China’s economy tripled in size between 2000 and 2010, growing at 10.4% annually and sur-passing Japan to become the world’s second largest economy after the United States. China’s GDP will continue to grow at an estimated 7%-8% over the next 10 years compared to 2-3% in the US and 1-2% in Germany. The difference is that consumption, rather than investment, is expected to be the driving force, accounting for 43% of total GDP growth by 2020, compared with contribution from investment of 38%, according to McKinsey Insights China – Macroeco-nomic model update.
By the end of 2012, China had a total urban popula-tion of 712 million - 53% of its total population and a rise from 26% in 1990. The shift from country to city is still in progress – urbanisation is expected to reach 70% and in 20 years cities will have added 350 million more people, more than the entire population of the United States today.
By 2025, China will have 221 cities with one million-plus inhabitants, compared with 35 cities of this size in Europe today. Urban habits are where future people and money will be. The process of urbanisation fuels the growth of the consumer market by widening the afford-ability and availability of goods.
Broad category
Analysing the Chinese consumer as a homogenous group is no longer a precise approach. Urban consumers can be broadly defined in the following four categories by Goldman Sachs based on empirical evidence: 1) Mass market (400-500 million). This group has seen their income grow at double digits annually to $3,000-7,500/year in recent years. This group generally does not own property and many are recent migrants from rural areas.
2) Core middle class (100-150 million). Born before 1970 and mostly city-dwellers, this group earns their income of $7,500-55,000/year and enjoys varying degrees of economic success. They usually own the home they live in.
3) Aspirational luxury consumer (10-20 million). In their 20s to early 40s, this group makes $20,000-100,000/year, desires luxury goods and can afford$1,000-3,000 purchase of goods. They have global views and are beginning to travel abroad frequently.
4) Movers and shakers (1 million). This group has sig-nificant wealth with assets over $1.5m. Their discre-tionary spending power is huge, but their income can be significantly more volatile than the economic growth.
Consumptions by the mass market and core middle class categories are a mid-to-long term structural story, introducing major opportunities across the board as more people will demand more products. Companies such as McDonald’s, Bosideng and Hyper-markets in F&B, sportswear and retail sectors, who can cater to these consumers, will have enormous opportunity. Consumers in categories one and two care more about prices and are more responsive to pro-motions and in-store ads.
Consumptions by the aspirational luxury and movers and shakers categories are more discre-tionary and thus more cyclical. Higher income groups’ expenditure is only around 60%+ of their disposable income, while for the lowest income groups, expendi-ture is close to 90% of disposable income. For example, recent government crackdown on spending resulted in a sharp drop in premium liquor sales. Both sales and price of Maotai, presumably the best liquor in China, have decreased by about 30% in six months. Compa-nies such as Bentley, Hermes and Chow Tai Fook in the auto and luxury consumer sectors were negatively affected in 2012 due to depressed stock market and uncertain economy outlook.
The service sector is becoming more important. Business services, such as finance, consultancy and logistics, and creative services, such as education and culture & entertainment will see faster growth due to changing spending patterns. Time-stressed residents of coastal areas, for example, are turning to catering and product delivery services in a big way.
There is no doubt China’s consumers will take some unexpected turns over the next two decades. However, one thing is certain: they will continue to demand more products and better services by both local and global companies. Investors and companies just need to make sure they get acquainted with and accompany the next generation of consumers on that journey.
