LI & FUNG RESEARCH CENTRE China Distribution & Trading ?· China Distribution & Trading Issue 48 November…

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    Li & Fung Research Centre

    Member of the Li & Fung Group

    China Distribution & Trading Issue 48 November 2007

    IN THIS ISSUE :

    Li & Fung Research Centre

    13/F, LiFung Centre

    2 On Ping Street

    Shatin, Hong Kong

    Tel: (852) 2635 5563

    Fax: (852) 2635 1598

    E-mail: lfdc@lf1937.com

    http://www.lifunggroup.com/

    Chinese Consumer Behaviour Revisited

    Today, the allure of Chinas consumer market is undeniably stronger than

    before. With impressive economic growth, strong retail performance, rising

    wealth levels and government initiatives to boost domestic consumption,

    Chinas consumer market presents rosy development prospects.

    Eyeing this huge market, both international and local brand owners and

    retailers are striving their best to understand the preferences of different groups

    of Chinese consumers so as to grab a firm share in the market.

    In this issue, we will first have a quick look on the growth drivers of the

    consumer market of China. We will then discuss the behaviour of the Chinese

    consumers. A brief description of the emerging groups of consumers in China

    will follow and selected consumption hotspots in China will be presented at the

    end of this issue.

    I. Growth drivers of Chinas consumer market

    1. Growing economy and booming retail sector

    After many years of rapid development, China is now the fourth largest

    economy in the world after the United States, Japan and Germany. In 2006,

    Chinas GDP continued to grow by 11.1% based on constant price to reach

    21.1 trillion yuan (approximately USD 2.8 trillion). The total retail sales

    of consumer goods in China, rising along with the growing economy,

    reached 7,641.0 billion yuan, with a year-on-year (yoy) increase of 13.7%.

    (see Exhibit 1). Considering one of the major 11th Five-Year Program initiatives

    is to promote private consumption and development of the service sector to

    shift the economic growth model from investment-driven to consumption-led,

    the growth potential of retail sector is anticipated to be huge.

    I. Growth drivers of 1

    Chinas consumer market

    II. Consumer behaviour 5

    in China

    III. Emerging consumer 13

    groups

    IV. Selected consumption 14

    hotspots

    LI & FUNG RESEARCH CENTRE

  • China Distribution & TradingIssue 48 November 2007

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    Li & Fung Research Centre

    Member of the Li & Fung Group

    Exhibit 1 The total retail sales of consumer goods, 1990-2006

    Source: National Bureau of Statistics (NBS)

    2. Increasing household income

    As said above, the Chinese economy has been growing at an impressive rate and this no doubt is one of the major causes

    for the increase in the income of both urban and rural households. As shown in Exhibit 2, the income of the Chinese

    households has been rising rapidly, especially in the past few years. The annual disposable income of urban households

    increased 10.4% yoy to 11,759 yuan while the annual net income of rural households rose to 3,587 yuan, with a yoy

    increase of 7.4% in 2006.

  • China Distribution & TradingIssue 48 November 2007

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    Li & Fung Research Centre

    Member of the Li & Fung Group

    Exhibit 2 Per capita annual disposable income of urban household and per capita annual net income of rural

    household in China, 2006

    Source: NBS

    3. The rise of middle class

    Twenty years ago, there might not be a significant sum of middle class in China. Nonetheless, amid a fast-growing

    economy that shows no signs of weakening, the disposable income of Chinese people increases significantly, so does the

    number of middle class.

    According to the National Bureau of Statistics (NBS), middle class refers to those with annual income between 60,000 and

    500,000 yuan (approximately USD 7,792 and 65,790). Official statistics said that about 5% of the total population (around

    65.5 million) fell into this category in 2005 and it would increase to 6% (around 80 million) within 2007 and 45% by 2020

    (see Exhibit 3).

    This group of people has stable and high income. Generally speaking, they are brand-conscious and less price-sensitive;

    and they also demand better shopping environment and higher quality goods and services. Hence, the rising middle class

    has become an important target segment for many international consumer goods companies who wish to grab a bigger

    slice of the Chinese pie.

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    Li & Fung Research Centre

    Member of the Li & Fung Group

    Exhibit 3 Fast expanding middle class in China

    Source: NBS

    4. Urbanization

    Exhibit 4 shows that the number of urban residents has been increasing stably since 1990. In 2006, the urban population

    accounted for 44% of the total Chinese population. It is expected that half of the total population will be living in cities by

    2010.

    During the process of urbanization, a large number of rural residents will migrate to the urban areas. This will trigger huge

    demand for housing, infrastructures, consumer goods and services, and so on.

    Exhibit 4 Increasing number of urban households, 1990-2006

    Source: NBS

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    Li & Fung Research Centre

    Member of the Li & Fung Group

    II. Consumer behaviour in China

    1. Consumption structure upgrade

    (1) Spending more on discretionary items

    Fuelled by robust economic growth and increase in personal disposable income, Chinese people no longer spend solely

    on necessities such as food. They are constantly upgrading their consumption structure. Exhibit 5 shows the Engel

    Coefficient, an indicator of living standard which measures the proportion of food expenditure to the total living

    expenditure, of Chinas urban and rural households since 1990. The continuous falling coefficient indicates the improving

    living standards of the Chinese residents. Urban residents are now purchasing more discretionary items and relative

    luxuries such as automobiles and houses while the rural people are improving their living standard by buying more

    durable goods.

    Exhibit 5 Engel Coefficients of urban and rural residents, 1990-2006

    Source: NBS

    Exhibit 6 gives you a rough idea on the changing consumption patterns of both urban and rural households in the past 15

    years. When comparing to the past, the urban households now spend less on food and clothing while consume more

    services such as medical, communication, educational and recreational services. The rural households also experience

    similar situation though at a less extent. According to the NBS, the yoy growth of retail sales of furniture, communication

    appliances, car, jewelry and daily consumables in 2006 were 30.0%, 27.2%, 22.9%, 22.0% and 16.0% respectively.

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    Li & Fung Research Centre

    Member of the Li & Fung Group

    Exhibit 6 The changing consumption patterns of both urban and rural households, 1990, 2000 and 2006

    Source: NBS

    (2) Increasing demand for quality products

    As said, Chinese people are now more willing to spend on high value products and services. They know more about

    quality products and services and renowned brands thanks to better access of information and greater efforts in

    advertising by the producers. For many Chinese consumers, branded products often symbolize high quality products.

    (3) Becoming more health-conscious

    Apart from being more brand-conscious, Chinese consumers are also more health-conscious. They are now better

    educated and informed and pay more attention on the quality of food they consumed. Meanwhile, they are also willing to

    buy products and services that can help relieve stress.

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    Li & Fung Research Centre

    Member of the Li & Fung Group

    2. New ways of spending

    (1) Use of credit card

    Today, China is by and large a cash-based society. For many Chinese, making payments by credit cards or debit cards is

    still a new way of spending. According to a recent survey by the Economist Intelligence Unit, among some one billion

    active cards (including credit and debit cards) being issued in China, only 50 million of them are credit cards. On average,

    Chinese card users make only one transaction each month; and about 80% of them pay off their entire balance.

    According to a survey by Credit Suisse, credit card ownership is most popular among the younger generation who

    generally is less conservative about money. Multi-card ownership is also observed among this age group.

    With the rise of the middle class, which pocesses higher purchasing power, credit card usage in China is expected to see

    a boom in the coming years.

    (2) Online shopping

    According to a recent national survey by the quasi-governmental China Internet Network Information Centre (CNNIC), the

    number of Internet users in China soared from 123 million as of June 2006 to 162 million as of June 2007; the number was

    second highest in the world, only after the United States. Among the surveyed users, more than 80% aged 35 or below.

    This reflects that Internet users in China are relatively young.

    The survey also stated that around 26% of Chinese Internet users (or 40 million people) engaged in online shopping as