Keeping Pace With the Changing Chinese Consumer

SHANGHAI, China — China’s consumers haven’t been this confident in two decades. Thanks to economic policies aimed at boosting less-developed regions as well as other reforms, wages are rising, growth is robust and the yuan is having its best year against the dollar since 2011.

With China moving toward a "modestly prosperous society," as president Xi Jinping put it in his congress opening speech in October, its luxury-goods market is poised to grow steadily again, nearly five years after it was knocked off course by the country's anti-corruption drive. Indeed, luxury consumption dropped in 2016 to its lowest level since 2009.

"Over the past few years, we went through a low period. Consumers won't spend on discretionary items — like luxury — when they're not confident. We are now seeing a comeback where the growth rate will gradually recover over the next few years," says Lan Luan, McKinsey & Company's associate partner in Shanghai.

Domestic consumption is important for the world’s second-largest economy, contributing 65.4 percent to economic expansion in the first three quarters of 2017, according to the National Bureau of Statistics. And the country’s digital-savvy upper-middle class, which is forecast to add $1.8 trillion in consumption by 2021, will fuel the boom.

While Chinese shoppers are taking to consumerism again with ease, the market is also changing at a speed capable of leaving all but the nimblest of brands breathless. What do companies seeking to capture the next wave of consumer-spending growth in China need to know?

Prioritising Personal Values

A new report by McKinsey & Co shared with BoF, which surveyed nearly 10,000 consumers aged 18 to 65 across 44 cities and seven towns in China, reveals a more multifaceted set of consumer segments, each with unique characteristics that determine their shopping habits. What's mutual across these consumers, however, is that they value quality and will do their research before spending on goods.

Fifty-five percent of respondents interviewed said they frequently check labels and ingredients, versus 47 percent. And 53 percent said they would pay a premium for an environmentally friendly product, versus 46 percent of overall respondents. "Brands that are really innovating, like Gucci, or even Burberry on the digital front, are winning over consumers," says Luan, one of the authors of the report.

"Craftsmanship will always be important, but it's all about the [values]," she continued. "Gucci, for example, have said they won't use fur anymore. Chinese consumers are becoming more socially conscious… and the change is due to the general economic development. Consumers, especially the younger generation, care more about things that are social-conscious and have value."

Alibaba Group found this to be true when 66 million customers, or 16.2 percent of the consumers on its retail marketplaces, bought five or more green products in 2015 and were willing to pay an average of 33 percent more for sustainable products. Luan notes that this shift is, in part, due to Western influences through social media. “[Chinese consumers] are global citizens and they’re learning about values from the rest of the world. They’re using their judgement to decide what’s good for them.”

Embracing Health

There has been a substantial uptick in the number of Chinese consumers who are concerned about their health and how diet, exercise and the environment could impact their quality of life. McKinsey found that 65 percent are seeking ways to lead a healthier lifestyle, as middle-class incomes rise rapidly and millions of Chinese consumers now have the ability to spend on health and fitness.

Luan notes that Chinese consumers’ interpretation of healthy living differs greatly from Western views. “The Chinese idea of health has always been more inside out, rather than outside in.” Indeed, the concept of “you are what you eat” remains deeply rooted in Chinese culture and beauty brands like Fancl, Kanebo and Shiseido, which offer collagen-based beauty drinks and powders, are popular in the country.

Changing cultural attitudes to sport, fitness and body image have also opened up a huge activewear opportunity. McKinsey found that shoppers were more willing to spend money on sports activities and buy sportswear, with 69 percent admitting to buying specialised running gear compared with 47 percent on average.

Some sportswear brands are already making moves into the market. Adidas has announced it will open 3,000 more stores over the next three years, bringing its total to 12,000. Reebok, which is owned by Adidas, plans to open 500 stores in three years. Specialist activewear brands are fast gaining a following, too. As of November 2017, Lululemon had 10 stores in China, having entered the market in 2016 with just three outlets.

A Sharing Economy

One of the fastest-growing and increasingly influential segments of Chinese consumers is what McKinsey calls the “post-90s generation.” While many reports in recent years have grouped China’s younger generation under the familiar term “Millennials,” this term doesn’t fully capture the unique attributes of this group, says Luan, adding that they also differ to Western Millennials.

For one, today it’s about “doing” things not “having,” says Luan. “[Chinese consumers] want to experience something rather than just own more things. Today, you see a lot of sharing, whether it’s bicycles or umbrellas.” According to data released by the State Information Center, China’s sharing economy jumped more than 75 percent last year. It’s expected to grow another 40 percent this year to more than $700 billion and could account for 20 percent of GDP by 2025.

Established clothes-rental services like Rent the Runway do not yet operate in China, although local players like Duolayimeng are emerging. The Beijing-based clothes-sharing start-up, which owns over 500,000 garments, offers users unlimited clothes for a monthly rental fee of $44.

The Power of KOLs

Social media is also key to winning the hearts and minds of this generation of consumers. While “being socially connected is also a huge phenomenon in the Western world,” this is especially important for the post-90s Chinese consumer. “They open their eyes in the morning and the first thing they do is check WeChat. Before they sleep, they go on WeChat,” she says.

Platforms like WeChat and Weibo are critical to China's Internet celebrity economy, in which most major luxury brands participate. Mr. Bags and Gogoboi are just two of a burgeoning cast of KOLs (key opinion leaders) that are shaping consumer behaviour. "The passion [of these individuals] to learn, to become an expert and to share is something that can be utilised by many brands," says Luan.

Used wisely, KOLs have the power to magnify brand awareness and ultimately influence purchase decisions — although Luan warns “the KOL business model is still not clear. Brands are still figuring out how to use them and how to measure their effectiveness. Over the next few years, KOLs will have more clear business models, and brands will figure out better ways to measure their success and use them as part of their marketing strategy.”

In Other News...

Vetements fans flocked to a one-day pop-up in Hong Kong. After weeks of teasing the event on Instagram, the French brand hosted its third flash-sale in Hong Kong, held in partnership with luxury boutique Joyce. The sale featured a limited-edition capsule collection of collaborations with Tommy Hilfiger, Umbro, DHL and Reebok, as well as installations inspired by Hong Kong's famous Ladies Market. Cofounder Guram Gvasalia was also present to introduce the new Vetements x Reebok Sock Runner.

Wallpaper* launches in China. Posting a WeChat greeting of "Hello, Wallpaper* has arrived in China," the monthly print publication and lifestyle brand has made its long-rumoured entry into the Chinese market. Bolstered by investment from private equity firm China Media Capital, Wallpaper* is Beijing-based publisher Huasheng Media's third licensed magazine launch of the year. "[We plan to] respect the namesake brand's identity, but diligently adapt to domestic market demand and activity," Huasheng Media's chief executive and newly appointed Wallpaper* editor-in-chief, Feng Chuxuan, told BoF.

Hong Kong retailer Joyce reports a loss of 28.8 million HKD. The multi-brand boutique, which introduced Chinese consumers to the likes of Alexander McQueen, Balenciaga and Yves Saint Laurent in the 1980s, has recorded dismal figures for the second year: it reported a loss of 28.8 million HKD ($3.69 million) in its interim results for the year ended September 30, 2017. The store is under increasing pressure as the rise of e-commerce is siphoning business away from traditional retail, while rents at China's high-end shopping malls continue to soar.

Asia's largest shopping mall opens in Nanjing. Golden Eagle Retail Group, an investment holding firm that develops and operates department store chains in China, has opened the doors to Golden Eagle World, a new shopping complex that houses brands from Chanel to SK-II. The 10 billion yuan investment drew 368,000 shoppers on its opening day, but drew comments from social media users wondering how long it could last, as e-commerce has been drawing shoppers away from malls, a phenomenon that is also affecting stores in the West.

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