Chinese consumer spending moves toward more premium goods

24 August 2016 Consultancy.uk

The Chinese economy continues to slow, as the country moves towards growth led by consumer spending. Consumers, even after the market turmoil of recent months, remain relatively upbeat about the growth of their incomes — many of whom are still keen to spend on premium goods, shopping experiences and international travel.

There has been much to-do about the economic situation in China, following a turbulent start of the year. While the markets have settled down more recently, the slowdown of the world’s second largest economy has set in — with a projection for the coming years of growth at between 5.5% and 6.5%. One of the major economic changes China is persuing is a move towards consumer led growth, which is to support the long term economic development of China.

In a new article from McKinsey & Company, titled ‘Here comes the modern Chinese consumer’, the consulting firm considers the Chinese consumer’s expectations and their shopping habits across a number of different regions. The research is based on 10,000 respondents from a wide range of regions across the country.

Chinese consumers remain upbeat about their future

Income clusters
While turmoil has been affecting the markets and the political classes, the everyday consumer remains relatively upbeat about growth in their future earnings. The consultancy asked respondents whether they agreed with the statement ‘my household income will increase significantly in the next 5 years’. This year 55% were confident their income would increase significantly over the next five years – just a few points lower than in 2012. The Chines consumer’s expectation about income growth is considerably higher than in developed countries, with 30% of UK consumers saying that they expected their income to increase in 2011 and 32% of consumers in the US in a similar survey.

The survey also considers regional differences, in terms of clusters of cities, on the future growth of income. The results suggest that particularly southern cities are up-beat about growth, while northern cities are more cautions. For instance, 70% in the Xiamen–Fuzhou City cluster are up-beat compared to 35% in Liao Central.

Happiness trumps wealth

Happiness not wealth
Income is not the only barometer reading for what matters to the Chinese consumer. The research finds that happiness is a sure sign of success — with 75% of respondents citing that a happy family is a key sign of success, up from 62% in 2009. Wealth, as the key metric for success, was cited by 48% of respondents in 2015. The survey also highlights that consumers are becoming more prudent about their financial affairs. In 2012, 54% said that borrowing is risky and they should live within their means, which has since grown to 64%. At the same time, the need to save significant amounts of money has increased from 47% in 2012 to 55% in 2015.

The premium demand

Premium demand
While saving money is likely to partially dampen spending based growth, a move towards more premium products is likely to benefit the growth of well positioned brands within the Chinese market — which most often are multi-national corporations. In the FMCG market, the number of respondents focusing on the most expensive and best products has increased from 32% in 2011 to 51% in 2015. In apparel growth the preference for premium brands has increased from 28% to 48%. In consumer electronics the market demand for premium, while relatively high, has seen little change in the past five years — up from 43% in 2011 to 49% last year. Across all consumer good types surveyed, premium is now preferred by 59% of consumers, up from 41% in 2011.

Online shoppers visiting physical stores

The shopping experience
The survey also noted a number of further trends in the Chinese market, including a focus on online shopping as well as international travel. In terms of e-commerce, the Chinese market is well developed in the consumer segment, with $615 billion in sales last year, around the same as Europe and the US combined — physical stores remain important, however, with physical store satisfaction outperforming those of web-shops. A trend towards social shopping, which includes family outings to buy and dine out, has seen shopping areas that offer both, outperforming single purpose stores. The number of consumers preferring to visit a physical store to test, touch and engage with products hits 87% in personal care and 72% in apparel – further highlighting the importance of the physical store.

The international travel segment is also seeing considerable growth within the Chinese economy, with around 70 million Chinese consumers travelling overseas in 2015, making 1.5 trips on average. While one of the key reasons for international trips is spending time with family — 74% of consumers saying it helps them to better connect with family and 45% of international trips involved family — shopping is integral to this experience. According to the research, 80% of consumers have made overseas purchases, and nearly 30% actually base their choice of a travel destination on shopping opportunities.

The research says that “the Chinese consumer is evolving. Gone are the days of indiscriminate spending on products. The focus is shifting to prioritising premium products and living a more balanced, healthy, and family-centric life. Understanding and responding to these changes in spending habits will be decisive in determining the companies that win or lose, whether international or domestic competitors. And while scale, speed, and simplicity proved advantageous in the past 15 to 20 years, the changing shape of Chinese consumption seems sure to topple some giants of the past and elevate new champions.”

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Lack of high street openings sees UK retail in precarious state

11 March 2019 Consultancy.uk

Changes in consumer behaviour, particularly in favour of online shopping, are starting to take their toll on shop-fronts in the UK, while stagnant wages are hitting peoples’ willingness to go out for food and drink. As a result, the rate of closures is more than four times that for the same period in 2017, although largely reflecting of a lack of new openings.

The retail market has fallen under a cloud of uncertainty in the UK; consumer confidence has dipped, while wages have continued to malinger in negative territory. Retailers are also under pressure from disruptive technology, as consumer sentiment shifts to more online shopping and at-home leisure. While retailers have been able to weather the storm for the past years, transformations, low consumer spending and technology have begun to take their toll.

New analysis from PwC explores the current market conditions in the UK for retail shops, focused on net openings and closings. The market changes in the UK have seen the net closures to date hit 1,123 in H1 2018 across the UK’s top 500 high-streets. The rate of closures was considerably above openings for the first half of 2018, at 1,569 openings and 2,692 closures. Compared to H1 2017, more than four times as many shops closed than opened.

Openings and closures for retail industry

The study considered the most prominent areas to see a reduction in openings and net closures across the retail landscape. Overall, fashion stores were the hardest hit in absolute terms, with a total of 104 closures for H1 2018, followed by public houses and inns, which saw 99 closures in the same period. Electrical goods stores saw a net -44 decline, with a total of 8 openings for the period. Meanwhile charity shops were in a state of relative flux, with 80 openings to 117 closures. The firm notes that service sector shops, including estate agent, banks, recruitment agencies and travel agents, among others, too have begun the process of moving online.

Not all areas of retail saw closures, with coffee and ice cream shops seeing a small net increase in openings over all. Book stores – predictions of their total obliteration appear to have waned – saw a net 18 openings, while supermarkets drew the highest overall growth relative to closures, at 18 opened and 6 closed.

Regional figures for the UK

Not all areas have seen the same level of closures, with the Greater London area and the South East the hardest hit by the current wave of closures, at -268 and -197 net change, respectively, compared to -23 and -25 closures for the same period in 2017. The middle of England too saw considerable closures, with the West Midlands clocking a net -89, and Yorkshire and the Humber down -117 stores overall.

Commenting on the figures, Lisa Hooker, consumer markets leader at PwC, said, “Openings simply aren’t replacing closures at a fast-enough rate. Specifically, the openings across ‘experiential’ chains, such as ice cream parlours, beauty salons and vape shops, haven’t been enough to offset closures in the more traditional categories. Looking ahead, the turmoil facing the sector is unlikely to abate. Store closures already announced in the second half of the year due to administrations and CVAs already will further intensify the situation.”

Related: Artificial Intelligence offers $340 billion opportunity to retail sector.