“Generation G”. G as in Growth.

“Generation G”. G as in Growth

Investors examining market trends in China should of course consider the growing consumer market and the spin off products and services that will grow in tandem. The US has a GDP of 15 trillion USD and consumer spending is 70% of that. China has a GDP of 6 trillion USD and 36% of that is consumer spending. The Chinese government has set a target to increase that to 45% of GDP in their next five year plan. This represents 540 USD billion increased spending on consumer products and services! And that does not even include the anticipated increased spending due to China’s GDP growth of 9% annually. China is in for a consumer market boom.

Chinese people of my age, that is, 30 plus, represent a very different generation compared to that of their parents. Born during the start of the “open door policy” which was proclaimed in 1978 they are a generation that have most only experienced economic growth, rising property prices, growing salaries, booming stock markets and of course increased possibilities. The only way has been up.

This generation, which I call Generation G, is less likely to save their salaries and be as thrifty as their parents and grandparents (who typically saved 35-40% of their salaries). Their increasing salaries and consumption expenditure has created a scramble, with domestic and foreign brands fighting for a slice of the market.

At the same time the wide variety of and available information about new products and services has turned Generation G into savvier and smarter consumers. This generation will be difficult to please. Generation G demands quality products and are very informed. On top of this, they are very demanding in terms of service and convenience and expect next or even same day delivery when ordering products.

Luxury brands will benefit. However, at the same time this generation has not only more choice but also greater access to information and possibilities to travel. They are more likely to check the prices of luxury products online, on taobao.com or in Hong Kong and buy the item tax free during a trip there, rather than in a fancy store on Huaihai road in Shanghai. Luxury consumption in China will grow but mainly due to the excess purchases of slightly older Chinese entrepreneurs and the few Generation G members that have already built up fortunes. I believe Hong Kong and popular travel destinations for Generation G will experience the largest growth in luxury consumption attributed to this generation, not mainland China.

In my view, the main beneficiaries of Generation G’s increased spending in mainland China are non luxury brands that manage to build a story and deliver “normal” prices for the broader market. They will need to offer aspirational products with brand attributes that create connections and a feeling of community. Buy a t-shirt in a Nike store in Beijing and the staff is likely to tell you about which basketball star wore the same t-shirt in the NBA finals. Starbucks is not selling coffee, they sell a white collar lifestyle. H&M offers products made by famous designers but at affordable prices. The lists goes on….

Another benefactor of Generation G’s rise are the companies that provide the services they demand. Just like the during the US gold rush, the ones who made the most money were the ones who sold picks and shovels to the miners. In China the companies that “sell the shovels” are express delivery companies, internet retailers like 360buy.com which has built an infrastructure to allow same day delivery, banks that can provide credit and information companies like Weibo which feed the thirst for product information and connecting with like minded individuals.

If I would invest in China today I would look for well positioned brands that can both deliver on the aspirations of and the services required by, Generation G.

/Magnus – Brand Activist in China