While China has enjoyed close to a decade of mass-growth, featuring ongoing double-digit GDP growth, as the country has matured the economic climate has transitioned to one of relative stability. With China recording an economic growth rate of 7.6 per cent in 2013, and looking on track for similar growth in 2014, opportunities are still plentiful for local and international brands alike, albeit more niche in nature.
Underpinning China’s transition to sustainable growth is the shift from an export/investment-driven economy to one driven by personal consumption. In 2008, domestic consumption made up about 35 per cent of growth. Today, it accounts for 50 per cent. China is the world’s most-populous nation, and as the country shifts to an economic model driven by that dynamic, its 1.4 billion consumers are taking the reins on consumption, particularly those in Tier 2 and Tier 3 cities where consumer confidence is surging.
Over the past year Nielsen’s Consumer Confidence Index recorded fairly consistent confidence levels for China, finishing 2013 with a Consumer Confidence Index score of 111, up one point on the previous quarter and 15 points above the global Consumer Confidence Index of 96. Looking at Tier 2 and Tier 3 cities, however, confidence levels have improved markedly over the same period. The country’s Tier 2 and Tier 3 cities both recorded a Consumer Confidence Index score of 105 in the third quarter of 2013, but surged to 112 and 111 respectively in the final quarter of the year, buoyed by willingness to spend (up 15 percentage points and 7 percentage points respectively) and perceptions around job prospects, up 10 percentage points in both Tier 2 and Tier 3 cities.
Combining these trends with projected population changes, the emerging Tier 1 cities are poised to be the new powerhouse of the Chinese economy. These demographic changes are hitting at an interesting time because they intersect with the broader trend of premiumization. Today’s Chinese consumers are increasingly individualistic and are looking for products that are new, exciting, and offer convenience for their busy lives. With higher levels of disposable income, they’re striving for a better quality of life, and they enjoy the feeling of indulgence.
Health is also a key driver of consumption in China. Health ranks as the third biggest concern for Chinese consumers behind work/life balance and the economy, and 64 per cent of Chinese consumers are actively saving to pay for future potential health issues. These concerns can prompt consumers to pay more for products with health benefits, such as infant formula, healthy food products and, most notably, health supplements.
Not only are Chinese consumers changing what they shop for, they are changing the way they shop. E-commerce has been, and will continue to be, a fast-growing channel that is re-shaping the retail landscape in China. Compared with offline sales, retail sales via the emerging online channels have been growing rapidly in China over the past few years. The number of online shoppers in China reached 302 million in 2013, and total online sales jumped by 29.5 per cent to 1.85 trillion yuan, or nearly eight per cent of China’s overall retail sales. M-commerce is also increasing, as smartphone penetration rises. The penetration of smartphones in China jumped from 50 per cent in 2012 to 72 per cent in 2013, and Chinese consumers have the highest level of confidence globally in use of payment cards on a mobile device – more than 70 per cent of Chinese consumers feel comfortable shopping online and using their payments cards on either a smartphone or tablet, as long as their personal information is protected.
In addition to the digitalization of channels, there is strong growth in traditional trade. Despite growth of modern trade, traditional trade continues to be an important part of the retail landscape, particularly in lower-tier cities. And smaller-format, specialty modern trade stores are pulling customers away from hypermarkets. At specialty stores for young mothers, sales of infant formula grew 15 per cent in the last 12 months. During the same period, skin care product sales jumped 23 per cent at cosmetic specialty stores.
As China’s economic future plays out in the years ahead, the key to unlocking growth lies in the individualization of consumption. Whether it’s FMCG (fast-moving consumer goods), auto or other durables, serving personalized, customized needs with new products and product upgrades is key. As consumers’ needs shift from functional to emotional, basics to self-realization, companies that understand these changes have a definite advantage in unlocking growth in the years ahead.