Emerging Chinese Market &

Consumer Insights
Vinay Dixit
Senior Director Asia Consumer Centers
McKinsey & Company
15 October 2010
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited

Presentation Outline

Chinese market & consumers

Continued
macroeconomic
resilience

Increasing
consumer
sophistication

Role of Internet in
lifestyle &
consumption

Macroeconomic fundamentals remain strong

Continued shift towards discretionary spend categories

Brands remain important, but loyalty is falling; moreover loyalty

is largely to a suite of brands rather than a single brand

While some consumers are upgrading, a majority are trading-off

to manage their share of wallet

The explosive growth of internet is causing significant shifts in

lifestyles, research process and purchase channels in China & India

Consumers are turning into smart-shoppers at accelerated pace

Continued drive towards urbanization results in majority of

economic activity to be concentrated in urban centers

City-tiers no longer the best business opportunity framework in China;

city-clusters more effective & efficient

McKinsey & Company

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McKinsey has invested in major efforts to understand the

China market and Chinese consumers
1

MGI Macro/Demographic Model

China Mass Consumer Studies

China Wealthy Consumer Study

Over 2 years of dedicated work

of 25 consultants
Econometric model (30,000+
equations) on macro,
demographic, income and
consumption
Over 150 interviews with experts
and government officials
City visits for verification of
published figures
Updated once every quarter/half
year for national-level indicators
and once a year for city-level
indicators
Used as source in joint studies
with central government agencies
and local governments

6 years of annual surveys and

interviews and the 2010 survey
includes
90-minute door-to-door
interview on general
attitudes, general shopping
behavior, trade-off behavior,
share of wallet and 5
categories (F&B, CE, HPC,
Apparel and Automobile)
deep-dive
15,000+ respondents with
~60 products and ~300
brands covered
Annual survey sample represents
74% of Chinas GDP
47% of the Chinese
population

Two waves of consumer surveys

in 2008 and 2010
35-45 minutes face-to face
interviews with ~2,000
respondents in each wave
The latest wave covering wealthy
consumers1 and less wealthy
consumers2 but with luxury
purchase experience
The latest wave covers 17 cities
across Tier 1-3
5 luxury goods categories and
~40 brands
Ethnographic studies and focus
groups to deeper understand
consumer behavior

4
Chinese consumer panel

Pre-profiled 12,000 panelists from mass consumer surveys and ~1,000

panelists from wealthy consumer surveys

1 Respondents with annual HH income RMB 250+ K

2 Respondents with annual HH income of RMB 35-250 K
SOURCE: McKinsey Insights China

McKinsey & Company

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CONTINUED MACROECONOMIC RESILIENCE

Chinas GDP has rebounded well, and is expected to stay

robust to 2025
Growth of China real GDP Quarterly (YoY)

Growth of China real GDP Yearly

14

14
11.9

12
10.7

10

10.3

History

Forecast

13
12
>9%

11

10

8~9%

<8%

9.8

6.2

8.7

7
2

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2007

08

09

5
2005

10

15

20

2025

2010

Chinas GDP is expected to grow at around 10% in 2010 and between 8-10%
through the current decade
SOURCE: Global Insight; McKinsey Insights China - August 2010 update

McKinsey & Company

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CONTINUED MACROECONOMIC RESILIENCE

Driven by faster urban GDP growth, urbanization rate is

expected to increase steadily and reach 61% by 2025

Urban
Rural

Real GDP
Trillion RMB, 2005, percent
CAGR 10-25
Percent
97

8.0

Real GDP per capita

Thousand RMB, 2005

69
46
19
72
28
2005

30
73
27
10

86

80

91

9.6
0.4

20

14

15

20

2025

2010

2015

Population
Million, percent
CAGR 10-25
Percent
1,307

2005

1,348

1,391

1,425

1,448

2020

0.5
2025

43

47

52

57

61

2.3

57

53

48

43

39

-1.6

2005

10

15

20

2025

7
24
11
34
14
51
16
73
15
99

1 Includes 650 official cities, 165 counties that are identified as hidden cities and new cities
SOURCE: McKinsey Insights China - August 2010 update

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CONTINUED MACROECONOMIC RESILIENCE

Richer households expand significantly to account for

~70% of all urban households by 2025

ALL URBAN
Wealthy
Middle class

CAGR
Percent, 10-25

Urban households by income bracket 1

Percent, Million
100% =

190 1
2 1 0

224
2
4

26

1
1

273
2
4 1

24
56

324
4
2

15

3.4

372
6
5

Global
Affluent

33

Mass affluent

15.9

35
4.9

45

44

24

Upper aspirant

18

Aspirant

26
24
14
25

2005

13

11

7
6

10

15

20

2025

Lower aspirant
Poor

-3.3

1 Brackets are defined by household annual income as global > 227K RMB; affluent 171-227K RMB; mass affluent 114-171K RMB; upper aspirants 79114K; aspirants 45-79K; lower aspirant 28-45K RMB; poor <28K RMB on 2005 real basis.
SOURCE: McKinsey Insights China - August 2010 update

McKinsey & Company

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Presentation Outline

Chinese market & consumers

Continued
macroeconomic
resilience

Increasing
consumer
sophistication

Role of Internet in
lifestyle &
consumption

Macroeconomic fundamentals remain strong

Continued shift towards discretionary spend categories

Brands remain important, but loyalty is falling; moreover loyalty

is largely to a suite of brands rather than a single brand

While some consumers are upgrading, a majority are trading-off

to manage their share of wallet

The explosive growth of internet is causing significant shifts in

lifestyles, research process and purchase channels in China & India

Consumers are turning into smart-shoppers at accelerated pace

Continued drive towards urbanization results in majority of

economic activity to be concentrated in urban centers

City-tiers no longer the best business opportunity framework in China;

city-clusters more effective & efficient

McKinsey & Company

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INCREASING CONSUMER SOPHISTICATION

Wealthy consumers in China are significantly younger than

their peers in the US and in Japan
Profile of wealthy consumers by age
Percentage of respondents

30
18-45

80
70

45-65

19

81

80% of wealthy
consumers in
China are below
45 years old

20

China1

US2

Japan3

1 Annual household income is above RMB 250K

2 Annual household income is above USD 70K (PPP factored)
3 Annual household income is above JPY 8 million (PPP factored)
SOURCE: Insights China; McKinsey

McKinsey & Company

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INCREASING CONSUMER SOPHISTICATION

Urban China's share of wallet will continue to shift

towards discretionary categories
Necessities

ALL URBAN

Semi-necessities

Thousand RMB, 2005, percent

100% =

26

37

10

CAGR
Percent, 10-25

36

52

73

95

20

18

29

24

12

11
10
5

10
11
5

9
11
5

9
6
10
4

11

14

15

13

16

18

20

21

2005

2010

15

20

2025

8
6
10
3
14

Discretionary

SOURCE: McKinsey Insights China - March 2010 update

12
5
16

14
5
18

6.8
Food
Apparel
Health care
Household
product
Housing and
utility
Personal items
Recreation, education
and cultural
Transportation,
communication

3.3

6.9

8.8

McKinsey & Company

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INCREASING CONSUMER SOPHISTICATION

Multiple forces are reshaping Chinas landscape more granular

geographic clusters are emerging as distinct consumption groups
3 Consumer preferences
Emergence of trend setting
hub cities and strengthening
of intra-cluster migration are
making consumer attitudes
and preferences converge
faster
Demographics
Share of wallet
General attitudes
Attitudes toward
consumption
Key buying factors
Media preference

1 Government policy

Emergence of
city clusters

Central and local governments

are developing coherent citycluster plans and policies
Policies under the 11th 5-year
plan
Inter-governmental
cooperation
Joint development of hard or
soft infrastructure

2 Economic linkages
Strong economic linkages enhance city cluster integration
Strong industrial linkages within clusters
Heavy intra-cluster trade in goods and services
Strong investments by hubs in spoke cities

SOURCE: Mckinsey Insights China

McKinsey & Company

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INCREASING CONSUMER SOPHISTICATION

We divided China into 22 city clusters accounting

for 92% of Chinas GDP
22 is not a magic
number! Each
company should tailor
clusters to meet its
unique requirements

Taiyuan (19)

Liao central south (30)

1.4% | 0.5%

4.3% | 2.4%

Guanzhong (15)

Central (39)

1.9% | 1.2%

3.6% | 0.7%

Small

Mega

xx (xx)

Cluster name # of cities

xx% | xx%

Cluster GDP &

Hub city GDP

Haerbin

Large

Changchun

Changchun-Haerbin (36)
3.6 | 1.6%
Jingjinji (37)

Huhehaote

Huhehaote (10)

1.3% | 0.4%

2.8% | 0.8%

Xian

Chengdu

Chongqing

SOURCE: Mckinsey Insights China

Nanchang

Kunming

10.1% | 6.2%

Shanghai

Hefei

5.5% | 1.8%
Shanghai (19)

Nanjing

Hangzhou (35)

Hangzhou

6.6% | 1.6%
Yangzi mid-lower (42)
4.1% | 1.8%

Guangzhou
Nanning

1.8% | 0.3%

Jinan

Zhengzhou

9.0% | 2.1%
Nanjing (28)

Qingdao

Changsha

2.2% | 0.8%

Nanning (28)

Dalian

Shandong byland (67)

Tianjin

Wuhan

Changzhutan (29)

1.0% | 0.5%

2.3% | 1.5%

Kunming (15)

Shijiazhuang

Chengdu (25)

Chongqing (15)

Beijing

10.8% | 8.5%

Shenyang

Taiyuan

Hefei (29)

2.7% | 1.6%

Fuzhou

Nanchang (21)
1.7% | 0.6%

Xiamen

Shenzhen

Coast West (38)

3.9 | 1.4%

Guangzhou (28)

Shenzhen (2)

6.9% | 2.6%

4.3% |2.9%

McKinsey & Company

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INCREASING CONSUMER SOPHISTICATION

Consumers place high importance on brands and prices when making

purchases because they believe the products are of better quality
Well-know brands are of better quality1
Percent of strongly agree or agree

45
Brands

16

Expensive products are of better quality1

Percent of strongly agree or agree

30

Over the years, brands

and prices are important
in China
More than 40% of
Chinese consumers
think well-known brands
are of better quality
(from 41% in 2007 to
45% in 2010)
Around 25% of Chinese
consumers think
expensive products are
of better quality (from
22% in 2007 to 30% in
2010)

Prices

10

1 U.K., U.S., and Japan data were from 2009 online consumer survey
SOURCE: Insights China by McKinsey China Consumer Survey (2010), online benchmark surveys (2008-2009)

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INCREASING CONSUMER SOPHISTICATION

However, single brand loyalty is declining rapidly

Brand loyalty
Repertoire of brands

Decreasing brand loyalty but increasing consideration from a repertoire of

brands
F&B CATEGORY EXAMPLE1

Percent of respondents

Only buy the

preferred brand

36

26

20

46
Consider a few brands
and decide among the
consideration set
Consider a few brands
but are open to others
if they are on sale
Always buy the best deal

48

24

46

44

18

21

29

27

2007

2008

2009

2010

1 Weighted average of 5 F&B (UHT/fresh milk, yogurt, chocolate, beer, and carbonated soft drink)
2 Among respondents who claim to consider a few brands and decide which one to buy in the store or consider a few brands but are open to others if it is
on promotions in the store
3 Weighted average of 17 F&B
4 Weighted average of 13 HPC products
5 Weighted average of 7 CE products
SOURCE: McKinsey Insights China 2007-2010 China consumer surveys

McKinsey & Company

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INCREASING CONSUMER SOPHISTICATION

Purchase decisions are now increasingly influenced by

emotional considerations Comparison vs. US and UK
Home/ personal care example1

Status2

Laptop example

12
4

25

21

What fits
me4

5
U.S.
(2008)

15

14
Family3

10

U.K.
(2008)

China
(2008)

10

China
(2010)

15

U.S.
(2008)

11

U.K.
(2008)

6
China
(2008)

10

China
(2010)

1 Facial moisturizer data for status and what fits me; laundry detergent data for family
2 Purchasing this brand can show my status
3 Using this brand makes me feel like my family is better off
4 It is a brand for people like me
SOURCE: McKinsey Insights China Annual Chinese Consumer Studies (2008, 2010); Online benchmark survey (2008)

McKinsey & Company

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INCREASING CONSUMER SOPHISTICATION

As consumers get more sophisticated, importance of Package Design is

getting increasingly important over the years for FMCG categories

Importance of Attractive Packaging Design

(percent)

Yogurt

Beer

12

2008

2010

SOURCE: Source

16

Carbonated
Soft Drink

17

24

Facial
Moisturizer

Chocolate

23

24

14

30

Hair
care

16

20

21

McKinsey & Company

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Presentation Outline

Chinese market & consumers

Continued
macroeconomic
resilience

Increasing
consumer
sophistication

Role of Internet in
lifestyle &
consumption

Macroeconomic fundamentals remain strong

Continued shift towards discretionary spend categories

Brands remain important, but loyalty is falling; moreover loyalty

is largely to a suite of brands rather than a single brand

While some consumers are upgrading, a majority are trading-off

to manage their share of wallet

The explosive growth of internet is causing significant shifts in

lifestyles, research process and purchase channels in China & India

Consumers are turning into smart-shoppers at accelerated pace

Continued drive towards urbanization results in majority of

economic activity to be concentrated in urban centers

City-tiers no longer the best business opportunity framework in China;

city-clusters more effective & efficient

McKinsey & Company

| 15

ROLE OF INTERNET

China has already had the worlds largest

internet user base

xx

Internet penetration,
percent

Total number of internet users1

Millions
1,734
420 million by June, 2010,
a penetration of 32%

384
228
96

81

54

47

43

37

17

Global

China2

US

Japan

India

Germany

UK

France

Korea

Australia

26

29

74

76

66

76

69

77

80

1 Including people access internet via PC and mobile phone. Data as of the end of 2009
2 For overall China population
6 years old

SOURCE: CNNIC; Strategy Analytics (2008); Tech Crunchies; Internet World Status (2009); McKinsey

McKinsey & Company

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ROLE OF INTERNET

Potential to more than double current base of online digital

consumers by 2015
Users (internet), penetration
Million, percent
740-770

PC and mobile
PC only
Mobile only

544

384

XX% Penetration

202

125

Penetration
Percent

151
31

87

2009

2015

Mobile
phone

58

86

Internet

29

55

Mobile
internet

18

46

SOURCE: McKinsey Digital Consumer Research; Publicly available information; Team analysis

McKinsey & Company

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ROLE OF INTERNET

Across markets, time spent on media increases with

increase in points of access

Digital media
Mobile Voice

Media time
Minutes per day1

Traditional

Non-internet users

Internet users

388
203
14 18
171

241
13 27
201

221
92
15
114

300
174
14
112

272
97

+91%

797

19
462

China

40
295

India

220
53
41
126

239
60
37
142

Non internet
user
without PC

Noninternet
user with PC

265
97
39
129
Internet user
without home
access

310

346

127
46
137

164
45
137

Internet user
with home
access

+57%
US Benchmark

m-internet

1 Note there is overlap from time consumers spend on 2 or more media at the same time
Note: Digital media consumption includes PC, DVD/CD, mobile etc.; traditional includes print, TV, landline radio etc
SOURCE: McKinsey Digital Consumer Research

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ROLE OF INTERNET

While internet penetration in China is largely dependent

on age

URBAN CHINA

Have you surfed the internet in the past 6 months?

Internet penetration clearly differs
by age
Percent of respondents (N = 13,271)

In fact, age is the most significant

differentiator
%; Weighted average deviation from mean2

18-24

Age

91

25-34

76

35-44

47

45-54
55-65

20
11

26
11

Income
9

Cluster
4

Tier
Gender

Average internet
penetration rate: 531
1 Among age 15-65
2 Weighted average of absolute deviation in each group from mean, sample size as weighting
SOURCE: Insights China by McKinsey China Consumer Survey (2010)

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ROLE OF INTERNET

once online, the amount of time people spent on

internet doesnt differ much by demographics

URBAN CHINA

How many hours do you spend on the Internet each week for personal reasons?
Time online does not differ much
by age
Average hours per week among internet
users (N = 7,079)
21

18-24

19

25-34
35-44
45-54
55-65

17
16
17

In fact, usage time is also similar across

others macro-demographics
%; Weighted average deviation from mean2

Age
Income

11
4

Cluster

12

Tier
Gender

5
3

Average time
online: 191
1 Among age 15-65
2 Weighted average of absolute deviation in each group from mean, sample size as weighting
SOURCE: Insights China by McKinsey China Consumer Survey (2010)

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ROLE OF INTERNET

When in the market to make a purchase, Chinese consumers are

increasingly using social media for checking product information
Percent of internet users who choose strongly agree or agree (N = 7,079)

Before purchasing new products, I always check the Internet for other people's
usage experience/comments/feedback

Total

2008

2010

Automotive

16

N/A

25

23

45

Consumer
Electronics

27

Apparel

12

20

Home/
Food &
Personal Care Beverages

12

14

20

19

The proportion of consumers checking online for product information

before purchasing is growing steadily over past 2 years
This trend is especially strong for high value & high involvement
categories

SOURCE: Insights China by McKinsey China Consumer Survey (2010)

McKinsey & Company

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In Summary

Chinese market & consumers

Continued
macroeconomic
resilience

Increasing
consumer
sophistication

Role of Internet in
lifestyle &
consumption

Macroeconomic fundamentals remain strong

Continued shift towards discretionary spend categories

Brands remain important, but loyalty is falling; moreover loyalty

is largely to a suite of brands rather than a single brand

While some consumers are upgrading, a majority are trading-off

to manage their share of wallet

The explosive growth of internet is causing significant shifts in

lifestyles, research process and purchase channels in China & India

Consumers are turning into smart-shoppers at accelerated pace

Continued drive towards urbanization results in majority of

economic activity to be concentrated in urban centers

City-tiers no longer the best business opportunity framework in China;

city-clusters more effective & efficient

McKinsey & Company

| 22

insights_china@mckinsey.com
http://insightschina.bymckinsey.com

McKinsey & Company

| 23