Chinese Middle Class Could Reach 550 Million in Three Years — Every American Corporation Wants in on This Boom

Wrong timing for a trade war

  • McKinsey analysis indicates the Chinese middle class could reach 550 million in three years — more than one-and-a-half times the entire U.S. population today.
  • A slew of companies, including animation firm Pearl Studio and Walmart, are trying to tap the massive market.
  • Massive multinational companies compete for market share with local brands, some of which have seemingly popped up over night.

Some are trying to create characters as memorable as Mickey Mouse. Others are launching lessons on how to cook steak. Still others know Chinese parents will pull out all stops for their kids.

It’s all a bet on the Chinese middle class, a consumer force McKinsey analysis predicts could reach 550 million in three years — that’s more than one-and-a-half times the entire U.S. population today.

American consumer giants and a slew of Chinese companies are now angling for a piece of the largest middle class market in the world.

For Shanghai-based Pearl Studio, China’s imminent rise as the world’s largest movie market means the timing is right for Chinese-themed animated films. The company emerged last year from a joint venture with DreamWorks Animation, and a group led by CMC Capital Partners.

Pearl’s first original film “Abominable” — which is set in modern-day China — was released in the U.S. on Sept. 27. It will be released in China on Oct. 1, the start of the week-long National Day celebrations.

“We believe China now is the other country that has the opportunity to build that world-class family entertainment company,” CEO Frank Zhu said in an interview with CNBC last month. “We believe China will soon have our own Mickey Mouse because of this booming of the whole entertainment industry, the booming of the consumer.”

“Abominable” is co-produced with DreamWorks and distributed outside China by Universal Pictures. The movie tells the story of teenagers who help a yeti return to its home by traveling across China. In addition to distributing the film domestically, Pearl’s monetization plans include partnerships with McDonald’sAlibaba, Chinese hotel chain Huazhu and online education platform Xueersi (which operates under the New York-traded TAL Education).

In his conversation with CNBC, Zhu was even more excited about Pearl’s next film, “Over the Moon,” which is a retelling of a Chinese legend directed by Glen Keane of “The Little Mermaid.” The animated musical is set for release next year in Chinese theaters and on Netflix.

The optimism comes despite a slowdown in China’s box office growth, not to mention the overall pressure on the economy and ongoing trade tensions with the U.S. But Chinese government policy announcements this summer to boost consumption makes it clear. For China’s economy today, the consumer is a critical opportunity – and source of growth.

“Consumption overall is robust, and you see what is driving that, it’s new consumers entering the middle class, and that is the primary driver of growth in the China market,” Daniel Zipser, senior partner at McKinsey, said in a phone interview earlier this month about an upcoming report.

Retailers find new ways to mix online and offline shopping

Walmart sees its chance now as well. The American retail giant has been in China for more than 20 years, but it is stepping up investment in the country with plans to build at least 14 more Sam’s Club membership stores by 2022, for a total of 40 to 45 locations.

Many existing stores, meanwhile, are getting renovations. Those upgrades include the installation of steak-cooking stations with a dedicated chef to teach members the best way to sear a piece of imported beef – using the store’s recommended seasonings and skillet.

Overall, Walmart spent more than 400 million yuan ($56 million) in the past 12 months to upgrade its China stores, Daniel Shih, chief of corporate affairs for the company in China, said in a phone interview with CNBC earlier this month. He added that in the next decade or two, Walmart plans to invest 8 billion yuan in supply chain development.

Already, Sam’s Club is using a multitude of depot centers to roll out one-hour delivery to its more than 2.6 million members in China. More than 290 Walmart stores also offer one-hour delivery through strategic partner Dada-JD Daojia, according to the online platform.

The other key to the company’s growth, especially Sam’s Club, is product quality, Shih said, noting how friend groups and social media influencers play an important role in driving sales (Sam’s in China delivered double-digit comparable sales growth last fiscal quarter).

In China, Sam’s Club stores feature an array of overseas brands highly sought after by Chinese tourists, as well as domestically selected products under an in-house brand. Management added that some popular items, such as a durian layer cake, were created by domestic staff.

Buying more ‘Made in China’

The high level of local influence speaks to a growing trend for success in China: homegrown brands.

Last week, Nike reported strong sales in the country. But on installment purchase site Fenqile, the e-commerce company said the sales growth of Chinese sneaker brand Huili is far outpacing that of Nike and Adidas. Sales of Chinese fashion brands and beauty products also more than tripled in August, Fenqile said. Comparison with other brands wasn’t available.

Some of these domestic names have popped up seem

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