Literature tilte Literature 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.