The FINANCIAL — Despite a slowing economy, China is projected to remain one of the world’s fastest-growing consumer markets, reaching $6.5 trillion in annual private consumption by 2020. At the same time, rising affluence, a new generation of consumers, and the increasingly powerful role of e-commerce will transform China’s consumer economy. These are among the findings of new research released today by The Boston Consulting Group (BCG) and AliResearch Institute (AliResearch).
The research, described in a report titled The New China Playbook: Young, Affluent, E-savvy Consumers Will Fuel Growth, found that even if annual GDP growth slows to 5.5% over the next five years—below the official target of 6.5%—private consumption is estimated to increase by around 9% annually. The incremental growth of $2.3 trillion alone would be comparable to adding a consumer market 1.3 times larger than that of today’s Germany or UK.
The research, conducted by BCG’s Center for Customer Insight and AliResearch, the research arm of Alibaba Group, also found that demographic, social, and technological trends will dramatically reshape China’s marketplace. Demand for services and premium products will surge, for example, and the expansion of e-commerce—especially mobile e-commerce—will open more of China’s vast market to a wide range of products.
“Consumer product companies must remain focused on China,” said Jeff Walters, a BCG partner and a coauthor of the report. “Not only will China remain one of the world’s greatest growth opportunities, but that growth will come from different products and through different retail channels.”
One reason consumption growth will continue to significantly outpace GDP growth is that demographic, social, and technology trends are essentially creating a two-speed consumer economy in China. These trends are:
Rising Affluence. An estimated 81% of consumption growth will come from China’s upper-middle-class and affluent households, which BCG classifies as those with average annual incomes of more than $24,000. By 2020, the number of such households is projected to double to 100 million. They are also projected to increase their spending by 17% per year, compared with a 5% growth rate among households earning around $10,000 to $24,000 a year.
A New Generation. Chinese aged 18 to 35 are poised to overtake those born in the 1950s, 1960s, and 1970s as the dominant force in the consumer market. Consumption by young-generation consumers is growing 14% annually—twice the pace of consumers older than 35—and is projected to account for 65% of growth.
The Rise of E-commerce. Private online consumption is projected to surge by 20% annually through 2020, compared with 6% annual growth in retail sales through brick-and-mortar stores. E-commerce will drive an estimated 42% of total consumption growth—to $1.6 trillion. Mobile e-commerce, which already accounts for 51% of all online sales in China, compared with a global average of 35%, will grow even faster.
These three trends will also alter the types of goods and services that Chinese households consume. Growth will be increasingly driven by high-value goods and services, for example. In previous decades, the huge expansion of China’s lower middle class fueled rapid revenue growth in daily necessities, such as soaps and kitchen appliances. But the research found that as Chinese consumers join the ranks of the upper-middle class and the affluent, they sharply increase consumption of services and premium goods—such as luxury goods, healthy foods, education, and travel—that enhance their lifestyle and well-being.
“E-commerce is transforming China’s marketplace. Our research found that e-commerce actually stimulates new demand in China by filling many needs that aren’t being met by brick-and-mortar stores,” said Hongbing Gao, director of AliResearch. “Spending on organic and imported foods by average online shoppers has been expanding dramatically in the last three years, for example,” he added.
The research found that many of the most popular goods are not available in local stores. E-commerce is also enabling brands to reach consumers in small cities across China. An analysis of Taobao sales of several leading premium skin-care products, for example, found that 45% of online sales originated in cities that don’t have those goods available in local stores.
To win in China’s new consumer market, companies need a new set of strategies. “Because the nature of consumption is changing dramatically, the winning strategies of the past are becoming outdated,” said Youchi Kuo, a BCG principal and a coauthor. “It will be more important than ever before for companies to target the right income segments and product categories and to be represented in fast-growing online retail channels.”