Global brands need Chinese to spend
Companies are looking to the nation’s massive retail market to jump-start business, but the pandemic has reshaped Chinese shoppers’ habits—at least for now
Global brands are hoping China’s gigantic consumer market will help rekindle growth as the world tries to recover from the coronavirus pandemic. They are facing an uphill battle. Companies from Lego A/S to Domino’s Pizza Inc. say they are seeing a solid bounceback in China, at least compared with a month or two ago. But a full return to normal, much less growth, is proving harder because so many people have lost jobs and income, or want to save more.
“It is time to be more careful with spending,” said Wu Yun, a 40-year-old executive at a private Chinese conglomerate in Shanghai. Though his own income hasn’t been affected by the crisis, Mr. Wu said he is reining in spending, canceling foreign vacations and planning to buy a new property.
China is the world’s largest consumer market, with $5.8 trillion in retail sales last year. Its coronavirus epidemic peaked earlier than in the West, so its recovery serves as an important signpost for what might be to come in the U.S. and Europe as retailers reopen.
After a 21% year-over-year decline in the first two months of 2020, Chinese retail sales recovered somewhat in March, falling 16% on year. That was better than some analysts had feared, and companies including Nike Inc. and L’Oréal SA cited encouraging Chinese demand in April earnings calls.
Online retailers fared best, with JD.com reporting a 10% jump in first-quarter sales. Some traditional retailers also prospered: Nike reported that quarterly sales in China had increased 5% on the year despite the crisis, while sales at L’Oréal rose 6% thanks to strong digital sales and engagement.
By late April, most Chinese stores had been open for several weeks, and luxury goods makers LVMH Moët Hennessy Louis Vuitton SE and Kering SA, Gucci’s parent, were sounding bullish. Chinese consumers appear eager to return “to their previous patterns of consumption,” said Jean-Jacques Guiony, LVMH’s chief financial officer.
Other companies have been more measured, noting that life in China remains far from normal. Coca-Cola Co. Chief Executive James Quincey told analysts that limits on gatherings in China were weakening consumption. Starbucks Corp. said in late March that its sales were down over 40% on the year for the same reason. Fashion chain Hennes & Mauritz AB said it was experiencing only a gradual recovery, while General Motors Co. and Ford Motor Co. both had a brutal first quarter with sales falling 43% and 35%, respectively.
The Economist Intelligence Unit forecasts that Chinese consumption won’t claw its way back to growth until next year. UBS Group AG also expects 2020 to be a grind, with increased online spending insufficient to offset the slump in spending offline.
Official data put China’s urban unemployment rate at 5.9% in March, equivalent to 27 million people. Independent estimates by UBS and others claim the true figure is nearer 80 million, with business closures decimating migrant workers’ jobs in particular.
Analysts note that official Chinese data don’t count people in informal jobs, including many service-sector and casual workers. They also don’t reflect people who have been temporarily furloughed or experienced pay cuts.
A mid-April McKinsey & Co. survey of Chinese consumers found that 40% said they’d be very careful about spending money; only 13% said they wouldn’t. Another survey, by the People’s Bank of China, found that 53% of depositors planned to save more from now on, compared with 22% who expected to spend more.
At one Shanghai mall, staff at multiple stores said traffic picked up in March—many businesses had reopened in early February, but few shoppers initially ventured out—but was still only at about 75% of previous levels. On a usually bustling street nearby, over half the shops had closed or were seeking new tenants. The owner of one fashion store said business was the worst she’d ever experienced, and that she planned to leave Shanghai after 20 years and return to her hometown.
Official anxiety over the recovery in China— which has seen a steady drip of new coronavirus cases—is evident in Beijing’s flow of edicts about the importance of rebooting consumption, and in the barrage of initiatives to tempt consumers back into the marketplace.
A new consumer festival in Shanghai, dubbed Double Five as it begins on May 5, promises discounts and extended operating hours at stores. The Ministry of Commerce launched a separate online shopping festival on April 28, with deals across most of China’s e-commerce sites.
Two provinces in eastern China, Jiangxi and Zhejiang, have urged employers to give workers half a day off every week to shop or visit restaurants and tourist spots. Local governments have been dishing out vouchers worth tens of millions of dollars offering discounts at local stores.
While international travel remains stalled, domestic bookings for China’s May Day holiday on Friday were on course to double to 43 million compared with another holiday weekend a month earlier, according to Trip.com, China’s largest travel company.
Caution hasn’t been a trait associated with the modern Chinese consumer, and it is unclear whether their reluctance to spend will be a lasting or temporary response to the pandemic.
Wang Haitian had been planning to trade his Nissan for a Tesla Model 3 this year, until the pandemic hit. “When you keep hearing negative news, from the economy to the stock market, it’s hard to feel the urge to spend more,” said the 31-year-old Mr. Wang, who works at a Shanghai investment fund. Holding on to cash “makes me feel more secure.”
Lynn Zhou likewise said she’s shifted her spending priorities since losing half her income when the Shanghai-based education startup she worked for closed in February.
“The epidemic forced me to think about what really matters in life,” Ms. Zhou, 33, said. “Owning Louis Vuitton handbags won’t protect you from the coronavirus.”
Several companies are pushing ahead with China investments, banking on the country’s long-term prospects. BMW AG recently started construction of a $3.2 billion factory in the northeastern city of Shenyang. Walmart Inc. said it would invest $425 million in Wuhan as part of a massive nationwide expansion program over the next five to seven years. “That hasn’t changed,” a company spokeswoman said. In March, Lego said it would open 150 new stores this year, mostly in China, a goal it said it’s sticking to.
When you keep hearing negative news, from the economy to the stock market, it’s hard to feel the urge to spend more. WANG HAITIAN A staff at a Shanghai investment fund