Our research team made two visits to China in the last month, visiting Shenzhen, Changsha (Hunan province), Hefei (Anhui province), and Shanghai. The recurring message we heard from companies we met during our trip is that, whilst the streets are buzzing and traffic is back, consumer sentiment remains weak. Consumers are consuming but, less than a year out of severe lockdowns, they are spending less. They are downtrading and are ever more value-for-money conscious. The fragmentation of media channels (newcomer platforms like Douyin and Kuaishou) and distribution channels (community group buying) has meant that smaller, lesser-known brands can connect directly to their target consumers and sell their products at much lower prices by cutting out the middleman. This has a huge impact on the larger and established brands which rely heavily on the traditional wholesale model. The outcome is weaker headline results for some of the flagship brands but the idea that China is over and consumers don’t want to consume is not valid.
Despite weak sentiment, Chinese people are still consuming. We saw this first-hand roaming the cities’ streets and travel hubs. The property crisis has led to a decrease in the willingness to invest in real estate, releasing more household income for consumption. The proportion of disposable income used for consumption by Chinese people reached 67% in the third quarter of 2023, a historical high, up from 64% in the first half of 2023 (vs 93% in the US[1]).
Something that has changed since the pandemic is that consumers in China are demanding both affordability and great quality over brand and appearances. Due to the economic downturn, consumers have gained more bargaining power with businesses. For example, Chapanda, a bubble tea chain operator, which has always been in in the mid-price tier, has performed far better than Nayuki, which has a reputation for being expensive, even though the latter reduced prices by 50% this year. We spoke to two hotel chain operators, which both told us they have seen downgrades from luxury to mid-tier.
The new generation of Chinese consumers (born after 1990) are less willing to pay a premium for a brand name and, in particular, do not worship foreign brands as compared to previous generations. This generation of consumers are keen followers of Key Opinion Leaders (KOLs) on social media, who they trust to give honest and reliable reviews of products’ quality/price.
Another recurring theme is that product innovation matters. Yu Garden Holdings (the company that owns one of Shanghai’s most famous tourist destinations, Yu Garden) reported that 30% of their jewelry sales are now contributed by a new product. Nayuki and Luckin (coffee chain) both confirmed that innovation and new products, while keeping prices unchanged, are very important for impressing consumers and maintaining profits.
For access to a recording of our recent China Insights webinar, please contact Investor Relations.
Footnotes
[1] As of September 2023. Source: US Bureau of Economic Analysis