China’s consumption upgrading

What is the major driving force of China’s economic development and social changes in the next decade? “Consumption upgrading” ranks among the top 3.

The nature of the so-called “consumption upgrading” is a phenomenon of population group changes, it especially refers to the sub-item of the “well-off group” that accumulates wealth and becomes separated from the middle class, and the “well-off group” is between the middle class and the super rich. For the thresholds from the middle class to the well-off group are different in all countries. According to the research report issued by the Boston Consulting Group in November 2012, in China, the line is approximately divided at the annual average disposable household income of 20,000 dollars. Below and above the threshold, consuming goods and services, consumption patterns and consumer motivation of groups of people are greatly different.

What does it mean for the upgrading of consuming goods and services?

The first difference of course lies in the affordability. This is easy to understand, for example, for cars, the well-off group buys Benz E series that cost 500,000 yuan, and the middle class buys Mazda that costs more than 100,000 yuan. The second is the difference of quality: middle-class women may use L’Oreal while the well-off-class women prefer Lancome.

What’s the influence of consumption patterns upgrading?

There are four major differences between the well-off class and the middle class. Firstly, members of the well-off class generally choose products and services with more nobility to express their tastes. Secondly, they always choose the top commodities in the same category. For example, in a long row of snack restaurants, the well-off class more prefers Din Tai Fung but not Guangmingcun. Thirdly, the well-off consumers pay high attention to luxuries that can be regarded as investment.

For example, the legend of the maintenance of value of Hermes scarf can be the important weight in their purchase decision. Fourthly, they are critical for the identity respect and emotional expression in services, for example, when travelling by high-speed rail, they will demand sitting on first-class seats.

What is the upgrading of the consumer motivation?

Firstly the upgrading lies in the settlement of identity. The closer the members of the well-off class are to the threshold of annual average disposable household income of $20,000, they pay more attention to the distinction between themselves and the middle class. More higher than the threshold, the more impulse the members of the well-off group have to catch up with the super rich. And among the peer, people in the well-off group are tend to make differential choices. Secondly the upgrading lies in that in the total amount of payment, the proportion of intangible services to tangible products rises.

What on earth is the scale of this “consumption upgrading”?

According to the above study of the Boston Consulting Group, by 2020, the number of people upgrading from the middle class to the well-off class in China will have a net increase of 160 million, and the total amount of the well-off class will be 280 million people. What is the concept of 280 million people? The population of Japan is less than 130 million, the population of Germany is 82 million, and the population of Korea is 50 million. In other words, the total population of our well-off class is about more than twice the population of Japan, 3.5 times that of Germany, and 5.5 times that of Korea. Viewing from the total quantity consumed, the total consumption expenditure of this group is about 20 trillion RMB, occupying 35% of China’s total amount of consumption, and 5% of the global total amount of consumption.

What are the investment opportunities brought by consumption upgrading? In general there are five subclasses.

The first subclass is classic categories, such as cars, cosmetics, traveling abroad, and body care services etc. In the course of consumption upgrading in every countries, the above ones are all the biggest categories that benefit from it.

The second subclass is the rising brands serving the third-level market. One major distinctive point of the Chinese style consumption upgrading is that in our newly added well-off class with the population of 160 million, three fourths of it comes from under third-level cities. This means that there are excellent opportunities for serving the new brands of the third-level well-off class. It is predictable that among industries serving the consumption upgrading group of under third-level cities, the brands of upgraded version of Naobaijin will appear, and a new generation Shi Yuzhu type entrepreneurs will appear.

The third subclass is the new financial investment. Except the 20 trillion yuan that have been spent, for the new well-off class, there are still 3 trillion yuan at hand. In the 30 trillion yuan, the increase of deposits, investments and insurances are calculated by trillions, among them, what are especially worth being regarded as optimistic are the new types of investments and the new types of insurance. Unprecedented significant development will appear in the insurance industry.

The fourth subclass is the focus on personalized services for the “sweet secondary generation (younger generation of the rich).” Not like the development and upgrading experience of other regions, the average age of the rising well-off group in China is more than ten years younger, and their children also have entered the consumption upgrading market earlier. Different opportunities have been brought by this group for consumption upgrading, and the distinct characteristics of this group are that they are more subdivided, with more minor popularity, and more digitalized.

The fifth subclass is the third party professional channels that cover the third level cities. One major feature of the Chinese style consumption upgrading is the decline of the occupation proportion of the first and second level central cities and the rapid promotion of the occupation proportion of third level and under third level rising cities. By 2020, if 80% of the well-off group is to be covered, the amount of cities that need to be entered must be over 600 and even reach 800. This has put forward a huge challenge for the marketing pattern of today’s first-line enterprises, and also has spread huge space for the third party channels that devote themselves to cities under the third level. A large batch of “new Suning” and “new Gome” with different industries and different professions are rapidly growing up.

Viewing from a wider angle, China’s middle class are upgrading and moving toward the well-off class without stopping. After seven or eight years, the total population of the well-off class will be 280 million, twice the 140 million people of the total population of the middle class. This will cause huge changes of economy and social life, and such changes are very active and positive. One important reason for the point being ignored is that the normal form of the old thinking has its stubbornness. Under the grand background of “taking the 1.3 billion people as the big denominator,” the Gini coefficient and the so-called “middle-income trap” always make people worrying. But once the old normal form of thinking is abandoned, a completely different China will be found, a China with full vitality, being in rapid consumption upgrading and looking attractive.

For “consumption upgrading,” China’s future is optimistic.

Originally published on Oriental Morning Post | 2013-8-19