The more affluent households in China are quite concentrated geographically. This is important to marketing strategy.
As the overall level of affluence in China has increased so has an increasing proportion and number of households reached the income/spending level where they are commercially attractive to more than just local retailers and service providers and manufacturers. Typically, this is households with 2 persons (1.4 wage earners) and a combined income before tax of US$20,000 or above. (Rmb 130,000).
This month’s insight looks at the trend in the number of such households and perhaps more importantly the distribution of those households across China. There is a very definite ‘affluence’ bias developing geographically which has significant implications for distribution and investment.
What is happening to household incomes in CHINA?
The expectation is that wages, and therefore household incomes, in China will increase along with the GDP. But it is necessary to appreciate that while the direction is likely to be positive, household incomes do not necessarily move in line with GDP. In the case of China, the intervening factors are
1) Share of productivity of the worker that is paid out in wages. The recent trend in both GDP per worker and wages per worker are shown in Figure 1 below. This model indicates that trends in the education profile of adults and accumulated Fixed Capital Investment per worker (with the calculation being done at Province level) result in GDP per worker (productivity) projected to grow at 5.2% per annum for the period 2016 to 2021 and at 4.2% per annum for 2021 to 2026. This compares to a rate of 7% pa for 2011 to 2016.
2) The proportion of this productivity of the worker that is paid in wages. In China at the current estimated level of 60% it has been rather low relative to international norms. However, this is a meaningful increase over the 2011 level of 53% and it is expected to continue to increase in future years because of (a) improved education/skill level of the average worker and (b) the slowing supply of workers. The number of persons of working age and hence supply of labour is still increasing in urban areas but now at a much slower rate which does make the labour market a bit more ‘tight’.
3) Finally, the household’s income is a function of the average wage per worker and the number of workers per household. With the declining number of persons per household this has meant that the rate of growth in number of urban households has been faster than the number of workers. Thus, the number of workers per household has declined from 1.97 in 2006 to 1.75 in 2016 and forecast to reach 1.56 by 2026. This may not appear a large decline but it represents a 11% decline for the total period (-1.1% per annum) per household for the next decade which must be offset by a similar increase in wages just for household income to be maintained. Basically, what it means is that household incomes, while increasing, do not increase as fast as wages.
Figure 1: Historic and Projected Trends in Productivity per worker, average wage (Rmb pa 2016 values) and share of productivity that goes out in wages.
The result of the above factors indicates that average and median real (2016 values in Rmb) urban household gross income (i.e. before tax) will grow from US$19,642 per annum to Rmb 30,608 in 2026 (A CAGR of 4.5% pa). Median urban household income is projected to grow from US$16,239 pa to US$24,628 pa. (CAGR of 4.2% pa). For the previous decade, the CAGR (Compound Average Growth Rate) was 7.2% and 6.8% per annum respectively – so a somewhat slower rate of growth – but still positive and in part reflects the higher base the increase is calculated on.
The evovling distribution of Urban Households By Income
Obviously, with an increasing average household income the distribution of households around that mean will change. The nature of the historic and projected change in the distribution is shown in Figure 2. Please note that household income data is expressed in US$s using the exchange rate of Rmb 6.75 to 1 US$ and 2016 real values.
Figure 2: Historic and Projected Trends in the Distribution of Urban Households by Gross Household Income (US$ pa 2016 values)
What is apparent from this chart is that over time the lower income segments (under US$20,000 pa) have declined in absolute number (and proportion) of households and all growth in the number of households is for income segments over US$20,000. This is to be expected in an economy where GDP is showing growth along with productivity per worker and share of productivity paid in wages.
But it is important to note that after 2021 the income segment US$20,000 to US$50,000 also stabilises in absolute size and growth moves up to the next highest income level. In short, in urban China, the growth segments are households with an income more than US$50,000 pa which at current exchange rates is Rmb 337,000 per annum.
The number of these affluent households is projected to increase from 10 million in 2016 to reach 42 million in 2026. This is an annual compound growth rate of 15% which makes it a very attractive albeit relatively small (4%) share of all urban households. But obviously, it increases in share over the next decade and is projected to be 13% of all urban households by 2026. This makes it a segment where laying the ground work now is worthwhile. Especially as being urban, they are biased to households which we term ‘Working Age Empty Nesters’. That is households consisting of two adults – with 1.3 wage earners – and no dependents and a well-equipped home. They are 40 to 64 years of age and now able to engage in discretionary spending and saving.
where are these households located?
Given the potential economic importance of these households to more expensive brands and services it is clearly useful to be able to locate them efficiently. At 4% of all urban households, in many cities there would not be enough of these households to justify physical distribution of a brand (i.e. retail outlet). The volume achieved simply would not cover the marginal of cost of distribution.
Fortunately, (for the marketing persons) these affluent households are relatively concentrated geographically. In 2016 there are 32 cities where the number of households with a gross income more than US$50,000 pa exceeds 100,000 and the location of these cities are plotted on the map below. Not surprisingly with the exceptions of Chongqing, Wuhan (Hubei), Chengdu (Sichuan), Changsha (Hunan) and Kunming (Yunnan) they are located along the eastern seaboard of China.
Figure 3: Location of the 32 cities that have more than 100,000 households with a Gross Household Income more than US$50,000 in 2016
By 2026 there will be 50 cities meeting this criterion even though the number of households earning over US$50,000 has increased from 10 million to 42 million. Figure 4 plots the location of the 50 key cities in 2026. Do note that in this map (Figure 4) the additional cities are still mainly along the coast both north and south of Shanghai – but particularly north towards, and including, Shandong province. While there is also an increase inland, it is more modest in nature.
Figure 4: Location of the 50 cities that are projected to have more than 100,000 households with a Gross Household Income more than US$50,000 in 2026
Not surprisingly if the criteria are lowered to a gross urban household income of US$20,000 (Rmb 130,000), which as shown in Figure 2 includes a total of 107 million urban households in 2016 then the coverage is more extensive. This is shown in Figure 5. Again, however, even though the number of such households increases to 206 million the geographical expansion is not great over the next decade. The wealthier cities get wealthier rather than there being a spread of that wealth to other cities.
Figure 5: Location of cities that are estimated to have more than 100,000 households with a Gross Household Income more than US$20,000 in 2016
The Implication for Companies and Investors
The important point here is the geographical concertation of ‘target’ households. While, perhaps sociologically, to have wealth concentrated in a smaller geographical area is not ideal, it is good news for those marketing physical products or services. China is a very large geographical area and if the market required coverage of all of China the distribution costs would be considerable.
With a concertation around Shanghai – with a less focus on Beijing area and Guangzhou the distribution/reach issue is considerably easier. By focusing on those areas, a brand can reach 80% of all US$50,000 plus households in 2016, and 47% in 2026. (in absolute number of households it this geographically selected market grows from 8 million households to 19 million.