Diverse Specialty and Small format Stores in Small cities Brings Higher Retail Growth
New Trends among High-Tier Consumers: Travel Aspirations Mixed With a Focus on Family and Convenience
China – Beijing – May 21, 2015: Chinese Consumer Confidence indexed at 106—a decline of one index point from the previous quarter and five index points from Q1 of last year, according to a new study by Nielsen. Global Consumer Confidence increased one index point in Q1 to 97, while China ranks the 9th among the 60 countries and regions measured in the Nielsen’s Consumer Confidence Index. In the first quarter of 2015, Chinese consumers’ perception about employment and personal finance both decreased by 3 percentage points to 69% and 64% respectively. Meanwhile, the willingness to spend showed an overall increase of 2 percentage points to 44%.
“Despite the slight decline in overall consumer confidence, Chinese consumers’ willingness to spend is seeing a recovery compared to Q4 last year, especially among lower-tier consumers,” said Oliver Rust, Managing Director of Nielsen China. “With the increasing disposable income of Chinese consumers, the low Consumer Price Index, and the continued rapid development of e-commerce, there is a significant potential of consumer spending yet to be unleashed.”
China’s Eastern region, despite a decline of two percentage points, reported the highest index of 115 points, followed by the Southern region (107, -5 points) and Northern region (105, -5 points). Although the Western region lagged behind the other regions at 97 (+3 points),it has shown a recovery from the previous quarter’s slight decline. The West is the only region that has seen an increase.
The Nielsen consumer confidence index measures perceptions of local job prospects, personal finances and immediate spending intentions. Consumer confidence levels above and below a baseline of 100 indicates degrees of optimism and pessimism, respectively.
The Story of Emerging Small City Consumption
The Consumer Confidence Index remained stable at 109 points in Tier 3 cities and increased by 1 point in Tier 4 to 107 compared with previous quarter.
In particular, when looking at the key indicators behind Nielsen’s consumer confidence, the immediate spending intentions in the following 12-month period jumped 8 percentage points to 50% among Tier 4 consumers.
“It’s great news to see such a big rebound of spending intention amongst Tier 4 consumers. These smaller cities, numbered at around 1,600 according to Nielsen, are telling an impressive consumer story that is vitally important for China’s consumption-driven economy in the years to come,” said Rust. “What we find in our research is that these small Tier 4 cities are leading the momentum for overall FMCG growth in China.”
During the Chinese New Year period in 2015, FMCG sales in these cities combined to take up 21.2% of overall sales nationwide, compared with 20.7% in Q1 2014. Compared to other tier cities, the FMCG year-on-year growth in Tier 4 cities also leads the ring with a growth rate of 11% in Q1 this year, followed by 7% in Tier 2 cities, 5% in Tier 3 cities and 4% in Tier 1 cities.
Small as these cities are, they are now a key driving force of the Chinese economy. These small cities, if combined, account for 40% of the national population, 42% of GDP, 35% of the retail sales and 21.2% of the FMCG sales in China. One of the key drivers behind this increase is attributed to the growth of specialty and small format stores that are more active in small cities.
With skin moisturizer for example, small specialty cosmetic stores offer a total of more than 8,600 different SKUs across the country (much more than the approximately 6,000 SKUs offered in hypermarkets), while half of them are sold only in cosmetic stores.
Besides offering a diverse assortment of products, specialty stores also enjoy more pricing flexibility compared with hypermarkets, which have prices more closely controlled by manufacturers. For infant milk formula, Nielsen’s findings show that top selling products contribute 41% of sales within hypermarkets, while those same products often have a lower price in baby stores as owners can more freely offer promotions.
“Pricing flexibility, wide assortment, and frequent promotions are key reasons that specialty stores are attractive. Local consumers are always searching affordable prices and high-quality products as they strive for a middle class lifestyle,” said Rust.
According to Nielsen, when Tier 4 consumers were asked where they spend their discretionary income, 65% said dining out, an increase of 3 percentage points compared to Q4 2014. Buying new clothes (65%, -7%) also surpassed putting money into savings (63%, -11%), followed by children’s education (60%, +1%) and tour/holidays/vacation (55%, +2%).
“The increasing importance of these small cities is no doubt a positive sign for manufacturers and retailers looking to unleash even more consumption power from these Tier 4 cities in the future,” Rust said. “With modern facilities and an emerging middle class, lower-tier cities are emerging quickly in today’s China. However, a combination of modern and traditional approaches will be important to win consumers in these cities, as consumers still embrace many traditional aspects of life.”
Increased Online Shopping Holiday Sales Lead to Offline Downtrend
Following a historic high of 118 points in Q4 of last year, Consumer Confidence in Tier 1 cities dropped five percentage points to 113 points this quarter. Meanwhile, the index of Tier 2 cities decreased by 4 index points to 108 in Q1.
“Instead of regarding it as a downtrend, we believe the changes in Consumer Confidence in upper tier cities are just normal fluctuations. While, despite these fluctuations, Tier 1 cities continue to drive Chinese Consumer Confidence momentum,” said Rust.
According to Nielsen, the decline in Consumer Confidence within upper-tier cities is mainly a stabilization of the current trend. The increase in the last quarter of 2014 is primarily attributed to a massive increase of online sales during the Singles’ Day online shopping holiday in late 2014.
“It doesn’t mean online channels will be the main driver behind the retail growth in China in the future. Instead, our findings show that clicks won’t be replacing bricks-and-mortar any time soon,” said Rust.
Another recent global survey on e-commerce and retail indicates that although a majority of Chinese respondents say they already, or are willing to, order grocery products online for home delivery, two thirds still claim that going to a grocery store is an enjoyable experience. A similar percentage (69%) considers grocery shopping in a retail store as a fun day out for the family.
“Online channels bring convenience for consumers while offline channels provide unique shopping experiences. Consumers are no longer shopping entirely online or offline, rather they’re taking a blended approach and using whatever channel best suits their needs. The most successful retailers and manufacturers will be at the intersection of the physical and virtual worlds, leveraging technology to satisfy shoppers however, wherever and whenever they want to shop,” said Rust.
Emerging Trends: Travel Aspirations Mixed With a Focus on Family and Convenience
According to Nielsen, both the domestic travelling population (+13%) and overseas travelling population (+15%) realized double digit growth year-on-year. However there is still a gap between upper and lower tier city consumers. 62% respondents from Tier 1 cities and 59% from Tier 2 choose to travel during holidays, higher than that of Tier 3/4 cities (52% and 54% respectively).
Nielsen’s data also shows that rising aspiration for travel among Chinese consumers brings new growth opportunities for single serving pack and on-the-go pack products. One example is the chocolate category, where single-serve-package chocolate grew by 9% in Feb and March 2015 compared with the same period of 2014. This was in in contrast to the 1 percent decline for the overall chocolate category. Similarly, ready-to-drink beverage products (including products like Ready-to-Drink Tea, Juice, packaged water) also grew by 12% (vs. 10% for overall category) in February and March versus the same period last year.
In addition to Chinese consumers’ increasing demand for travel, a focus on family and convenience can be found among Chinese consumers in their daily spending behaviors. Take the family cleanser pack (including laundry liquid, kitchen cleanser and bathroom cleanser) for instance; Tier 1 cities saw an impressive growth rate of 152% in Q1 this year, followed by 112% in Tier 3, 91% in Tier 2 and 83% in Tier 4 cities.
In addition to the previous findings, Nielsen’s survey shows increased spending on home improvement and decoration (+1%) by Tier 1 consumers and on children’s education (+5%) by Tier 2 consumers. “For both manufacturers and retailers, it’s time to give special attention to these changing upper-tier consumers who are transitioning from self-recognition to family focus, from saving for the future to travelling to see the world,” said Rust. “The key to winning over these changing consumers lies in identifying and riding the trends to best meet their evolving needs with the best products and services.”
ABOUT THE GLOBAL SURVEY
The Nielsen Global Survey, which includes the Global Consumer Confidence Index, was established in 2005. This Nielsen Global Survey of Consumer Confidence and Spending Intentions was conducted Nov. 10-28, 2014 and polled more than 30,000 online consumers in 60 countries throughout Asia-Pacific, Europe, Latin America, the Middle East/Africa and North America. The sample has quotas based on age and sex for each country based on its Internet users and is weighted to be representative of Internet consumers. It has a margin of error of ±0.6%. This Nielsen survey is based only on the behavior of respondents with online access. Internet penetration rates vary by country.
Nielsen uses a minimum reporting standard of 60% Internet penetration or an online population of 10 million for survey inclusion. The China Consumer Confidence Index is compiled from a separate mixed methodology survey among 3,500 respondents in China.
The sub-Saharan African countries in this study are compiled from a separate mobile methodology survey among 1,600 respondents in Ghana, Kenya and Nigeria. These three countries were added to Nielsen’s measurement of consumer confidence in the first quarter of 2014 using a mobile survey methodology, which differs from the online methodology used to report consumer confidence and spending intentions for the other 60 countries outlined in this report. As such, the three sub-Saharan African markets are not included in the global or Middle East/Africa averages discussed throughout this report.
Nielsen N.V. (NYSE: NLSN) is a global performance management company that provides a comprehensive understanding of what consumers Watch and Buy. Nielsen’s Watch segment provides media and advertising clients with Total Audience measurement services across all devices where content—video, audio and text—is consumed. The Buy segment offers consumer packaged goods manufacturers and retailers the industry’s only global view of retail performance measurement. By integrating information from its Watch and Buy segments and other data sources, Nielsen provides its clients with both world-class measurement as well as analytics that help improve performance. Nielsen, an S&P 500 company, has operations in over 100 countries that cover more than 90% of the world’s population. For more information, visit www.nielsen.com.
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