• by Jack Loechner , Staff Writer @mp_research, June 27, 2007

A McKinsey study entitled "Serving the new Chinese Consumer," reported by Diana Farrell, Ulrich A. Gersch, and Elizabeth Stephenson, is significant in its breadth, as well as its clarity in viewing the social and commercial opportunities for marketers worldwide. Instead of a viewpoint of what can be sourced from China, the study focuses on the needs of the Chinese consumer and the change in household wealth in the next 20 years. A Research Brief cannot do it justice, but can serve as a catalyst for those interested in preparing for future opportunities in China.

As China's economy has soared at consistently astonishing rates, begins the report, many global companies have focused on serving the country's most affluent urban customers. But new research by the McKinsey Global Institute (MGI) highlights the emergence of a far larger, more complex segment-the urban middle class, whose spending power will soon redefine the Chinese market.

Consumers in China's urban-affluent segment earn more than 100,000 renminbi (about $12,500 US) a year and command 500 billion renminbi, nearly 10 percent of urban disposable income, despite accounting for just 1 percent of the total population.

They consume globally branded luxury goods voraciously, allowing many companies to succeed in China without significantly modifying their product offerings or the business systems behind them. And since this segment is currently concentrated in the biggest cities, it's easy to serve, both for companies now entering the Chinese market and for old hands seeking a steady revenue stream.

However, fixating on the urban-affluent consumer could mean that companies fail to capitalize on the dramatic changes that lie ahead as China's economic growth improves the livelihood of hundreds of millions of its citizens, posits the study

Over the next 20 years more people will migrate to China's cities for higher-paying jobs. These working consumers, once the country's poorest, will steadily climb the income ladder, creating a new and massive middle class.

The rising economy in China will lift hundreds of millions of households out of poverty. Today 77 percent of urban Chinese households live on less than 25,000 renminbi a year; by 2025 that figure will drop to 10 percent says the study. By then, urban households in China will make up one of the largest consumer markets in the world, spending about 20 trillion renminbi annually. Since these estimates were calculated at today's tightly managed exchange rates, they may significantly underestimate China's future consumer purchasing power.

Annual Income (one Chinese renminbi equals approximately 12 ½ cents, U.S.)

• Global Affluent (>200,000 renminbi annually)
• Mass Affluent (100,001-200,000 ren)
• Upper Middle Class (40,001-100,000 ren)
• Lower Middle Class (25,001-40,000 ren)
• Poor (< 25,000 ren)

Source: McKinsey Global Institute, 2066

As this economic tide rises, the writers anticipate two phases of steep growth in the middle class, with waves of consumers in distinct income brackets emerging and receding at specific points. The first wave, in 2010, will be the lower middle class. A decade later, the upper middle class will follow.

When accounting for purchasing-power parity, a household income of 100,000 renminbi, for instance, buys a lifestyle in China similar to that of a household earning $40,000 in the United States.

Two features of China's emerging middle class are already particularly notable.

• It will be unusually young. In the United States income generally peaks between the ages of 45 to 54.9 Since higher-paying jobs require a higher level of education and training, the Chinese government currently makes substantial investments in higher education for the younger cohorts, meaning that the country's wealthiest consumers will be from 25 to 44 years old.
• The urban middle class will dwarf the current urban-affluent segment in both size and total spending power. The biggest opportunity for companies selling mass-consumer goods and services will be the newly empowered middle class. To serve these households successfully, companies will need to understand how the saving and spending patterns of consumers change as their incomes increase.

China is evolving from a relatively monolithic, poor country into a vibrant marketplace with complex and rapidly developing consumer segments, concludes the report. Instead of focusing mostly on urban-affluent customers, who are just the tip of the consumer iceberg, more companies should adjust their strategies to include the emerging middle class as a core customer segment. This approach poses many challenges, but for companies that anticipate the changes that lie ahead, the opportunities will be as vast as the country itself.

Diana Farrell is director of the McKinsey Global Institute, Ulrich Gersch is a consultant in McKinsey's New York office, and Elizabeth Stephenson is a consultant in the San Francisco office.

Please find the complete article here.