The Young Generation To Reject Frugality, Major Metropolitan Areas for Free-Spending Decadence?
While I’m iffy about Forbes’ China reporting, which tends to rival the Wall Street Journal’s for selective fact-finding and conjecture, I found this article on China’s young generation to be pretty interesting. While it is well-established that the under-30 crowd in China — who grew up in the post-Deng Xiaoping capitalist era and, as such, has no recollection of or interest in the staid, poverty-stricken Maoist period — is the polar opposite of their parents’ generation, not so much attention has been paid to their spending habits and rejection of traditional Chinese financial characteristics.
Having grown up, or come of age, during the ’80s and ’90s, this generation has become accustomed to the free-wheeling cash-is-king culture that now permeates Chinese society, for better or for worse. They have grown up, as every Chinese generation, in an ultra-competitive culture and environment, which — when mixed with out-of-control capitalism — has taken them into a completely new direction for China’s youth. Unlike their parents, these young Chinese have a very low savings rate and are more than willing to part with their disposable income…if the product is worth it. Marketers already know this, and they are localizing their product offerings accordingly.
This is particularly noticeable in the popularity of “semi-luxury” products that exist in the Chinese market only. Luxury brands create these exclusive products partly out of pragmatism, of course, since young Chinese who don’t want to spend $3,000 they don’t have on a Louis Vuitton bag will instead buy a domestic brand or knockoff — and young(ish) Chinese who DO have the money might jet off to Hong Kong to buy that bag cheaper. However, if Louis Vuitton creates a semi-luxury bag that sells for $500 or less, the young, middle-class buyers could be far more willing to drop their paycheck on it. While John Pomfret is not convinced about the success of these China-only products, making reference to a similar failed attempt by Longines in the 1980s, if done correctly (e.g. without making reference to actually being China-only) it could entice even more young shoppers.
“People under age 32 are driving sales. It’s shocking to me how few companies actually understand that,” said Shaun Rein, head of China Market Research Group. A McKinsey report released earlier this month found that wealthy consumers in China are 20 years younger than their peers in the U.S. and Japan. A whopping 80% of them are under age 45, compared with 30% in the U.S. and 19% in Japan. McKinsey defined “wealthy” as urban households earning over 250,000 yuan, or about $37,000, a year.
That means a company like Lancome, which is the largest luxury cosmetics and skin care brand in China, had to tailor its anti-aging product line by convincing young people that they needed to take action earlier on such skin care, McKinsey notes. Gucci and Louis Vuitton have understood that “their bread and butter in mainland China will actually be 22 to 32 year olds,” so they’ve created 500 yuan ($73) to 1,000 yuan ($146) bags for that segment, Rein said.
The Forbes article also predicts that the younger generation will differ from the first post-Mao segment in where they choose to settle down. In Forbes’ view, we can soon expect to see young, educated Chinese go against the trends of the last couple of decades and pass up Beijing or Shanghai for second- or third-tier urban areas, where living costs are more reasonable, competition slightly less bloody, and amenities comparable. Marketers with an intuition for this young generation’s geo-economical mindset have already latched onto this emerging (or perhaps only fetal) trend, and are optimistic that the future of Chinese business will lie in the country’s interior.
[C]ompanies should go scouting in lower-tier cities, like Chengdu, Sichuan Province and Wuhan, Hubei Province, for the future affluent consumer. McKinsey estimates that three-quarters of the growth in the wealthy consumer segment, which is expanding 16% a year, will come from consumers who do not currently live in the four biggest cities, Beijing, Shanghai, Guangzhou and Chongqing. Too many countries targeting China’s affluent focus on Beijing and Shanghai, but competition will be much less fierce in the other cities, the consultancies said.
Personally, I am not 100% convinced that Chinese young generation is quite so quick to head to smaller cities to chase their dreams. While I do think it will be more common in coming years for young college graduates to head off to Xi’an, Changsha, or Kunming for work, I still think it will be quite a few years off.
Young Chinese may lust after expensive products, and they may be far more willing to save less, buy more, and throw caution to the wind than their parents or older siblings (if they have them). But at their core, by western standards they are still incredibly pragmatic. As long as Beijing, Shanghai, and other top-tier cities represent the centers of commerce and opportunity, young people will continue to flock there. While there are encouraging signs that the phenomenal growth seen by China’s coastal East is starting to shift inward — helped along, strangely enough, by the global economic crisis — I still think second- and third-tier cities, while they should be part of the China strategy for luxury brands, should continue to take secondary priority. Catering to the 18-to-30 demographic, by creating lower-priced collections and sub-brands geared to their price points and tastes, however, is an excellent starting point.