China consumer demand: A four horse carriage

Fundamentally, there are three ongoing drivers to propel consumer demand in the coming years:

• Urbanization: an additional 242.5 million people are expected to migrate to China’s cities between 2015 and 2030⁴, bringing millions of people into formal employment and bolstering what is already the world’s largest retail market.
• Income growth: there has been a steady increase in disposable incomes during recent years, with 8.4% y-o-y⁵ recorded in H1, as workers transitioned to higher paying jobs in services sectors and labor markets tightened.
• Lifestyle upgrades: China’s consumers are increasingly trading up for higher-quality, premium brands and services. There are a number of drivers for this, including increased incomes and desire for social status, and its driving demand in a wide range of sectors, including autos, home appliances, foods, high-end liquor, and clothing.

While the three above demand-side factors are fundamental to the long-term outlook, there is an important structural change playing out on the supply-side that offers growth opportunities in the future.

That means applying the latest technology to improve in-store experiences, consumer choice, supply chain management, and delivery efficiency. Examples of ‘new retail’ approaches include:

• Opening unmanned stores: where consumers visit, check out products, order via online systems, pay via mobile payment or facial recognition, and either get their products delivered directly to their homes, or have them rapidly delivered in-store.
• Upgrading old capacity: renovating mom-andpop stores, supplying them with online ordering infrastructure, and adapting them to serve as delivery centers. These service upgrades give retailers updates on what products are selling well, special offers on new products, and closer, more efficient supply chain management.
• Online tracking from beginning to end: all aspects of the purchasing cycle are recorded online, giving retailers detailed information on consumer preferences and buying trends, which can then be used to refine product offerings and improve supply chain and inventory management.
• Rapid last-mile delivery: home delivery within 30 minutes of ordering marks a huge leap forward in order fulfilment even from two to three years ago, and drone deliveries offer new delivery options that can make last-mile fulfilment even more rapid.

These aspects have clear benefits for consumers in terms of rapid delivery, cheaper prices, and convenience, but for companies the benefits are:

• Reaching into untapped markets: new ways of tapping into unpenetrated, offline retail sectors, like groceries and fresh produce, make it likely that retailers can seek growth by monetizing retail channels and pockets of growth that are currently part of unorganized retail markets.
• Much more detailed data on consumer behaviour: bringing consumer demand and ordering online creates a highly valuable flow of customer data that allows firms to understand demand more closely, and adapt product offerings to the market, and more efficiently manage inventory.

And initial data that compares order numbers at one leading new retail format store, Alibaba’s Hema, show a marked advantage compared to two established supermarket chains in China, indicating a strong response from consumers to new formats.

The transition to organized retail being driven by new retail formats that give consumers better experiences and promotes stronger competition is one aspect of China’s ongoing consumer story that has plenty of room to run in the coming years.

This transition, coupled with the strong underpinning outlook for fundamental demand drivers, will present excellent opportunities for investors in the companies that manage the infrastructure, i.e. IT platforms, and deliver the products, i.e. companies in consumer sectors, as China’s consumer story continues.