JAKARTA (TheInsiderStories) - Despite a cooling economy, consumer confidence in China has been surprisingly resilient over the past few years as salaries have continued to rise and unemployment has stayed low, McKinsey says in its 2016 China Consumer Report.
However, its latest survey of Chinese consumers reveals that consumers are becoming more selective about where they spend their money, shifting from products to services and from mass to premium segments. They are seeking a more balanced life where health, family, and experiences take priority.
Reflecting 10,000 in-person interviews with people aged 18 to 56 across 44 cities, McKinsey’s 2016 China Consumer Report found that the days of broad-based market growth are coming to an end.
The report examined the evolving behavior of Chinese consumers through three lenses: how willing they are to spend, what they are buying, and where they are buying.
How willing they are to spend
When asked about their expectations regarding future income, 55 percent of consumers McKinsey interviewed were confident their income would increase significantly over the next five years—just two percentage points lower than in 2012.
That’s not to say that Chinese consumers are unaware of the deteriorating condition of the economy. A growing number are seeking to save and invest, and McKinsey found differences in consumer confidence widening at a regional level. While confidence about income growth during the next five years rose to 70 percent in the Xiamen-Fuzhou city cluster, for example, it decreased to as little as 35 percent in Liao Central.
What they are buying
McKinsey found that consumers are generally becoming more selective about their spending. They are allocating more of their income to lifestyle services and experiences—over half plan to spend more on leisure and entertainment (the 50 percent surge in box-office receipts in the past year is just one indicator of that trend). At the same time, spending on food and beverages for home consumption is stagnating.
Chinese consumers are also increasingly trading up from mass products to premium products: McKinsey found that 50 percent now seek the best and most expensive product, a significant increase over previous years.A rising proportion of Chinese consumers focus on a few brands, and some are becoming loyal to single brands. The number of consumers willing to switch to a brand outside their “short list” dropped sharply. In apparel, for instance, the number of consumers willing to consider a brand they hadn’t before dropped from about 40 percent in 2012 to just below 30 percent in 2015.
Where they are buying
Although China is the world’s largest e-commerce market—generating revenue of about 4 trillion renminbi ($615 billion) last year, around the same as Europe and the United States combined—and consumers increasingly purchase online, physical stores remain important. Consumers engage with brands both online and offline, and satisfaction with physical stores remains higher than with online ones. But the gap is narrowing, especially as satisfaction with hypermarkets declines.
One trend that is helping maintain interest in physical stores is “retailtainment.” Two-thirds of Chinese consumers say that shopping is the best way to spend time with family, an increase of 21 percent compared with three years ago. 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.
Consumers also reinforce family ties through travel: 74 percent of consumers say travel helps them to better connect with family, and 45 percent of international trips were taken with family in 2015, compared with 39 percent in 2012.
More than 70 million Chinese consumers traveled overseas in 2015, making 1.5 trips on average, and shopping is integral to this experience. Some 80 percent of consumers have made overseas purchases, and nearly 30 percent actually choose their travel destination based on shopping opportunities. Among international travelers, around half of their watch and handbag purchases are made overseas, while apparel and cosmetics are the most frequently purchased categories.
“Chinese consumers remain upbeat about the future. However, gone are the days of indiscriminate spending on products. The focus is shifting from products to services, from mass to premium, and from domestic to overseas spending. Consumers are seeking a more balanced life, where health, family, and experiences take priority”, said Daniel Zipser, Partner in McKinsey’s Shanghai Office and Leader of the Consumer & Retail Practice in Greater China.
“Understanding and responding to changes in spending habits will be decisive in determining the companies that win or lose, whether international or domestic competitors”, said Fang Gong, Partner in McKinsey’s Shanghai office. (*)