Despite a slowing economy, China is projected to remain one of the world鈥檚 fastest-growing consumer markets, reaching US$6.5 trillion in annual private consumption by 2020, says a new research released by the Boston Consulting Group and AliResearch Institute, the research arm of Alibaba Group.
The research 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 US$2.3 trillion alone would be comparable to adding a consumer market 1.3 times larger than that of today鈥檚 Germany or U.K.
The research also found that demographic, social, and technological trends will dramatically reshape China鈥檚 marketplace. Demand for services and premium products will surge, for example.
“Consumer product companies must remain focused on China,” says Jeff Walters, a BCG partner and a coauthor of the report. “Not only will China remain one of the world鈥檚 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.
An estimated 81% of consumption growth will come from China鈥檚 upper-middle-class and affluent households, which BCG classifies as those with average annual incomes of more than US$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 US$10,000 to US$24,000 a year.
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.
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 US$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鈥檚 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.
To win in China鈥檚 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,” says Kuo Youchi, 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.”
