China 2016: INTRODUCTION | CONSUMER MOOD
Optimistic consumers spend, but priorities begin to change
Chinese consumers had many reasons to feel pessimistic last year. But they did not. Despite the slowdown in economic growth and extreme stock market fluctuations, Chinese felt optimistic about the economy and the stock market. These factors only had a modest efect on spending, even for big-ticket purchases.
The rate of spending on fast moving consumer goods (FMCG) is declining because consumers are becoming more pragmatic and sophisticated as shoppers. Consumers sought discounts in the FMCG categories they viewed as commodities. In other FMCG categories, especially related to personal health, consumers were willing to pay a premium. With growing disposable income, Chinese consumers also are spending more on travel and entertainment. These findings are contained in two recent WPP reports. BrandZTM research examined the attitudes and behaviors of China’s individual investors toward the end of 2015, after the stockmarketdeclinedprecipitously. Kantar Worldpanel analyzed the FMCG shopping patterns of Chinese households.
Almost three-quarters of China’s small investors feel optimistic about the stock market based on faith that the government will continue to drive economic growth and correct any stock market di culties along the way. These attitudes are fairly consistent across age, gender, income, city of residence and investment experience. Around three-quarters of Chinese individual investors also feel optimistic about the economy. Two-thirds of the optimists believe that China’s economy is in transition and will becomehealthier. Asomewhatsmaller group, 60 percent, is confident that the government is trying to improve the economy. And for 55 percent, China’s increased international stature reassures them about the nation’s economy.
Their optimism is reflected in the vitality of the retail industry, which grew at a monthly rate of 10 percent or more during 2015, according to China’s National Bureau of Statistics. Retail spending also is indicative of China’s economic growth driver shifting from production to consumption. Although the 6.9 percent annual GDP growth in 2015 was less than half of GDP growth at its peak, in 2007, consumption now contributes a greater proportion to GDP, which is also comprised of investment and net exports.
The pessimists, a minority, worry that economy is declining, inflation is rising, and housing prices are high. Some expressed concern about China’s declining volume of exports. Not surprisingly, high housing prices was a greater source of pessimism among younger people, ages 18-to-30.
Because of the general optimistic frame of mind, over 80 percent of investors surveyed in the BrandZTM report said that the stock market volatility would have little or no e ect on their spending. They expected to limit cutbacks for necessities and moderate spending for luxuries and entertainment, if necessary.
They also planned to continue spending for telecommunications services and education. Big-ticket spending was well protected, too. Few people planned to cancel the purchase of a car, home or vacation because of the stock market setbacks. Most may postpone purchase of a home, but few will cancel these plans. Vacations are most sacrosanct.
This optimism and determination to maintain spending habits happened in the context of the increasing a uence and sophistication of Chinese consumers and the refinement of consumption behavior. Chinese are shopping less but spending more on each trip because they increasingly are concerned not with price alone, but value and quality.
The change in shopping behavior is clear in FMCG spending, where the rate of growth has declined from 11.8 percent in 2012 to 3.5 percent in 2015, according the research by Kantar Worldpanel. The research divides the 26 FMCG categories studied into two groups: those with prices rises exceeding inflation and those lagging inflation.
The results identify 16 categories with prices rises exceeding inflation, in which consumers are willing to pay a premium, and 10 categories that lag inflation, in which consumers expect to pay a promotional price for a commodity product. For example, consumers will pay a premium for bottled water, but expect to buy carbonated soft drinks on promotion. Of FMCG brands that increased market penetration, meaning they added new buyers, 64 percent sold products at premium or even super premium prices.
Implications for Brands
Consumers are optimistic and continue to spend, but they spend di erently. How consumers spend on essentials varies by FMCG category. And it is important for brands to understand whether their customers are willing to pay a premium for perceived value or instead are willing to purchase only on promotion.
Outside of FMCG, brands in categories like travel and leisure have an opportunity to accelerate growth as consumers shift their spending from filling needs to satisfying wants. Chinese consumers, especially in the larger cities, continue to pursue their aspirations regardless of changes in the economy and stock market.
Opportunities are available to both Chinese and multinational brands. But Chinese brands are gaining advantage. They have achieved parity with multinationals in Brand Power, the BrandZTM metric of brand equity that correlates with market share. Chinese brands gained market share an average of 10 percent in 18 of the 26 FMCG categories studied in the report by Kantar Worldpanel. Multinationals grew share in only eight categories, averaging gains of 3 percent.