New customers emerge with higher incomes, says McKinsey
A group of new mainstream customers is emerging in China, rapidly advancing in size and purchasing power, the 2012 annual report of Chinese consumers released by Mckinsey & Co said.
More than 10,000 respondents, including a large sample of the middle class, in 44 cities took part in the study, the report said.
It defines “new mainstream customers” as those with an annual income above 106,000 yuan ($16,000), with markedly different spending behavior than the broader mass shoppers, who still comprise the vast share of Chinese customers. This group mainly lives in first-tier and second-tier coastal cities, is younger and more reliant on the Internet.
The new mainstream customers are willing to trade up, rely on the Internet more to conduct searches, take emotional considerations more into account when making purchases, trust brands and prefer online shopping, said Max Magni, partner and head of McKinsey’s Greater China consumer practice.
“Instead of the big, trustworthy brands that many companies have used to good advantage up until now, more diverse portfolios of brands and niche products will be advisable,” said Magni.
The report found that if the trend of China’s growth unfolds as projected, roughly maintaining a GDP growth rate at about 7 percent, the new mainstream shoppers will comprise nearly 400 million people by 2020.
According to the report, the structure of Chinese shoppers will largely change. The new mainstream group is expected to occupy 51 percent of all households by 2020, up from 14 percent now. Meanwhile, the upper mass group, which makes up 54 percent now, will shrink to 25 percent in 2020.
New mainstream customers are defined not only by their income but also by a new way of living and spending, Magni added.
China will gain itself a position among “upper-middle income” economies by World Bank standards by 2020, an economics expert predicted on Oct 9.
China’s annual per capita GDP is likely to top $10,000 by 2020 from last year’s $5,530, Cai Zhizhou, an economics professor at Peking University, was quoted as saying in a report in the 21st Century Business Herald.
By then, China will fall into the income range of upper-middle income economies set by the World Bank, he said.
According to a recent report by The Economist, there are more than 1 million Chinese people whose individual assets exceed 10 million yuan ($1.6 million).
However, Chinese people’s confidence about their future income is declining.
Although still among the world’s most optimistic concerning their economy, the Chinese expressed a dimmer view with regard to rises in their personal income, the McKinsey & Co report found.
At least 56 percent of respondents agreed that they expect their household income to significantly increase over the next five years, down from 60 percent a year ago. The percentage of optimists climbed to a peak in 2010 with 62 percent but declined over the next two years.
Coincidentally, a survey of depositors published by the central bank this month shows that the index of residents’ confidence in their future income was 53.2 percent from April to June, 1.7 percentage points lower than the previous three months and the lowest level since the survey was first conducted in 1999.
The percentage that remains optimistic about their household income in China is still much higher than other countries, including the US (32 percent), said Magni, partner and head of McKinsey consumer practice in Greater China.
The report also found that the Chinese people are still fond of saving. The average respondent reported saving 22 percent of his income, a full 8 percentage points higher than his counterparts in the US and Great Britain.
However, Chinese people have to spend more because of inflation, the report said. More than 80 percent of respondents cited higher prices as the primary reason for spending more on food. At least two-thirds of shoppers reported spending more in real terms.
The report stays positive on Chinese consumer spending, predicting that a new mainstream shopper will emerge, and Chinese people are “fundamentally more optimistic” about the economy.