since 2010.” It also concluded that as China’s job market remains tight, “average wages should continue to rise over the near term as the economy shifts from low-wage manufacturing industries to better-paying service and high-tech industries.”
Further, while there have been concerns that recent declines in China’s stock market will dampen consumer spending, the report said those worries are likely exaggerated. The reasoning was that “only 15 percent of urban households have stock investments.” Moreover, a survey of 2,000 Chinese consumers by BCG’s Center for Customer Insight following the stock market crash indicated that macroeconomic trends have had minimal influence on consumer sentiment. “Only 7 percent of Chinese consumers responded that stock market trends would influence their decision to spend more or less,” while the respondents said that other factors — 35 percent cited rising incomes — would be more influential, the report noted.
As for the impact of e-commerce, the study projected the channel to drive 42 percent of total consumption growth, or $1.6 trillion, with 90 percent of that growth to come from the mobile e-commerce platform. Further, cross-border e-commerce purchases are projected to account for 15 percent of total e-commerce purchases in China by 2020. Consumers are also projected to demand premium goods and services, such as luxury goods, healthy foods, education and travel. Current growth in the consumer sector has centered more on daily necessities, such as soaps and kitchen appliances.
Hongbing Gao, director of AliResearch, said, “E-commerce is transforming China’s marketplace. Our research found that e-commerce actually stimulates new demand in China by filling many needs that aren’t being met by brick-and-mortar stores.”
Youchi Kuo, a principal at BCG and coauthor of the study, said, “Because the nature of consumption is changing dramatically, the winning strategies of the past are becoming outdated.” Kuo added that for companies to win, “It will be more important than ever before for [them] to target the right income segments and product categories and to be represented in fast-growing online retail channels.”
The study also predicted that companies will have to venture far beyond China’s biggest metropolitan areas to win the loyalty of the upper- and middle-class households, as well as the affluent households. The report said there are high concentrations of those households in more than 2,000 Chinese cities, and estimated that to reach 80 percent of this market in 2020, “companies will need to establish their presence in 430 cities.”
Tier 1 cities — huge metropolises such as Beijing, Shanghai and Guangzhou — are projected to increase by 10 percent per year through 2020, reaching 30 million. The fastest growth is expected to come from small cities. “Of the 46 million additional upper-middle-class and affluent households that will emerge in China by 2020, half will likely be located outside the top 100 cities. The study classified those smaller, but high growth, cities as belonging to tier 4 or lower.
The study also noted that younger Chinese consumers are very brand conscious, and as a sign of their growing sophistication are more open to local brands.