'High-speed' households to fuel surge in new consumption

The gap between higher-and lower-end consumers in China is widening, according to a Boston Consulting Group report.

The report, released on Monday, described the world's second-largest consumer market as a "two-speed" one in which a relatively small number of upper-and middle-class shoppers have a disproportionate influence. The more affluent households will account for about $1.7 trillion of this year's $3.2 trillion urban consumer market.

The vibrant group of "high-speed" households, defined by BCG as those with a monthly income of more than 12,000 yuan ($1,900), will grow by 18 percent annually in the next five years to a $3.8 trillion market.

The lower-end segment will grow by just 3 percent annually from a $1.5 trillion market to a $1.8 trillion market by 2020.

Higher-income households are disproportionately gaining from rising incomes. The average affluent household anticipates nearly 11 percent income growth for the next year, while less affluent ones expect 6 percent growth. Considering the existing vast income disparity, the expectations gap of five percentage points translates into a 20-fold difference in actual earnings.

BCG's annual consumer survey also found "a tale of two consumers". Half of the consumers feel secure, believe that their economic future is bright and are ready to spend and trade up during the next year. The other half are much less confident.

Overall consumer sentiment is slightly stronger than last year but still below what it was before the global financial crisis, BCG found.

The share of consumers planning to spend more in the next 12 months declined from 31 percent to 27 percent this year, as the economic slowdown caused rising uncertainty.

But the share of consumers intending to maintain their current spending level rose from 44 percent last year to 54 percent.

The survey found no difference in consumption confidence between those who had invested in the equity market and those who had not.

"The equity market is not a driving force for Chinese consumers. This is not necessarily a bad thing because it suggests a major correction of the stock market will not affect consumer spending either," said Jeff Walters, a BCG partner and co-author of the report.

The rising incomes of "high-speed consumers" and their optimism hold vast implications for the companies that seek to cash in on them, the report said.

Companies that want to reach high-speed households will need to broaden their distribution channels. Of the current 81 million high-speed households, 46 million are located in lower-tier cities. By 2020, about 84 million of the projected 142 million high-speed households will be located in those cities, meaning that companies need a larger presence there.

Companies will also need a multi-channel approach. The better-off consumers are digitally savvy and active online shoppers. About 40 percent of affluent households shop online frequently, defined as at least once a week, compared with 20 percent of lower-end households.

"These high-speed households are active online shoppers. They also yearn for convenience and quality of service. They pursue customized consumption that sets them apart from mass-market consumers, and they care less about price," said Youchi Kuo, an expert principal at BCG.