On the back of strong growth in household income and wealth, retail spending has been one of the few shining lights for the Chinese economy of late.
The pace of growth, no matter what method used to measure it, has been phenomenal since the turn of the century.
According to analysis produced by UBS equity analysts Xinyu Liao and Yunyun Hu, retail sales of consumer goods grew at a compound average growth rate (CAGR) of 13.8% since 2000, leaving the total amount spent by Chinese households last year at a mammoth 30 trillion RMB (US$4.6 trillion).
From the levels of 2000, that represents a more than six-fold increase.
As as the chart below from UBS shows, despite a recent deceleration in the pace of growth, retail sales of consumer goods, let alone services, is still growing at a rate of around 10% per annum.
Breaking down the retail sales figure further, there’s one component that stands head and shoulder above the rest when it comes to annual growth: online retail sales.
It grew by an astonishing 33.% in 2015, accounting for more than 10% of total retail sales, a figure that dwarfs comparable online spending figures from the US and Japan.
With mobile usage in China exploding, so too is retail spending on mobile devices. It grew by over 100% in 2015, continuing the trend seen since late 2013.
According to Xinhua, citing a research report from the China Internet Network Information Center (CINIC), Chinese internet traffic through mobile devices surged by 36.79 million people in the first six months of 2015, taking the total number accessing the web through smartphones to 594 million.
Massive growth, and combined with Chinese demographics, one that looks set to see spending on mobile devices skyrocket even further in the years ahead.
Of China’s more than 1.3 billion people, 43% are aged between 10-39 years. While less than half of the population, what they lack in numbers, comparatively speaking, they make up for in terms of internet usage.
Nearly 80% of China’s internet users come from this age group, presenting an enormous opportunity for retailers as their numbers, and wealth, increase.
“With younger people set to become China’s most influential group of consumers in the next few years, we expect growth in online and mobile consumption to continue, say Liao and Hu. “Equally importantly, their consumption habits are likely to influence the next generation, as more of these younger consumers go on to become parents. Thus, we believe the shift from offline to online channels could have far-reaching implications for the spending habits of Chinese consumers.”
Based on the changes witnessed in Chinese household spending patterns over the past 25 years, those firms offering discretionary items look set to do well.
Like most economies making the transition from developing to developed status, the proportion of household spending directed to necessities has been steadily falling, replaced by discretionary spending such as education and housing.
Clearly the opportunities to tap into marketplace are immense, as discovered by many firms in and outside of China over recent years. However, the formula to do that successfully, particularly for foreign firms, might not be so easy to crack.