BEIJING (Bloomberg): They’ve got money to burn, eschew foreign labels, and are driven by a swelling sense of nationalism that can ensnare even the biggest global brands.
They’re China’s Generation Z and they’re shaking up shopping.
The 270-million-strong cohort born since the mid-1990s is already flexing their power: they have the fastest spending growth out of any generation in China, are top buyers of cosmetics and tourism services, and have upended online shopping. Their influence will only grow, with spending set to rise four-fold to 16 trillion yuan (US$2.4 trillion) by 2035, according to China Renaissance.
Meeting the demands of the young, nationalistic and exacting Gen Z will require an immense shift in how Western companies -- who have bet that decades of demand for foreign goods will endure -- do business in China and poses an unprecedented challenge to their market dominance. It also sets the stage for a rise in domestic companies to meet growing appetite for, and pride in, China-made goods.
"Gen Z is the first real consumer generation in China,” said Zak Dychtwald, founder of trend research company Young China Group.
"Similar to the baby boomers in the US, China’s Gen Z are redefining the country’s consumer economy and will continue to do so in every single life stage that they go through.”
It’s not just the sheer size of the market that sets them apart from their peers. Unlike their counterparts in the US or Europe, who grew up during the global financial crisis and its aftermath, China’s young shoppers have known nothing but sustained growth - the pandemic is the first major blight on the economy in their lifetimes - and many were only-child ‘emperors,’ doted upon by parents willing to spend to meet their every need.
That’s now reflected in their money habits. About a quarter of China’s Gen Z don’t save at all, compared with the global average of 15%, according to an OC&C report. They’re also more likely to be impulsive with their purchases. The term Moonlight Clan has been coined to describe people who spend their entire paychecks each month -- or an entire lunar cycle, according to McKinsey & Co.
The group also prefers to spend their money on themselves, and is less inclined to have kids or buy property, which are becoming increasingly unaffordable.
But what truly sets China’s Gen Z apart from previous generations, and poses the greatest threat for multinationals from Sony Group Corp to Christian Dior SE and Nike Inc. is their growing nationalism, fuelled by Beijing’s desire to flex the country’s rising global clout. It’s put governments and companies on an increasingly delicate footing, lest they find themselves at the centre of a storm of criticism.
Young, proud Chinese drove the backlash against Hennes & Mauritz AB and Nike after the companies denounced the use of cotton from the contentious Xinjiang region due to accusations of human rights violations against its Uyghur minority. H&M, in particular, has become a cautionary tale with its business in China yet to recover.
The gap left behind paved the way for local rivals like Anta Sports Products Ltd. and Li Ning Co. - who support Xinjiang cotton - to surpass them in sales by introducing products targeting local consumers, including apparel emblazoned with Chinese characters and sneakers inspired by the Forbidden City. By the end of January 2022, Anta and Li Ning dominated 28% of sneaker sales, 12 percentage points higher than before the Xinjiang outcry.
It’s a shift echoed across other consumer segments, with local drink maker Genki Forest to cosmetic brand Perfect Diary gaining market share and customer loyalty in sectors that used to be dominated by international names.
Local brands’ "key focus is maintaining their brand position relevant to the Chinese consumers, while global brands must balance not only the trends in China, but also globally to ensure it does not become different things in different countries,” said Kenny Yao, a director at AlixPartners Shanghai, a consulting firm that advises clients on developing businesses in China.
Unlike their parents, China’s Gen Z tends to be less impressed by products simply because they’re foreign.
Western trends dominated the market once China started to open up to foreign investment in the late 1970s. It sparked an influx of brands from McDonald’s Corp to Toshiba Corp, Adidas and Starbucks Corp. That helped fuel China’s rise into the world’s second-biggest economy.
Sarah Lin, a 22-year-old student in Beijing, said her parents still get excited by items that only have foreign-language labels because they assume it’s a premium product. But during the time she studied abroad, she realised many brands considered high end in China are mass-market names at home. Now, she prefers to research products and is happy to buy domestic names due to their improving quality and designs that appeal to her.
"In the past, people would think those who wear Li Ning can’t afford Nike, but foreign brands are not as mysterious to me as to my parents,” said Lin.
"I don’t want to pay any premium for a brand’s origin, I’ll only pay for its designs and value for money.”
Meeting the needs of more discerning customers is also proving a challenge for some foreign brands. Each year, companies from LVMH to Zara roll out collections of handbags to sweaters to mark the Lunar New Year, but their styles -- usually emblazoned with traditional folk art and lots of red and gold -- are often made fun of by young Chinese consumers who want to express their individual style rather than buy mass-produced fashion that treats them as a monolith.
Other firms have been more targeted in appealing to Gen Z. Prada SpA’s recent Lunar New Year collection involved a competition for under-30s artists to have their work judged and chosen for a project. Toothpaste brand Crest used a multi-day immersive event that had users solving a murder mystery as part of a new-product launch.
A growing sense of cultural pride has developed alongside a maturation of Chinese brands. And while the shift to buying local isn’t unique to China, few places in the world have the extensive government support and state media apparatus to push the idea on to consumers so comprehensively.
The revival of hanfu -- a traditional, flowing style of clothing characterised by a robe worn over a skirt - is a case in point. Initially a small-scale movement in the mid-2000s, it’s grown into a market worth 10 billion yuan ($1.5 billion) a year and is drawing investor interest. Designer Shisanyu raised over 100 million yuan in an April last year, led by Loyal Valley Capital and Bilibili, while Sequoia-backed retailer Shierguangnian has emerged as a top seller.
Like their peers worldwide, China’s Gen Z grew up online and the country’s use of social-commerce has become an increasingly important tool for brands. The sales channel, which allows users to buy products through social media platforms and interact directly with live streamers, is expected to grow into a more than $1.6 trillion business by 2025. That’s about half of total e-commerce sales and up from one-fifth in 2019, according to China Renaissance.
It’s proved to be a fertile source of revenue for domestic brands. Florasis, a Chinese cosmetics brand founded in 2017, has become the country’s biggest, supported by livestreamers who demonstrate products and engage with users.
But Western firms, not as accustomed to the method of selling, have had more mixed results. An hour-long livestream by Louis Vuitton in 2020 drew viewers, but also complaints that the setting was too low-end for the luxury label.
Both domestic and foreign firms are also grappling with mounting short-term headwinds as China’s pursuit of Covid Zero leaves it stuck in a cycle of lockdowns and reopenings that are taking a growing economic and social toll. The youth jobless rate hit a record in April and Gen Z has the most conservative view on increasing spending this year, according to an OC&C report in December.
Still, Gen Z’s increasing power means their preferences will re-shape the consumer sector for decades to come.
"Foreign brands need to be aware that, compared with older generations, China’s young shoppers are even more demanding,” said Veronica Wang, partner at OC&C Strategy Consultants. They "can no longer enter the market arrogantly, saying ‘hey this is our cool product, take it’. They need to try understanding better what Chinese consumers want and like, embracing Chinese culture and being more open-minded to adjust themselves to fit in the local market.”
Wang highlighted South Korean eye-wear brand Gentle Monster as an overseas label able to gain ground with younger Chinese consumers through constant product innovation and themed stores, which speak to Gen Z’s desire for a memorable experience. Foreign companies will also need to empower their teams in China, who can better read local consumption patterns and make rolling out new products more efficient.
"The greatest mis-perception of China is that modernization means Westernization,” said trend researcher Dychtwald.
"That’s been the gamble for all brands.”