Jun 06, 2012
Most large retailers understand they will need China for their future growth. But, they will need to understand the economic, social and demographic changes making the consumers’ profile and their spending manner and habits. It is a difficult task taking into account the differences of this country. Since 2005, McKinsey led annual surveys of the Chinese consumer and polled more than 60,000 persons in 60 cities, studying revenue growth, changing spending patterns rising above expectations, sometimes in line with those of their western counterparts and sometimes not, and the development of many various segments of consumers. Demographic changes.
They include rising revenues, urban life, a better education and a greater mobility… Japan witnessed the same changes in the Fifties and Sixties and South Korea and Taiwan in the Eighties. But, some factors are unique such as the government policy of the single child and the real economic imbalance between the various regions. Today the Chinese is getting rich rapidly: disposable revenues per household of the urban consumers are expected to double between 2010 and 2020, rising from $ approximately 4,000 to 8,000, coming closer to the current Korean norms but still far from some developed countries such as the United States (about $ 35,000) and Japan ($ 26,000). Now, these current large revenue differences will still persist even if the number by category will change significantly. Currently, the major part of the population is made of “value” consumers or price conscious consumers living in households with annual disposable incomes between $ 6,000 and 16,000 or sufficiently to cover their basic needs.
“Mainstream” or traditional consumers, those who have money enough with incomes between $ 16,000 and 34,000, make a very small group. China counts less than 14 million of these households, which represent 6% of the urban population only. A tiny group of affluent consumers has incomes of $ 34,000 and weighs 2% only of the urban population or 4.26 million households. But the situation is changing. As so many consumers are getting richer so rapidly, many Chinese of the “value” category will join the “mainstream” consumers in 2020 to account for 51% of the urban population. But their wealth level will remain weak compared with western countries. However, with 167 million households, or about 400 million people, this group will impose the consumption standards and will be able to pay for cars and some small luxury products. The “value” consumers, who will decline to 36% of the urban households in 2020 from 82% in 2010, will still represent a huge market for better-priced merchandise with 116 million households or 307 million people. Affluent consumers will constitute a minority elite with 6% of the population in 2020, which will be translated into 21 households or 60 million consumers. Wealth and urban life. Today, 85% of the mainstream consumers live in the 100 wealthiest cities and 10% only in the 300 wealthiest cities. But, this percentage will grow by around 30% by 2020. By that time, many families of these cities will be able to buy merchandise and services such as flat-screen televisions and travels in foreign countries, all products that are today reserved to the wealthiest urban zones. Incomes by category. Changing incomes will vary in the cities:
In 2000, Advanced cities have 88% of value consumers, 6% of mainstream and 2% of wealthy consumers. In 2020, it is changing : 12% of value, 71% of mainstream and 16% of affluent, Developing cities have 11% of poor, 88% of value, 1% of affluent and in 2020, 4% of poor, 22% of value, 67% of mainstream and 7% of affluent, Emerging cities: 25% of poor, 75% of value in 2000 and in 2020, 9% of poor, 44% of value and 43% of mainstream and 4% of affluent, Lagging cities: 47% of poor, 53% of value in 2000 and in 2020 : 17% of poor, 56% of value, 24% mainstream and 3% of affluent. New spending patterns. Economic changes and their impact on the consumer profile help to identify some key trends in the spending patterns of the next decade. Discretionary spending growth. Rising revenues and the government’s efforts to boost consumption will benefit to all firms of the sector but at various levels according to their product portfolios.
Discretionary
categories will register the highest growth with 13.4% between 2010 and 2020, as they will be more accessible to a larger number of consumers. Next categories include the semi-necessities (up 10.0%) and the necessities (+7.2%). It is clear that all these averages will vary greatly by the region and the city. Discretionary spending is expected to grow significantly over 2020 rising from $ 0.64 trillion in 2000 to 4.38 trillion in 2020, the grocery share declining from 43% to 20%. The remainder being broken between : housing & utilities (12%), household products (5%), health care (10%), apparel (10%), communication (8%), transportation (13%), education (5%), recreation equipment (8%) and personal items (5%). It is clear that the most affluent Chinese will be the main consumers of the discretionary products. The consumption model described by McKinsey suggests that in 2010 average spending per household of value, mainstream and affluent consumers amounted to $ 2,000, 4,000 and 12,000 respectively. These figures will grow to $ 3,000, 6,000 and 21,000 in 2020. So that if all these consumers grow their spending, the gaps between the various income groups will widen significantly. The second trend lies in higher aspiration and improvement increasingly led by consumers looking to have a better life, to improve their way of life and to raise their social statute. There are many Chinese to judge themselves and the others by their spending.
An early and strong growth in the developing markets happens when significant groups of consumers test products for the first time. As markets mature, growth is coming from consumers who buy more merchandise and services more often and negotiate to buy more expensive versions of products they already own. This pattern explains why some basic categories have little room to expand: many consumers have already the means to buy them and will probably not buy a large quantity, which does not mean that there will not be any growth at all. It is also the case of semi-necessities categories such as apparel, health care and household products: more consumers will be able to buy various equipment for various opportunities or will buy other branded products. Consequently, brands focusing on mass market consumers might need to be repositioned to answer to their growing aspirations while more recent and newer brands may overtake more established competitors while offering premium products and create a higher-quality image. Remember that China has already become a notable market for luxury products in 2010 and might overtake Japan to become their largest market by 2015.
The emerging senior market. By 2020, there will be 126.5 million more of citizens over 65, which corresponds to a high segment of consumers whose spending patterns will differ from older citizens today. In 2011 they were more ready to save and less in favor of spending on discretionary products such as travel, leisure activities or nice apparel. More Chinese over 55-year old met difficult conditions during the Cultural Revolution at the end of the Sixties and Seventies. Consequently, it is not surprising that they estimate important not to spend all the time. Among the residents of the major cities, 55 to 65-year-old consumers spend half of their spending on food and little on the discretionary categories: 7% only on apparel. Chinese 10 years younger allocate 38% only to grocery but 13% to apparel. These surveys show that older consumers behave very differently from younger ones.
Today, the 45 to 54-year olds, who will constitute the older generation by 2020, have similar spending patterns to 34-to 45 year-old Chinese, who devote 34% on food and 14% on apparel. Implications for firms. The largest challenge lies in building and maintaining a leading position in this country. The next challenge lies in the fact that China is so vast and its regions so various that it is almost considered as a collection of separate countries. Firms should redefine the role of their regional divisions and headquarters and give more decision power to the former. Needs of consumers might become so various in these regions that the local decision power will be essential. Regional offices should have the full responsibility for their accounts, the strategic planning, consumer survey, portfolios… and headquarters serve stores and safeguard the company brands with less power and at lower overhead costs. Third challenge: over the next decade, it will be necessary for firms to take into account the emergence of various consumer categories. In 2020, they will have to position their brands or sub brands, target more narrowly the consumption segments and offer more adapted prices as brands expanded to too many consumption and price segments may have difficulties in protecting their position on the market.
