China may be seeing a slowdown in economic growth, but the country’s higher-income households are “disproportionately benefiting from rising incomes” and will make the biggest contribution to urban consumption growth in the next five years, according to a new report by Boston Consulting Group.
Entitled “A Tale of Two Chinese Consumers,” BCG’s new study released on Monday finds that a China’s “high-speed consumers,” or those defined as middle-class, upper-middle-class, and affluent, are expected to contribute to 90 percent of China’s increase in urban consumption by 2020.
Today, this consumer group has about 81 million members, and is predicted to “generate about $1.7 trillion of the $3.2 trillion in urban consumption anticipated for 2015.” BCG predicts that their numbers will rise to 142 million by 2020, when they are expected to contribute $3.8 trillion to China’s total of $5.6 trillion in urban consumption.
This consumer group’s outsize contribution to total consumption is not just because they have more wealth, but also because that wealth is growing at a much faster rate than what BCG calls the “aspirant” class. The study finds that the “average affluent household is expecting nearly 11 percent income growth; the average aspirant household, only 6 percent,” marking a 20-fold difference in actual earnings between the two groups.
Geographically, lower-tier cities hold a large proportion and growing number of these consumers. A total of 46 million “high-speed” consumers now live in lower-tier cities, a number expected to increase to 84 million by 2020. This population will also become much more dispersed—brands “currently need a presence in 530 cities to reach 80 percent of these households,” says the report, but “by 2020, they will need to be in 615 cities.”
In addition, online presence is just as important as brick-and-mortar for brands trying to reach this digitally engaged consumer segment. The report finds that 40 percent of these consumers shop online at least once a week, compared to only 20 percent in the “aspirant” segment. Frequent online shoppers now make 27 percent of all their purchases online, while infrequent shoppers do so for 11 percent. A total of 35 percent of frequent online shoppers said they plan to increase their spending in the next year, while 58 percent of them “say they do not have enough things and want to buy more.”
Overall, this “high-speed” group is more optimistic about their future earning and spending than the lower-income group, says the report. It finds that households with more than 5 percent income growth over the past year are two times as likely to spend more within the next year as those with lower income growth. The survey found that these affluent consumers “feel secure today, believe that their economic future is bright, and are ready to spend and trade up in the next year.” Meanwhile, “low-speed” household incomes will grow by only 3 percent annually from now until 2020, and caused the total share of consumers planning to spend more in the next year to decline by 4 percent from last year.
As a result of these findings, BCG recommends that consumer-facing companies forget about taking a “mass approach” to the Chinese market and instead put all their eggs in the high-earning basket when it comes to both product offerings and marketing. While this may seem like good news for luxury brands, the study actually finds that these consumers “do not, however, intend to spend more on luxury items,” rather planning to up their spending on “health and wellness,” as well as “organic or fresh fruits, meats and vegetables, and baby-related products.”