China has been one of the world’s fastest-growing consumer markets in recent decades and there’s no sign that is going to change anytime soon, slowing economy or not, U.S. management advisory firm Boston Consulting Group said in a new report released today.
However, the profile of Chinese consumers and the products they buy are slated to change over the coming five years, according to BCG’s report, “The New China Playbook: Young, Affluent, E-savvy Consumers Will Fuel Growth,” which predicts three trends to watch in the country’s consumer market through 2020: upward mobility, a new generation of consumers and the continued rise of e-commerce.
BCG expects China’s upper middle class and affluent households to overtake the emerging middle class as the main drivers of consumption growth. At the same time, a younger generation of sophisticated consumers will rise in prominence, and e-commerce through online marketplaces such as Alibaba Group’s Taobao and Tmall.com will play an increasingly important role in the Chinese economy.
“The growing role of richer, younger, Internet-savvy consumers will boost demand for different kinds of products purchased through different kinds of retail channels,” BCG said in the report. “Indeed, this emerging consumer class will transform the structure of China’s economy.”
This transformation is already underway as Chinese consumers increasingly go online to make purchases via desktop computers and smartphones, according to BCG. In 2010, e-commerce made up just 3 percent of total private consumption, but that number will reach 20 percent five years from now, generating $1.6 trillion in sales. In the U.S., e-commerce accounted for 7.4 percent of total consumption in the third quarter of this year, according to the U.S. Department of Commerce. Also, within this category, 15 percent of Chinese e-commerce transactions will be cross-border, another burgeoning sales channel as the Chinese government takes steps to make the import and export of goods via e-commerce easier for both consumers and retailers.
The report, which was done in partnership with AliResearch, the research arm of Alibaba Group, arrives as investors across the globe watch growth targets for China’s gross domestic product decline in the face of decreased exports, once the backbone of the economy. But Chinese consumers are unfazed, BCG said.
BCG predicted that even if China’s economic growth slows to 5.5 percent—well below the 6.5 percent target—the country’s consumer economy will expand by about half to $6.5 trillion by 2020 from $4.2 trillion now. The $2.3 trillion differential over those five years is still 1.3 times larger than Germany’s entire $1.8 trillion consumer market.
Rising incomes will help to fuel that growth. The number of upper middle class and affluent households—those with more than $24,000 and $46,000 in annual disposable income, respectively—will double to 100 million by 2020, and they’ll account for 81 percent of total consumption growth during that period.
Increasing affluence will also help to push shopping trends in new directions and to new locales. Where consumer goods such as personal-care products once dominated sales, the next five years will see the demand for services take over, especially in areas such as healthy foods, education and travel, BCG researchers wrote. Moreover, merchants that want to reach this growing demographic will have to move beyond major cities such as Beijing, Shanghai and Guangzhou. BCG said that about half of the 46 million new upper middle class and affluent households expected by 2020 will be located in fourth-tier cities or lower, or those outside China’s top 100 cities.
E-commerce sites such as Taobao has made moves to capture this growth in services. The report pointed to Taobao’s lifestyle service channel, which had customers in 300 cities only six months after launch. And most of those customers were 35 or younger and they were making online arrangements for home-based services such as house cleaning, with as many as 2,600 maids booked in a single day at one point.
Omnichannel retailing, where consumers are driven from online promotions to offline services accessed via smartphones, will be another key area of growth, BCG said. E-commerce purchases made on mobile devices currently generate 51 percent of all online sales in the country—well above the global average of 35 percent. Mobile transactions will account for nearly three out of every four online purchases by 2020, BCG predicted, as Chinese consumers increasingly rely on the Internet to obtain local services and purchase products, such as organic foods, that they can’t find in local brick-and-mortar stores.
An ability to attract a younger demographic, those born in the 1980s, ’90s and the first decade of the 2000s, will increasingly spell success or failure for companies selling into China, BCG said. The country’s up-and-coming crop of college-educated shoppers under the age of 35 are sophisticated and brand conscious in ways the previous generation was not. Their consumption is growing at 14 percent annually, double that of consumers over 35, and they spend more than their elders—as much as 40 percent more in many product categories. By 2020, BCG said the young generation’s share of total consumption is projected to reach 53 percent in 2020 from 45 percent.
Companies that wish to remain competitive in China—or those entering for the first time—will need to adjust their strategies to fit in with these shifting demographics, BCG said, as the days of ubiquitous and insatiable Chinese demand across all product categories are over.
“Even though overall consumption will continue to boom in China over the medium term, targeting the wrong income segment, playing in the wrong categories, and being underrepresented in the fast-growing online channels will be a formula for slow growth,” the report said.