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Greater China Consumer & Retail Practice China consumer report 2020 The many faces of the Chinese consumer

Johnny Ho Felix Poh Jia Zhou Daniel Zipser

December 2019

China’s slowing GDP and the trade remarkably resilient and remain a dispute with the U.S. have injected a powerful, transformative force not cloud of uncertainty into the Chinese just in China but also across the globe. economy. Some observers have Although it’s likely the growth rate for predicted that these developments will consumer spending will be slightly spell bad news for Chinese consumption, lower in 2019 than in 2018, consumers which has thus far been a powerhouse continue to increase their spending by for economic growth. a considerable margin and are eager to pay for items with a strong value Our research shows that they may not proposition. This year’s Double 11, need to worry so much. for instance, was record shattering. Although traditional drivers of China’s Total sales on all platforms were up This year’s Double 11 GMV economy – investment, exports, and 31 percent over last year and reached on all platforms was up manufacturing – are struggling, the RMB410 billion (US$58 billion), far more country’s consumers remain confident. than Cyber Monday and Black Friday’s After dipping in the second half of 2018, online sales combined. the Consumer Confidence Index hit a ten-year high earlier this year. (Exhibit 1) 31% Consumers in China are proving to be

Exhibit 1 Although retail sales growth has slowed, the Consumer Confidence Although retail sales growth has slowed, the Consumer Confidence Index has bounced Index has bounced back since the start of the China-US trade back since the start of the China-US trade dispute dispute but retail sales growth continues to slow down Retail sales growthgrowth vs. vs. Consumer Consumer Confidence Confidence Index Index (Jan. (Jan. 2012 2012 through through Sep. Sep. 2019) 2019) Retail sales growth vs. Consumer Confidence Index (Jan. 2012 through Sep. 2019) % (left axis), index (right axis) % (left axis), index (right axis) Retail sales YoY (%, 3 month moving average, left axis) Retail sales YoY (%, 3 month moving average, left axis) Consumer Confidence Index (right axis) Consumer Confidence Index (right axis) China-US trade Chinadispute-US started trade dispute started 20 130 20 130 18 125 18 125 120 16 120 16 115 14 115 14 110 12 110 12 105 105 10 10 100 100 8 95 8 95 6 90 6 2012 13 14 15 16 17 18 19 90 2012 13 14 15 16 17 18 19

Source: National Bureau of Statistics Source: National Bureau of Statistics

China consumer report 2020 3 The overall pace at which Chinese screen TVs, and holiday travel. consumption has grown is almost hard (Exhibit 2) Most rural Chinese, on the to imagine: Just a decade ago, most other hand, remain relatively poorer; urban Chinese had enough money to nearly all the growth has come from Chinese consumer cover basic needs like food, clothes, cities. These urban consumers are now spending represented and housing (92 percent had annual the main driver of the Chinese economy, household disposable incomes of with their spending accounting for more 140,000 renminbi or less). Today, than 60 percent of GDP growth1. And half are living in relatively well-to-do across the globe, Chinese consumer

31% households (annual disposable incomes spending represented 31 percent of of global household of 140,000- 300,000 renminbi) where household consumption growth from consumption growth from they have ample funds for perks like 2010 to 20172. 2010 to 2017 regular meals out, beauty products, flat

Exhibit 2

The middlemiddle class class population population is rising is rising in China in China

Urban Population in China mn Annual household disposable income 2018 real RMB terms 2010 2018

Global >390K 6 16

Affluent 297-390K 3 10

Mass affluent 197-297K 10 63

Upper aspirant 138-197K 34 311

Aspirant 79-138K 403 257

Lower aspirant 49-79K 134 89

Poor <49K 79 72

Upper aspirant & above population, % of total ~8% ~49%

Source: McKinsey Global Institute

1 In 11 of the 16 quarters since 2015 2 Source: World Bank data

4 China consumer report 2020 Now, ten years into this expansion, Chinese consumer behavior since consumer behavior is shifting and 2005. Between May and July 2019, we see a bifurcation among Chinese we surveyed 5,400 respondents from consumers. On one hand, a segment of 44 cities, representing approximately consumers in lower tier cities continues 90 percent of China’s GDP and half of spending money freely without any its population. We asked them about worry about cost or saving for the their spending patterns in 2018 versus future. Other consumers, though, the previous year and tracked their mostly in large, expensive cities like attitudes and expectations about Beijing, Shanghai, and Guangzhou, products across a variety of categories. are responding to the dip in China’s We also did deep dives into several economic growth and the increased different consumer segments to reveal cost of urban living by adjusting their deeper layers of insight. This year, we attitudes and, in some cases, their present five key consumer trends that spending. companies need to know to help them formulate their operational strategies This is the subject of McKinsey’s most and stay competitive in one of the recent China Consumer Report, which world’s most important markets. is part of a series of comprehensive reports the firm has done on urban

Young, free-spending consumers in lower tier cities are today’s growth engine. Trend 1 This important set of consumers is unaffected by slowing growth and rising living costs and has an outsized impact on spending growth.

Most Chinese consumers are increasingly discerning, savvy, and frugal about their spending. Trend 2 Meaningful distinctions exist across how consumers are behaving and we highlight three additional consumer segments to take note of.

The health conscious movement is here to stay. A large majority of consumers say they are seeking a healthier lifestyle, which presents Trend 3 opportunities for companies to define what health really means.

Chinese consumers continue to be more sophisticated travelers. Consumers are moving away from the predictability and low prices of large group Trend 4 tours in favor of smaller, higher-end tours and self-guided adventures.

High-end Chinese brands are increasingly appealing. Consumers want to connect with their cultural heritage and are willing to see Trend 5 Chinese brands as both desirable and high quality. This represents opportunities for both domestic brands and multinational players.

China consumer report 2020 5 Trend 1: Young Free Spenders in lower tier cities are today’s growth engine

This year, we identified an important lot less time commuting. This allows category of consumers who play an them free time to eat out, follow the outsized role in keeping Chinese latest trends, and buy products that consumer spending surging ahead: will enhance their lifestyle and social Young Free Spenders. These status. Young Free Spenders also consumers are young digital natives believe that expensive products are who reside predominantly in tier 2, generally better than cheaper ones 3 or 4 cities, where living costs are and they aren’t particularly concerned lower. Flush with disposable cash, they with saving for the future. Such habits are optimistic about their futures and afford them considerable spending Young Free Spenders have little hesitation about spending power. The segment accounts for only constitute 25% of the their money, whether on a new tech one quarter of our survey population population but device, an overseas trip, or high-end but is responsible for almost 60 percent skincare. They have a lot more time on of 2018’s total spending growth over their hands than their counterparts 2017. In nearly every category we track, in larger metropolises. Consumers in Young Free Spenders have significantly 60%of total spending growth smaller cities tend to leave work and boosted their purchases. (Exhibit 3) (2018 over 2017) arrive home at 5 or 6 pm and spend a

6 China consumer report 2020 Exhibit 3 Young Free Spenders show significant net spending increase in all Young Free Spenders show significant net spending increase in all categories categories Change in actual spending by category (2018 vs. 2017)1 1 %Change of respondents, in actual spending Young Free by Spenderscategory (2018(N = 313), vs. 2017) ranked by % of consumers increasing spending % of respondents, Young Free Spenders (N = 313), ranked by % of consumers increasing spending Decreased by -5% or more No change (-5~5%) Increased by 5% or more

Fresh milk Baby skincare Skincare Yogurt Chinese fast food restaurants Casual wear Western fast food restaurants Juice Sports footwear Sports apparel Bottled water Cosmetics Sports and energy drinks UHT/ambient milk Red wine Cafes Infant milk powder Ready to drink tea Baijiu Energy drinks Chocolate Carbonated soft drinks Instant noodles Beer Spirits (excl. Chinese Baijiu) 0% 25% 50% 75% 100% 1 Question: Thinking of your/your family's consumption behavior in 2018, do you notice any change in spending in categories listed below when compared with 2017? What is the level of change per below? Source: McKinsey China Consumer Survey

China consumer report 2020 7 Although much of the attention on in tier 3 and 4 cities increased by 38 China’s new generation of affluent percent CAGR from 2010 to 2018, consumers has focused on urban greater than the 23 percent growth seen areas like Beijing and Shanghai, in tier 1 and 2 cities. These relatively the emergence of this group shines affluent households (what we call ‘upper Relatively affluent a spotlight on the importance of aspirant’ and ‘mass affluent’ classes) households now account consumers in lower tier cities, such as now account for more than 34 percent for more than Mianyang, Yancheng, and Zigong. In of the population in tier 3 and 4 cities, recent years, the numbers of middle nearly the proportion found in high-tier and upper middle-class consumers in cities five years ago. (Exhibit 4) smaller, lower-profile tier 3 and 4 cities 34% have risen at a rapid clip. The number of the population in tier of households with annual disposable 3 and 4 cities income of 140,000-300,000 renminbi

Exhibit 4 Well-to-do consumers have increased significantly in lower tierWell-to-do cities consumers have increased significantly in lower tier cities

Tier 1 and 2 Tier 3 and 4 CAGR of number of upper aspirant and mass affluent households % of upper aspirant and mass affluent households 2010-2018 % % of upper aspirant and mass affluent households in lower tier cities now in line with what the proportion in high tier cities was 5 years ago 59 60 55 23% 49 51 50 41 36 40 34 28 30 27 38% 21 23 17 20 15 15 12 10 7 3 4

0 2010 11 12 13 14 15 16 17 2018

Source: McKinsey Global Institute

The increased spending of Young Free now purchase more than a thousand Spenders in lower tier cities has been brands on these platforms, and they fueled, in part, by ecommerce platforms account for anywhere between 10 and such as Pinduoduo, which have helped 30 percent of a category’s sales on expand the availability of branded these sites. products in these cities. Consumers can

8 China consumer report 2020 Trend 2: Most Chinese consumers are increasingly discerning, savvy, and frugal about their spending

Although Young Free Spenders are consumers. Some continue to increase seemingly immune to the realities of their spending and don’t mind paying slower economic growth, this isn’t the higher prices while others have moved case for most Chinese consumers. A in the other direction and are trying to majority of our respondents showed save money. signs of greater caution in their Discerning Consumers are busy, spending. Sixty percent told us they affluent, middle aged Chinese who, weren’t interested in spending rashly, like Young Free Spenders, have plenty even if they felt “rich,” a jump from the of money to spend. But unlike their 52 percent of respondents who said free spending counterparts, these this in 2017. (Exhibit 5) consumers don’t have much free time It’s not hard to see why. Between 2012 for entertainment and are interested in and 2018, consumption expenditure trading up to more expensive products in China’s cities rose 65 percent, mainly to get better quality, not attain outpacing inflation and GDP growth, social status. Discerning Consumers while at the same time income growth increased their spending in 23 out of slowed. Disposable income per capita 25 categories and accounted for 23 rose 9 percent in 2018, down from 13 percent of 2018’s spending growth. percent in 2012. Consumers, however, Savvy Shoppers also care about better 60% are reacting to economic tightening told us they weren’t quality products but, with slightly lower in different ways. We have identified interested in spending incomes than Discerning Consumers several groups of these more cautious rashly, even if they felt “rich” and Young Free Spenders, they aren’t

ConsumersExhibit 5 want to save more and prepare for the future, especiallyConsumers want to save more and prepare for the future, especially Consumersthose in higher want to tier save cities more and prepare for the future, especially those inthose higher in higher tier cities tier cities “Even when I am rich, I won’t consume rashly. I should always prepare for future uncertainty” “Even when I am rich, I won’t consume rashly. I should always prepare for future uncertainty” “Even% of respondents when I am rich, (N = I 5355)won’t consume rashly. I should always prepare for future uncertainty” % of respondents (N = 5355)

% 2017of respondents1 2019 (N = 5,355) 20171 2019

66 66 63 63 59 60 59 60 55 53 55 53 52 50 52 50 46 46 40 40

Overall Tier 1 Tier 2 Tier 3 Tier 4 Overall Tier 1 Tier 2 Tier 3 Tier 4

1 2017 numbers are based on online/mobile respondents only (a subset of total respondents) to ensure compatibility with 2019 numbers 1 2017 numbers are based on online/mobile respondents only (a subset of total respondents) to ensure compatibility with 2019 numbers Source: McKinsey China Consumer Survey Source: McKinsey China Consumer Survey

China consumer report 2020 9 always willing to pay more for them. In the board, with the biggest declines in fact, they traded down to less expensive nice-to-have categories that are often products in more categories than they the first to go when spending gets tight, traded up. (Exhibit 6) At a stable place such as energy drinks, sodas, bottled in their lives, financially and personally, water, and Chinese Baijiu. (Exhibit 7) Savvy Shoppers have both the time and These consumers have lower incomes inclination to do the careful product than other segments and are more evaluations needed to find better, likely to live in tier 1 and 2 cities, so longer lasting products without paying it’s not surprising that low prices and more. These consumers are more likely saving money are more important to to be married, middle aged, female, them than quality and brand appeal. and living in expensive tier 1 cities. They Frugal Consumers are most likely to be account for just 6 percent of the year’s young and single. They are also busy, spending growth. hard working, and feel reasonably confident about their future. While this Frugal Consumers represent a new optimism does not always translate into category of consumer behavior. spending more money on a daily basis, Accounting for 10 percent of our survey they do tend to spend on important population, these individuals decreased moments in life. their spending on categories across

Exhibit 6 Savvy Shoppers have become more selective and are trading off Savvy Shoppers Shoppers have have become become more more selective selective and are and trading are offtrading across off categories across categories across categories 1 Change in actual spending by category (2018 vs. 2017) 1 Change in actual spending by category (2018 vs. 2017)1 % of respondents, Savvy Savvy Shoppers Shoppers (N (N = = 288 288),), ranked ranked by by % % of ofconsumers consumers increasing increasing spending spending

Decreased by -5% or more No change (-5~5%) Increased by 5% or more

Fresh milk Cosmetics Skincare UHT/ambient milk Chinese fast food restaurants Yogurt Bottled water Juice Casual wear Energy drinks Baby skincare Sports apparel Baijiu Sports footwear Red wine Ready to drink tea Sports and energy drinks Western fast food restaurants Spirits (excl. Chinese Baijiu) Beer Carbonated soft drinks Infant milk powder Cafes Chocolate Instant noodles 0% 25% 50% 75% 100% 1 Question: Thinking of your/your family's consumption behavior in 2018, do you notice any change in spending in categories listed below when compared with 2017? What is the level of change per below? Source: McKinsey China Consumer Survey

10 China consumer report 2020 Exhibit 7

Frugal Consumers Consumers are are decreasing decreasing their theirspending spending across the across board the board 1 Change in actual spending by category (2018 vs. 2017) 1 Change in actual spending by category (2018 vs. 2017)1 % of respondents, Frugal Frugal Consumers Consumers (N= (N=131),131), ranked ranked by by % % of of consumers consumers decreasing decreasing spending spending Edited

Decreased by -5% or more No change (-5~5%) Increased by 5% or more

Energy drinks Carbonated soft drinks Bottled water Sports and energy drinks Baijiu Ready to drink tea Red wine Western fast food restaurants Yogurt Juice Chocolate Instant noodles Cafes Beer Casual wear Sports footwear UHT/ambient milk Sports apparel Fresh milk Skincare Spirits (excl. Chinese Baijiu) Chinese fast food restaurants Baby skincare Cosmetics Infant milk powder 0% 25% 50% 75% 100% 1 Question: Thinking of your/your family's consumption behavior in 2018, do you notice any change in spending in categories listed below when compared with 2017? What is 1 Question: Thinking of your/your family's consumption behavior in 2018, do you notice any change in spending in categories listed below when compared with 2017? What is the level of change per below? the level of change per below? Source: McKinsey China Consumer Survey Source: McKinsey China Consumer Survey

China consumer report 2020 11 Trend 3: The health conscious movement is here to stay

As consumers strive to take care of Health conscious consumers are paying themselves amid the stress, congestion, more attention to their food choices, in and pollution of urban living, they are a way that goes beyond simply ensuring expecting to increase their spending food safety. This year, more consumers mainly on categories related to health said they were intentionally choosing and lifestyle. (Exhibit 8) healthier food. This was true across city tiers but most pronounced in tier 1 cities.

Exhibit 8

Consumers are increasing their spending mainly on categories related to health and Consumers are increasing their spending mainly on categories lifestyle related to health and lifestyle Change in actual spending by category (2018 vs. 2017)1 Change% of respondents in actual spending (N = 1,325), by ranked category by %(2018 of consumers vs. 2017)1 increasing spending % of respondents (N = 1325), ranked by % of consumers increasing spending Decreased by -5% or more No change (-5~5%) Increased by 5% or more

Fresh milk Chinese fast food restaurants Cosmetics Skincare Casual wear UHT/ambient milk Yogurt Bottled water Juice Sports footwear Sports apparel Baby skincare Red wine Sports and energy drinks Ready to drink tea Western fast food restaurants Baijiu Infant milk powder Cafes Energy drinks Carbonated soft drinks Beer Chocolate Instant noodles Spirits (excl. Chinese Baijiu) 0% 25% 50% 75% 100% 1 Question: Thinking of your/your family's consumption behavior in 2018, do you notice any change in spending in categories listed below when compared with 2017? What is the level of change per below? Source: McKinsey China Consumer Survey

12 China consumer report 2020 Sixty percent of consumers in large yogurt that features natural ingredients. cities said they always check the Fifty-five percent said “healthy and ingredient labels for packaged food and natural ingredients” is their top buying 60% will not buy a product if it doesn’t seem factor. of consumers in large cities healthy. Two product categories that Subtle distinctions exist in how said they always check have benefited from this are fresh milk consumers approach health in high the ingredient labels for and yogurt, both of which have health versus low tier cities. Consumers in packaged food halos. Among the 25 product categories lower tier cities haven’t reached the we tracked, fresh milk was the top same level of understanding about product Chinese consumers said they what constitutes a healthier lifestyle spent more on in 2018, compared to as consumers in high tier cities. For 2017. Half of all respondents told us instance, top categories lower tier they were buying more of this product consumers are spending more on and 38 percent said they were buying include carbonated soft drinks and more yogurt. Young Free Spenders, juice. in particular, are interested in buying

Trend 4: Chinese consumers continue to be more sophisticated travelers

Seeking more enjoyable experiences in end options. Consumers 45 years and their lives, consumers are booking lots older are particularly interested in of trips. Spending by urban Chinese smaller tours (32 percent said this was on travel between 2014 and 2018 their preference). outpaced GDP growth, increasing by The majority of trips taken by 14 percent CAGR versus 7 percent. Chinese consumers continue to be to (Exhibit 9) Yet as they travel more, destinations within China. Yunnan and consumers are becoming more Sichuan are two of the most popular. sophisticated and discerning about Tier 1 city travelers are more likely than how they plan their trips. For domestic lower tier travelers to venture outside travel, over 60 percent of Chinese say of China and take longer trips (greater they now prefer self-guided excursions than eight days). When it comes to instead of the large package tours that outbound travel, Chinese travelers were popular a decade ago. (Exhibit 10) still favor Greater China (Hong Kong, This is especially true for tier 1 travelers Taiwan, Macau) and Asian destinations (80 percent said they prefer self- (Japan, Korea and Southeast Asian guided tours). When Chinese travelers countries), but long-haul (e.g., Europe, do book packaged tours, they are North America) and niche destinations increasingly choosing smaller, higher- (e.g., Iceland) are also on the rise.

China consumer report 2020 13 Exhibit 9

High growth growth for for domesticHigh domestic growth and andoutbound for outbound domestic travel fromtravel and 2014 outbound from to 2018 2014 travel to 2018 from 2014 to 2018 Spending on China domestic and outbound trips TrillionSpending RMB on China domesticSpending and outboundon China domestictrips and outbound trips Trillion RMB Trillion RMB

+14% p.a. +14% p.a. 6.0 6.0 0.8 11% 0.8 11% 4.7 4.7 0.7 0.7 3.6 3.6 Outbound 0.6 Outbound 0.6

5.1 14% 5.1 14% 3.9 3.9 Domestic 3.0 Domestic 3.0

2014 16 2014 2018 16 2018

Source: Local tourism statistics; Press search Source: Local tourism statistics; Press search

Exhibit 10 Chinese travelers prefer self-guided excursions and small- sizedChinese premium travelers prefer tours self-guided excursions and small-sized premium tours Type of trip for the most recent domestic trip and average spending per trip Type of trip for the most recent domestic trip and average spending per trip % of survey respondents (N = 1,058) % of survey respondents (N=1058)

2 Others1 9.8K

Self-guided tour 37 9.5K

Self- / semi-self guided Joined a local short-haul package tour at destination on a tour self-guided/semi-self-guided tour 9.9K

9 Semi-self-guided tour 13.8K 13

Package tour with travel in bus (21-50 ppl) 13 10.9K

Mid-end/high-end coach tour (10-20 ppl) Package tour 16 15.4K

10 Private and customized package tour (<10ppl) 14.1K

1 including river cruise and other types Source: McKinsey China Consumer Survey

14 China consumer report 2020 Trend 5: High-end Chinese brands are increasingly appealing

Gucci sunglasses, Mercedes SUVs, New this year is the fact that many Godiva chocolate, Gillette razors. consumers are also likely to pick local Western brands used to be the mark brands for more expensive premium of a comfortable, modern, middle class products. China is one of the top lifestyle in China. In contrast, shoppers countries of origin for higher end digital perceived Chinese brands to be of devices, skincare, cosmetics, and red inferior quality and lacking in cachet. wine. Consumers are even developing In recent years, this has changed a taste for Chinese fashion – not dramatically. Instead of focusing on generic knock offs but carefully crafted lower priced products, many Chinese and branded clothes by Chinese players have upgraded the quality, designers like Ms Min, Ming Ma and performance, and value of their Angel Chen. These fashion lines now offerings. In our survey, respondents appear alongside top Western brands told us they had a clear preference for in China’s luxury department stores. Chinese brands over foreign ones in Outside the luxury market, brands 13 out of 19 categories. These include like Icicle have successfully catered basic items like tissue paper, home to consumers seeking affordable cleaning products, milk, and fresh food, homegrown fashion. 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. (Exhibit 11)

China consumer report 2020 15 Exhibit 11 Top 3 countries of origin that consumers most likely buy when purchasing 1 Toppremium 3 countriesproducts of origin by that category consumers most likely buy when purchasing premium1 products % of respondents in in tier tier 1 1 and and 2; 2; tier tier 3 3 and and 4 4 cities, cities, N N = = 745/580 745/580

Personal digital Dairy gadgets Skincare Casual wear Red wine Cosmetics 46

32 35 32 25 23 18 17 20 18 Tier 1 14 13 10 9 9 11 and 2 5 8

China Australia USA China USA Germany France China South France USA China France China Italy France USA Italy Korea

32 31 24 25 21 18 19 20 12 12 14 13 13 Tier 3 11 8 10 and 4 6 5

China Australia UK USA China Japan China France South China France Italy France China Switzerland France Japan China Korea

1 Premium definition varies by price tier across categories. For a 1 liter bottle of dairy beverage, RMB 60-100; for personal digital gadgets, RMB 5,000-12,000 for a smartphone; for skincare, RMB 1,500-5,000 for 50ml; for casual wear, RMB 8,000-20,000 for a jacket; for a bottle of red wine, RMB 2,000-5,000; for cosmetics, RMB 300-500 for lipstick. Source: McKinsey China Consumer Survey

At the same time, Chinese consumers packaged themselves as international remain confused about where brands are often mistaken as foreign. originate. Many believe that global Le Conte chocolate and BeingMate brands with a longstanding presence infant milk powder are thought to in China are local brands. Half of all be foreign brands by 42 percent of consumers say 7-Up is a Chinese brand respondents. and 49 percent think the same of Yakult drinks, which hail from Japan. On the other hand, Chinese brands that have

16 China consumer report 2020 China consumer report 2020 17 Implications for brands

Double down on the Young Free minds of Young Free Spenders should Spenders embed such social media engagement capabilities into their organizations. Until recently, most global brands devoted the bulk of their marketing Monitor consumers who are “trading resources to China’s largest cities like off”, especially in higher tier cities Shanghai or Beijing. We expect the Companies will need to decide if their buying power of Young Free Spenders strategy should include Savvy and in lower tier cities to only increase and Frugal consumers as target segments. thus represent a growth engine for a Together, these two groups comprise wide range of categories. Companies 31 percent of the urban population and should spend time understanding who reside primarily in higher tier cities. these consumers are and what their Brands that decide to target these key buying factors are, then have a consumers could pursue strategic clear plan to reach them. Developing partnerships with ecommerce premium and aspirational products that players such as Pinduoduo, which are going to appeal to these consumers do an effective job of reaching these and focusing on the route to market and segments. These platforms can provide distribution in lower tier cities will be insights about and access to Savvy and key. Companies will need to carefully Frugal consumers without encroaching consider their omnichannel strategies1, on a brand’s more premium positioning since many Young Free Spenders enjoy and pricing in other channels. shopping in trendy malls, as well as spending time online. Capitalize on the health trend In our survey, we found that consumers With 72 percent of urban consumers in tier 3 and 4 cities are more motivated saying they are actively seeking a by social engagement and product healthier lifestyle, many brands have exclusivity than shoppers in tier 1 an enormous opportunity to proactively and 2 cities. As a result, parties and shape perceptions about what it means exhibitions may be more valuable in to be healthy. In the vitamins and reaching Young Free Spenders than supplements category, for example, traditional marketing campaigns. companies could emphasize their Product offers that feel unique to products as ‘herbal’ and ‘natural’ and them are also likely to have appeal, highlight their value in preventative as are creative uses of social media. care. Platforms like WeChat and Douyin In addition to selling products, (Tik Tok in English) now offer new companies will also want to emphasize direct-to-consumer channels or how experiential offerings can mini-programs that brands can use to contribute to a healthy lifestyle. Gym influence and engage with consumers and fitness players, for instance, and drive sales. We’ve seen brands could upgrade their offerings beyond create a variety of programs, including lessons and classes to include lifestyle attention-grabbing games and quizzes, elements like juice bars and relaxation one-off opportunities to purchase lounges. Focusing on the quality of unique products from online and personal trainers and offering hassle- 72% physical stores, and options for self- free experiences (such as online of survey respondents told designed products or reservations booking for training and classes) are us they were actively seeking for personalized services. Brands also key factors in boosting enrollment. a healthier lifestyle that want to capture the hearts and

1 Source: McKinsey Digital, “China digital consumer trends 2019”

18 China consumer report 2020 Implications for brands

Create distinct, memorable Multinational companies should experiences that will surprise and respond to the desire for Chinese delight China’s more sophisticated products with innovation, introducing consumers Chinese elements to their products and their branding in ways that feel The fact that many Chinese travelers sophisticated and authentic. For have grown tired of the standardized example, L’Oreal collaborated with the approach of large tour groups is National Museum to offer five limited further evidence that consumers are edition lipsticks that reflect China’s seeking not just high value products artistic heritage. Each container or services but novel experiences. features an image inspired by the Some retail brands have responded classical elegance of five historic by creating immersive experiences for Chinese beauties. To allow for this kind consumers. For example, Lululemon of innovation, multinational companies built a fitness and yoga community should give greater freedom and for consumers that centers on regular flexibility to local teams. classes and large yoga events. Nike personalizes a customer’s interaction Chinese companies should take with the brand and offers tailored advantage of this trend by celebrating shoes through its Nike by You program. their Chinese heritage and origin, as Eyewear company Gentle Monster this is something Chinese consumers creates a sense of modern design and are increasingly craving. Companies contemporary art in its brick-and- should pair this with continuous mortar stores and holds seasonal improvements in quality and desirability themed in-store exhibitions to maintain to create a value proposition that will a sense of freshness. be hard to beat. For example, Erdos, the world’s largest maker of cashmere Be smart about how you incorporate products, is moving into a more Chinese elements into your products premium segment and emphasizing the Thanks to the government’s campaign higher end craftsmanship and design of to boost national pride and the ongoing these products. trade dispute with the U.S., Chinese consumers have plenty of reasons to be patriotic with their spending.

Conclusion Chinese consumers are responding in distinct ways to the country’s current economic uncertainty and slowing growth. Some continue spending freely and seeking out more expensive options, while others have grown more discerning and are tightening their belts. But for the large majority of consumers in our survey, there is a consistent story. These consumers remain confident and will collectively represent an economic powerhouse for the foreseeable future.

China consumer report 2020 19 About the McKinsey China Consumer Survey

Our study combined a comprehensive survey of Chinese consumers, in-depth research, and observations from our work advising companies in China. The survey was conducted from May to July 2019, and is part of a series of comprehensive surveys of Chinese consumer behavior conducted by McKinsey since 2005. The survey sample included approximately 5,400 respondents from 44 cities, representing approximately 90 percent of China’s GDP and more than half of its population. We conducted online research with respondents, covering consumers’ general attitudes and purchasing behavior, key trends regarding their consumption patterns and leisure habits, and attitudes toward life, success, money, and health. The survey included a deep dive into apparel, cosmetics, and fast moving consumer goods categories, including food, personal care, and household products. Our research was supplemented by additional research that McKinsey is conducting on consumer sentiment in 26 countries. Results from our 2019 Global Sentiment Survey are available on mckinsey.com. To download a free PDF of this report visit: mckinsey.com/china-consumer-2020

Johnny Ho Felix Poh Associate Partner Partner Shanghai Shanghai

Jia Zhou Daniel Zipser Associate Partner Senior Partner Beijing Shenzhen

The authors would like to acknowledge the contributions of the following colleagues to the research and writing of this report: Janet Guo, Eric He, Glenn Leibowitz, Joyce Liu, Carlton Ng, Kellie Wang, Jackey Yu and Cherie Zhang.

20 China consumer report 2020

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