At the end of 2019, signs of a downturn of the Chinese economy became more pronounced. As a result of global uncertainties and the ongoing trade war with the United States, the Chinese economic growth rate has been the lowest in the past 30 years (source: BBC). In addition, the recent outbreak of the coronavirus threatens to put additional pressure on the Chinese economy. While the long-term economic impact of the pandemic on China cannot yet be determined, economic growth in the first quarter of 2020 is expected to be one to two percentage points lower than previously expected (source: SCMP). A ray of hope in this time of crisis was provided by the signing of the Phase 1 trade agreement between China and the US at the beginning of 2020. But despite signs of a slight improvement in the relations between the two largest economies, the situation is not expected to return to normal in the near future.
While government representatives on both sides view current developments with great concern, Chinese consumers seem to be unimpressed by the situation and the resulting impact on themselves. Amidst the trade dispute, Singles’ Day, China’s largest annual shopping event (also known as the Double Eleven), once again broke all records. From 2018 to 2019, sales revenues rose by 31%. Therefore the event has witnessed constant sales growth in the ten consecutive years since its launch (source: McKinsey). After just 68 seconds, sales reached one billion dollars (source: Manager Magazin) and by the end of the day had risen to $58 billion (410 billion RMB). Thus Singles’ Day creates far more revenue than its western counterparts, Black Friday and Cyber Monday combined (source: McKinsey).
The following article will analyze why the buying power of Chinese consumers does not seem to be diminishing despite the weakening economy and will give a forecast for the future development of the Chinese consumer market.
Since the beginning of the Chinese reform and opening policy over 40 years ago, the standard of living of many Chinese has improved dramatically. Since then, over 700 million citizens have been lifted out of poverty (source: ISDP). The urban areas in China’s eastern and southern regions, in particular, have experienced a remarkable development. While the average per capita annual income of urban Chinese in 1990 was just under 1,500 RMB, by 2018 the income had multiplied to 39,250 RMB (approx. $5,620) (source: Statista). According to McKinsey, 49% (400 million people) of urban households in China now have an annual income of 138,000 RMB ($19,761) or higher. In 2010, only 8% (53 million people) of urban households had such incomes. While the population in cities such as Beijing, Guangzhou, Shenzhen and Shanghai have particularly benefited from the overall Chinese development, most regions are still lagging far behind in their development. Inequality in China has risen sharply since 1980 and peaked in 2008 when the top 10% of the Chinese had 41.7% of the national wealth. Since then, the level of inequality has fallen somewhat as cities in provinces such as Ningxia, Shanxi, Guizhou and Chongqing are catching up rapidly. Nevertheless, China is now one of the countries with the highest income inequality in the world (source: IMF). However, the Economist Intelligence Unit expects the government’s efforts to reduce inequality to be successful and that three-quarter of China’s population will belong to the national middle class by 2030.
Lower-Tier Cities Drive Consumption Growth
Chinese cities are divided into different ranks (Tiers) depending on their GDP, size and economic power. The four tier 1 cities include Beijing, Shanghai, Guangzhou, and Shenzhen. These are followed by 46 tier 2 cities, 193 tier 3 cities, 696 tier 4 cities and numerous other cities with a lower ranking. The term “lower-tier cities” usually refers to all cities ranked below the second tier in which around 60% of the urban Chinese population lives (source: Alizila). While the markets in the higher-tier cities are already largely developed and growth figures there are slowly declining, the new wave of consumption growth is emerging in the lower-tier cities. This development is favored by several factors. First and foremost, the economic conditions for citizens in these cities are improving steadily, favoring their consumption. While the cost of living in the cities is still comparatively low, income is rising rapidly. Xi’an (Tier 2), for example, recorded average income growth of 8.2% in 2018. Per capita income in China’s rural regions even rose by a total of 8.8% in 2018 (source: Investo). According to a report by Nielsen, these factors lead to consumers in lower-tier cities being more confident in their consumption. The Consumer Trend Index, which is a measure of job prospects, individual financial power and consumer spending, rose particularly strongly in tier 3 and tier 4 cities, while it remained constant in higher-rated cities (source: Alizila). In addition, the consumer market in lower-ranked cities is growing quantitatively because these cities have a high population growth rate. China has already experienced strong urbanization over the past forty years. While 19% of the population lived in cities in 1980, by 2017 the figure had risen to 58% (source: Ordre). According to World Bank estimates, this figure will further increase to 70% (1 billion people) by 2030 (source: World Bank). The largest increase will take place in “lower-tier cities”.
Another factor that will boost consumption is the improvement of connections between cities in China, making it easier to supply smaller cities with goods. This will enable companies to sell their products more efficiently and to benefit from developing markets (source: Investo). After the total annual consumption in “lower-tier cities” amounted to $3.3 trillion in 2017, Morgan Stanley expects it to rise to $8.4 trillion by 2030. Of this amount, $6.9 trillion is expected to be generated in cities, while the rest will be generated in rural regions (source: Alizila).
Overall, the Chinese consumer market offers excellent development prospects. While the share of domestic consumption in China’s GDP is currently still quite low at just 39.1%, it is 68% in the US, 62.2% in India and 55.8% in the EU (source: Investo). By 2030 the private domestic consumption share in the Chinese economy could rise to 47.4% according to The Economist. This means that the increase in private consumption in China from 2015 to 2030 would be greater than the total volume of the European consumer market today (source: EIU).
Consumers Spend their Money More Freely than Before
Regardless of where they live, the purchasing behavior of Chinese citizens also varies according to their demography. The foundation of the Chinese consumer goods market is formed by the relatively young group of buyers aged between 20 and 35. This group tends to spend large portions of their income on digital devices, clothing and leisure activities. Their good personal prospects enable members of this group to spend their money more carefree than older generations did. The often academically educated young Chinese have very good prospects on the labor market, as the employment rate of academics in the country is almost 92% (source: Santander). Every year the group of young academics continues to grow, most recently by over 7.5 million people (source: Statista). Thus, the Chinese consumer market offers the best growth prospects in demographic terms. Older generations in China traditionally have a high savings ratio. Chinese aged 55 to 65 tend to put their money aside and limit spending on necessities. This generation spends half of its income on food and only about 7% on clothing. Chinese between 35 and 45 years of age spend 34% of their income on food and 14% on clothing (source: McKinsey). Across the population as a whole, spending on food, drinks and tobacco has fallen from 37% of income in 2005 to 30% of income in 2015. This development shows that Chinese consumers have more and more money left over after their basic needs have been met (source: EIU).
In 2018, Chinese citizens spent the highest percentage of their income on personal finances and housing (23.7%). Despite the already high level of spending on financial products, Mintel predicts a further annual increase of 10.1% in this category by 2023 (source: Mintel). Whether the demand for financial products will really increase as much as Mintel predicts will depend above all on whether the supply side undergoes important reforms. Currently, there are government restrictions on the purchase of foreign financial products with which the government aims to control the outflow of RMB from the country in order to handle possible currency fluctuations (source: EIU).
The product category witnessing the second-highest consumer spending in 2018 was food for domestic consumption. A total of about 14.3% of income was spent on this category. Mintel expects a further increase of around 5.3% annually until 2023. Furthermore, the Chinese spent on average almost 9% of their annual income on holidays. A strong annual growth of 12.8% is also expected in this category until 2023. According to Mintel, further significant increases will occur in the sectors of transport (10.2% p.a.), leisure and entertainment (9% p.a.), beauty (7% p.a.), clothing and accessories (6.9% p.a.) until 2023 (source: Mintel). According to the Economist Intelligence Unit, the Chinese automotive industry also continues to face rosy times, even though the Chinese automotive market is already the largest in the world. Currently, there is one car for every five Chinese whereas in the USA it is one car for every 1.3 people. Demand is expected to rise above all from “lower-tier cities”, where the purchasing power of citizens is increasing and the transition of most citizens into the middle class is progressing (source: EIU)
While Chinese consumers increase their consumption spending overall, their quality awareness becomes more pronounced. In a study by Mintel, 91% of respondents said that the quality of a product plays a greater role in the purchasing decision than the price and that a high price is even perceived as an indicator of high quality and can have a positive impact on the purchasing decision. A large proportion of consumers (81%) are also keen to try out new products and say that they keep their eyes open when shopping (source: Mintel). This also increases the potential to persuade Chinese customers with clever marketing strategies, as brand awareness amongst the new group of buyers is growing rapidly. When making purchases, greater emphasis is being placed on the brand image, which can be improved by engaging famous brand ambassadors or pursuing a sustainable business model (source: Nielsen).
The Chinese society is traditionally collectivist. Thus, an individual’s standards, preferences, and norms are strongly influenced by their social environment which has a major impact on the individuals purchasing decisions. For this reason, advertising in China is often geared to the needs of a group rather than an individual. As soon as a product is positively accepted by a reference group, a trend develops which spreads over large parts of the same group (source: Santander). Despite the high degree of collectivism, companies should not underestimate that individuality is becoming more common in China. This is especially true in areas such as fashion and holidays. Overseas travel is becoming increasingly popular for Chinese people. In 2015, 120 million Chinese traveled overseas, spending a total of 104.5 billion US dollars. This represents an increase of 16.7% over the previous year (source: EIU). More and more Chinese are giving preference to individual travel over groups. This trend is particularly noticeable among young and well educated Chinese from Tier 1 cities.
Overall, Chinese buyers are becoming more conscious of their purchasing decisions. This trend is clearly visible in the food sector, as the majority of young consumers in China now attach importance to high-quality food, not only to guarantee food safety but also improve their own health. Although this trend is mainly visible in Tier 1 cities, it can be observed throughout the whole society. According to McKinsey, 60% of consumers in large cities state that they check the ingredients of packaged products before buying them, and reconsider making a purchase if the product is perceived to be unhealthy.
In summary, the young consumer group from “lower-tier cities” in particular is driving the increase in personal consumption in China. However, since the offline shop infrastructure in these regions is not yet as well developed, end consumers are mainly buying specific products online (source: Alizila). China’s e-commerce giant JD recently announced that this year’s Double Eleven purchases from “lower-tier-cities” have increased by 60% compared to last year. In addition, Alibaba announced that 70% of new active platform users originate from less developed regions in China. In order to exploit the enormous potential of China’s developing regions, companies must, therefore, become active online. It should be noted, however, that customer interests can vary greatly between regions and city tiers. In order to develop the right market strategy, it is, therefore, crucial to study target audiences carefully beforehand.
To learn more about the regional specifics of the Chinese consumer market, please read our previous article about the importance of thinking regionally in China.
How Melchers supports foreign companies in exploiting the Chinese market potential
In order to profit from the great potential of the Chinese consumer market, it makes particular sense to look beyond the large, developed cities and turn to emerging regions. However, these cities and regions are mostly unknown to foreign companies. In addition, the demands of local consumers on products and their marketing differ greatly from those in Tier 1 cities. Thus, there is a risk that companies with little experience in China will miss the new Chinese consumption growth wave.
Melchers can help foreign companies to develop and roll out their own China strategy. We have been active in China business for over 150 years and maintain offices in 18 Chinese locations. As a result, we have a strong national and local presence and understand the individual needs of consumers across China. We help our brand partners to understand the Chinese retail market, correctly assess the market size and competitive situation and identify short, medium and long-term opportunities for growth. In doing so, we are able to assume the entire retail function of our brand partners.
To learn more about our services, please contact us at firstname.lastname@example.org