Despite a steep decline in consumer confidence and a surge in savings in 2022, Chinese consumers could be poised to start spending again in 2023, according to a new report by McKinsey & Company.
The report, “2023 McKinsey China Consumer Report: A Time of Resilience,” draws on a nationwide survey of 6,700 Chinese consumers, online transaction data for more than 1,000 product categories, and macroeconomic analysis conducted by the McKinsey Global Institute (MGI).
The report highlights five major trends shaping consumer behavior in the world’s second largest economy.
The middle-class continues to rise
China’s base of upper-middle-income and above consumers, who accounted for 55 percent of urban household consumption in 2021, continues to grow at a rapid clip.
MGI data show that the number of urban households earning incomes of more than RMB 160,000 ($21,800) expanded at a compound annual growth rate (CAGR) of 18 percent between 2019 and 2021, rising from 99 million to 138 million. By 2025, another 71 million households could enter this higher income bracket, underscoring the vibrant potential of China’s consumer market.
Findings from McKinsey’s survey of Chinese consumers supports this macroeconomic projection: 54 percent of respondents said they believe their household income will significantly increase over the next five years.
Premiumization maintains momentum
Even during challenging times, premium brands still outperform mass brands. Despite rising anxiety over the economy and their personal incomes, when they do spend, consumers still trade up to more premium brands when they’re looking to reward themselves.
The strong growth of upper-middle-income and above households and the spending power they bring to bear has proved to be a boon for high-quality and premium brands: 26 percent of these wealthier respondents said they spent more in 2022 compared with the previous year. Only 14 percent of these consumers said they had cut their spending in 2022.
Smarter choices, but not trading down
Chinese consumers are tightening their belts: In 2022, the proportion of respondents who said they or their family increased spending by 5 percent or more versus the previous year fell by half from 32 percent in 2019 to 16 percent, while 22 percent said they had decreased their spending.
As a result, consumers are not trading down, but they are getting much smarter about what they buy and where. They are very creative at finding the cheapest way to buy the brand they want, whether it’s through WeChat groups, parallel imports on Taobao, or the latest livestreaming deal. Without compromising on the brand and product they desire, they are making more rigorous trade-off decisions and more actively seeking discounts and promotions. Some are even managing to consume more while spending less.
It’s all about the product
Chinese consumers are becoming much savvier about what they buy. In 2022, functionality extended its lead as the most important factor influencing Chinese consumers of fast-moving consumer goods. Chinese consumers are deeply knowledgeable about the features and specifications of the products they buy, from the ingredients that go into their facial cream, to the type and quality of down feathers that make up their favorite jacket.
Survey respondents cited “safe/natural ingredients” and “required efficacy/flavor/design”—both functional factors—as the top two buying factors when purchasing non-food items, at 39 percent and 40 percent, respectively.
Local companies are winning
While it’s not a new phenomenon, the preference for local brands has accelerated in the past few years. And, contrary to what many think, national pride is not the only driving factor. Chinese brands today offer excellent products that are competitive or sometimes even superior to their foreign peers.
According to McKinsey’s survey, 49 percent of Chinese consumers think domestic brands are of ‘better quality’ than foreign brands versus 23 percent who believe the converse is true. This finding held true in roughly the same proportion across 12 different product attributes covered by the survey.
"China’s increasingly affluent consumers are proving to be resilient. As economic pressures drive them to be more discerning, they are increasingly choosing products for quality and functionality. Brands that can respond quickly as these conditions change will outperform their competitors as China’s consumer behavior continues to expand."
Daniel Zipser, Senior Partner and Leader of McKinsey’s Consumer & Retail Practice in Asia, said.
About the 2023 McKinsey China Consumer Report
The study combined a comprehensive survey of Chinese consumers, ethnographic research, and observations from McKinsey work advising companies in China. The survey was conducted in July 2022 and is part of a series of comprehensive surveys of Chinese consumer behavior conducted by McKinsey since 2005. The survey sample included around 7,000 respondents from 44 cities and nearby rural areas, representing approximately 90 percent of China’s GDP and more than half of its population.
McKinsey conducted interviews with respondents through digital devices, covering consumers’ general attitudes and purchasing behavior, key trends regarding their consumption patterns and leisure habits, and attitudes toward life, success, money, and health. The survey included a deep dive into apparel, cosmetics, and FMCG categories, including food, personal care, and household products. McKinsey's work was supplemented by additional research that the company is conducting on consumer sentiment in more than 40 countries.
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