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COVID-19 has irreversibly transformed consumer behavior and identifying the 'new reality' is key to growth and transition

The outbreak of the novel coronavirus in 2020 has had an irreversible impact on Chinese consumer spending, and the effects span multiple segments, from more affluent consumers to highly price-conscious buyers. As spending bounces back, it is now clear that many of the trends that set in during the pandemic are the "new reality" that will continue into 2021 and beyond.

While analyzing the changing consumer behavior, three distinct phases were noticed. In the early stages of the novel coronavirus outbreak when lockdowns began, consumers were mainly buying food and essential items. As the number of new cases declined and the economy began restarting, people were able to spend more time outside, and business in other spending categories began recovering. Now that everyday life has mostly returned to normal, consumer activity in China is almost back to pre-pandemic levels.

Although uncertainty remains in 2021, based on a recent consumer study, Boston Consulting Group's Center for Consumer Insights has identified four key behavioral shifts.

First, consumers are cautiously optimistic about their income growth in 2021.Although 23 percent of consumers reported being hit hard in 2020, only 5 percent of consumers expect their income to decrease in 2021. In fact, 32 percent of consumers believe that their income will increase by an average of 15 percent. This positive sentiment naturally leads to stronger purchase intentions.

Overall, more consumers are planning to increase their spending than cut back. However, consumers are becoming more polarized in their spending intentions. The middle-income group and less well-off consumers will remain conservative in 2021, increasing spending mostly on essential items. Affluent consumers, on the other hand, are likely to spend more across a wider variety of categories.

Second, the structure of consumer spending has shifted. Although the number of novel coronavirus infectors in China is now minimal, people's risk aversion because of small local outbreaks is likely to remain throughout 2021. Demand for health and lifestyle products is likely to remain strong through the year, becoming the top expenditure for the more affluent consumers.

For lower-income groups, essential items will be the top priority. However, we will continue to see sales growth across all demographic segments. Personal care and fresh food are the most popular categories in reported consumers' spending plans for 2021, while discretionary products like home electricals, outdoor and travel products are at the bottom.

Third, a notable V-shaped trading-up was observed in the second half of 2020, compared to the first half. In the first half of 2020, 55 percent of consumers said they traded down to less expensive items, while only 28 percent said they traded up. However, only 15 percent reported downgrading in the second half of the year, and as many as 37 percent were buying more expensive items.

Furthermore, consumers have become more rational about their purchases. Brands or retailers seen as offering good value for money have become popular and their sales have grown fast. The trend has been noticed in categories such as cosmetics, life accessories and mobile phones, and will likely further expand.

Fourth, the pandemic has accelerated the rise of new sales formats and the integration of online and offline channels. Selling through livestreaming became popular during the initial lockdown period, while offline channels stagnated.

Some of these changes will become the new reality--consumers who choose social commerce as their top channels have increased by 60 percent, community group purchasing has increased by 40 percent, and traditional e-commerce by 25 percent. What is clear is that in the new reality, the integration of new online channels and traditional offline channels is here to stay.

It is also interesting to note that the pandemic has not dampened demand in the real estate market--56 percent of consumers said that they planned to buy a house within the next five years, and nearly half of them were looking outside of the cities they live. As real estate is an investment rather than a liquid asset, this trend shows that consumers are optimistic about China's long-term economic development and are willing to plan beyond the short term.

These trends have several implications for businesses. As buying power and confidence levels vary across consumer segments, companies need to differentiate between these groups in their activities, and adjust according to regions and income levels. They can capitalize on the opportunities from affluent middle-income consumers trading up, while paying attention to changes in preferences among lowincome groups.

In addition, "super value for money" is becoming more important in consumer purchase decisions. Consumers are increasingly paying attention to the true value of their purchase--in terms of both functionality and emotion.

This will create opportunities for more Chinese brands to compete in the mass to masstige segments, which of course also requires high standards on product development and supply chains.

As new sales formats continue to emerge, companies will need to diversify the range of channels through which they can reach and sell to consumers. Online and offline channels should be interconnected effectively to provide a superior customer experience.

And lastly, there will be many opportunities in health categories such as food, home products, medical products, and lifestyle services.

The toughest period for Chinese consumers is over, and we can look forward to renewed spending momentum throughout 2021 and beyond. As China increases its emphasis on domestic consumer demand, companies that move nimble to ride on the trends could be some of the biggest winners in the next phase.

The author is a managing director and partner of Boston Consulting Group. She also leads BCG's Center for Consumer Insight in China. The author contributed this article to China Watch. The views do not necessarily reflect those of China Daily.