McKinsey Asia Consumer and Retail

2009 Annual Chinese

Consumer Study
Part I:
Consumer behavior during
the financial downturn

McKinsey
Insights China
McKinsey Asia Consumer and Retail

July 2009

2009 Annual Chinese

Consumer Study
Part I: Consumer behavior during the financial downturn

Jennifer Ding
Vinay Dixit
Glenn Leibowitz
Max Magni
Daniel Zipser
The authors wish to thank Derek Chang, Josephine Chen,
Howard Tomb, and Cherie Zhang for their contributions to this report.

McKinsey
Insights China
4

This is the first in a series

of reports on Chinese
consumers planned by
McKinsey Insights China
in 2009. Subsequent
parts of this report will
be published over the
next few months.
 5

Contents
Executive summary 6

Impact of the financial downturn on

consumer behavioral trends in China 9

Variation in downturn’s impact

by region and demographics 17

Conclusion 21
6
Executive summary
The global financial downturn has
only temporarily shaken Chinese
consumers—in 2009, consumer
confidence fell to a 5-year low and
growth in retail sales declined in
most categories. At the beginning of
the year, many executives expressed
concerns about the impact of the
crisis on their businesses in China,
pointing to missed sales targets as
evidence of a dramatic cut back in
consumer demand.
Yet our recent survey of 15,000
Chinese households in 58 cities,
conducted at the height of the global
financial crisis, suggests that while
the crisis may be exerting a short-
term impact on consumer behavior,
the longer-term trends we have
observed over the past several years
will continue.
This year’s survey1 examines the
impact of the crisis on the five
behavioral trends that we have
observed since conducting our
first extensive survey of Chinese
consumers in 2005. In some cases,
the crisis appears to have slowed
some of our previously identified
trends, putting a damper on, for
example, years of torrid growth
in consumption, and making
consumers reluctant to spend more
to trade up to premium products.
On the other hand, the crisis appears
to have accelerated other changes
in consumer behavior, such as the
shift from brand to value, and the
desire to collect information from
the internet and other sources before
making purchasing decisions. This
year’s survey also highlights a shift
in spending from more expensive
channels—such as department
stores and brand exclusive stores—to
hypermarkets, supermarkets, and
digital malls.
McKinsey Insights China
2009 Annual Chinese Consumer Study: Part I 7

Evidence suggests that the financial Despite recent shifts in shopping

downturn has impacted some
segments of consumers more than
others. Unsurprisingly, consumers
with lower incomes and those living
in more export-dependent regions
such as Shenzhen have been affected
the most. In general, lower-income
consumers, with less job security
and fewer financial resources to fall
back on, have shifted their behavior
more substantially than affluent
consumers.
and spending habits brought on
by the global financial crisis, our
survey shows that, fundamentally,
the behavior of Chinese consumers
remains unchanged. They are likely
to continue their transformation into
one of the most sophisticated and
demanding groups of consumers in
the world.

Our survey also shows that

consumers aged 25 to 44 have
changed their behavior more than
those in other age groups—perhaps
because they are more likely to
be saddled with greater financial
obligations such as mortgages,
car repayments, and school-age
children.

1 McKinsey Insights China conducted its first Annual Chinese Consumer Study in 2005 and has since
studied over 30,000 consumers. The 2009 survey, from December 2008 to March 2009, covered 15,000
consumers in 58 Chinese cities. For more details, please visit http://insightschina.bymckinsey.com
8
McKinsey Insights China
2009 Annual Chinese Consumer Study: Part I 9

Impact of the financial downturn on

consumer behavioral trends in China
The five consumer behavioral trends
we identified from 2005 to 2008
seem to be holding:
1. Steady growth in consumption
2. Increasing consumer
sophistication
3. Slower product trade up
4. Continuous shift from brand to
value
5. Smarter shopping.
As a result of the financial downturn,
a new trend, channel trade down,
has emerged (Exhibit 1).
The global financial crisis has shaken
Chinese consumer confidence—
accordingly, the consumer
confidence index fell from 94.5 in
March 2008 to 86.0 in March 2009,
a 5-year low (Exhibit 2). Especially
hard hit have been low income
earners and those living in regions
that depend more on exports, such
as Shenzhen. Sales of big-ticket and
discretionary items also dropped
sharply in late 2008.
However, this year the sale of
big-ticket and discretionary items
are showing signs of growth, along
with an increase in gross domestic
product (GDP). Meanwhile, the
Chinese government has launched a
RMB 4.12 trillion (US$603 billion)
stimulus package, and experience
after the SARS incident and other
downturns shows that consumer
confidence is likely to rebound
sharply. The consumer confidence
index rose for the first time in
9 months—from 86.0 in March
2009 to 86.1 in April 2009, and
edged up further in May 2009 to

Exhibit 1: Chinese consumer trends during the financial downturn

Impact of
Exhibit 1: Chinese Key trends downturn Key insights
consumer behavioral
trends during the financial ▪ Spending growth flat in 2009, down from 24% in 2007-2008
Growing
1 Slowed ▪ Purchasing frequency has remained flat for food and beverages
downturn consumption
and dropped in home and personal care category

2
Increasing ▪ Consumers continue to demand products with more functional
Accelerated
sophistication attributes, better product quality, greater variety, and lower prices

3 Trading up Slowed ▪ Mass and premium consumers alike are now slower to trade up

Shifting from ▪ More consumers are looking beyond brand to value

4 Accelerated
brand to value ▪ This trend accelerated for 6 of the 22 products surveyed

▪ Consumers are searching for more product information

Smarter
5
shopping
Accelerated ▪ The number of people visiting product review websites has
grown at a much faster rate than total internet usage

Channel trade
▪ Consumers are moving away from department stores and other
6 Emerged expensive channels toward digital malls, hyper- and
down supermarkets, etc.

SOURCE: McKinsey analysis

10

Exhibit 2: Consumer confidence has declined to a 5-year low

Consumer confidence index Exhibit 2: Consumer

confidence declined to a
100 5-year low
Chinese consumer
confidence often rebounds quickly
98 after a sharp drop, as seen after
the SARS incident
96
Aug 2008

94

92
Global financial
High inflation crisis
period
88
SARS
86
2003 04 05 06 07 08 2009

SOURCE: CEIC; McKinsey analysis

86.7—indicating that perhaps we previous years, as well as the

may be witnessing a turnaround in emerging channel trade down trend.
consumer sentiment.

While the global financial crisis has

slowed the growth of consumption
in China and cooled the desire for
consumers to trade up to higher
quality products, consumers,
however, continue to become more
sophisticated in what products they
look for and how they shop. Due to a
proliferation of products, brands and
retail channels, and wider internet
penetration, Chinese consumers
have many more options today
than they did even in 2007. While
the global downturn has appeared
to shift some aspects of consumer
behavior, we believe those changes
are temporary.
Below we discuss the impact of the
downturn on the five consumer
behavioral trends observed in
1. Steady growth in
consumption
China has enjoyed years of
extraordinary economic growth.
In line with this economic growth,
retail sales grew annually at 20 to
30 percent for five years running
until the global downturn. Since
then, the overall rate of growth has
slowed, declining quarter-on-quarter
from 16 percent in Q4 2007 to 5
percent in Q4 2008. We saw declines
in purchasing frequency for home
and personal care, and food and
beverages, decreased spending on
some categories such as leisure
and entertainment, and delays in
purchases of big-ticket items.
Despite these sharp shifts,
consumption growth appears to be
McKinsey Insights China
2009 Annual Chinese Consumer Study: Part I
2 Source: Euromonitor.
Exhibit 3: Retail sales
growth and big ticket
item purchases
-30
Nominal car and house sales (in square meters) growth
Percentage, YoY by units
100
100
11
returning to early 2008 levels as years, Chinese consumers continue
consumers resume their normal to demand products with more
shopping and spending behaviors. functional attributes, along with
Quarter-on-quarter GDP growth rose greater variety and better value for
to 6.4 percent in Q1 2009, up from 0 money. More than one in four of the
percent in the previous quarter and consumers we surveyed expressed
an astounding 18.1 percent in Q2 their preference for greater product
2009. Retail sales also rebounded variety, up from only one in eight in
and saw year-on-year growth of 15 2008, and companies are responding
percent in June. In June, car sales to these demands. Marketers in the
jumped by more than 48 percent, hair care sector, for example, have
while house sales in terms of floor introduced shampoos that promise
space sold increased by nearly 54 to fight split ends, dandruff, or hair
percent year-on-year (Exhibit 3). loss—causing the overall share of
the top five brands to decline from
58 percent in 2001 to 46 percent2
2. Increasing consumer
in 2008 as multiple challengers
sophistication launched products to meet niche
Reflecting a consumer trend that has demands.
been apparent for the past several
Retail sales growth and big ticket purchases
Real1 monthly retail sales Real retail sales growth rate
Percentage, YoY
90
SARS Restrictive macro
control Retail sales
rebounded and
20
Retail sales growth and big ticket purchases experienced a
YoY growth of
15
15% in Jun
2009
10
5 High inflationary period Heavy snowfall Beijing Olympics
Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jun 09
Auto unit sales growth
Floor space sales growth
▪ Car sales
grew by 48%
50
50
1 Nominal retail sales growth adjusted by retail sale price index in Jun 2009
▪ House sales
00
SOURCE: CEIC; McKinsey Global Institute analysis grew by 54%
in Jun 2009
-50
-50
Jan Jul Jan Jul Jan
2007 2008 2009
1 Nominal retail sales growth adjusted by retail sale price index
SOURCE: CEIC; McKinsey Global Institute analysis
12
Meanwhile, in addition to product
variety, consumers are also seeking
additional functional benefits as a
justification for value. Chocolate
offers a remarkable example—while
consumers around the world seek
this product out for pleasure alone,
as many as one-third of Chinese
shoppers now look for chocolate with
added calcium.
In addition to products with extra
features, consumers are also looking
for better prices. In the above
chocolate example, the proportion of
consumers looking for “better price/
value for money” increased from
33 percent in 2008 to 45 percent
in 2009. This also appears to be a
cross-category phenomenon—for
example, copycat mobile phones,
with the same look and features of
more expensive brand name phones,
are increasingly popular with
consumers who are looking for more
features at a lower price. Sales of
copycat phones grew from 17 million
units in 2006 to 62 million in 2008.
This trend is likely to continue
as incomes increase, competitive
intensity spurs specialization and
category innovation, and consumers
gain access to more information
about brands, products, prices, and
channels.
3. Slower product trade
up
In the first two annual surveys we
conducted, a growing number of
consumers reported that they were
prepared to pay higher prices for
better products. This broad trend
toward trading up, one of the surest
reflections of consumer confidence,
has slowed sharply among mass
consumers and the more affluent
alike in our most recent survey.
When we interviewed premium
consumers—that is, those
whose spending is in the top 30
percent—from December 2008 to
March 2009, we asked what they
paid last year for a given product,
what they are paying now, and what
they expect to pay in Q1 2010. For
example, for a 750 millilitre bottle of
shampoo, they were willing to pay an
average of 12 percent more between
2008 and 2009, but said they were
willing to pay only 9 percent more
next year. Mass consumers also
appear to have scaled back their
comparatively modest plans to trade
up—they expect to spend 6 percent
more, a drop from 13 percent last
year.
As with the other trends, we expect
consumers to resume their tendency
to trade up as China emerges from
the downturn and consumers regain
their optimism.
4. Continuous shift from
brand to value
By international standards, Chinese
consumers are still relatively brand
driven—when finding a preferred
brand out of stock, they are more
likely to go to another store to find it
or return later. This year, 47 percent
McKinsey Insights China
2009 Annual Chinese Consumer Study: Part I
of food or beverage consumers fell
into this category, compared to
about 41 percent of Americans and
fewer than a third of Japanese and
British consumers.
Our research shows, however, that in
recent years brand loyalty has eroded
steadily in China. More consumers
are looking beyond popular brands
13
for what they consider good value,
if not the lowest price. This explains
why more consumers today are
willing to consider a wider variety of
brands.
Overall, value-driven consumers
increased from 17 percent in 2008
to 27 percent in 2009. Nearly three
out of four people shopping for flat
14
screen TVs were brand-driven in
2007, but only 67 percent in 2008,
and 63 percent in 2009. We see
more consumers today shopping
carefully to find the best deal for the
same product and to save money.
While the shift from brand to
value across product categories is
significant, we generally observe that
around 40 percent of consumers
in a given category may be willing
to focus more on value than
brands—marking an upper limit on
the share challengers can hope to
gain. In other words, more than half
of consumers for many products are
brand driven. However, single brand
loyalty is declining in China, having
dropped from 31 percent in 2007
to 19 percent in 2009—consumers
generally have a shortlist of brands
to consider when shopping for a
product and they shop for the best
deal among those listed. Therefore,
brands need to continue to improve
their value proposition to stay
within the consideration set of their
consumers.
5. Smarter shopping
During the financial downturn,
consumers have begun to shop more
carefully by visiting stores in person
and conducting online research.
From Q1 2008 to Q1 2009, total
internet use grew by 39 percent, and
the number of consumers visiting
product review websites grew by
more than 50 percent. In some
categories, the change has been
even more pronounced. Websites
featuring reviews of consumer
electronics had more than twice as
many unique visitors in Q1 2009 as
they did in Q1 2008—over 20 million
per month3.
In addition to price comparisons,
which people tend to pursue
3 All figures from MyMetrix
more diligently during financial media trend database, 2009.
McKinsey Insights China
2009 Annual Chinese Consumer Study: Part I
downturns, consumers are also
conducting more online searches for
details about product attributes and
varieties, competing products, and
retail outlets.
Although the use of online resources
is growing fastest among younger
consumers, older generations are
also becoming more familiar with
the internet and are increasingly
comfortable with using online
resources. Our survey showed that in
the last year, the share of consumers
aged 45 to 64 who looked at online
reviews before making their final
purchase decisions rose from 10.6 to
13.2 percent. We expect this trend
to continue, in line with increasing
consumer sophistication.
6. Channel trade down
Our research this year identified a
new trend, channel trade down, that
in some ways parallels a pattern in
15
American and European markets.
Thanks to internet penetration and
the proliferation of retailers and
retail formats, such as super- and
hypermarkets and digital malls,
Chinese consumers are now moving
away from department stores and
other relatively expensive channels.
Nearly three out of four survey
respondents reported buying their
last mobile phone through one
of these more price-competitive
channels in 2009, for example,
compared to less than half in 2008.
We see this trend in a wide range of
products. For example, the number
of consumers who said they used
price-competitive channels when
purchasing a facial moisturizer
jumped from 73 percent in 2008 to
88 percent in 2009.
16
McKinsey Insights China
2009 Annual Chinese Consumer Study: Part I 17

Variation in downturn’s impact

by region and demographics
While the overall direction of household spending dropped 16
consumption in China remains percent in Shenzhen in 2009,
unchanged, the effect of the financial even while it rose by 20 percent
downturn varies widely according in Wuhan. In 2009, shoppers in
to the circumstances of consumers. Shenzhen are also becoming more
Understanding their behavior today value conscious, with 52 percent
requires knowing more about their reporting that they choose the brand
location, income, and age. offering the best deal or are open to
other promotional brands, compared
to 25 percent in 2008. For Wuhan,
Geography
the equivalent 2009 figure is 39
Since buyers around the world have
percent.
cut back on spending, the global
downturn has hit China’s export-
oriented areas harder (Exhibit 4). Income
About 90 percent of Shenzhen’s Low- and high-income consumers
manufacturing and mining output alike are becoming increasingly
is slated for export, for example, sophisticated, but their behavior
compared to 10 percent of Wuhan’s. diverges sharply in other respects
This has caused Shenzhen’s GDP (Exhibit 5). Our research shows that
to grow at only 3.4 percent in Q1 consumers with low income, who
2009 against Q1 2008, compared generally have less job security and
to Wuhan’s 8.9 percent. As a result, fewer financial resources to fall back

Exhibit 4: Consumers in export-oriented areas changed their behaviors most significantly

More significant Most impacted

Exhibit 4: Consumers
in export-oriented areas Export oriented Less export oriented
changed their behaviors Shenzhen Shanghai Jingjinji Liaoning Zhengzhou Wuhan
most significantly Export
percentage1 ~90 ~50 ~40 ~20 ~10 ~10

Slower growth in
consumption
Increasing
sophistication
Slower product
trade up
Shift from brand
to value

Smarter shopping

Channel trade
down

1 Percentage of export goods in industrial output in manufacturing and mining

SOURCE: Insights China Annual Chinese Consumer Survey (2007-2009); McKinsey analysis
18

on if they become unemployed, are to value, and proving slower to trade

now spending about 9 percent less up than they were in 2008.
than last year.

Their brand loyalty remains relatively

Age
strong, but they are shopping smarter The financial downturn has made the
and trading down channel to save biggest impression on consumers in
money when they do make purchases. the 25 to 44 age bracket—perhaps
They report a desire to curtail their because they tend to have heavier
spending on food and beverages, financial obligations. Nearly two out
as well as apparel, shoes, and of three consumers have at least one
accessories. child under 15, for example, compared
to about one in ten consumers in the
Most high-income consumers have 18 to 24 and 45 to 65 age brackets.
felt less economic pain overall. Consumers aged 25 to 44 have
With fewer concerns about keeping adjusted their behaviors along all six
their jobs or paying for education, behavioral trends identified in our
medical care or retirement, they can survey, from spending less overall to
continue to satisfy their increasingly shopping in cheaper channels
sophisticated tastes and shop in (Exhibit 6).
up-market channels. These consumers
are not blind to economic realities, of Consumers in the 18 to 24 age bracket
course—they too are looking for better are better educated than previous
deals, shifting their focus from brand generations, and many, as the products

Exhibit 5: Lower-income consumers are more impacted and show more significant changes in
behavior

More significant
Exhibit 5: Low-income
Low income1 High income1 consumers are more
impacted and show more
Slower growth in consumption significant changes in
behavior
Increasing
sophistication

Slower product trade up

Shift from brand to value

Smarter shopping

Channel trade down

1 Low income consumers: monthly household income <RMB 3,000; High-income consumers: monthly household income >RMB8,000

SOURCE: Insights China Annual Chinese Consumer Survey (2007-2009); McKinsey analysis
McKinsey Insights China
2009 Annual Chinese Consumer Study: Part I 19

Exhibit 6: Consumers aged 25 to 44 have been impacted the most, those under 25 the least

Exhibit 6: Consumers More significant

aged 25 to 44 have been 18 - 24 25 - 44 45 - 65

impacted the most, those
under 25 the least Slower growth in consumption

Increasing
sophistication

Slower product trade up

Shift from brand to value

Smarter shopping

Channel trade down

SOURCE: Insights China Annual Chinese Consumer Survey (2007-2009); McKinsey analysis

of China’s one-child policy, are such their behavior seems to have

used to having four grandparents been least impacted by the financial
and two parents supporting their downturn. We have found that
spending. In our survey, 61 percent some are slowing their consumption
expect their household income to growth and shopping more in
significantly increase in the next 5 down-market channels, but their
years compared to 48 percent among shopping behavior in the four other
those in the 35 to 44 age bracket. dimensions remains unchanged.
Those aged 18 to 24 are also more
optimistic about the future and as
20
McKinsey Insights China
2009 Annual Chinese Consumer Study: Part I 21

Conclusion
The momentum of economic and social change in
China is so great that the global financial downturn
appears to have caused only a temporary dip on an
otherwise long and steep road to growth. Despite
economic uncertainty and shifts in consumer
behavior, as evident in our most recent survey,
Chinese consumers do not appear to be undergoing
fundamental changes in their behavior and attitudes.

The most successful consumer product companies will

be those with the most detailed understanding of the
marketplace and consumers in different geographies
and demographic groups. Companies can gain short-
term competitive advantage by shifting their focus
to consumers relatively unaffected by the downturn.
Moreover, this granular understanding of consumers
and their return to pre-downturn behaviors are critical
inputs for the longer-term strategies of companies in
China.
22

McKinsey Insights China

Insights China provides businesses with the data, analytics and rapid,
customized problem-solving and decision-making support to help build
robust strategies for China’s rapidly changing marketplace. The data and
analysis combine results from McKinsey’s annual Chinese consumer surveys
with proprietary macroeconomic and demographic data and analysis from
the McKinsey Global Institute (MGI).

Since 2005, we have interviewed more than 30,000 Chinese consumers,

giving us an in-depth understanding of their attitudes and spending behavior
in more than 100 product categories. The respondents include a wide range
of incomes, ages, regions and cities, and represent 80 percent of China’s
GDP, 90 percent of disposable income, and 50 percent of the population.
In 2008, we conducted an additional study of 1,750 consumers with annual
household incomes in excess of RMB 250,000, giving us unprecedented
insight into the behavior of this fast expanding and economically important
segment. The macroeconomic and demographic data offers detailed historic
and forecast data on population, income, and consumption for more than
800 cities. We update the information twice yearly to account for changing
conditions.

McKinsey experts are at hand to offer guidance, including the facilitation

of workshops to address specific business issues. In addition, we have a
registered panel of more than 5,000 mainstream and 500 wealthy Chinese
consumers to help further explore such issues in a timely fashion.

For more information about Insights China, please contact one of

the following experts:

Vinay Dixit
+86 (21) 6132 3095
vinay_dixit@mckinsey.com

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+86 (21) 6133 4248
jennifer_ding@mckinsey.com

You can also email us at insights_china@mckinsey.com or visit our website

at http://insightschina.bymckinsey.com
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July 2009
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