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BCG: Chinese Consumption Will Hit $6.5T by 2020

All eyes turned to China this year, as growth in the world’s second-largest economy slowed to a six-year low, factory activity was flat and its central bank chose to devalue the yuan for the first time in more than two decades.

But that doesn’t mean the country should become a no-go for global retailers looking to expand overseas.

According to a new report published Monday by Boston Consulting Group (BCG), Chinese consumer spending looks set to grow by $2.3 trillion to hit $6.5 trillion by 2020, driven by rising affluence, younger shoppers and e-commerce.

Titled “The New China Playbook: Young, Affluent, E-savvy Consumers Will Fuel Growth,” the study said that even if China’s annual GDP growth slowed to 5.5% over the next five years (it was 6.9% in the most recent quarter), private consumption is expected to increase by around 9 percent annually.

In layman’s terms, that would be the equivalent of adding a consumer market 1.3 times bigger than that of today’s Germany or U.K.

Moreover, an estimated 81 percent of this growth is expected to come from China’s upper-middle-class and affluent households—that BCG classified as those with average annual incomes of more than $24,000—of which there will be around 100 million by 2020.

In fact, affluent households are expected to increase their spending by 17 percent per year, compared with a 5 percent growth among households earning around $10,000 to $24,000 a year.

Meanwhile, Chinese aged 18 to 35 are poised to grow their spending by 14 percent annually—that’s twice the pace of consumers aged 35 and older—and projected to account for 65 percent of GDP growth.

“Consumer product companies must remain focused on China,” Jeff Walters, a BCG partner and a co-author of the report, stated. “Not only will China remain one of the world’s greatest growth opportunities, but that growth will come from different products and through different retail channels.”

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The research, conducted by BCG’s center for consumer insights and Alibaba’s AliResearch, said that demographic, social and technology trends are creating a two-speed consumer economy in China that seeks out services and premium products that enhance their lifestyle and wellbeing, such as luxury goods, healthy foods, education and travel.

But many of the most popular products aren’t available at local stores, so shoppers have no choice but to look for them online. BCG predicted a surge in digital sales of 20 percent annually through 2020, compared with 6 percent annual growth in brick-and-mortar sales.

“Our research found that e-commerce actually stimulates new demand in China by filling many needs that aren’t being met by brick-and-mortar stores,” Hongbing Gao, director of AliResearch, said.

To that end, e-commerce will drive around 42 percent of total consumption growth, accounting for $1.6 trillion, and mobile commerce will grow even faster.

“Because the nature of consumption is changing dramatically, the winning strategies of the past are becoming outdated,” Youchi Kuo, a BCG principal and a co-author, said. “It will be more important than ever before for companies to target the right income segments and product categories and to be represented in fast-growing online retail channels.”