Outlines ways in which spending could increase from today’s 35 percent to between 45 and 50 percent of GDP – over 18,500 yuan of additional annual consumption per capita
Boao, Hainan – April 10, 2014 – As China’s investment-driven economy continues to transform into one driven by personal consumption, the country could see a boost in household consumption from today’s 35 percent of GDP to between 45 and 50 percent by 2020 according to Mitch Barns, chief executive officer of Nielsen, a leading global provider of information and insights into what consumers watch and buy. Barns spoke yesterday at the Boao Forum for Asia’s annual conference, taking place this week in Hainan Province.
“The upper end of this range amounts to additional spending of approximately 26.9 trillion yuan over 2012 levels – over 18,500 yuan of additional consumption per capita, taking consumption per capita to well over twice 2012 levels,” said Barns at a panel discussion on key spending trends in China, one of the world’s most dynamic and fastest-growing markets. (All numbers are in 2012 constant yuan.)
A tough road, but a promising future
Nielsen information, in agreement with that of the World Bank, puts Chinese household final consumption today at about 35 percent of GDP, compared to the worldwide average of 60 percent. Meanwhile, the household savings rate as a percentage of disposable income almost doubled in China from about 16 percent in 1990 to more than 30 percent two decades later.
“Chinese consumers often cite the lack of a social safety net as the main reason why they need to save as much as they do,” said Barns.
According to Nielsen’s latest survey on Chinese consumers’ attitudes on consumption and savings, consumers in Tier 1 cities save most, with the savings rate as high as 60 percent. Those consumers aged between 40 and 60 save more than 70 percent. Incentives for saving include feeling safe (63%) and preparing for old age (57%), a family emergency (55%) or the loss of a job (55%).
Chinese consumers are also reluctant to borrow: Nielsen’s survey shows that only 13 percent of Chinese have ever held a loan (home [46%] and car [33%] purchases were the top incentives for taking out a loan). Nearly half of the respondents “don’t like the feeling” of carrying debt (48%); another 48 percent believe interest rates are too high. Further, over a quarter of all respondents (27%) say the actual process of borrowing money is a significant barrier – repayment or application procedures are too complex. About the same number (25%) don’t believe they would qualify for a loan in the first place.
“A Chinese population more confident in its ability to satisfy its education, healthcare and pension needs, and that can take out and repay loans more easily, will be a Chinese population ready to expand its consumption,” said Barns.
Four key drivers to boost consumption
Based on Nielsen’s insights, Barns suggests that companies consider four issues:
1) Find the tipping point:
Nielsen’s information indicates that Chinese families who earn a household income of around 10,000 yuan per month, who save more than 3,000 yuan per month, and who own a house and a private car free of debt feel most comfortable with their saving levels and are more willing to spend. When Chinese consumers do spend, they say they are looking for products that fit their lifestyle/attitude (77%), products that are more useful (67%), products that are safer (64%) and products that work better (63%).
“In addition to the encouraging policy actions taken by the current Chinese government to further boost domestic consumption, the consumption potential at and beyond this tipping point could be fully unleashed if marketers, both local and international, could identify and respond to consumer demand as it emerges and be ready to provide the right goods at the right time to the right market segments,” said Barns.
Barns continued: “For consumers in mature and wealthier cities, the opportunities lie in offering new product experiences or brand upgrades, while in some areas of the country, particularly rural ones, the opportunity may well lie in providing a first-time brand experience – a purchase of a new brand of toothpaste or shampoo for the first time. Companies need to understand when different consumers will want to spend more, because they will want their goods and services to hold a place in consumers’ minds before they are ready to open their wallets.”
2) Go for premium:
The most immediate, addressable opportunities exist with consumers in Tier 2 and Tier 3 cities, according to a recent Nielsen study about consumers’ openness to greater spending. When asked if they would buy more premium products if they had more to spend, 38 percent of Tier 2 and 37 percent of Tier 3 city respondents said they would. The corresponding number among Tier 1 respondents was 28 percent.
Nielsen’s information indicates that Tier 2 and 3 consumers, thanks to relatively high income but less pressure, spend as much as 40 percent of their total disposable income on consumable goods, such as digital and entertainment products. These consumers also claimed to be particularly willing to spend on clothes, dining out and their children’s education in Nielsen’s most recent consumer confidence survey.
“Tier 2 and 3 consumers are now the primary drivers of consumption growth as their populations show a greater propensity to spend on current needs and wants – as, indeed, they pass the tipping point,” said Barns. “It is in Tier 2 and 3 cities that we consistently hear from consumers with a desire to buy premium, branded products.”
“Marketers must have a strategy for each tier – but also a strategy for cities that are transitioning between tiers,” Barns added.
3) Winning the E-Commerce Customer
Amid the Chinese government’s call for increased online activity as a key driver of domestic consumption, Nielsen’s information reveals a great market opportunity for E-commerce. “Today, no marketer’s approach to China will be complete without a robust e-commerce strategy. Crucial here is the distinct openness we see from Chinese consumers towards mobile payments,” said Barns.
Covering both online and offline, one of the greatest potential sources of future growth comes from health and wellness products, including healthy foods and beverages, sports equipment, and air-purifiers. According to Nielsen surveys, this category of products has seen a purchase intention increase of over 10 percentage points in just the past year, driven largely by demand in 2nd and 3rd tier cities, where health concerns even outrank concerns over income.
4) The rise of service industry
The rise of the service industry registered 8.3% year-on-year growth, according to Chinese government figures. One striking example: in 2013, surveyed parents expressed a greater willingness in the future to spend money on children’s education outside compulsory programs.
“Chinese consumers’ desire to save competes with the desire to provide for children’s needs at a time when China’s new family-planning policy will lead to more children to buy for,” said Barns. In Q3 and Q4 2013, spending on children ranked in the top three uses of disposable income, according to Nielsen’s global survey of saving and investment strategies.
Ultimately, said Barns, “today’s Chinese marketplace is nuanced and sophisticated. Success requires a sharp understanding of changing consumer habits and careful timing. Trillions of yuan hang in the balance – and so, more importantly, does a crucial element of the speed of the next phase of China’s economic transformation.”
Nielsen Holdings N.V. (NYSE: NLSN) is a global information and measurement company with leading market positions in marketing and consumer information, television and other media measurement, online intelligence and mobile measurement. Nielsen has a presence in approximately 100 countries, with headquarters in New York, USA, and Diemen, the Netherlands. For more information, visit www.nielsen.com.
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