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Business News/ Industry / Banking/  Slowdown or not, Chinese are on a shopping spree
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Slowdown or not, Chinese are on a shopping spree

The Chinese are confident of a significant rise in their incomes in the next 5 years, finds McKinsey

According to the report, the Chinese are shopping for sure. But rather than spending on products, they are busy buying lifestyle services and experiences. Photo: BloombergPremium
According to the report, the Chinese are shopping for sure. But rather than spending on products, they are busy buying lifestyle services and experiences. Photo: Bloomberg

New Delhi: China’s economy may be facing a slowdown but that’s hardly a concern for the Chinese. People in China are buying lifestyle services, premium products and expect an increase in their income.

This was disclosed in a survey by global consulting firm McKinsey and Co. The survey titled The Modernization of the Chinese Consumer was conducted between September and November 2015, among 10,000 Chinese consumers from 44 cities, representing approximately 75% of China’s gross domestic product and one-half of the Chinese population.

The McKinsey study showed that people in China are confident that their income will increase significantly in the next five years, which, in turn, will result in higher spending. According to the report, 55% of Chinese consumers surveyed said their income will go up. This is just two percentage points down from the 57% the study reported in 2012.

However, the level of confidence in China varied from state to state—it dipped in the Liao Central South city-cluster to 35%, while jumped to 62% in the Nanjing city-cluster.

“What we see in 2015 is actually far better than what was expected in general," said Daniel Zipser, a Partner in McKinsey’s Shanghai office and leader of its Consumer and Retail Practice in Greater China.

However, he added that there are fundamental challenges in the market and the risks in the economy are rising. “But there’s optimism. Yet if the risks are not successfully addressed, this optimism won’t stay. In China, it is now earn more to spend more. At the same time, it’s a saving economy," said Zipser.

According to the report, the Chinese are shopping for sure. But rather than spending on products, they are busy buying lifestyle services and experiences. For example, 25% of the consumers surveyed said they will spend more on leisure and entertainment (8 percentage points more than in 2012).

However, in product consumption, premiumization is key. Chinese are shopping for premium products—a sharp shift from the mass segment, the study said. About 50% of the consumers surveyed said they seek to buy the best and the most expensive products. In the cosmetics category, 44% of the consumer want to trade up while just 4% may trade down.

“Consumers are becoming more selective and going premium. Spending power is increasing, which results in a better business case for premium products. It’s not a volume game anymore. Chinese are unlikely to consume more, but they’ll definitely spend more. And, spending will be more in the non-food segment," said Zipser.

A similar trend is also visible in India. A report by consulting firm IMRB KantarWorldPanel, released in March 2015, said that about 50% of the total new launches in the personal care products were in the premium category. The report added that the trend was not restricted to the personal care products segment but was visible across fashion, automobiles and consumer durables.

Volume growth—particularly in food and beverages—is mostly flat, the McKinsey report added. Surprisingly, consumers are spending on foreign brands in the premium category. “Chinese brands have not gained much traction in many premium segments such as skincare, cars, sports apparel, and fashion," McKinsey report said. Foreign brands still hold a leadership position in the premium segment, it added. However, there are exceptions. Chinese brand Huawei is growing its share in the premium smartphone market even as penetration by other local companies in premium segments remains limited. But the local brands are gaining market share in the mass segment, the report added.

Besides, a rising proportion of Chinese consumers focus on a few brands. The number of consumers willing to consider a brand outside of their consideration list for apparel, for instance, dropped from 40% in 2011 to below 30% in 2015, added the report.

McKinsey noted that the Chinese consumers are aware of the “deteriorating condition of the economy". The number of people seeking to save and invest is on the rise. The report also found differences in consumer confidence widening at a regional level. While confidence about income growth during the next five years rose to 70% in the Xiamen-Fuzhou city cluster, it decreased to as little as 35% in Liao Central.

The most interesting side of the Chinese consumer market, Zipser said, is the scale of the e-commerce industry. “This leads to fundamental changes in physical retailing. Shopping malls are no longer meant for just shopping, they are becoming more of activity destinations for kids and families. So, they are reinventing themselves to stay relevant," he added.

With about 30% of company’s revenue coming from e-commerce, the gap between online and offline retail is narrowing, especially as satisfaction with hypermarkets declines. “Retailtainment", as McKinsey termed it, is one trend that is helping maintain interest in physical stores. China, the world’s second largest economy, is the world’s largest e-commerce market— generating revenue of about $615 billion (4 trillion renminbi) in 2015, which is almost equal to Europe and the US combined, the report added.

“Two-thirds of Chinese consumers say that shopping is the best way to spend time with family, an increase of 50% compared with three years ago. Shopping malls—which combine shopping, dining, and entertainment experiences the entire family can enjoy—have benefited most from this trend, at the expense of big-box retail outlets such as department stores and hypermarkets," added the report.

According to the report, 70% of respondents strongly agreed that “being successful means having a happy family" (up from 62% in 2009) while 48% believe “being successful means being rich" (up from 47% in 2009). “China is not at the early stage of development anymore, and this resulted in focus shifting more towards ‘happy family’ from aspiring to become rich," Zipser said.

Clearly, the Chinese consumer is modernizing and their focus is shifting to purchasing more premium products and living a more balanced, healthy and family-centric life. While scale, speed, and simplicity proved advantageous during the past 15 to 20 years, the changing shape of Chinese consumption is set to topple some giants of the past, and elevate new champions, adds the report.

The outlook for the next 5-10 years looks positive, Zipser said. “One of the reasons: China has minimal unemployment," he added.

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Published: 18 Mar 2016, 12:55 AM IST
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