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The challenges facing luxury as China gets richer with estimated $1 trillion GDP by 2020

China is on track to getting richer, and discretionary spending will continue to skyrocket. The country’s GDP is currently around $6 trillion. Within the next 7 years, McKinsey & Co. suspects it will reach $11 trillion. As people get wealthier, discretionary spending increases. Service-related industries are expected to benefit the most. In particular, “sectors such as leisure (defined as movie, theater, and coffeehouses), travel, and beauty products and beauty treatments are all likely to see brisk growth.”

McKinsey projects recreation and education-related spending, which is now greater than $160 billion annually, will increase 12 percent a year. The greatest marketing potential remains among members of the middle class, who suddenly have money for goods and services they traditionally didn’t splurge on: recreational activities, chocolate, cosmetics, and other luxuries.

The latest McKinsey report from their China offices, called “What’s Next for China?” defined several key areas marketers should focus on:

Embrace the new trends in urban development. Not all of China’s cities – especially the emerging ones – are alike. Brands should “design city-specific solutions—products, marketing approaches, and operating models” that will work for small cities that are projected to influence Chinese growth for the long haul.

Focus on the growing demand for services and consumer goods. With so much money to go around, companies should innovate their offerings for consumers. Demand will continue to grow for such things as catering and financial services for years to come.

Design city-specific solutions. Companies need to “recognize the heterogeneity of the line-up of Chinese cities and adapt their offerings accordingly to the needs of these populations.” While six megacities – with populations of more than 10 million – have dominated China up to now, purchasing power will come to rest with smaller cities that will underpin China’s growth for the next two decades. Factors like “differences in population (urban versus rural), age, and household income” must all be considered.

Serve the people. “That was a Maoist slogan, and it may be ironic that we are using it to describe China’s capitalist evolution,” McKinsey says. However, China has a long way to go in this department. For one, IT capabilities need to increase to allow retail networking to grab hold of both rural areas and small cities. Changing spending patterns will create gains in creative services, such as education or culture and entertainment. Time-stressed Chinese are becoming very interested in food catering services, for example. Also, the need for service in existing sectors to improve.

Brand management entails a multi-brand portfolio. Existing quality gaps between multinational companies’ (MNC) products and those of local companies are holding China back. Both sides may benefit from this differential through partnerships, acquisitions or joint ventures. Notably for MNCs, “there are opportunities to capture in this quality differential, notably in joint ventures with Chinese companies. In this way, MNCs can build local awareness of their brands, leverage their partners’ distribution channels and customer base, and build closer relationships with local government to better capture and understand relevant policies.”

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