Rising incomes to drive consumer boom in China

Young customers key demographic, new survey says

A dramatic consumer boom will take place in China over the next 10 years on the back of rapidly rising urban incomes, before demographic trends begin to slow growth, according to a new book by economists at Credit Suisse First Boston.

Supported by one of the largest surveys of consumer attitudes in China, The Rise of the Chinese Consumer predicts that the numbers of urban households earning more than US$5,000 a year will increase annually by 24%, drawing in millions of new consumers.

The beneficiaries of the boom will be companies with brands that appeal to young consumers and that can sidestep the rampant price-cutting that affects so many product categories in China.

The development of a consumer society in China is very much going to be a feature of the next 10 years, says Jonathan Garner, global strategist at CSFB and the main author of the book. By then the Chinese consumer market will be the second largest in the world and the principal driver of global growth.

For analysts of consumer spending, a household income of US$5,000 is seen as a milestone, the point where families have some form of discretionary spending rather than purchasing only necessities.

According to the CSFB research, the percentage of urban households with incomes of more than US$5,000 will rise from 17.4% now to just over 90% in 2014.

The core of the consumer boom will take place over the next decade while the category of 20- to 29-year-olds is still growing, creating a “demographic sweet spot,” Mr. Garner says. From 2014, a sharp increase in the number of retired people is likely to slow growth and the rise in consumer spending.

Companies able to turn rapid sales growth into rising profits will be those that can capture youthful imaginations. “ Young urban consumers are willing to pay for brands they like,” he says.

The research showed that the winners were likely to be in sectors such as restaurants, cosmetics, luxury goods and tourism. McDonald’s and Yum! Brands, the owner of KFC, enjoyed some of their highest margins in the world in China because young Chinese appeared willing to pay a relatively high price for the taste of their products and the environment of their restaurants.

Similarly, 13% of respondents said they planned to take an overseas holiday next year, something that would have been almost unheard of a decade ago.

But carmakers, supermarkets and food and drink producers will find it harder to appeal. More than 50% of respondents said they had no brand preference when it came to cars, which could lead to heavy discounting. For food shopping, quality and safety — qualities that might allow retailers to charge higher prices — were considered low priorities.

The result of this increase in consumer spending, according to CSFB, will be a six percentage points drop in Chinese household savings rates.

However, Mr. Garner says he thinks the risks to financial markets from a drop in Chinese savings are limited, in part because higher oil prices have increased the funds coming in from the Middle East.