mckinsey insightschina (awesome structure)

7/24/2019 Mckinsey InsightsChina (Awesome Structure)

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McKinsey & Company 1|

Presentation Outline

Role of Internet inlifestyle &consumption

Increasing

consumersophistication

Continued shift towards discretionary spend categories

City-tiers no longer the best business opportunity framework in China;city-clusters more effective & efficient

Brands remain important, but loyalty is falling; moreover loyaltyis largely to a suite of brands rather than a single brand

While some consumers are upgrading, a majority are trading-offto manage their share of wallet

Chinese market & consumers

Continuedmacroeconomicresilience

Macroeconomic fundamentals remain strong

Continued drive towards urbanization results in majority ofeconomic activity to be concentrated in urban centers

The explosive growth of internet is causing significant shifts inlifestyles, research process and purchase channels in China & India

Consumers are turning into smart-shoppers at accelerated pace


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McKinsey has invested in major efforts to understand theChina market and Chinese consumers

SOURCE: McKinsey Insights China

1 Respondents with annual HH income RMB 250+ K2 Respondents with annual HH income of RMB 35-250 K

Over 2 years of dedicated workof 25 consultants

Econometric model (30,000+equations) on macro,demographic, income andconsumption

Over 150 interviews with expertsand government officials

City visits for verification ofpublished figures

Updated once every quarter/half

year for national-level indicatorsand once a year for city-levelindicators

Used as source in joint studieswith central government agenciesand local governments

Two waves of consumer surveysin 2008 and 2010

35-45 minutes face-to faceinterviews with ~2,000respondents in each wave

The latest wave covering wealthyconsumers1 and less wealthyconsumers2 but with luxurypurchase experience

The latest wave covers 17 citiesacross Tier 1-3

5 luxury goods categories and~40 brands

Ethnographic studies and focusgroups to deeper understandconsumer behavior

6 years of annual surveys andinterviews and the 2010 surveyincludes 90-minute door-to-door

interview on generalattitudes, general shoppingbehavior, trade-off behavior,share of wallet and 5categories (F&B, CE, HPC,Apparel and Automobile)deep-dive

15,000+ respondents with~60 products and ~300brands covered

Annual survey sample represents 74% of Chinas GDP 47% of the Chinese

population

MGI Macro/Demographic Model China Wealthy Consumer StudyChina Mass Consumer Studies

1 2 3

Pre-profiled 12,000 panelists from mass consumer surveys and ~1,000panelists from wealthy consumer surveys

Chinese consumer panel4


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McKinsey & Company 3|SOURCE: Global Insight; McKinsey Insights China - August 2010 update

Chinas GDP has rebounded well, and is expected to stayrobust to 2025

CONTINUED MACROECONOMIC RESILIENCE

Growth of China real GDP YearlyGrowth of China real GDP Quarterly (YoY)

11.9

10.7

6.2

0

2

4

6

8

10

12

14

Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1

10.3

Q2

2007 08 09 2010

9.8

8.7

5

6

7

8

9

10

11

12

13

14

20252015102005

History Forecast

>9% 8~9%


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1 Includes 650 official cities, 165 counties that are identified as hidden cities and new cities

SOURCE: McKinsey Insights China - August 2010 update

Driven by faster urban GDP growth, urbanization rate isexpected to increase steadily and reach 61% by 2025

CONTINUED MACROECONOMIC RESILIENCE

Real GDPTrillion RMB, 2005, percent

PopulationMillion, percent

Real GDP per capitaThousand RMB, 2005

73

2005

19

2872

10

27

30

69

20

91

2025

97

914

86

15

46

20

80

2025

1,448

39

20

1,425

61

43

52

10

57

15

1,348

53

1,391

48

47

2005

43

1,307

57

15

16

14

11

7

99

73

51

34

24

2025

2015

2020

2010

20059.6

0.4

8.0

2.3

-1.6

0.5

CAGR 10-25Percent

CAGR 10-25Percent

Urban

Rural


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1 Brackets are defined by household annual income as global > 227K RMB; affluent 171-227K RMB; mass affluent 114-171K RMB; upper aspirants 79-114K; aspirants 45-79K; lower aspirant 28-45K RMB; poor


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Increasing













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20

7081

45-65

18-45

Japan3

19

US2

30

China1

80

Profile of wealthy consumers by agePercentage of respondents

80% of wealthy

consumers inChina are below45 years old

1 Annual household income is above RMB 250K

2 Annual household income is above USD 70K (PPP factored)3 Annual household income is above JPY 8 million (PPP factored)

SOURCE: Insights China; McKinsey

Wealthy consumers in China are significantly younger thantheir peers in the US and in Japan

INCREASING CONSUMER SOPHISTICATION


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McKinsey & Company 8|SOURCE: McKinsey Insights China - March 2010 update

Urban China's share of wallet will continue to shifttowards discretionary categories

ALL URBAN


Thousand RMB, 2005, percent CAGRPercent, 10-25

Necessities Semi-necessities Discretionary

10 10

11

12 14

6 6

589

1011

11

1012

1110

937

29 24

20 18

13

14

3

26

20

95

21

Recreation, edu-

cationand cultural

100% =

Personal items

18

5

5Housing andutility

Household

product

Health care

Transportation,communication

2025

Food

Apparel

73

20

15

52

16

5

5

14

4

2005

5

18

15

2010

36

16

6.8

3.3

6.9

8.8


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McKinsey & Company 9| 9

Multiple forces are reshaping Chinas landscape more granulargeographic clusters are emerging as distinct consumption groups

Central and local governmentsare developing coherent city-cluster plans and policies

Policies under the 11th 5-yearplan

Inter-governmentalcooperation

Joint development of hard orsoft infrastructure

Strong economic linkages enhance city cluster integration

Strong industrial linkages within clusters

Heavy intra-cluster trade in goods and services

Strong investments by hubs in spoke cities

Emergence of trend settinghub cities and strengtheningof intra-cluster migration are

making consumer attitudesand preferences convergefaster

Demographics

Share of wallet

General attitudes

Attitudes towardconsumption

Key buying factors

Media preference

Emergence of

city clusters

Government policy

Economic linkages

Consumer preferences 13

2

SOURCE: Mckinsey Insights China



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xx (xx)

xx% | xx%

Cluster name # of cities

Cluster GDP &Hub city GDP

Large MegaSmall

22 is not a magicnumber! Each

company should tailorclusters to meet its

unique requirements

Chongqing

Chongqing (15)

2.3% | 1.5%

Nanning

Nanning (28)

1.8% | 0.3%

Kunming

Kunming (15)

1.0% | 0.5%

Huhehaote

Huhehaote (10)

1.3% | 0.4%

Hangzhou

Hangzhou (35)

6.6% | 1.6%

Changchun

Haerbin Changchun-Haerbin (36)

3.6 | 1.6%

Nanchang

Nanchang (21)

1.7% | 0.6%

Shenzhen

Shenzhen (2)

4.3% |2.9%

Dalian

Shenyang

Liao central south (30)

4.3% | 2.4%

`

Xian

Guanzhong (15)

1.9% | 1.2%

Taiyuan (19)

1.4% | 0.5%

Taiyuan

Central (39)

3.6% | 0.7%

Zhengzhou

Chengdu (25)

2.7% | 1.6%

Chengdu

Hefei (29)2.8% | 0.8%

Hefei

Yangzi mid-lower (42)

4.1% | 1.8%Changzhutan (29)

2.2% | 0.8%

Changsha

Coast West (38)

3.9 | 1.4%

Fuzhou

Xiamen

Jingjinji (37)

10.8% | 8.5%

Beijing

Tianjin

Shijiazhuang

Shandong byland (67)

9.0% | 2.1%

Qingdao

Jinan

Nanjing (28)

5.5% | 1.8%

NanjingShanghai (19)

10.1% | 6.2%

Shanghai

Guangzhou (28)

6.9% | 2.6%

Guangzhou

Wuhan

We divided China into 22 city clusters accountingfor 92% of Chinas GDP

SOURCE: Mckinsey Insights China



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Consumers place high importance on brands and prices when makingpurchases because they believe the products are of better quality

Well-know brands are of better quality1

Percent of strongly agree or agree

Expensive products are of better quality1

Percent of strongly agree or agree

Brands

Prices

45

1698

30

1097

SOURCE: Insights China by McKinsey China Consumer Survey (2010), online benchmark surveys (2008-2009)1 U.K., U.S., and Japan data were from 2009 online consumer survey

Over the years, brandsand prices are importantin China More than 40% of

Chinese consumersthink well-known brandsare of better quality(from 41% in 2007 to

45% in 2010) Around 25% of Chinese

consumers thinkexpensive products areof better quality (from22% in 2007 to 30% in2010)



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However, single brand loyalty is declining rapidly

SOURCE: McKinsey Insights China 2007-2010 China consumer surveys

1 Weighted average of 5 F&B (UHT/fresh milk, yogurt, chocolate, beer, and carbonated soft drink)

2 Among respondents who claim to consider a few brands and decide which one to buy in the store or consider a few brands but are open to others if it ison promotions in the store 3 Weighted average of 17 F&B 4 Weighted average of 13 HPC products 5 Weighted average of 7 CE products

1821

2927

4448

4646

3626 20 24

53Always buy the best deal

Consider a few brandsbut are open to othersif they are on sale

Consider a few brandsand decide among theconsideration set

Only buy thepreferred brand

2010

3

20092008

5

2007

Percent of respondents

Decreasing brand loyalty but increasing consideration from a repertoire ofbrands

F&B CATEGORY EXAMPLE1

Brand loyalty

Repertoire of brands



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Laptop exampleHome/ personal care example1

Purchase decisions are now increasingly influenced byemotional considerations Comparison vs. US and UK

SOURCE: McKinsey Insights China Annual Chinese Consumer Studies (2008, 2010); Online benchmark survey (2008)

12

434

15

36

14

105

2125

U.K.(2008)

U.S.(2008)

China(2010)

China(2008)

1 Facial moisturizer data for status and what fits me; laundry detergent data for family2 Purchasing this brand can show my status

3 Using this brand makes me feel like my family is better off4 It is a brand for people like me

Status2

Family3

What fitsme4

10

122

62

44

106

1115

China(2010)

China(2008)

U.K.(2008)

U.S.(2008)



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As consumers get more sophisticated, importance of Package Design isgetting increasingly important over the years for FMCG categories

Importance of Attractive Packaging Design(percent)

SOURCE: Source


16

12

2010

2008

Yogurt

24

9

Beer

24

17

30

23

ChocolateCarbonatedSoft Drink

20

14

FacialMoisturizer

21

16

Haircare


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Increasing













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McKinsey & Company 16|SOURCE: CNNIC; Strategy Analytics (2008); Tech Crunchies; Internet World Status (2009); McKinsey

Total number of internet users1

Millions

17374347

548196

228

384

AustraliaKoreaFranceUKGermanyIndiaJapanUSChina2Global

1,734

26 29 74 76 7 66 76 69 77 80

1 Including people access internet via PC and mobile phone. Data as of the end of 20092 For overall China population 6 years old

China has already had the worlds largestinternet user base

Internet penetration,percent

xx

420 million by June, 2010,a penetration of 32%

ROLE OF INTERNET


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Potential to more than double current base of online digitalconsumers by 2015

Users (internet), penetrationMillion, percent

SOURCE: McKinsey Digital Consumer Research; Publicly available information; Team analysis

15187

125

2015

740-770

544

2009

384

31

202

29 55Internet

18 46Mobileinternet

58 86Mobilephone

Penetrat

ion

Percent

XX% Penetration

Mobile onlyPC only

PC and mobile

ROLE OF INTERNET


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Across markets, time spent on media increases withincrease in points of access

TraditionalMobile Voice

Digital media

97112114201171

388

19

272

300

14174

221

1592

241

13 27203

14 18

+91%

US Benchmark

797

295

40

462

SOURCE: McKinsey Digital Consumer Research

1 Note there is overlap from time consumers spend on 2 or more media at the same timeNote: Digital media consumption includes PC, DVD/CD, mobile etc.; traditional includes print, TV, landline radio etc

137137129142126

346

m-internet

45

164

Internet userwith homeaccess

310

46127

Internet userwithout homeaccess

265

3997

Non-internetuser with PC

239

3760

Non internetuserwithout PC

220

4153

+57%

Non-internet users Internet users

India

China

Media timeMinutes per day1

ROLE OF INTERNET


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Have you surfed the internet in the past 6 months?

While internet penetration in China is largely dependenton age

URBAN CHINA

1 Among age 15-652 Weighted average of absolute deviation in each group from mean, sample size as weighting

SOURCE: Insights China by McKinsey China Consumer Survey (2010)

Internet penetration clearly differsby age

Percent of respondents (N = 13,271)

In fact, age is the most significantdifferentiator

%; Weighted average deviation from mean2

11

20

47

76

91

Average internetpenetration rate: 531

55-65

45-54

35-44

25-34

18-24

2

4

9

11

26

Gender

Tier

Cluster

Income

Age

ROLE OF INTERNET


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How many hours do you spend on the Internet each week for personal reasons?

URBAN CHINA

Time online does not differ muchby ageAverage hours per week among internetusers (N = 7,079)

In fact, usage time is also similar acrossothers macro-demographics%; Weighted average deviation from mean2

17

16

17

19

21

Average timeonline: 191

55-65

45-54

35-44

25-34

18-24

3

5

4

Gender

Tier

Cluster 12

Income

Age 11

once online, the amount of time people spent oninternet doesnt differ much by demographics


1 Among age 15-652 Weighted average of absolute deviation in each group from mean, sample size as weighting

ROLE OF INTERNET


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Before purchasing new products, I always check the Internet for other people'susage experience/comments/feedback

2010 25

2008 16

Total

45

N/A

Automotive

27

23

20

12

Apparel

Consumer

Electronics

19

14

Home/

Personal Care

The proportion of consumers checking online for product informationbefore purchasing is growing steadily over past 2 years

This trend is especially strong for high value & high involvementcategories

When in the market to make a purchase, Chinese consumers areincreasingly using social media for checking product information

20

12

Food &

Beverages


Percent of internet users who choose strongly agree or agree (N = 7,079)

ROLE OF INTERNET


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In Summary


Increasing













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mckinsey insightschina (awesome structure)

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