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Economy

Young Chinese are the consumers the world has been waiting for

If there is one segment of consumers to watch in the world today, it is the approximately 200 million Chinese between the ages of 15 and 24. They represent about 15% of the mainland population. Their numbers are rising rapidly. And they are changing virtually everything.       

     Up until now, Chinese consumers have mostly wanted low prices and acceptable quality. They have been overwhelmingly value-focused. Successful brands like Haier in washing machines and Master Kong in instant noodles have won by offering inexpensive goods with standardized quality, and by achieving economies of scale as fast as possible to reach the vast but still relatively poor middle class.      

     However, young Chinese consumers are not worried about saving a few yuan. They have, by and large, been raised in abundance. Unlike previous generations, they have no memory of hunger or real hardship. They have mostly grown up in modern apartments with lots of conveniences.       

     As a result, they are far less frugal than their older counterparts. They will buy lattes for $4 -- Starbucks is more expensive in Beijing than in most of the U.S. They will pay for branded clothes. And even those who aren't wealthy will splurge on luxuries like handbags and electronics, at least sporadically. It is not uncommon for a young Chinese worker's entire paycheck to be spent on an iPhone or other luxury item.   

Buying from the heart  

Young Chinese consumers are also more emotional. They are going through a process of self-discovery. They are interested in how products and services make them feel, and how their peers see them. A good example of this more emotional type of spending is the current surge in the Chinese market for diamonds. This is mostly driven by the 10 million young couples getting married each year.       

     These young consumers are creating lots of surprises for companies. We are now seeing a shift toward brands that incorporate Chinese heritage and services. We are seeing an increasing desire for luxury pampering. If you go to the Antarctic, you will be shocked by the number of Chinese tourists zipping around in inflatable motorboats.    

     Unfortunately for many companies, we are seeing lots of brand-hopping by these fickle consumers. A study by Bain & Co. found that the top five consumer brands in 10 categories lost 30% to 60% of their customers between 2011 and 2012.      

     Young consumers are also very confident about their financial futures. In study after study, young Chinese evince a strong belief that they are going to live well and make more money than their parents. Young Chinese with jobs have incomes orders of magnitude higher than their parents did at their age. And they have never known bad times. This sort of financial confidence enables greater spending -- both with credit and through less saving. The risk: An increasing number of young consumers have lots of nice possessions and no nest egg. 

Leisure boom  

Overall, young Chinese are the consumer demographic the world has been anxiously waiting for: emotional, confident and big-spending. By 2020, 35% of consumption in China will come from the younger set.      

     These consumers are already creating a boom in leisure, personal services and high-end hospitality. Unsurprisingly, they spend a lot on travel. And the markets for wedding planning, cosmetology and boutique resorts are all going through the roof. According to media agency Starcom China, Chinese consumers between 18 and 30 years old already account, directly and indirectly, for half of household spending.      

     The young consumer story gets even better, from a business perspective. In a 2012 McKinsey & Co. study, there was some fascinating data on how Chinese are increasingly delaying certain life events. They are getting married later, and having children later.       

     This change in behavior results in even greater spending. In 2010, for example, approximately a quarter of Chinese high school students went to college. That proportion is expected to increase to about 40% by 2020.       

     Going to college and then getting a job usually means delaying marriage and family. So young Chinese are staying single longer and have more time and money than before. This means more hobbies, more vacations, nicer apartments and so on. This also eventually leads to more expensive weddings (and divorces).      

     Put all this together and you have 200 million transformative consumers rising in China. If Chinese consumer spending is a wave that will change the world, young Chinese are the front of that wave.    

Jeffrey Towson is a professor of investment at Peking University's Guanghua School of Management in Beijing.

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