2023 China Consumer Report
Recent macroeconomic challenges have dampened Chinese consumer sentiment after years of exuberant economic growth and rising consumer spending. Consumer expectations were obscured by the decline in the stock market, the drop in real estate transactions, and mobility restrictions to curb the COVID-19 virus. We have excerpted the following from McKinsey’s “2023 McKinsey China Consumer Report”.
Despite economic challenges and declining consumer confidence, China’s economy is showing some resilience. According to China's National Bureau of Statistics (NBS), disposable income per person increased by 5.3% in nominal terms in the first nine months of 2022. Compared to pre-pandemic levels, urban employment remained stable at 5.5% in September and consumer price inflation had increased by an average of 2% in the first nine months of 2022.
58% of urban households reported “saving money for a rainy day" and affirmed their intention to save money rather than spend it, the highest level since 2014. The rapid growth of savings deposits, which increased by RMB14 trillion in the first nine months of 2022, shows that Chinese consumers would rather save their money than spend it.
The Ministry of Commerce reports that inbound foreign direct investment (FDI) in China has hit a record high, reaching a record $181 billion in 2021, up 21% year-on-year, despite media reports of imminent downsizing or even withdrawal of multinational companies from China. Despite the pressure of slow economic growth, FDI again grew rapidly in the first half of 2022, up 24% year-on-year.
5 trends in China’s consumer market
Trend 1: The expansion of the middle class
The fact that China's base of upper-middle class and high-income consumers, who accounted for 55% of urban household consumption last year, continues to grow rapidly is a major reason for optimism. With annual incomes above RMB160,000, these households are gradually becoming upper-middle-class and high-income groups. Between 2019 and 2021, this segment increased by 18%, from 99 million to 138 million. China is anticipated to generate an additional 71 million upper-middle-class and high-income households in the following three years. According to McKinsey’s global consumer survey, 49% of respondents in China agreed that “the economy will recover within 2 to 3 months, and become as strong as it was before COVID-19 or even stronger”, in contrast to 11% - 26% of consumers in mature markets. This confirms the general optimism expressed by consumers in the survey in China.
Trend 2: Premiumization keeps going
Despite increasing concerns about the economy and personal income in difficult times, luxury brands continue to outperform mass brands as consumers prefer premium brands when they want to reward themselves. High-income consumers are increasing their spending in nearly all fast-moving consumer goods (FMCG) categories. High-income consumers plan to spend their money; 26% of respondents are spending more in 2022 than the previous year, while only 14% are cutting back. With the emergence of trendy and inventive local companies, many multinational brands that once held a dominant position in the mass or mainstream category are being squeezed by competitors and experiencing dramatic sales reductions.
Trend 3: Making wiser decisions without downgrading
The shift in market dynamics enables customers to maintain their standard of living by making more stringent trade-offs; some are even able to buy more while spending less by actively seeking discounts and special offers. Instead of compromising by switching to cheaper brands or products, high-income consumers are limiting their purchase frequency or adjusting their preferences in specific areas, while lower-income consumers are choosing cheaper products within the same brand or cheaper channels. Consumers are getting smarter about the products and channels they buy rather than downgrading. 60% of Chinese consumers interact with over-the-top (OTT) music and video streaming platforms at least once a day and spend an average of about two hours a day watching short videos. Because Douyin is less about marketing, and more about providing content-based product information and a highly interactive user experience that helps consumers make informed choices, it has gained popularity among Chinese consumers.
Trend 4: The focus is on the product
Functionality extended its lead as the most important factor for Chinese consumers of fast-moving consumer products in 2022, after losing ground to emotional considerations between 2015 and 2019. Chinese consumers are very knowledgeable about the features and specifics of the things they buy, from the ingredients in cosmetics and skincare products to the type and quality of a jacket. While consumer confidence and spending may continue to fluctuate with the changing socioeconomic situation, one trend is that Chinese consumers are focusing on researching and purchasing products that meet their more stringent requirements.
Trend 5: Local businesses are succeeding
Customers no longer pay a premium for foreign brands; Chinese companies now produce outstanding products that are competitive or, in certain cases, even "higher quality" than overseas competitors, as 49% of Chinese consumers confirm that Chinese consumers choose domestic brands for their quality and innovation, not for low prices or national pride. Today, domestic companies can offer high-quality products with a distinct value proposition that appeals to Chinese consumers, and they respond more quickly to trends with bolder investments. Therefore the demand for local brands has increased in recent years.
As economic difficulties force Chinese customers to be selective, they are increasingly opting for high-quality and functional products. Companies that can respond swiftly to changes will beat their competitors as China’s consumer market expands.
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