Observation: Understanding diverging consumption trend in China

Let’s start by looking at some retail sales data to get a glimpse of China’s diverging consumption trends today.

The first half of 2024 saw Beijing’s total retail sales reach ￥698.24 billion ($98.7 b), a slight year-on-year decline of 0.3% according to the Beijing Statistics Bureau, according to the Beijing Statistics Bureau, . In comparison, Shanghai’s retail sales hit ￥916.57 billion ($129.6 b), down 2.3%, while Guangzhou remained flat at ￥560.16 billion ($79.2 b). Shenzhen bucked the trend, with sales growing 1.0% to ￥507.2 billion ($71.7 b). It’s noticeable that in June, retail figures for major cities slipped further. Tianfeng Securities (天风证券) estimated significant year-on-year declines for Shanghai (-9.4%), Beijing (-6.3%), Guangzhou (-9.3%), and Shenzhen (-2.2%). Meanwhile, second-tier cities saw retail sales increase by 3.1% in the first half of the year, with third- and fourth-tier cities performing even better, up 4.6%.

Photo by Zekai Zhu on Pexels.

What about the catering industry? Data from China’s National Bureau of Statistics shows a divide within the catering industry. In the catering industry, large-scale businesses reported a 0.6% revenue drop in 2023, while smaller businesses grew by 3.9%. In June, revenue for major enterprises fell again by 0.6%, but smaller businesses continued to rise by 3.9%, a trend that persisted into July with major businesses down 0.1%, and smaller ones up 4.5%. This shows that smaller, independent businesses are the key drivers of retail growth.

Note: Large-scale businesses in China are defined as those with over ￥5 million ($0.7 m) in annual retail revenue, and ￥2 million ($0.28 m) for accommodation and catering businesses.

Photo by Alex on Unsplash.

This paints a picture of weak consumption in first-tier cities, while lower-tier markets continue to show resilience.

McKinsey's research on micro-consumers further highlights this diverging consumption trend. McKinsey’s latest 2024 China Consumer report — Getting Granular: In Search of Pockets of Growth in China — highlighted that millennials (ages 26-41) in first- and second-tier cities are the most pessimistic about future spending. In contrast, the most optimistic consumers are high-income retirees and Gen Z (under 25) with financial support from their parents. Another notably optimistic group is middle-aged individuals (42-65 years old) with mid-to-high incomes in third-tier cities. Lower living costs and a smaller burden of debt have left them (middle-aged citizens in third-tier cities) generally optimistic about future spending growth, aligning with the faster consumption growth seen in lower-tier cities compared to first-tier ones.

Chart from McKinsey’s latest 2024 China Consumer report: Getting Granular: In Search of Pockets of Growth in China.

Brands that recognize the rapid recovery in third- and fourth-tier cities and seize the opportunity for consumption upgrades may experience significant growth in the future. We can see some brands, big and small, are already been doing that: Haidilao is expanding through franchises, Lululemon is opening stores in second and third-tier cities, and various clothing brands are launching affordable alternatives (平替) to Lululemon and Arc'teryx.

On August 15, 2024, Lululemon opened its first store in the Mixc located in Nantong, Jiangsu Province, a second-tier city in China. Currently, there are 43 Lululemon stores in China, with the largest number of stores in first-tier cities and more than 20% of stores in second and third-tier cities. Image: VOGUE, China

Consumers in the sinking market are ready to explore luxury products, but their definition of "luxury" differs from that of first- and second-tier city residents. In contrast to urban white-collar workers focused on logos, county-town fashion prioritizes subtlety and low-key taste, where being too flashy can be frowned upon. In these communities, people are aware of each other's economic situations, so there’s no need to rely on big-name brands to make a statement. Developing “affordable/entry-level luxury” products for third- and fourth-tier cities presents an opportunity in China’s increasingly diverging consumer landscape.