Chinese Consumer Study-2009

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McKinsey Asia Consumer and Retail

2009 Annual Chinese

Consumer StudyPart I:Consumer behavior during

the nancial downturn

McKinseyInsights China


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July 2009

2009 Annual ChineseConsumer StudyPart I: Consumer behavior during the nancial downturn

McKinsey Asia Consumer and Retail

McKinseyInsights China

Jennier Ding

Vinay Dixit

Glenn Leibowitz

Max MagniDaniel Zipser

The authors wish to thank Derek Chang, Josephine Chen,

Howard Tomb, and Cherie Zhang or their contributions to this report.


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This is the rst in a series

of reports on Chinese

consumers planned by

McKinsey Insights China

in 2009. Subsequent

parts of this report will

be published over thenext few months.


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Contents

Executive summary 6

Impact of the nancial downturn on

consumer behavioral trends in China 9

Variation in downturns impact

by region and demographics 17

Conclusion 21

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6

Executive summary

The global nancial downturn has

only temporarily shaken Chinese

consumersin 2009, consumer

condence fell to a 5-year low and

growth in retail sales declined in

most categories. At the beginning of

the year, many executives expressed

concerns about the impact of the

crisis on their businesses in China,

pointing to missed sales targets as

evidence of a dramatic cut back in

consumer demand.

Yet our recent survey of 15,000

Chinese households in 58 cities,

conducted at the height of the global

nancial crisis, suggests that while

the crisis may be exerting a short-

term impact on consumer behavior,

the longer-term trends we have

observed over the past several years

will continue.

This years survey1 examines the

impact of the crisis on the ve

behavioral trends that we have

observed since conducting our

rst extensive survey of Chinese

consumers in 2005. In some cases,

the crisis appears to have slowed

some of our previously identied

trends, putting a damper on, for

example, years of torrid growth

in consumption, and making

consumers reluctant to spend more

to trade up to premium products.

On the other hand, the crisis appears

to have accelerated other changes

in consumer behavior, such as the

shift from brand to value, and thedesire to collect information from

the internet and other sources before

making purchasing decisions. This

years survey also highlights a shift

in spending from more expensive

channelssuch as department

stores and brand exclusive storesto

hypermarkets, supermarkets, and

digital malls.


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2009 Annual Chinese Consumer Study: Part I 7

Evidence suggests that the nancial

downturn has impacted some

segments of consumers more than

others. Unsurprisingly, consumers

with lower incomes and those living

in more export-dependent regions

such as Shenzhen have been affected

the most. In general, lower-income

consumers, with less job security

and fewer nancial resources to fall

back on, have shifted their behavior

more substantially than afuent

consumers.

Our survey also shows that

consumers aged 25 to 44 have

changed their behavior more than

those in other age groupsperhaps

because they are more likely to

be saddled with greater nancial

obligations such as mortgages,

car repayments, and school-age

children.

Despite recent shifts in shopping

and spending habits brought on

by the global nancial crisis, our

survey shows that, fundamentally,

the behavior of Chinese consumers

remains unchanged. They are likely

to continue their transformation into

one of the most sophisticated and

demanding groups of consumers in

the world.

1 McKinsey Insights China conducted its rstAnnual Chinese Consumer Study in 2005 and has sincestudied over 30,000 consumers. The 2009 survey, from December 2008 to March 2009, covered 15,000

consumers in 58 Chinese cities. For more details, please visit http://insightschina.bymckinsey.com


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Impact o the fnancial downturn on

consumer behavioral trends in China

Exhibit 1: Chinese

consumer behavioraltrends during the fnancial

downturn

More consumers are looking beyond brand to value

This trend accelerated for 6 of the 22 products surveyed

Consumers are searching for more product information

The number of people visiting product review websites hasgrown at a much faster rate than total internet usage

Mass and premium consumers alike are now slower to trade up

Spending growth flat in 2009, down from 24% in 2007-2008

Purchasing frequency has remained flat for food and beverages

and dropped in home and personal care category

Consumers continue to demand products with more functional

attributes, better product quality, greater variety, and lower prices

Trading up

Increasing

sophistication

Growing

consumption

Shifting from

brand to value

Smarter

shopping

Key trends

Impact of

downturn Key insights

Accelerated

Slowed

Channel trade

down

Consumers are moving away from department stores and otherexpensive channels toward digital malls, hyper- andsupermarkets, etc.

Slowed

Accelerated

Accelerated

1

2

3

4

5

6

SOURCE: McKinsey analysis

Emerged

The ve consumer behavioral trends

we identied from 2005 to 2008

seem to be holding:

1. Steady growth in consumption

2. Increasing consumer

sophistication

3. Slower product trade up

4. Continuous shift from brand to

value

5. Smarter shopping.

As a result of the nancial downturn,

a new trend, channel trade down,

has emerged (Exhibit 1).

The global nancial crisis has shaken

Chinese consumer condence

accordingly, the consumer

condence index fell from 94.5 in

March 2008 to 86.0 in March 2009,

a 5-year low (Exhibit 2). Especially

hard hit have been low income

earners and those living in regions

that depend more on exports, such

as Shenzhen. Sales of big-ticket and

discretionary items also dropped

sharply in late 2008.

However, this year the sale of

big-ticket and discretionary items

are showing signs of growth, along

with an increase in gross domestic

product (GDP). Meanwhile, the

Chinese government has launched a

RMB 4.12 trillion (US$603 billion)

stimulus package, and experience

after the SARS incident and other

downturns shows that consumer

condence is likely to rebound

sharply. The consumer condence

index rose for the rst time in

9 monthsfrom 86.0 in March

2009 to 86.1 in April 2009, and

edged up further in May 2009 to


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returning to early 2008 levels as

consumers resume their normal

shopping and spending behaviors.

Quarter-on-quarter GDP growth rose

to 6.4 percent in Q1 2009, up from 0

percent in the previous quarter and

an astounding 18.1 percent in Q2

2009. Retail sales also rebounded

and saw year-on-year growth of 15

percent in June. In June, car sales

jumped by more than 48 percent,

while house sales in terms of oor

space sold increased by nearly 54

percent year-on-year (Exhibit 3).

2. Increasing consumer

sophisticationReecting a consumer trend that has

been apparent for the past several

years, Chinese consumers continue

to demand products with more

functional attributes, along with

greater variety and better value for

money. More than one in four of the

consumers we surveyed expressed

their preference for greater product

variety, up from only one in eight in

2008, and companies are responding

to these demands. Marketers in the

hair care sector, for example, have

introduced shampoos that promise

to ght split ends, dandruff, or hair

losscausing the overall share of

the top ve brands to decline from

58 percent in 2001 to 46 percent2

in 2008 as multiple challengers

launched products to meet niche

demands.

Exhibit 3: Retail sales

growth and big ticket

item purchases

Real retail sales growth rate

0

10

15

20

5

90

-30

Real1 monthly retail salesPercentage, YoY

High inflationary period Heavy snowfall Beijing Olympics

SARS Restrictive macro

control

Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jun 09

Retail sales

rebounded and

experienced a

YoY growth of

15% in Jun

2009

-50

0

50

100

1 Nominal retail sales growth adjusted by retail sale price index

SOURCE: CEIC; McKinsey Global Institute analysis

Floor space sales growth

Auto unit sales growth

2008 20092007

Car sales

grew by 48%

in Jun 2009

House sales

grew by 54%

in Jun 2009

JanJulJanJulJan

Nominal car and house sales (in square meters) growthPercentage, YoY by units

-50

0

50

100

2 Source: Euromonitor.

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Meanwhile, in addition to product

variety, consumers are also seeking

additional functional benets as a

justication for value. Chocolate

offers a remarkable examplewhile

consumers around the world seek

this product out for pleasure alone,

as many as one-third of Chinese

shoppers now look for chocolate with

added calcium.

In addition to products with extra

features, consumers are also looking

for better prices. In the above

chocolate example, the proportion of

consumers looking for better price/

value for money increased from

33 percent in 2008 to 45 percent

in 2009. This also appears to be a

cross-category phenomenonfor

example, copycat mobile phones,

with the same look and features of

more expensive brand name phones,

are increasingly popular with

consumers who are looking for more

features at a lower price. Sales of

copycat phones grew from 17 million

units in 2006 to 62 million in 2008.

This trend is likely to continue

as incomes increase, competitive

intensity spurs specialization and

category innovation, and consumers

gain access to more information

about brands, products, prices, and

channels.

3. Slower product tradeup

In the rst two annual surveys we

conducted, a growing number of

consumers reported that they were

prepared to pay higher prices for

better products. This broad trend

toward trading up, one of the surest

reections of consumer condence,

has slowed sharply among mass

consumers and the more afuent

alike in our most recent survey.

When we interviewed premium

consumersthat is, those

whose spending is in the top 30

percentfrom December 2008 to

March 2009, we asked what they

paid last year for a given product,

what they are paying now, and what

they expect to pay in Q1 2010. For

example, for a 750 millilitre bottle of

shampoo, they were willing to pay an

average of 12 percent more between

2008 and 2009, but said they were

willing to pay only 9 percent more

next year. Mass consumers also

appear to have scaled back their

comparatively modest plans to trade

upthey expect to spend 6 percent

more, a drop from 13 percent last

year.

As with the other trends, we expect

consumers to resume their tendency

to trade up as China emerges from

the downturn and consumers regain

their optimism.

4. Continuous shit rombrand to value

By international standards, Chinese

consumers are still relatively branddrivenwhen nding a preferred

brand out of stock, they are more

likely to go to another store to nd it

or return later. This year, 47 percent


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of food or beverage consumers fell

into this category, compared to

about 41 percent of Americans and

fewer than a third of Japanese and

British consumers.

Our research shows, however, that inrecent years brand loyalty has eroded

steadily in China. More consumers

are looking beyond popular brands

for what they consider good value,

if not the lowest price. This explains

why more consumers today are

willing to consider a wider variety of

brands.

Overall, value-driven consumersincreased from 17 percent in 2008

to 27 percent in 2009. Nearly three

out of four people shopping for at


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3 All gures from MyMetrixmedia trend database, 2009.

screen TVs were brand-driven in

2007, but only 67 percent in 2008,

and 63 percent in 2009. We see

more consumers today shopping

carefully to nd the best deal for the

same product and to save money.

While the shift from brand to

value across product categories is

signicant, we generally observe that

around 40 percent of consumers

in a given category may be willing

to focus more on value than

brandsmarking an upper limit on

the share challengers can hope to

gain. In other words, more than half

of consumers for many products are

brand driven. However, single brand

loyalty is declining in China, having

dropped from 31 percent in 2007

to 19 percent in 2009consumers

generally have a shortlist of brands

to consider when shopping for a

product and they shop for the best

deal among those listed. Therefore,

brands need to continue to improve

their value proposition to stay

within the consideration set of their

consumers.

5. Smarter shopping

During the nancial downturn,consumers have begun to shop more

carefully by visiting stores in person

and conducting online research.

From Q1 2008 to Q1 2009, total

internet use grew by 39 percent, and

the number of consumers visiting

product review websites grew by

more than 50 percent. In some

categories, the change has been

even more pronounced. Websites

featuring reviews of consumerelectronics had more than twice as

many unique visitors in Q1 2009 as

they did in Q1 2008over 20 million

per month3.

In addition to price comparisons,

which people tend to pursue

more diligently during nancial


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downturns, consumers are also

conducting more online searches for

details about product attributes and

varieties, competing products, and

retail outlets.

Although the use of online resourcesis growing fastest among younger

consumers, older generations are

also becoming more familiar with

the internet and are increasingly

comfortable with using online

resources. Our survey showed that in

the last year, the share of consumers

aged 45 to 64 who looked at online

reviews before making their nal

purchase decisions rose from 10.6 to

13.2 percent. We expect this trend

to continue, in line with increasing

consumer sophistication.

6. Channel trade down

Our research this year identied a

new trend, channel trade down, that

in some ways parallels a pattern in

American and European markets.

Thanks to internet penetration and

the proliferation of retailers and

retail formats, such as super- and

hypermarkets and digital malls,

Chinese consumers are now moving

away from department stores and

other relatively expensive channels.

Nearly three out of four survey

respondents reported buying their

last mobile phone through one

of these more price-competitive

channels in 2009, for example,

compared to less than half in 2008.

We see this trend in a wide range of

products. For example, the number

of consumers who said they used

price-competitive channels when

purchasing a facial moisturizer

jumped from 73 percent in 2008 to

88 percent in 2009.


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Variation in downturns impact

by region and demographics

While the overall direction of

consumption in China remains

unchanged, the effect of the nancial

downturn varies widely according

to the circumstances of consumers.

Understanding their behavior today

requires knowing more about their

location, income, and age.

Geography

Since buyers around the world have

cut back on spending, the global

downturn has hit Chinas export-

oriented areas harder (Exhibit 4).

About 90 percent of Shenzhens

manufacturing and mining output

is slated for export, for example,compared to 10 percent of Wuhans.

This has caused Shenzhens GDP

to grow at only 3.4 percent in Q1

2009 against Q1 2008, compared

to Wuhans 8.9 percent. As a result,

household spending dropped 16

percent in Shenzhen in 2009,

even while it rose by 20 percent

in Wuhan. In 2009, shoppers in

Shenzhen are also becoming more

value conscious, with 52 percent

reporting that they choose the brand

offering the best deal or are open to

other promotional brands, compared

to 25 percent in 2008. For Wuhan,

the equivalent 2009 gure is 39

percent.

Income

Low- and high-income consumers

alike are becoming increasingly

sophisticated, but their behaviordiverges sharply in other respects

(Exhibit 5). Our research shows that

consumers with low income, who

generally have less job security and

fewer nancial resources to fall back

Exhibit 4: Consumers

in export-oriented areas

changed their behaviors

most signifcantly

SOURCE: Insights China Annual Chinese Consumer Survey (2007-2009); McKinsey analysis

1 Percentage of export goods in industrial output in manufacturing and mining

More significant Most impacted

WuhanShanghaiShenzhen Liaoning Zhengzhou

Shift from brand

to value

Slower product

trade up

Slower growth in

consumption

Increasing

sophistication

Channel trade

down

Smarter shopping

~90 ~50 ~20 ~10 ~10

Exportpercentage1

Export oriented Less export oriented

Jingjinji

~40


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Exhibit 5:Low-income

consumers are more

impacted and show more

signifcant changes in

behavior

Slower growth in consumption

Shift from brand to value

Smarter shopping

Slower product trade up

Channel trade down

High income1Low income1

Increasing

sophistication


1 Low income consumers: monthly household income RMB8,000

More significant

on if they become unemployed, are

now spending about 9 percent less

than last year.

Their brand loyalty remains relatively

strong, but they are shopping smarter

and trading down channel to save

money when they do make purchases.

They report a desire to curtail their

spending on food and beverages,

as well as apparel, shoes, and

accessories.

Most high-income consumers have

felt less economic pain overall.

With fewer concerns about keeping

their jobs or paying for education,

medical care or retirement, they cancontinue to satisfy their increasingly

sophisticated tastes and shop in

up-market channels. These consumers

are not blind to economic realities, of

coursethey too are looking for better

deals, shifting their focus from brand

to value, and proving slower to trade

up than they were in 2008.

Age

The nancial downturn has made the

biggest impression on consumers in

the 25 to 44 age bracketperhaps

because they tend to have heavier

nancial obligations. Nearly two out

of three consumers have at least one

child under 15, for example, compared

to about one in ten consumers in the

18 to 24 and 45 to 65 age brackets.

Consumers aged 25 to 44 have

adjusted their behaviors along all six

behavioral trends identied in our

survey, from spending less overall toshopping in cheaper channels

(Exhibit 6).

Consumers in the 18 to 24 age bracket

are better educated than previous

generations, and many, as the products

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Exhibit 6: Consumers

aged 25 to 44 have been

impacted the most, those

under 25 the least


25 - 44 45 - 6518 - 24

Slower growth in consumption

Shift from brand to value

Smarter shopping

Slower product trade up

Channel trade down

Increasing

sophistication

More significant

of Chinas one-child policy, are

used to having four grandparents

and two parents supporting their

spending. In our survey, 61 percent

expect their household income to

signicantly increase in the next 5

years compared to 48 percent among

those in the 35 to 44 age bracket.

Those aged 18 to 24 are also more

optimistic about the future and as

such their behavior seems to have

been least impacted by the nancial

downturn. We have found that

some are slowing their consumption

growth and shopping more in

down-market channels, but their

shopping behavior in the four other

dimensions remains unchanged.

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Conclusion

The momentum of economic and social change in

China is so great that the global nancial downturn

appears to have caused only a temporary dip on an

otherwise long and steep road to growth. Despite

economic uncertainty and shifts in consumerbehavior, as evident in our most recent survey,

Chinese consumers do not appear to be undergoing

fundamental changes in their behavior and attitudes.

The most successful consumer product companies will

be those with the most detailed understanding of the

marketplace and consumers in different geographies

and demographic groups. Companies can gain short-

term competitive advantage by shifting their focus

to consumers relatively unaffected by the downturn.

Moreover, this granular understanding of consumers

and their return to pre-downturn behaviors are critical

inputs for the longer-term strategies of companies in

China.


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Insights China provides businesses with the data, analytics and rapid,

customized problem-solving and decision-making support to help build

robust strategies for Chinas rapidly changing marketplace. The data and

analysis combine results from McKinseys annual Chinese consumer surveys

with proprietary macroeconomic and demographic data and analysis from

the McKinsey Global Institute (MGI).

Since 2005, we have interviewed more than 30,000 Chinese consumers,

giving us an in-depth understanding of their attitudes and spending behavior

in more than 100 product categories. The respondents include a wide range

of incomes, ages, regions and cities, and represent 80 percent of Chinas

GDP, 90 percent of disposable income, and 50 percent of the population.

In 2008, we conducted an additional study of 1,750 consumers with annual

household incomes in excess of RMB 250,000, giving us unprecedented

insight into the behavior of this fast expanding and economically important

segment. The macroeconomic and demographic data offers detailed historic

and forecast data on population, income, and consumption for more than

800 cities. We update the information twice yearly to account for changing

conditions.

McKinsey experts are at hand to offer guidance, including the facilitation

of workshops to address specic business issues. In addition, we have a

registered panel of more than 5,000 mainstream and 500 wealthy Chinese

consumers to help further explore such issues in a timely fashion.

For more information about Insights China, please contact one of

the following experts:

Vinay Dixit

+86 (21) 6132 3095

[email protected]

Jennifer Ding

+86 (21) 6133 4248

[email protected]

You can also email us at [email protected] or visit our websiteat http://insightschina.bymckinsey.com


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McKinsey Asia Consumer and Retail Practice

July 2009

Chinese Consumer Study-2009

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