November 22, 2019
China is entering an era of “new consumption,” characterized by new products, services, and technologies to meet the needs of new customers.
This “new consumption” represents an enhanced stage of consumption upgrading, with rising consumption and new infrastructure as key drivers.
Furthermore, China’s new consumers –– including the country’s new middle class and those in lower-tier markets –– have seen their purchasing power increase, and are willing to pay a premium for quality.
Figure 1: “New consumption” at a glance
Source: CICC Research
Rising consumption on the back of gradual price convergence
The longstanding difference in prices between online and physical stores, as well as on the Chinese mainland versus overseas, is being eliminated. The convergence in prices could lead to the next evolution of the consumer industry and facilitate an increase in consumption.
Online vs offline prices
For a long time, online stores have been able to sell products at lower prices than physical stores, which helped e-commerce flourish in China. However, perhaps as a sign of change, a major domestic
operator of physical retail shops selling a wide range of products –– including electronics and appliances –– adopted a strategy of having the same prices on its online store and at its physical stores.
This strategy, which is one of many examples that support the “new consumption,” has made this retailer’s physical stores popular again with consumers, and they have found it worthwhile to visit
the brick-and-mortar stores for infrequently bought home appliances. In China,
the average replacement cycle for air conditioners, refrigerators, washing
machines, and TVs is as long as 10 years.
Domestic vs overseas prices
Over the years, international brands have tended to sell their products at higher prices in China than overseas, as a result of their pricing strategies as well as taxes and fees levied on imported
goods, which prompted Chinese consumers to make purchases abroad.
Figure 2: Chinese tourists have higher per capita overseas
shopping spending than non-Chinese tourists
Source: Nielsen survey (2017), CICC Research
Figure 3: Breakdown of 2018 South Korea duty-free market by
consumer nationality
Source: Korea Customs Service, CICC Research
However, Chinese consumers’ increasing purchasing power has prompted international brands to change their pricing strategies. In 2019, a number of international luxury brands, including Louis Vuitton and Gucci, announced price cuts on the Chinese mainland in response to the
country’s VAT reduction.
Figure 4: A sample of Louis Vuitton’s prices – Chinese mainland
vs Hong Kong
Note: Prices obtained from Louis Vuitton stores and websites on
August 30, 2019
Source: Louis Vuitton website, China World Mall, CICC Research
This price convergence represents a sizable opportunity for overseas spending to return to China, potentially providing a boost to the domestic economy.
New infrastructure to promote new consumption
The continued improvement in new infrastructure is potentially creating the conditions for a boom in China’s consumer market. Mobile internet helps companies create new ways to sell products. Extensive transport networks and large logistics companies ensure the smooth delivery of goods. Ubiquitous mobile payments make consumption more convenient. Big data, AI, and cloud computing improve the efficiency of production, retailing and marketing.
Figure 5: Elements of new infrastructure
Source: CICC Research
Even “old economy” businesses are relying on new infrastructure for their operations. For example, restaurants can now manage many aspects of their business, from marketing to managing online reservations to food delivery as well as their payment collection hardware and software (POS
systems), all from the infrastructure of a single third-party provider. This sort of new infrastructure should help restaurants reduce costs and facilitate the “new consumption.”
Figure 6: Meituan provides restaurants with one-stop intelligent
services
Source: Company websites, Baidu, CICC Research
China’s new consumers
New consumers in lower-tier cities
A key segment of China’s new consumers are those in lower-tier cities, where there has been an increase in consumer confidence and rapid growth in online sales. Over 2014–2018, online retail
sales grew at a 74% CAGR in China’s rural areas, demonstrating strong growth momentum.
Figure 7: Consumer confidence is improving in lower-tier cities
Source: Nielsen, Ministry of Commerce of China, CICC Research
While the new consumers in lower-tier cities tend to be more price-sensitive, they could potentially be new buyers of consumer goods with small price markups. In addition, they are increasingly
paying attention to product quality, reputation and brands.
New middle class: A fast-growing group
of new consumers that prefer high-quality and innovative products
In addition, China has a growing middle class, which is conducive to greater consumption. There are about 35.6mn households with annual income of more than US$34,000 in China’s urban areas.
While the annual income of these households is not high in absolute terms, the number of such households is rising rapidly, and their income and spending power continue to grow.
Figure 8: Structure of per-capita income of urban households in
China
Source: National Bureau of Statistics of China, CICC Research
For more details, please see our report Booming “new consumption” in China published in November 2019.