IN FOCUS6-8 min read

Five trends to watch in China’s consumer sector

The near term focus understandably remains on Covid-19 and its global impact. But once the pandemic recedes, the outlook for China’s consumer sector is strong.



Sarah Liu
Head of China A-Shares Research

As the world continues to try to contain the spread of Covid-19, China is among the few countries sustaining a return to normal activity.

Restrictions on movement have been lifted and the government’s test and trace system has so far proven effective in containing new outbreaks. As a result, shops, restaurants and other services have been able to reopen, and consumers have regained the confidence to spend.

Investment and export areas of the economy have so far led the recovery, but the consumer sector is now picking up more meaningfully. Prior to the pandemic, the contribution of consumption to GDP in China was expected to increase, and become a more significant driver of economic growth.

Private consumption currently accounts for around 39% of GDP, but this is still relatively low when compared to other major global economies such as the US (68%), Japan (55%) or the eurozone (54%).

Despite the setback this year, we expect this figure to rise further as the transition from an investment-led to consumption-driven economic growth model continues.

We look at five key trends in this already large but expanding consumer market.

1) E-commerce is expanding and accelerating

The growth in e-commerce is a long term trend that has been gaining momentum for some time, and is set to continue. As my colleague Jose Pun wrote, the impact of the pandemic has provided a huge boost to online sales.

The largest beneficiaries have been the segments which were previously underpenetrated by online sales; in many cases where consumers were unaccustomed to purchasing certain products online.

This year the online ordering and delivery of fresh foods and groceries, for example, has seen a step change. But so too have purchases of larger home appliances such as air conditioning units, where bricks and mortar stores previously dominated.  

Services such as education have also seen a shift in sales from offline to online. Almost all of China’s students switched to online learning at some stage this year, elevating the penetration rate to over 90% in the first half of the year. This was an area which parents and students were particularly reluctant to switch to online from offline in the past.

2) Market leading companies are becoming more dominant

We are seeing industry-leading consumer companies, domestic or foreign, gain market share. This has been most notable in the home appliance, sportswear, education and home furniture segments. The largest players have greater economies of scale, are growing faster and are able to cut prices in order to consolidate the market. The growth of e-commerce has created a more level playing field in terms of information availability, providing consumers with better awareness of pricing. The Covid-19 pandemic has accentuated this existing trend.

For example, Midea, the world’s largest home appliance manufacturer, cut the prices of its air conditioning units to the lowest point in a decade this year. The impact on its profit margin was small, and management still targets positive earnings growth this year. By contrast, some of its smaller competitors are likely to post losses.  

New online marketing methods have enabled the leading companies to gain a competitive edge. For example, the use of Key Opinion Leaders (KOLs), or social media influencers to promote brands and products. But these are costly and therefore less accessible to smaller companies.

Higher research & development (R&D) budgets enable the larger companies to continually improve product quality. Investment in new technology, notably automation and inventory management, is also enabling the larger players to cut unit costs.

3) Overseas consumption is returning to China

Chinese citizens are estimated to account for over a third of global luxury goods spending. Yet only a small fraction of this spending has historically been in China. This is changing.

In the past few years, the Chinese government has taken a series of measures to encourage domestic spending and to support its duty free industry. Some of these have effectively been to render overseas spending relatively less attractive. Back in 2018, for example, VAT was cut to 13% from 17%.

Meanwhile, the tropical island province of Hainan has received policy support to encourage tourism. This year the government lifted the duty quota cap by over 300%, while the unit price quota was scrapped. Companies such as China Tourism Duty Free and Wangfujing Group have been major beneficiaries of these policies this year.   

The impact of the pandemic has been to fan this trend. With international tourism constrained by lockdowns and quarantines, there has been a recovery in domestic tourism, which should continue to benefit after the pandemic abates.  

4) Consumer spending is becoming polarised between luxury and mass market

Much has been written on the long-term prospect for consumers to upgrade spending to higher quality goods and services, as average incomes rise. This was clearly visible between 2008-2018, when average selling prices showed consistent increases.

But this trend is not as uniform as it once was; in fact the reverse is true over the past few years for some segments. What we see today is consumer behaviour becoming somewhat polarised.

Luxury brands continue to see strong growth in demand; notably in cosmetics and autos. Perhaps surprisingly, many luxury brands have reported sharp rises in sales growth this year. In the second quarter, for example, LVMH, Kering, Richemont, Audi and BMW reported 65%, 40%, 49%, 36% and 31% growth in mainland China respectively. By contrast, mass market consumers have become more value conscious, particularly given the pressures as a result of the pandemic.

While companies offering value for money, or those with a strong luxury brand are performing well, it’s the brands in the middle who face the greatest pressure. 

5) Online integration of resources

Many consumer sector companies are increasingly looking to integrate their online and offline businesses.

The objective is to share their stock, marketing campaigns and customers. This would make the supply chain more efficient as it would enable stock to be stored closer to the end customer, in turn reducing shipping times and costs.

On the sales side, measures include awarding online purchases with points for future offline purchases. These require investment in technology in terms of databases, supply chains and inventory management systems. For example, Sportswear manufacturer ANTA Sports recently announced the acquisition of 30% of its distributors. Meanwhile its competitor, Li Ning, is aiming to increase the capabilities of its offline retail stores.

In the education sector, companies are seeking to merge online and offline service offerings, whether for homework or testing.

Interestingly, some companies now even have the capability for one teacher to lead a class of up to five thousand students. This takes place via live-broadcasting, with artificial intelligence enabling teachers to monitor their students level of focus and attention. Teaching assistants then follow up with homework and answer any questions. This “big class live-broadcasting” business model is expected to grow significantly this year.

There are a number of companies competing to gain share of this expanding market. The main listed companies are TAL Education, New Oriental Education and Technology Group, GSX Techedu and Youdao. But there are a few more unlisted companies also aggressively competing in this area.

Focus on the long term

In the near term, the focus may understandably remain on Covid-19 its impact on people and economic activity globally. But once the pandemic recedes, as a result of a vaccine, more effective therapeutics or herd immunity, the outlook for growth in China’s consumer sector remains strong.

For investors, this area of the economy is likely to become increasingly important. The Central Committee of the Communist Party of China is scheduled to meet this month, to draw up the 14th 5 year plan for the years 2021-25. Although the final details are not expected to be unveiled until March, look out for further details over new economy development and the outlook for targeted sectors such as consumption.


Important information 

Any references to companies is for illustrative purposes only and not a recommendation to buy and/or sell. 

The article is not intended to provide, and should not be relied on for investment advice.

Information and opinions contained herein are subject to change

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.


Sarah Liu
Head of China A-Shares Research


The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.