rise of affluent chinese consumers

8/14/2019 Rise of Affluent Chinese Consumers

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THE RISE OF THE AFFLUENT CHINESE CONSUMER AND ITS IMPACT ON CHINASCONSUMER MARKET

Changing demographics and spending power

1. In tandem with rapid economic growth, real average disposable income in China has grown3.2 times over the past 20 years to about RMB 25,300 today. Income distribution within Chinahas changed significantly and a structure of distinct income classes has developed. Thesecomprise:

Poor: less than RMB 25,000 Lower aspirants: RMB 25,000 40,000 Upper aspirants: RMB 40,000 100,000 Affluent: RMB 100,000 200,000 Global: Greater than RMB 200,000

2. Over the next 20 years, the combination of rising GDP, demographics, education gains andcontinued labor market development will help the mass of Chinas population move from theworking poor and the bottom end of the lower-aspirant bracket, up into the solid middle classof the upper-aspirant bracket.

According to a McKinsey Global Institute study, by 2015, about 44% of Chinas urbanhouseholds will have annual income of more than RMB 40,000. This comprises 41%of households in the upper aspirants income class, 2% in the affluent class and 1% inthe global class.

By 2025, 68% of Chinas urban households will have annual income of more thanRMB 40,000. The majority of 61% of households will be in the upper aspirant class,5% in the affluent class and 2% in the global class. In absolute numbers, thesetranslate to 215 million, 18 million and 7 million households in the upper aspirantclass, affluent class and global class respectively.

3. The upper-income brackets are expected to command a large and growing amount ofspending power. The most affluent subset of the upper-income class - the global class will


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be among the global rich, earning incomes that put them at levels of middle class or above inthe developed economies of the world. They are expected to wield considerable spendingpower, accounting for 16% (RMB 3.6 trillion) of real disposable income in China in 2025.Together with the affluent class, which itself will account for another 11% (RMB 2.5 trillion) ofreal disposable income in China in 2025, this higher income segment of the population willaccount for 27% (RMB 6.1 trillion) of Chinas real disposable income in 2025.

4. Chinas growth into one of the largest consumer markets in the world will be powered by thespending of its new urban middle and upper class.

Upper aspirants consumption expenditure is expected to grow from RMB 0.4

trillion in 2005 to RMB 4.9 trillion in 2015 and RMB 12.2 trillion in 2025. The combined consumption expenditure of the affluent and global class is

expected to grow from RMB 0.3 trillion in 2005 to RMB 1.4 trillion in 2015 andRMB 4.5 trillion in 2025.


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Changing consumption patterns

5. As income rises in China, consumers are expected to spend proportionately less on basicnecessities such as food and clothing and more on discretionary items and relative luxuries(e.g. cars, plasma TV, branded goods).

6. A number product categories are expected to grow significantly by 8% p.a. or more between2005 and 2025 personal items (8.1%), transport and communication (10%), health care(12%), recreation and education (9.7%) and housing and utilities (11.7%).

7. The upper aspirants, affluent and global classes are expected to be the main drivers for thedemand for personal items, transportation and communication, health care, recreation andeducation and housing and utilities.

In 2015, these income classes are expected to account for 77% of Chinas totalspending on personal items, 74% of spending on communication and transport, 66%of spending on health care, 69% of spending on recreation, and 63% of spending onhousing and utilities.

A number of products will likely see a sharp rise in demand over the medium tolonger term:


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o Consumption in personal items like watches, jewellery, cosmetics will growsignificantly. A rising proportion of spending will be steered towards luxurybrands (see next section) with the rising affluence of the population.

o According to monthly figures from the Chinese state media, China hasleapfrogged the US to become the world's largest auto market in Jan 2009.Priced at RMB 100,000, and with increasing availability of auto loans, privatecars have become increasingly affordable to the upper-aspirant, affluent andglobal income classes. Further growth in the market can be expected overthe next 10-20 years.

o Chinas mobile-phone market, which currently already is the largest in theworld in terms of the number of subscribers, will continue to grow. Mobilephones have become prestige items to Chinese consumers, with youngconsumers typically replacing their mobile phones every 6 to 12 months.

o Leisure travel and vacationing will become more widespread as air ticketsbecome more affordable to the rapidly growing higher income classes. Anincreasingly large segment of the high net worth consumer group will preferto spend their money on niche traveling experience rather than run of the mill

tours. To cater to such demand, companies like China Adventure Travel hasbeen formed, offering tailor-made hunting trips across the world, costing upto 1 million yuan ($146,400).

o Electronic products like DVD players, game consoles, home karaokesystems, as well as services like satellite television, concerts and nightlifeoptions will see an increase in demand among the more affluent. Innovativerecreation markets will continue to grow as well. Online gaming, for instance,is a significant new growth area, having grown from US$100 million in 2002to more than US$1 billion in 2008.

o Driven by demographics and increasing life expectancy, spending on healthcare will grow exponentially. Many leading multinational pharmaceutical

companies have shifted some of their R&D to China. At the same time, theyare targeting the Chinese consumer market, increasing the availability oftheir products, and ensuring that most of their price points are within reach ofChineses mass market consumers.

Increasing Popularity of Luxury Brands in China

8. Luxury items and branded goods have started to and will continue to benefit from Chinasincome growth and the rise of the middle and upper classes. Indeed, luxury brands aremaking in-roads into the Chinese market. For example, in late 2008, Italian design houseVersace brushed off global economic woes to hold its first ever fashion show in China, sayingit expected Asia to become its second-largest market in 2009 after Europe, helped in part by

China.

9. According to a HSBC / MasterCard study in 2007, more than 75% of the middle class,modern women and DINK (double income with no kids) have purchased luxury goods, withmodern women showing the highest propensity to do so. According to the study, the mostpopular watch brands are Omega and Rolex, while Louis Vuitton is the most preferredfashion brand.


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10. Some luxury brands operating in China are seeking a local relevance, creating products thatare specifically tailored towards or centered around Chinese consumers. For example, LouisVuitton offered a range of Lantern Charm accessories based on the traditinonal Chineselanterns to celebrate the opening of the new Beijing store

1.

11. Companies such as Coach, Paul Smith and Armani have shifted some of their manufacturingto China in recent years2. In addition to its retailing operations, Zegna bought a 50% stake inSharMoon in 2003, a Wenzhou-based company that produces mens suits. French luxuryhouse Hermes has planned for investment into local production facilities to double sales inChina over the next few years. Dior opened a landmark boutique Dior Cosmetic in Shanghaiin 2003, which was designated the most luxurious Dior boutique, and made China the thirdcountry to have such a boutique. Louis Vuitton set up a 3-storey China World store inShanghai, with an overall area of almost 18,000 square feet. This is the largest of the brands

stores in China.

12. Many luxury brands are finding local or regional partners to help them enter the Chinesemarket. For example, US watch retailer Tourneau has formed a partnership with Hong KongsPeace Market Limited and International Watch Group to open stores in China. Another largecompany that acts as an agent for brands in China is Hong Kongs Dickson Concepts. Itrepresents such brands as Polo Ralph Lauren, Brooks Brothers and ST DuPont.

13. Increasingly, home grown brands in China are establishing themselves as a source of prideand a badge of the countrys emerging self confidence. While very few local luxury brandshave emerged, there are some which are perceived as luxury on a local scale and haveportrayed themselves as being international although their main market is a domestic one.Such brands include Goldlion as well as jewellery brands Chow Tai Fook and Tse Sui Luen.

14. Two home grown fashion brands LaVie and Shanghai Tang have emerged on the globalscale and have been touted as being luxury. These brands have made in-roads into foreignmarkets and have gained global recognition and success.

1 Luxury cars target Chinas new rich, Peoples Daily, June 2004.2

Luxurys new empire, The Economist, Vol 371 (8380) 2004.

rise of affluent chinese consumers

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