Meet the Chinese consumer of 2020
Evolving
economic profiles will continue to be the most important trend shaping the
market.
Most large
consumer-facing companies realize
that they will need China to power their growth in the next decade. But to keep
pace, these companies will also need to understand the economic, societal, and
demographic changes shaping the profiles of consumers and the way they spend.
This is no easy task not only because of the fast pace of growth and subsequent
changes in the Chinese way of life but also because of the vast economic and
demographic differences across the country.
These differences are
set to become more marked, with significant implications for companies that
fail to grasp them. Since 2005, McKinsey has conducted annual consumer surveys
in China, interviewing a total of more than 60,000 people in upward of 60
cities.1Our surveys have
tracked the growth of incomes, shifting patterns of expenditure, rising
expectations—sometimes in line with those of the respondents’ Western
counterparts and sometimes not—and the development of many different consumer
segments. Those surveys now provide insights to help us focus on the future. We
cannot, of course, predict it with certainty, and external shocks might
confound any forecast. But our understanding of consumer trends to date,
coupled with an analysis of the economic and demographic factors that will
further shape them in the next decade, serve as a useful lens for contemplating
the profile of the Chinese consumer in 2020.
Changing demographics
Many of the changes
taking place in China are common features of rapid industrialization: rising
incomes, urban living, better education, postponed life stages, and greater
mobility. Japan saw similar changes in the 1950s and 1960s, as did South Korea
and Taiwan in the 1980s.
But some unique factors
are also at work, such as the government’s one-child policy and the marked
economic imbalances among regions. Our analysis reveals important insights into
the likely demographic and socio-demographic profiles of Chinese consumers at
the end of this decade.
Changes in economic
profiles have been and will continue to be the most important trend shaping the
consumer landscape. The Chinese are certainly getting richer fast: the
per-household disposable income of urban consumers will double between 2010 and
2020, from about $4,000 to about $8,000. That will be close to South Korea’s
current standard of living but still a long way from its level in some
developed countries, such as the United States (about $35,000) and Japan (about
$26,000).
The current vast
differences in income levels will persist, however, although the numbers at
each level will shift dramatically. At
present, the great majority of the population consists of “value”
consumers—those living in households with annual disposable incomes between
$6,000 and $16,000 (equivalent to 37,000 to 106,000 renminbi), just enough to
cover basic needs. “Mainstream” consumers, relatively well-to-do households
with annual disposable income of between $16,000 and $34,000 (equivalent to
106,000 to 229,000 renminbi), form a very small group by comparison. China has
fewer than 14 million such households, representing only 6 percent of the urban
population. A tiny group of “affluent” consumers, whose household income
exceeds $34,000, accounts for only 2 percent of the urban population, or 4.26
million households.
Until now, these
divergences have presented multinational companies operating in China with a
choice: to target only mainstream and affluent consumers or to stretch the
brand to serve the value segment. Those that took the first course could more
or less maintain the same business model they applied in other parts of the
world, without needing to de-engineer their products. But in taking that
approach, they limited themselves to a target market of 18 million households.
Companies that chose to serve the value category benefitted from a much bigger
market to play in—184 million households—but their products had to be cheaper,
they were forced to adapt their business models, and profitability was lower.
This situation is
changing. Because the wealth of so many consumers is rising so rapidly, many
people in the value category will have joined the mainstream one by 2020.
Indeed, mainstream consumers will then account for 51 percent of the urban
population. Their absolute level of wealth will remain quite low compared with
that of consumers in developed countries. Yet this group, comprising 167
million households (close to 400 million people), will become the standard
setters for consumption, capable of affording family cars and small luxury
items. Companies will be able to respond by introducing better products to a
vast group of new consumers, thus differentiating themselves from competitors
and earning higher profits. Nevertheless, value consumers, whose ranks will
fall to 36 percent of urban households in 2020, from 82 percent in 2010, will
still represent an enormous market for cheaper products: 116 million
households, or 307 million consumers.
Affluent consumers will
remain an elite minority, making up only 6 percent of the population in 2020.
(In the United States in 2010, more than half of the population earned at least
$34,000.) But that 6 percent will translate into about 21 million affluent
households, with 60 million consumers.
While income is
expected to rise across China, some cities and regions are already
significantly wealthier than others. Understanding these variations in the rate
of development is important because they will affect which categories of goods
and services grow most rapidly, and where.
Today, about 85 percent
of mainstream consumers live in the 100 wealthiest cities; in the next 300
wealthiest, only 10 percent of consumers are mainstream, but that percentage
will rise to nearly 30 percent by 2020. At that point, many families in these
cities will be able to afford a range of goods and services (such as
flat-screen televisions and overseas travel) that are now largely confined to
the wealthiest urban areas.
New spending patterns
An understanding of
China’s changing economics and its impact on the profiles of consumers helps to
identify some key trends in spending patterns in the next decade. We discuss
three: high growth in discretionary categories, the tendency to trade up as
consumers spend some of their discretionary income on better goods and
services, and the emergence of a senior market.
Higher discretionary spending
Bigger incomes and
government efforts to increase consumption will benefit all consumer-facing
companies, though to varying degrees, depending on their product portfolios.
Discretionary categories will show the strongest overall growth—13.4
percent—between 2010 and 2020, as these goods become affordable to growing
numbers of consumers. Next come semi-necessities (10.9 percent growth) followed
by necessities (7.2 percent). These average figures will of course vary
significantly by region and city.
A discretionary
category within food—dining out—is expected to grow by 10.2 percent a year in
the coming decade, against 7.2 percent growth for basic food ingredients.
Of course, the
wealthiest people—those in our affluent segment—will be the main consumers of
discretionary items. Less obvious is theextent to which they will
be able to afford more such items in 2020, compared with people in other income
groups, as their numbers and wealth grow. Our consumption model suggests that
in 2010, average household spending for value, mainstream, and affluent
consumers was about $2,000, $4,000, and $12,000, respectively. These figures
will jump to $3,000, $6,000, and $21,000, respectively, by 2020. So although
all consumers will increase their spending, the gaps between different income
groups will widen significantly. Stark disparities in standards of living are
emerging in China.
Aspirational trading up
The second noticeable
trend in spending is a propensity to trade up, driven increasingly by consumers
aspiring to improve themselves, the way they live, and their perceived social
standing. Many Chinese, like their Western counterparts, judge themselves and
others by what they buy.
Strong early growth in
developing markets comes when large numbers of consumers try products for the
first time. As markets mature, growth relies on consumers who buy more goods
and services more frequently and trade up to buy pricier versions of items they
already have. This pattern explains why some basic-necessity categories have
little room for growth: many consumers can already afford such items and
probably won’t buy a great deal more of them. But that does not mean no growth
at all. Take the market for sauces and condiments. Most people can already
afford to buy as much as they need of these items. But the increased attention
now paid to health and well-being shows that even here, companies have
trading-up opportunities.
Such opportunities also
exist within semi-necessity categories, such as apparel, health care, and
household products: more consumers will be able to afford different outfits for
different occasions, for instance, or to buy additional branded products. As a
consequence, brands focused on mass-market consumers might need to be repositioned
to suit their rising aspirations, while newer, younger brands may be able to
leapfrog more established competitors by offering premium products and crafting
a premium brand image.
But it is the top end
of the market that will benefit most from trading up: growth at the high end of
some consumer goods categories already outpaces average growth for those
categories as a whole. Sales of premium skin care products, for instance, rose
by more than 20 percent a year in the past decade while the industry average
was 10 percent.
Annual volume growth
rates of more than 20 percent are foreseeable for luxury SUV cars, compared
with around 10 percent for basic family models. China had already become a
leading luxury market by 2010 and could overtake Japan to become the biggest
such market by 2015.
Emerging senior market
The aging of China
means that as a share of the total population, it will have five percentage
points more people above the age of 65 in 2020 than it has today. That is an
extra 126.5 million citizens, clearly an important consumer segment. What is
equally important is the way the spending patterns of older people in 2020 will
differ from those of older people now. In our 2011 survey, the elderly were
more inclined to save and less willing to spend on discretionary items such as
travel, leisure, and nice clothes. These tendencies will probably be much less
apparent in 2020.
Most people in China
over the age of 55 experienced the harsh conditions of the Cultural Revolution,
in the late 1960s and early 1970s. Not surprisingly, they think it important
not to spend frivolously. Among residents of tier-one cities, 55- to
65-year-olds allocate half of their spending to food and little to
discretionary categories: only 7 percent goes toward apparel, for example.
People who are ten years younger devote only 38 percent of their spending to
food but 13 percent to apparel. Indeed, our consumer surveys have revealed that
although today’s older consumers behave very differently from younger ones,
today’s 45- to 54-year-olds—the older generation come 2020—have spending
patterns similar to those of 34- to 45-year-olds (who allocate 34 percent of
their spending to food and 14 percent to apparel). This finding implies that
companies will have to rethink their ideas about what older Chinese consumers
want.
Implications for companies
The biggest challenge
is building and sustaining a leading position in China and, for multinationals,
using it to drive global growth. In fact, as the country with the world’s
largest group of mainstream consumers, it could be an excellent test bed for
companies that serve this consumer segment. Our analysis indicates that huge
variations in the growth rates of companies operating in China come 2020 are
likely, depending on the product category, consumer segment, and geography.
A second challenge is
that China is so vast and its regions so diverse it should be treated almost as
a collection of separate countries. Companies should redefine the roles of
their regional divisions and headquarters, delegating more decision-making
power to the former. Many companies already operate with three, five, or even
more regional bases, but these tend to function only as sales offices,
executing instructions from the top. Consumer needs could become so varied across
China’s regions that local insight and strategic decision-making power will be
vital. Regional offices should therefore receive full responsibility for their
own profit-and-loss accounts, strategic planning, consumer research,
innovations, portfolios, route-to-market models, and marketing. The corporate
center should have a redefined role—serving the individual units and
safeguarding the company’s brands—with less power and at a lower overhead cost.
A third challenge stems
from the fact that undifferentiated mass consumption and the rising cost of ads
made the scale of a brand or product crucial to its success in the past decade.
Companies provided the same value proposition—usually framed around a product’s
functional benefits—to all types of consumers, while stretching brands across
product categories and price tiers to leverage scale and garner market share.
Over the next decade, the game will change to take account of the emergence of
different categories of consumers and their own sense of their differences and
individuality. Companies will need the crispest value propositions to connect
with each group and to stand out from competitors. By 2020, they will have to
position brands (or sub-brands) to target narrower consumer segments and offer
more tailored value propositions. Brands extended across too many consumer
segments and price points may struggle to defend their market position. Hard
though the transition could be, at some point companies that have focused on
maximizing their brands’ scale will have to adopt a model based on a portfolio
of more targeted brands or sub-brands to connect with different consumer
segments.
No doubt China and its
consumers’ behavior will take some unexpected turns over the next decade.
Nonetheless, our research reveals the clear direction of travel. To be sure of
taking part in that journey, companies in the market should start making the
acquaintance of China’s 2020 consumers today.
Read Meet the 2020 Chinese consumer, the full report on which this article is
based, on the McKinsey Greater China Web site.
By Yuval Atsmon and Max Magni
http://www.mckinsey.com/global-themes/asia-pacific/meet-the-chinese-consumer-of-2020
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