Lower-Tier Cities Act As the Consumer Spending Growth Engine in China

January 14, 2020

McKinsey Well to Do Consumers in Chinese Cities Jan2020The number of middle-class and affluent Chinese consumers has increased dramatically in the past several years with almost half (49%) of the urban population in China coming from households with an annual disposable income of 138K renminbi (approximately $19.9K) or more in 2018 (compared to about 8% in 2010). The growth of the middle class isn’t just being seen in higher-tier cities such as Beijing and Shanghai: a recent report from McKinsey & Company shows that just more than one-third (34%) of the population in tier 3 and 4 cities in 2018 were either upper aspirant or mass affluent households.

While middle and upper middle-class households account for nearly three-fifths (59%) of households in tier 1 and 2 cities, these same income levels are increasing in tier 3 and 4 cities at a faster rate. Upper aspirant and mass affluent households in the lower-tier cities grew at a 38% compound annual growth rate (CAGR) between 2010 and 2018, compared to the 23% growth experienced by tier 1 and 2 cities. In fact, these households’ market share in tier 3 and 4 cities is now at the same point as tier 1 and 2 cities just 5 years ago.

Much like the young consumers in the US who make more transactions than any other generation, young consumers in China are also opening their wallets. In particular, McKinsey identified a subgroup of “Young Free Spenders” – digital natives mostly from tier 2, 3, and 4 cities – who are increasing their spending across a host of categories, including fresh milk, baby skincare, skincare, fast food and casual wear. In fact, this segment, which makes up about one-quarter of the population, accounts for 60% of spending growth.

Despite this growth in middle-class and young shoppers spending more, 59% of the more than 5,300 Chinese consumers surveyed by McKinsey say they do not spend rashly. This more frugal attitude towards spending has increased in the past 2 years across the cities in tiers 1-3 but has actually decreased – and is less prevalent – in tier 4 cities.

That doesn’t mean that Chinese consumers aren’t willing to pay more for certain premium products. About one-third (32%) of consumers in tier 1, 2, 3 and 4 cities are likely to purchase premium dairy products while 35% of consumers in tier 1 and 2 cities and 24% of consumers in tier 3 and 4 cities are likely to purchase premium personal digital gadgets.

The full report can be downloaded here.

About the Data: Results are based on a survey of 5,400 Chinese consumers from 44 cities, representing 90% of China’s GDP and half of its population.

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