Written by Raphael Thiolon and Ben Black

What Are the Key Consumer Trends in China in 2024?

In late October, we spent time with our portfolio companies active on the ground in China, including Oatly, Cible Skin and Red Sun Senior Care, and catching up with friends old and new. Whilst the consumer and economic environment is highly complex, and has visibly deteriorated, we saw a number of propositions and entrepreneurs flourishing – and the prize at stake is undeniably substantial for the winners.

How Is Deflation Impacting Consumer Spending in China?

Deflation is real in China and very evident. Price compression in all channels, heavy discounting and overstock of higher ticket price products are all visible, alongside multiple luxury malls with Western brands and very few shoppers to fill them. However, despite a post-COVID growth slowdown denting consumer confidence, Expenditure and Disposable Income have rebounded to c.5-7% YoY growth and 8-9% reported respectively. House prices are on a downward trajectory, but household balance sheets remain relatively strong given consumer caution. 900 million people and c.60% of consumer expenditure is within Tier 3 cities and lower which is driving growth as infrastructure investments, urbanisation, ecommerce penetration and lower cost domestic-production in new sectors (such as Electric Vehicles) are opening-up productivity gains, and unlocking massive latent consumer power. The prize remains huge over the long-term.

In that context, see 4 of our Key Observations:

1. 1. Less is More is the new motto; driven by the Common Prosperity ideology and consumers’ shift from ostentatious Luxury Products towards more Experiential & Healthier living

1. 1. The Unstoppable rise of Digital-First Coffee chains – now going global

1. 1. Grocery retail is bifurcating, with both Club/Membership Warehouses, and specialist offline chains in growth

1. 1. Senior Care again a top priority post COVID, as China’s demographic challenges are mounting

 

Why Chinese Consumers Are Shifting to Experiential and Healthier Living

 

For the first time in 30 years, Chinese consumers are facing a tough economic environment and clouded future outlooks, therefore reducing their overall consumption. In parallel, the government has made it clear that its ultimate goal is now Common Prosperity, ie a more distributed and conscious enrichment of its population, after two decades where the top 1% accumulated fantastic business success and wealth, and making it very visible to others. Status and Luxury still matters in China, and will continue to do so, but it seems we are entering a new phase, more akin to some Western markets, where success needs to be celebrated more discretely, but also where sophisticated consumers will be accumulating less goods and spending more on unique experiences, travel, and health.

This has contributed, since the beginning of 2024, to a massive, unexpected and unprecedented slowdown in luxury spend, with some Western brands experiencing astonishing drops in store visits and revenues (Gucci China sales are down over -35% in Q3 2024 vs last year ; premium beauty is declining YoY for the first time ever). However, this challenging environment will only widen the gap between winners and losers, and some brands / categories more aligned towards Chinese consumers’ new aspirations are still thriving. Arc’Teryx jackets can be found throughout Beijing’s fancy restaurants and Shanghai’s crowded streets, and the Canadian premium technical outwear brand is nearing USD 1bn retail sales in China, an impressive tenfold increase in 5 years. Some luxury, purely aspirational high-end skincare brands are suffering double-digit revenue declines, but science-based, efficacy-focused brands like SkinCeuticals or Cible Skin are still growing at double-digit rates in China today. Consumers are less interested in brand promises, and more likely to turn to cheaper domestic offerings, and hence foreign brands truly need to deliver unique, differentiated products which fit their needs.

Sports, outdoor activities & wear, pet, cultural & social entertainment, aesthetic beauty, mental wellness, health-enhancing products & services are all categories poised to continue to grow in China above Western rates, and we remain very excited about mission-driven brands that can sell a different value proposition and product set to increasingly discerning Chinese consumers.

The Rise of Digital-First Coffee Chains in China – Going global

Whilst coffee consumption remains low by global standards (c.20 cups per capita in China, vs Japan at c.350 per year), smaller-format, digital-first coffee chains built around mobile ordering and with simpler operating models offering better value to customers are expanding at a rate hard to fathom in other geographies.

Market leader, Luckin’ Coffee now operates over 21,300 stores, up c.12,000 in the past 18 months. Similarly Cotti, launched in Oct 2022 by former Luckin’ Coffee executives, just opened it’s 10,000^th store globally – in context that’s roughly opening the size of Tesco’s global estate every year. This compares to Starbucks with c.7,500 stores in China and c.32,000 in 80 countries globally built in 43 years since founding. Digital first players are offering high-speed, value for money, and a constant stream of Limited Time Offer innovations to drive consumer excitement and adoption. Luckin’ Coffee currently has a cumulative user-base of a staggering 230 million people – equivalent to the population of the world’s 5^th largest country. With recent expansion into SE Asia, and US under exploration, we expect the landscape to rapidly shift with these new juggernauts emerging…

How Grocery Retail in China Is Bifurcating Between Membership Warehouses and Specialist Chains

Whilst overall FMCG growth is flat to slightly declining, channels are shifting. Traditional supermarkets, hypermarkets and ecommerce models and losing out with declining growth, with Club, Convenience and Content-based ecommerce gaining share. Membership Warehouses such as Sam’s Club (Walmart) & CostCo continue to proliferate in Tier 1 cities serving the upper middle classes, even whilst traditional supermarkets see double-digit YoY declines. Sam’s Club first opened in 1996, now operating out of c.50 stores serving over 4 million families with $11bn in sales, with c.50% coming from online. Outside Tier 1 cities, there is an observable expansion of specialist snacking discount models such as MHMM group (Super Ming & Busy For You brands), which has surpassed 10,000 stores with a direct procurement model cutting cost and offering value back to end-consumers.

Both models, serving different ends of the demographic spectrum and growing rapidly highlight the massive opportunity for models driving efficiency through scale/direct sourcing in capturing margin that can ultimately be passed onto an end consumer. At both ends of the demographic spectrum, ‘value’ is critical and being articulated in different ways to unlock new opportunities.

What Are the Demographic Challenges Driving Growth in China’s Senior Care Industry?

New births in China fell by 6% in 2023, while preschool enrolments dropped by a stunning 11%, leading to the closure of 14,000 kindergartens across the country. Despite the Chinese government’s efforts to boost natality, China is now posting one of the world’s lowest birth rate (trending towards 1), which means the country’s population is now declining, and will be ageing fast. The current difficult macro is only exacerbating the issues, with young females even less inclined to have babies, as they fear for their jobs, purchasing power, and overall future prospects.

In this context, the need to support seniors is becoming more acute, because single children cannot take care of both parents at home in cities and apartments that have become increasingly expensive, but also because the rising Chinese life expectancy leads to a higher prevalence of dementia, Alzheimer’s and other acute diseases that require 24/7 assistance in specialized homes. The authorities are realizing this, and it has become a priority to both increase the number of available beds / facilities, but also improve the quality of care & life in existing nursing homes, to make both children and parents more comfortable around the sensitive decision to move dependent seniors in. To some extent, solving the senior care issue in China is also a prerequisite to then fixing the dropping birth rate and overall population decline. We therefore expect a lot more capital and investor attention towards all type of products & services designed for seniors, as 1/3 of the Chinese population (450 million people) will be aged 60 or above by 2040, and this generation will be a lot wealthier than the previous one.

How Entrepreneurs and Investors Can Thrive in China’s Changing Market

With a newly elected and emboldened Trump Administration in the US, hawkish on China, adding further complexity to an already highly uncertain domestic backdrop; we look forward to seeing how the next 18 months unfolds and how entrepreneurs at home and abroad adapt accordingly to capture the huge Chinese consumer prize at stake.