Chinese may be cutting back on spending. But there’s one area that continues to grab wallet share

An increase in spending by “young free spenders” in China are helping the local fitness industry, according to McKinsey’s bi-annual survey of the consumer released Thursday.

Despite U.S.-China trade tensions and a slowdown in domestic economic growth, these so-called young free spenders “have significantly boosted their purchases” from last year in nearly every category the McKinsey report tracked. Health consciousness dominated.

The top ten product categories by greatest spending increase included fresh milk, skincare, yogurt and sportswear.

The young free spender demographic, as defined by McKinsey, covers young people who live predominantly in China‘s less developed, lower-tier cities. Cheaper living costs and less demanding work schedules — relative to peers living in major metropolises like Beijing and Shanghai — also give this group of consumers more time and disposable income.

“What is clear … you absolutely have to double down on this segment,” Felix Poh, one of the McKinsey partners who worked on the report, told CNBC. “They’re likely going to be core to a company’s marketing and sales growth going forward.”

The group represents a quarter of the Chinese population surveyed, but account for 60% of the spending growth between 2017 to 2018, according to the study, which covered 5,400 respondents in 44 cities. Conducted between May and July, the survey is part of a research series conducted by McKinsey since 2005.

“What we do see clearly is increase in spending, particularly in categories that are focused on health and lifestyle. This trend goes beyond the young free spenders, but they are clearly a big driver of this trend,” Poh said. “There’s an increasing demand (for) having personal trainers, more interesting classes that focus on the latest trends, Zumba, etc. and I think we’re going to see a lot of continued innovation in those categories as well.”

Local companies and investors are taking notice, just as the Chinese government has released new policies in the last few years to promote national fitness and sports.

It’s not immediately clear how many fitness centers there are in China, but estimates indicate more than 37,000 opened in just a few years.

• For example, fitness center “The One Fitness” was launched in 2008 and now has more than 60 swimming clubs in Beijing and Tianjin, according to the company website.
• Goldman Sachs, GGV Capital and Tencent are lead investors in Keep, a seller of smartphone-based fitness programs that has raised $174 million, according to Crunchbase. The Beijing-based company launched about five years ago with a focus on online workouts, and has since opened physical gyms. Keep ranks third in Apple‘s China app store in the fitness category.
• Fosun RZ Capital and Jiansheng Sports Fund (co-established by Sequoia Capital China and China Media Capital) are the two lead investors in Supermonkey, a Shenzhen-based fitness center chain that has raised 410 million yuan, according to Crunchbase. Supermonkey is known for trendy workout spots and customers can book classes through a mini-app in WeChat, China’s primary messaging tool.

Some foreign brands are also benefiting. In a third-quarter earnings conference call on Dec. 11, Lululemon CEO Calvin McDonald said the company’s China e-commerce business grew more than 60% for that quarter.

“We will double our store base in China this year, and we believe we are only scratching the surface of our potential within China and Asia overall,” McDonald said, according to a transcript accessed through StreetAccount.

The rest of McKinsey’s survey respondents were more affected by the slowdown in economic growth.

Those who said they weren’t interested in spending rashly, even if they felt “rich,” climbed to 60% from 52% in 2017. Official figures show retail sales have slowed this year to 8% growth, down from last year’s roughly 9% increase.

Other consumer groups the survey studied held back a little more on spending, while a new category of “frugal consumers” decreased their spending across the board. They accounted for about 10% of those surveyed, and were more likely to have lower incomes and live in tier-one and tier-two cities, the McKinsey report said.

“It all goes back to not treating the Chinese consumer as a homogeneous unit,” Poh said.

“The Chinese consumer is extremely resilient,” he said. “As long as you have an appealing value proposition Chinese consumers will still spend that money.”

— Chushi Hu contributed to this report.