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McKinsey: What the Modern Chinese Consumer Wants and How it Will Affect Retail

China’s ongoing economic woes have certainly roiled markets and stoked commentary about the country’s heyday coming to an end, but consumers are still spending money and the goods they’re buying increasingly air on the luxury side.

Consumer confidence in the country has been resilient in recent years as salaries are still rising and unemployment has stayed low, McKinsey & Company wrote in a new report, “The Modernization of the Chinese Consumer.”

The days of broad-based market growth, however, are in fact coming to an end.

In interviewing 10,000 Chinese consumers age 18 to 56, across 40 cities, McKinsey found that shoppers are getting choosier about where they spend, shifting from products to services and from mass to premium, and seeking a more balanced life where health, family and experiences top the priority list.

“We are witnessing the modernization of the Chinese consumer, and that will only make the market more challenging for consumer-goods companies,” McKinsey noted. “But for those able to get it right, the rewards may be substantial.”

How willing Chinese consumers are to spend

The economy doesn’t seem to have yet had too big an effect on consumer expectations about future income—55 percent still think their salaries will increase “significantly” over the next five years, down only slightly from the 57 percent who thought so in 2012.

“That’s not to say that Chinese consumers are unaware of the deteriorating condition of the economy,” McKinsey said. “A growing number are seeking to save and invest, and we found differences in consumer confidence widening at a regional level.”

Confidence about income growth in the coming five years rose to 70 percent in the Xiamen–Fuzhou city cluster, compared to dropping down to 35 percent in Liao Central.

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What they are buying

Lifestyle has started to supersede material things for some Chinese consumers, with more than half planning to spend more on lifestyle services and experiences, like movies, while spending on food and drinks for home has been flat to declining.

When they do spend on products, Chinese consumers are trading up from mass to premium. According to McKinsey, 50 percent of those surveyed seek the best and most expensive offering, a “significant” increase over previous years.

“It’s no surprise that the growth of premium segments is outpacing that of the mass and value segments, and foreign brands still hold a leadership position in that premium market,” according to the report.

More consumers in China are focusing on just a few brands and some are becoming loyal to just one. Those willing to buy from a brand outside of their “short list” are few.

With apparel, specifically, the number of consumers willing to consider a new brand fell from 40 percent in 2012 to just under 30 percent last year.

“Becoming part of the closed set of the few brands that consumers consider, or even the one brand that consumers prefer, is increasingly challenging,” according to McKinsey. “Fewer consumers are open to new brands, and promotions are becoming less effective at encouraging consumers to consider them.”

Chinese brands still haven’t gained much traction in certain premium categories, including fashion, but in mass market, local brands are snagging market share from foreign brands with better product propositions.

Where they are buying

China has the world’s largest e-commerce market, generating 4 trillion yuan ($615 billion) in 2015 (almost the same as the U.S. and Europe combined) and despite online’s increasing relevance, physical stores are still important.

“Consumers engage with brands both online and offline, and satisfaction with physical stores remains higher than with online ones,” McKinsey said. “But the gap is narrowing, especially as satisfaction with hypermarkets declines.”

The trend that’s helping keep interest in physical stores is what McKinsey calls “retailtainment.” Malls that combine shopping, dining and entertainment for the whole family are benefitting biggest from this trend as two-thirds of Chinese consumers say shopping is the best way to spend time with family.

Consumers are using travel as a way to bond with family, too. Seventy-four percent said it helps them better connect with their loved ones—and those trips are turning into shopping opportunities.

Roughly 80 percent of consumers said they have made overseas purchases and nearly 30 percent said they pick the travel destination based on the shopping on offer. International travelers said half of the watches and handbags they purchase are bought overseas, and apparel is one of the most frequently purchased categories.

“Overall, Chinese consumers are adopting new products, services and retail experiences at rates unseen in developed markets,” McKinsey said. Five years ago, for example, no one in China was using mobile payments for purchases and now 25 percent of the population has adopted the method.

“While new highways, high-speed-rail links, and mobile Internet access have strengthened connectivity between neighboring clusters over the past few years, we found that differences across the country’s 22 geographic clusters have grown even more pronounced,” the report continued.

In Shanghai, 35 percent of consumers said they bought apparel online in the past six months, compared to just 4 percent in Chengdu.

“The Chinese consumer is evolving,” McKinsey said. “Gone are the days of indiscriminate spending on products. The focus is shifting to prioritizing premium products and living a more balanced, healthy, and family centric life.”

Companies that get that and respond accordingly will be the winners, and those that don’t won’t.

“While scale, speed, and simplicity proved advantageous in the past 15 to 20 years, the changing shape of Chinese consumption seems sure to topple some giants of the past and elevate new champions,” the report noted.