The consumption in China is surging and Chinese consumers are more confident about their future this year despite the inflationary backdrop， according to the 2011 Annual Chinese Consumer Study by McKinsey Co released recently.The survey estimates that by 2020 and within the course of one decade， real consumption will have doubled to $4.8 trillion and China will then be the world’s second-biggest consumer market after the United States. Yet in some respects， private consumption remains stubbornly low.The Chinese have taken to consumerism with ease， embracing thousands of new products， services， and brands.The survey also reveals a higher level of confidence among consumers about their financial futures compared with last year， which will likely affect their buying behavior.58 percent of respondents said they expected their incomes to rise in the next year， compared with 39 percent in 2010. That compares with 33 percent in the United States and just 22 percent in the United Kingdom.Chinese consumers are also spending more on goods or services. However， Chinese consumers still save， on average， over one-third of their incomes， compared with 4.4 percent in the United States.As a proportion of GDP， private consumption is well below that of other countries， accounting for 33 percent of GDP in 2010， compared with 71 percent in the United States and 65 percent in the United Kingdom， for example. In fact， Chinese domestic consumption’s share of GDP has fallen over the past decade as the value of investment has risen.The government is keen to rebalance the economy and has responded by flagging domestic consumption as a top priority in its latest five-year economic plan. The plan includes a range of consumption-boosting measures such as subsidies on energy-efficient cars， rebates to rural consumers on purchases of electronic goods， and an increase in the minimum wage.“It’s obvious that lots of Chinese people are still optimistic about their future， with a better quality of life stimulated by government domestic policies，” Yuval Atsmon， a partner of McKinsey Co in Shanghai and co-author of the report， was quoted as saying by China Daily.Now it is golden time for companies selling to the Chinese， although of course it will take time for such measures to take effect.Current consumer sentimentAccording to the survey， at the end of 2010， annual inflation in China was running at 4.6 percent. By August this year it had reached 6.2 percent—close to its highest level in three years. This is inevitably affecting real growth in consumption， which fell from 9.4 percent in 2009 to 8.5 percent in 2010.The survey shows that the consumers—either by buying in greater quantities， buying more frequently， or by buying more expensive items in a given category—is holding firm. And whereas the last year’s survey showed how consumers offset higher spending in some categories by spending less in others， this year there appears to be much less rebalancing. Indeed， the proportion who spent less in the past year in any given category has fallen significantly， from 68 percent in 2010 to 31 percent in 2011.Moreover， Chinese consumers are spending more than ever before. Several reasons account for the extra spending. On average across categories， some 50 percent of the survey participants identified inflation as the main reason they spent more. Of the remainder， 35 percent said the main reason was trading up—that is， buying more expensive versions of goods in a given category. This is an increase from 26 percent last year. Sixty percent said buying in larger quantities or buying more frequently was the main reason for their extra spending compared with 54 percent last year.Although many more consumers are trading up to buy more expensive brands， they still want the best deal for their extra spending and in some respects are becoming more price sensitive.Growth opportunities for companiesThe survey also suggests where future growth opportunities lie， an important consideration if companies are to prioritize what are inevitably limited resources in such a huge market.A decade ago， most category growth came from first-time buyers. But this is changing， as so many products are now both available and within the financial reach of so many consumers. Instead， large variations in the importance of first-time buyers have opened up depending on the category and geographic region.At the geographic level， penetration of certain goods may be high in China’s more economically developed regions， but there are plenty of consumer acquisition opportunities in those that are less developed， and which the government has targeted for higher economic growth， said the survey.A few categories， in particular big-ticket items such as cars， have significant growth potential through firsttime buying.For many categories that have been in China for more than ten years， however， and are widely affordable albeit at different price points， the headroom for growth from first-time buyers is limited.In such cases， an essential component of capturing rising spending power will be to persuade consumers to buy more of the same thing—either by making more frequent purchases or buying in greater quantities—or to trade up to more expensive products in the same category.It is clear that category growth depends not only on a product’s affordability but also its availability. Companies with a well-configured sales and distribution network can quickly tap into rising spending power in different regions， and encourage consumers to adopt new products. And if they are ahead of the game， they can capture market share at others’ expense.Growth can also be found in shaping Chinese tastes， as well as tailoring products to suit them.Experience shows that Chinese consumers can be quick to adopt what were once unfamiliar offerings， opening up whole new areas of growth for consumer marketers. In the same vein， growth lies in persuading consumers to use a product on different occasions.Consumers’ emerging needsThe survey indicates that Chinese consumers’ expectations continue to rise. Basic functional requirements， such as product durability for consumer electronics， comfort for apparel， and taste for food and beverages， are still the main factors that determine consumers’ choice of brand， and they matter far more than they do in more developed markets.Second， Chinese consumers have high brand awareness but low brand loyalty. Nowadays， Chinese consumers are familiar with hundreds of different brands and the survey detects no let-up in the influence of brands on consumers’ buying decisions. But neither does it yet indicate strong signs of increasing loyalty to any single brand.The survey shows the extent to which consumers value the brand more than the price or the channel， and often by some distance. This stems in large measure from consumers’ belief that branded products are safer， of higher quality， and more reliable than nonbranded ones. 45 percent of Chinese consumers believe that well-known brands stand for better quality.The importance of quality and safety to Chinese consumers has been reinforced by a series of safety scares. But faith in brands still does not translate into brand loyalty. In fact， both the number of consumers who always choose from among several brands and the number of brands in their repertoire continue to rise.Despite these findings， the survey indicates that Chinese consumers could become more brand loyal as incomes rise—at least for higher-value products. 26 percent of those with monthly incomes of more than RMB 8，500 buy only one brand of mobile phone compared with 21 percent across all income groups.Third， the importance of internet is rising， though Chinese consumers still rely on traditional media. Given the fierce competition for consumers’attention and even fiercer competition for their loyalty， a key question remains how best to reach them.All marketers’ eyes are on the Internet， wondering how big an influence it is in China. The survey shows that while the number of urban households with access to the Internet is still surging， rising from 46 percent of the population in 2009 to 52 percent in 2010 and 59 percent today， its media reach—that is the numbers exposed to Internet advertising—is still relatively low. The Internet has by no means replaced other media channels as an important source of product information.The survey shows the growing influence of social media in China， and perhaps the declining influence of banner advertising.Fourth， the appeal of Internet shopping is exploding. Even though fewer than 14 percent of respondents shopped on the Internet in the past year， China’s online retail market， worth around RMB 500 billion in 2010， is already second in terms of value after the US market.The survey shows that what Chinese consumers value most about the Internet is the convenience， wide assortment， and price. What concerns them most and deters them from buying more online is the quality of such goods.“The potential development of the e-commerce market in China is prom- ising， as more Chinese consumers have started buying products， especially clothes and accessories， via Internet，”Atsmon said.What should companies doThe findings from the survey have clear implications for companies seeking to capture the next wave of consumer spending growth in China. These include the need to understand where growth lies both at the category level and in different geographic regions in order to prioritize resources and tailor strategies appropriately; to strike a balance between building mass appeal and meeting the needs of specific consumer groups; to focus on perceived value， not absolute price; to modernize marketing tools for the Internet age; and be quick to embrace the rapidly growing online sales channels.First， the survey suggests that the companies prioritize growth op- portunities Geographic expansion will need to be high on companies’ agenda if they want to maintain double-digit growth. Many international companies still focus on the top-tier cities where incomes are higher and modern trade channels such as department stores and malls are more prevalent.Companies will have to make their products much more broadly available to capture this demand， and do so urgently. Yet at the same time， companies will need to be wary of broadening their reach without first securing significant market share in any given regional market.Otherwise， they may find themselves present in many markets but strong in none， and so failing even to be considered by consumers let alone win their loyalty.Considerable resources will be needed to build sufficient scale in any one region through wide distribution， investments in in-store execution， and marketing， let alone several.Second， the companies should tailor strategies to capture growth opportunities. As the survey shows， regional differences in affordability—and affinity with certain products as well as marketing methods—means a countrylevel strategy will not suffice. Only by understanding what underpins growth potential at the geographic level in any given category will companies be able to craft an appropriate strategy for capturing maximum growth.In more mature and less expensive categories， companies that have previously focused on winning consumers will instead have to coax them to buy more frequently or trade up. But as the survey shows， there are still numerous brands that could capture high growth by educating consumers about their functional and， increasingly， emotional benefits， and so shape consumers’ tastes.Marketing methods and in-store operations will also need to reflect regional development as well as local preferences.Third， the companies should build mass appeal and meet the needs of specific consumer groups Scale is important to help companies afford the increasing but essential cost of advertising， which in turn builds awareness and encourages consumers to consider a product.However， the survey also shows how consumers are becoming more discerning. This means companies will have to work hard to show how their products are relevant to particular groups of consumers， by emphasizing the product’s enhanced functional or emotional benefits perhaps， or why these consumers might want to trade up to a more expensive item. The challenge then becomes how to meet the demands of so many different consumer groups.One way is to develop different products for different groups under the same brand， as Master Kong has done， or different products with different brand names， as L’Oréal has done. Both strategies present challenges.Fourth， the companies should focus on perceived value， not price Although Chinese consumers are keen on getting value for money—and the survey detects increased signs of price sensitivity—a low price alone will not suffice， even in an inflationary environment.Companies will have to focus on communicating the value， as well as the price competitiveness， of their goods， throughout the value chain， from functional benefits to packaging， promotions， and consumer loyalty programs.Fifth， the companies should modernize your marketing tools. Just as the brand has to build scale and simultaneously meet the individual needs of different consumer groups， so too does any marketing campaign.Traditional mass media therefore remain crucial as they are a highly effective， if expensive， means of generating awareness and establishing trust at scale and have by no means been outclassed yet by the Internet. The fact that the credibility of most channels， including in-store promotions and advertising， is rising indicates how important it is to continue to reach customers through many different touch-points， as they appear to reinforce one another.Marketers must also acknowledge the growing reach of Internet channels—particularly social media given the increased trust consumers place in the recommendations they receive from other consumers rather than compa- nies—and how this can help a brand build stronger emotional connections with consumers. In the past， companies may have been wary of making heavy online marketing investments as the returns can be hard to measure. But they now have little choice but to increase or reallocate resources to this channel.Last but not least， the companies should offer an online option. Many companies have given only scant attention to online sales， and are preoccupied with building their sales and distribution networks offline. This will need to change， for although online sales are still only a tiny proportion of overall sales in most categories， the survey leaves no doubt as to their enormous importance， particularly for brands trying to attract younger and wealthier consumers， and in those categories where adoption has been particularly quick. Different categories will need to move online at different speeds， but without an online sales channel， many companies will soon find themselves disadvantaged.Companies may choose either to set up their own online site， or make their products available on others’. As with their marketing activities， companies will need to ensure that the customer experience is the same off- and online， as the two channels reinforce each other.Companies will also need to set high standards for their online operations given that concerns about product quality， payment security， and customer service are currently major barriers to online shopping.McKinsey’s sixth annual survey of Chinese consumers’ shopping behavior was conducted from February to April. Like those of previous years， the report is a snapshot of urban consumers’ buying behavior. As such， it aims to help marketers to understand how consumers are responding to these shaping factors， and how best to capture spending growth at this particular stage of the market’s development.The survey interviewed 15，000 consumers in 49 cities， across 4 city tiers and 6 geographic regions， and surveyed general attitudes， leisure activities， and Internet usage.
