By Yuval Atsmon, Lihua Li, Max Magni, Ian St-Maurice and Cathy Wu
Li Hong works as a manger in one of the many new logistics companies that have sprung up in Suzhou. Over the last five years, as a result of three promotions, the 33-year-old’s take-home pay has doubled. Her stock-market investments are performing admirably and her husband’s career is also thriving. Together, they earned RMB 120,000 in 2010 (about $18,200), an upper-middle-class income in Suzhou. All in all, Hong’s family is doing well, and their standard of living is rising commensurately, with more expensive meals out and the occasional day at a spa.
But Hong remains a cautious home economist. Every month, she saves 35 percent of her earnings, to finance the home she would like to buy and unexpected medical expenses. And when she does splurge on a bigticket item, she cuts back elsewhere. In early 2011, for example, after three months of research, she bought a laptop that cost nearly a month’s salary. To compensate, she dined out less and made fewer spa visits.
In effect, Li Hong “traded-off” the price of the computer by taking a scalpel to many smaller transactions, thus allowing her to continue her high rate of saving. And she is not alone. Millions of other Chinese consumers have displayed similar “trading-off” spending strategies. That is one of the most interesting conclusions of McKinsey 2010 Chinese Consumer Study—an annual survey of 15,000 consumers from different regions, income levels, and age groups. Nearly 75 percent of the survey respondents said that in the past year they had traded-up in at least one category; two-thirds of these said they had offset this increased spending by purchasing less expensive goods in other categories (Exhibit 1). They are, in short, acting just like Li Hong.
This behavior holds true in all income and age groups (Exhibit 2). The evidence is that even as they grow wealthier, Chinese people are staying notably frugal, pragmatic and cautious. For the near future at least, they are not going to stop saving and start financing their lifestyles with credit. We can say that with confidence because this behavior runs deep: Ethnic Chinese living outside China exhibit similar attitudes. First and second-generation Chinese-Americans are more likely to own their own homes than other Americans, for example, and are considerably more dubious about the use of credit.
The implication, then, is that Chinese consumers will stick to their values—sacrificing purchases in some areas to finance upgrades in other. But with the economy growing so fast, overall consumer spending will still rise—almost 10 percent a year for the next decade. By 2021, China is likely to replace Japan as the world’s second-largest consumer market.
At a time when the government tries to make consumer spending the primary generator of economic growth (rather than government spending), trading-off presents an interesting dynamic. As for consumer-product marketers, tradingoff creates both massive opportunities and unique challenges. To benefit from trading up, and to avoid being hurt from trading down, marketers must build a steady innovation pipeline, tailor products to the China market; broaden their brand portfolios; pay attention to cross-category opportunities and point-of-sale marketing; and create buzz to quickly scale up trading up opportunity.