The Business Confucius Institute Annual Lecture featuring Gordon Orr took place at Leeds University Business School on Thursday 22 November 2018.
Gordon Orr is a non-executive board member at Meituan-Dianping, Lenovo and Swire Pacific. After opening McKinsey’s practice in China he led the Greater China practice for many years and was Chairman of McKinsey Asia from 2009 to 2014. Gordon regularly writes about China on LinkedIn where he has 1.3 million followers and was recently named as a LinkedIn Influencer in their Top Voices of 2018.
Just like the previous Annual Lecture speaker, James Kynge from the Financial Times, Gordon drew a crowd. The lecture was attended by 120 staff, students and external guests eager to hear the speaker’s insights into the Chinese consumer.
After briefly covering the macroeconomic context Gordon went on to discuss five key characteristics and behaviours of Chinese consumers.
Chinese consumers are increasingly:
The Senior Advisor at McKinsey had a wealth of data and graphs to illustrate his points, drawing from sources including the McKinsey Global Consumer Sentiment Survey, the McKinsey Consumer Report and the McKinsey iConsumer Survey among others.
Chinese consumers are increasingly confident
Consumer confidence is at a ten-year high, and consumers are also very optimistic about their country’s economy and their household situation.
Growth is lifting families into the middle class, and it is the pace of growth that is really remarkable. This additional income goes into spending. Chinese consumers traditionally don’t have much debt to pay off, and younger consumers are more likely to spend than save.
Rising household debt and house prices could cause problems in the future.
Chinese consumers are increasingly family focussed
Families are getting smaller in China and may live further apart from each other than before. There is generational asymmetry with the over 40s generation significantly wealthier than the generations before and after them. Despite, or maybe because of these challenges, there is a return to wanting to spend time on family related activities.
Trends that Gordon highlighted included the importance of family bonding as a factor when choosing leisure activities, and the significant amount parents spend on their children’s education. 42% agree that their child’s education tuition significantly reduces what they spend on themselves.
Demographic shifts are changing the nature of families as the population ages. Today 35% of people in Shanghai are over 65! 10 million people are joining the over 60s population each year, and these retirees spend differently and spend less.
This is why Gordon asserts that “we really shouldn’t just extrapolate forward” and expect consumer spending in China to keep increasing at the same rate.
Chinese consumers are increasingly health conscious
The growing older generation are not the only ones spending more on health care.
China has very high rates for certain illnesses, particularly some that could be linked to pollution. Gordon mentioned stomach cancer as an example. 10-11% of the population suffer from diabetes and around 30% are pre-diabetic.
When only 20 years ago Chinese people still officially worked 6-day weeks, employees now expect 3-4 weeks annual leave and are likely to spend some of that abroad. Life pressures are starting to lighten and people are striving for more balance. This includes focusing on healthy eating and exercise, and there is a trend towards vegetarianism in major cities.
Chinese consumers are increasingly ‘premiumising’
Chinese consumers are increasingly trading up to buy premium products that they perceive to be offering added value. This is in direct contrast to the trading down trend that we see in the UK. Chinese consumers are increasingly brand loyal, although Gordon noted that they are still price sensitive: “you have to deliver a value that can’t be matched at a lower price”.
Beer was the example Gordon used to illustrate the effects of consumers’ tendency to trade up, and the benefits for brands that have patiently waited for this to happen. The beer market in China has long been dominated by cheap Chinese brands. Budweiser went to China pitching themselves as an affordable premium beer, and the market has now finally come to them. Although their market share is still not particularly high, Gordon estimates that their market share of the profit is probably over half of the market.
The average price of a mobile phone has increased 65% in the last 5 years, and the mean price paid for a phone in China is now around £270. 6 out of 7 are sold by Chinese brands.
Consumers are also increasingly willing to spend on services and experiences. The Starbucks roasters in Shanghai was an example used to demonstrate this.
As for holidays, Gordon emphasised the difference between first time and repeat travellers. There is little profit in the controlled, tour group model of travel preferred by first time visitors with a checklist of sights to tick off. In contrast, the more experienced international traveller is selecting from a wide range of premium independently organised experiences. These travellers are relatively small in number but the market is growing very fast and is extremely profitable.
Chinese consumers are increasingly digital
Digital payment and e-commerce was a key discussion point here. The UK is the only significant country where e-commerce penetration is anything like it is in China (in the US cash payments are still very common). In China there are very few cash payments – a theme that came up in the previous Annual Lecture with James Kynge -, and Gordon asserts that “it will be very hard to use cash in China in 5 years’ time”.
The lecture was followed by questions on Chinese students abroad, challenges for retail, healthcare, house prices, and rising debt in China.
The pace of collective adoption of a trend is faster (in China) than anywhere in the world.
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