Wealthier Chinese will spend more on food, but market share will drop
Shoppers are now looking to upgrade their consumption habits and switch to more expensive and premium brands. But understanding how this will play out will be critical for manufacturers with access to robust data and local knowledge as consumers spend more on more expensive segments like housing, financial services and automobiles.
“Consumer preferences will shift alongside changes in income levels and the wider adoption of middle-class lifestyles,” said a new report by the Economist Intelligence Unit.
“Based on comparisons with more developed Asian economies and the fact that Chinese spending on food and housing is still relatively high, there remains plenty of scope to expand spending across several discretionary consumer goods and services categories.
“The emerging middle class will look to upgrade their consumption, shifting to higher quality and more branded products [across a range of markets],” it added in an assessment of Chinese retail markets up to 2030.
The pattern of Chinese consumption has changed drastically over the past decade, the report found. The most notable difference during this time has been a reduction in the proportion of spending on basic necessities.
The proportion of average nominal consumption expenditure spent on food, beverages and tobacco has fallen to 30% in 2015, from 37% in 2005, according to calculations based on household survey data by the National Bureau of Statistics. This is consistent with international practice: as incomes rise, consumers increase spending across a broader range of categories.
The fall in the proportion of spending on food is mirrored by a sharp rise in the allocation to housing, where spending leapt to 22% of total average expenditure in 2015, from just 10% a decade earlier.
Still, due to consumers having more money available, the largest retail sales categories in value terms remain automotive and food, beverage, tobacco and alcohol. These experienced above-average rates of expansion in 2010-15.
Looking ahead, comparing Chinese consumer expenditure with that in South Korea—a richer country that has transitioned to more consumer-led growth—is instructive, the EIU points out.
“Data on household spending in South Korea suggest that consumer spending on necessities has fallen. On average, expenditure on food accounted for around just 15% of total South Korean household expenditure in 2015. China may well follow that track,” it said.
International comparisons suggest that China is still at an early-to-middle stage of development in terms of per-capita consumption, roughly at the level of Malaysia in the 2000s. This points to strong potential for more discretionary spending in the coming years, as well as for switching to more expensive and premium brands, while food, beverage and tobacco consumption “will see milder growth in the period to 2030, because market demand is mostly met”.
Businesses that fail to understand these divergent trends will struggle to succeed, the report warned, with intense competition in the marketplace and the disruption caused by e-commerce making market knowledge even more imperative.
“The idea of a large Chinese middle-class holds a powerful allure, but realising the potential of private consumption will not be without challenges. More consistent regulatory enforcement is needed to ease concerns about food and product safety.
“In the future, however, meeting the needs of a booming and more demanding middle-class group of consumers will be fundamental to economic sustainability,” the EIU concluded.