Consumer behaviour has been shifting ever since Covid-19. On another hand, a segment of consumers in lower-tier cities continues spending money freely without any worry about cost or saving for the future. Other consumers, mostly in large cities such as Beijing, Shanghai, and Guangzhou are responding to the dip in China’s economic growth and the increased cost of urban living by adjusting their attitudes and, in some cases, their spending.
This is the subject of McKinsey’s most recent China Consumer Report. This year, we present five key consumer trends that companies need to know to help them formulate their operational strategies and stay competitive in one of the world’s most dominant markets.
This year, we identified an important category of consumers who play an outsized role in keeping Chinese consumer spending surging ahead. These consumers are young digital natives who reside predominantly in tier 2, 3 or 4 cities, where living costs are lower than big cities. They are optimistic about their futures and have little hesitation about spending their money, whether on a new tech device, an overseas trip, or high-end skincare products. They have a lot more time on their hands than their counterparts in tire 1 cities. Consumers in small cities tend to leave work and arrive home at 5 or 6 pm and spend a lot less time commuting.
This allows them to have free time to eat out, follow the latest trends, and buy products that will enhance their lifestyle and social status. Young Free Spenders also believe that expensive products are generally better than cheaper ones and they aren’t particularly concerned with saving for the future. Such habits afford them considerable spending power.
Although much of the attention on China’s new generation of affluent consumers have focused on urban areas like Beijing and Shanghai.The emergence of this group shines a spotlight on the importance of consumers in lower-tier cities, such as Mianyang, Yancheng, and Zigong.In recent years, the numbers of middle and upper-middle-class consumers in tier 3 and 4 cities have risen at a rapid speed. The number of households with annual disposable income of 140,000-300,000 yuan.
Consumers have increased significantly in lower-tier cities. The increased spending of Young Free Spenders in lower-tier cities has been fueled, in part, by e-commerce platforms.
Relatively affluent households now account for more than 34% of the population in tier 3 and 4 cities in tier 3 and 4 cities increased by 38% CAGR from 2010 to 2018,
greater than the 23% growth seen in tier 1 and 2 cities. These relatively affluent households (what we call ‘upper aspirant’ and ‘mass affluent’ classes) now account for more than 34% of the population in tier 3 and 4 cities, nearly the proportion found in high-tier cities five years ago.
With this important insight, we believe that the increased spending of the Young Free Spenders in lower-tier cities has been fueled, mostly on the e-commerce platforms such as Pinduoduo and 1688, which have helped expand the availability of branded products in these cities. Consumers can now purchase more than a thousand brands on these platforms, and they account for anywhere between 10% to 30% of a category’s sales on these sites.