The changing behaviour of Chinese consumers is now regularly shaking the world. Suddenly, when these consumers change their minds about something, it ripples outward into the global economy. The economic trend underlying this is the steady advance of China’s urban middle class families who are rapidly transitioning from “value hunters” to more emotional, aspirational and free-spending consumers.
Chinese consumers continue to grow relentlessly in number and wealth. This is a well-studied economic trend. But what people are missing is how the changing behaviour of these consumers is now regularly shaking the world.
Suddenly, when Chinese consumers change their minds about something, it ripples outward into the global economy. And this phenomenon is going to get a lot more noticeable in the next years.
The economic trend underlying this is the steady advance of China’s urban middle class families. This is the group to watch. According to McKinsey & Co., Chinese urban household disposable income will reach $8,000 a year by 2020. This will be about the same level as South Korea, but in a much, much larger population. After Middle Eastern oil, Chinese urban middle class families are arguably the most valuable natural resource on the planet.
But within this big trend, an important shift is now occurring. Urban families are rapidly transitioning from “value hunters” to more emotional, aspirational and free-spending consumers.
Price-focused consumers have dominated the China story thus far. They typically have had little brand loyalty and tend to shop around for the best deals, mostly for life’s necessities. Chinese companies such as Haier Group and China Vanke have done very well selling these consumers air conditioners and apartments at affordable prices.
The more emotional group now emerging, called ”new mainstream” consumers by McKinsey, already has life’s basics. And they have enough disposable income to buy discretionary items such as lattes and trips to Thailand. What they care about is quality, brands and how products make them feel. So they want real iPhones, not cheap alternatives, and they are able and willing to pay for them. What is fascinating about this group is that they behave similarly to consumers in developed markets.
And here’s the factoid that matters. These “new mainstream” consumers accounted for about 5% of China in 2010, with value seekers then accounting for the overwhelming majority. But according to McKinsey, the new mainstream will represent at least half of urban middle class families by 2020. This is the important transition that is happening right now.
It means Chinese consumers are rapidly becoming much more emotional and unpredictable. Suddenly, when Chinese consumers like a movie, such as “Star Wars: The Force Awakens”, they become one of the biggest source of revenue for it.
In 2015, McDonald’s, KFC, and other US fast-food chains got a painful lesson in this phenomenon after media reports of alleged contaminated food in their Chinese outlets. Their global financial results took significant hits. While reported as a food scandal, this incident was really about urban Chinese families caring more about food safety now than in the past.
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Overwhelmed
Conversely, if Chinese consumers decide that a particular brand is safe or better than its rivals, foreign companies can suddenly be overwhelmed with orders. This recently happened to Swisse Wellness Group, one of Australia’s leading vitamin and supplement companies.
During the first half of 2015, Swisse, which had virtually no operations in China, suddenly found its sales there growing very rapidly. It turned out that Chinese consumers had begun ranking its products highly on Tmall. Revenues for the year (ended in June) jumped to A$313.1 million ($235 million) from A$125.6 million a year earlier. And unsurprisingly, a Chinese company (Biostime International Holdings) quickly bought Swisse in A$1.39 billion deal.
Another example is the story of the Bobbie Bear, a bright purple teddy bear stuffed with lavender and sold by a farm in Tasmania. This small lavender farm, a retirement project of owner Robert Ravenus, became inundated with orders after Chinese model/actress Zhang Xinyu posted a photo of her Bobbie Bear online. Orders surged to more than 45,000 and the farm was forced to suspend online sales, as it could not handle the demand from China.
The company then had to place limits on how many bears could be bought by visitors to the farm’s gift shop. Chinese tourists were showing up in Tasmania in droves to make purchases. Annual visitors to the farm exceeded 60,000. At one point, a hacker, presumed to have been Chinese, broke into the farm’s computer system to try to place orders.
My point is that increasingly emotional Chinese consumers (i.e., less pure value seeking) are now regularly causing events such as this around the world.
Increasing Mechanisms
A second important factor is that the mechanisms through which Chinese consumers can impact companies around the world are increasing. The Swisse vitamin example was possible because cross-border e-commerce, known as “haitao” in China, now lets consumers there buy overseas goods online and get them delivered. Both Amazon and Tmall are charging after this cross-border opportunity right now.
Another mechanism is real estate. Every six to 12 months, Chinese consumers seem to discover a new favourite place and start buying huge numbers of homes there. This phenomenon started in Hong Kong a few years ago. Buying then switched to Vancouver and Toronto. In the last year, we have seen heavy Chinese purchasing of homes in New York and California.
Tourism is another powerful mechanism. The number of trips abroad by Chinese tourists now exceeds 120 million a year and their travel tastes can be unpredictable as well. For example, following the 2012 hit movie “Lost in Thailand”, Chinese tourists started flooding into Chiang Mai, the main tourist hub in the area where the movie was filmed. Arrivals to the city were reportedly up 500% in 2013 alone.
So in 2016, two important factors are coming together: the increasingly emotional behaviour of Chinese consumers (who are growing in power) and a multiplication of the mechanisms by which this influence can impact the world, often in real-time.
What this means for markets and businesses around the globe is that they can now be directly impacted by what is discussed at dinner tables, in offices and online in China. My recommendation is to start paying attention to those conversations.
The article was first published in the Nikkei Asian Review, March 2016.
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About the Author
Jeffrey Towson is a Professor of Investment at Peking University Guanghua School of Management. He is the co-author of the #1 best seller The One Hour China Book.
