As living standards in China continue to advance, its vast consumer market is undergoing fundamental change.

As living standards in China continue to advance, its vast consumer market is undergoing fundamental change. Most significant is the increasing manifestation of behavior and spending patterns typical of more affluent nations. A fast-growing segment of the population is becoming more self-indulgent in purchasing activity, more individualistic in wants and needs, and more loyal to favorite brands – even while maintaining some of the traits for which Chinese consumers are renowned, such as spending lots of time in stores comparing products. We anticipated this trend in our report “Meet the 2020 Chinese Consumer,” published last spring, which projected what would happen to buying habits and attitudes over this decade as the urban population became increasingly dominated by “new mainstream consumers” – those with incomes above RMB 106,000 (equivalent to $16,000)1.

A dichotomy is emerging, even more rapidly than we expected, between this segment and the broader mass of consumers who are still in the early stages of satisfying desires for goods and services that exceed basic needs. That is the principal finding of this report, which conveys the results of McKinsey’s annual survey of Chinese consumers.

Still by far a majority of the urban population are those exhibiting spending behaviors that have long been characteristic of Chinese consumers — that is, they are basic value seekers; they tend to take their purchasing cues from others; and although brand-conscious they lack sufficient sophistication about brands to become loyal to particular ones. But they will gradually be overtaken in number as more people reach mainstream levels of income — and the shift is starting to unfold with remarkable rapidity. Our survey data show consumers attaching much greater importance than before to emotional considerations such as whether products enhance their feelings of individuality and fulfill needs for self-expression. The data also show that in addition to having higher incomes, these types of consumers tend to be more prevalent in bigger cities and in the urban clusters along China’s coast; they are also younger than the population as a whole.

Because the dichotomy between the two groups is materializing so rapidly, companies will have to adjust their marketing strategies with dispatch to serve both market segments, lest they fall behind in this must-win corporate battleground. Scale, speed and simplicity have been the key to success for many firms in China for the past 15 to 20 years, but capturing the rising generation of consumers over the next decade will require ensuring that products and marketing strategies are relevant to consumers’ personal needs and wants. Instead of the big, trustworthy brands that many companies have used to good advantage up to now, more diverse portfolios of brands and niche products will be advisable — some with few frills but plenty of functional benefits, others that “speak directly” to consumers’ emotions.

Other highlights of this year’s survey include the following:

• ƒƒChinese consumers are a bit less optimistic about their futures in 2012 than they were last year. That dip in confidence should be kept in perspective, however. Compared with consumers elsewhere in the world, the Chinese remain extraordinarily positive regarding their prospects for enhancing their incomes. This bodes well for rebalancing the economy in a healthier direction, with greater dependence on consumption and less on business

ƒƒ• At the same time, the propensity to save among Chinese is still very high, reflecting their concern about whether the nation’s social safety net is adequate to protect their longterm financial security. But rising needs and changing lifestyles are translating into higher spending in a variety of categories. For example, as the Chinese get busier, they are buying more ready-to-eat food to save time. Notably, trading up — buying more expensive products and services — continues to be a powerful trend fueling the increase in Chinese
consumer expenditures.

• ƒƒConsumers prefer foreign brands in some categories, notably electronics, and prefer Chinese brands in others, such as personal care. But the good news for global companies is that the younger and more affluent consumers are, the more likely they are to favor
foreign brands.

Download the full report here.