As China addresses the sustainability of high growth rates and economic rebalancing away from export-and manufacturing-led growth, outlook for domestic consumers continues to grow increasingly positive as disposable incomes rise and unemployment remains low. China’s middle class, now more than 200 million, can afford basic necessities and are pursuing premium products and a well-balanced lifestyle with an emphasis on health, family, and “socializing” the shopping experience.

Consumption to improve quality of life

McKinsey’s consumer sentiment survey recently noted that 55% of Chinese believe their income will grow significantly over the next 5 years, compared with less optimistic views from American and British consumers, at 32% and 30% respectively. These expectations lead to greater pressure on the Chinese working class to purchase expensive real estate, maintain higher-paying jobs, and start families.

A survey conducted by Tsinghua University revealed pressures are mounting – 88% of respondents consider themselves “generally fatigued” and 53% are not satisfied with their physical and mental health. Furthermore, more than 60% of civil and white-collar workers said pressure was largely driven by the requirement of buying a home and paying a mortgage.

As a result, the middle class is becoming more attentive to health and wellness, driving a renewed focus on premium products and services, nutrition and balanced diets. Western fast food, which historically experienced strong growth in China, is on the decline as more consumers become aware of the negative health consequences and obesity issues. Consumption of carbonated drinks is also down markedly, while more people are drinking fresh fruit juices.

Government policies are further promoting the awareness of health related issues and in 2011, China’s 12th Five-Year Development Plan formally highlighted the nutrition and health food industry. Mintel, a market research firm, expects sales of vitamins and dietary supplements to reach USD 5.3 billion by 2017, more than double the level from a decade ago. This transition is creating opportunities for brands to address more health-conscious consumers. Within our portfolio, Yao TaiTai and Yonghong are launching healthier concept products to capture the rising demand.

Shopping as quality family time

While China is the world’s largest e-commerce marketplace, with a US$600 billion market compared to around US$ 350 billion in the U.S., the consumer experience is still driven by the brick-and-mortar experience. Many consumers prefer shopping offline, but the gap is narrowing as consumers enjoy the convenience of online shopping. The concept of “Retailtainment”, in which consumers socialize around the shopping experience, is becoming increasingly important in China. Two-thirds of consumers say that eating out and shopping is one of the best ways to enjoy their time with family. Property developers are analyzing the use of creative space in shopping malls to offer destination-style experiences with one-stop shopping, dining and entertainment experiences to address the needs of an entire family.

Consumer brand loyalty growing as rewards kick in

Chinese consumers are more attentive to loyalty rewards and the benefits of VIP-shopper memberships. This is fueling the trend that consumers typically stick with one or two specific brands in each category and are less likely to switch to brands outside their “core list”. This helps to address long-standing concerns in China around brand loyalty. However, it also results in increased marketing and promotional costs to achieve customer conversion, especially in entrenched industries like apparel.

Within Lunar’s portfolio, Little Star Brands Group was an early adopter of brand loyalty programs and now boasts a sizable VIP-shopper database allowing products to be directly marketed to a consumer base that is actively engaging with promotional content. Our brands are also able to creatively work to selectively cross-sell product offerings, which we anticipate will result in a number of interesting strategic partnerships in the near future. 

In conclusion, do not sell the Chinese consumer short! The opportunity for operational improvements, the changing customer behavior we are observing, and the continued drive for a better quality of life in China will mean phenomenal opportunity for our consumer businesses in the years ahead.