masses.jpgChina's well-heeled consumers make a tempting target for luxury goods firms. However, greater rewards lie ahead for western businesses that focus on China's new emerging middle class, according to McKinsey.

China's buoyant economy will lift hundreds of millions of households out of poverty in the coming two decades.

That will make China's middle class one of the largest consumer markets in the world with annual spending power of around 20 trillion yuan ($2.5 trillion) by 2025 — almost as much as what Japanese households spend today.

Now, $2.5 trillion can buy an awful lot of flat-screen TVs, cars and foreign holidays. But many western businesses have not yet got the message.

“While some companies are already focusing on the evolution of this new class, many others have yet to broaden their vision and thus risk missing a significant opportunity.”

That is because the traditional target has been China's urban affluent, who make up around 1% of the population and whose tastes are easier to understand.

These nouveau riche earn more than 100,000 yuan a year and account for nearly 10% of urban disposable income. They consume globally branded luxury goods voraciously — just count the number of (genuine) Gucci bags in Shanghai — and so luxury goods companies have been able to succeed in China without having to significantly modify their product offerings — or the business systems behind them.

And since this segment is currently concentrated in the biggest cities, it's easy to serve, both for companies now entering the Chinese market and for old hands seeking a steady revenue stream. But the urban affluent are just the low-hanging fruit and the richer rewards will come to those who target the emerging middle class, argues McKinsey.

“Although producers of luxury goods may continue to cater only to the wealthiest households, other companies — especially manufacturers of mass consumer goods — can win the bigger prize by broadening their focus to include the emerging middle class.”

Growth will initially be driven by the emergence of a lower middle class, who will account for around 44% of China's population by 2011. The following decade will see the emergence of a large upper middle class which will account for a staggering 520m people by 2025.

Two features of China's emerging middle class are notable. First, it will be unusually young compared with that of most developed markets. Second, the middle class will grow to dwarf today's affluent class in both size and total spending power.

Early movers, such as Coca-Cola and P&G, have already begun creating models to target China's new middle class profitably. Has your business?