Many people have asked me lately: What about the Chinese consumer? What are they thinking right now? Are they panicking with plummeting stock and real estate markets? Isn't China's economy dead with the export sector actually declining in November? Why and how are Chinese consumers still spending since we saw 20.8% retail sales growth in November?
Andrew Jacobs from the New York Times interviewed me about the Chinese consumer in this article.
I told him that the real engine for growth is actually the Chinese middle class, especially younger Chinese who like to buy on-credit, as I wrote recently in a commentary for Forbes entitled "In China, Online Shopping Soars."
While increasing unemployment for workers in the export sector is something that we all need to look at from a moral and humanitarian standpoint, from purely a business one they do not count much for GDP consumption growth. Their salaries unfortunately are too low. The media is intent on making this a bigger story than it really is, I believe, to sell papers with great headlines. There was one the other day in a top tier daily something like, "China Business Confidence at All-Time Low". The article talked about a survey which found that Chinese executives were demoralized more than any time since the survey started and were preparing for a Depression, doomsday scenario. Of course, the last paragraph said that the survey was started in 2006… People need to stop getting frightened from news headlines and start doing real analysis by looking at indicators.
Importantly, a full 80% of consumers that my firm recently interviewed said that they were optimistic and fully believed that the Chinese government would implement the economic policies necessary to jumpstart the economy and have it boom in 3 years. This would explain why 70% of the respondents said that they would spend as much if not more in 2009 than they did in 2008, except for in the auto sector, as I wrote about here for Seeking Alpha.
Confidence in the Chinese government and confidence in the financial system is high. They have been moving very quickly to increase money supply and spur investment. There have been no bank-runs because there is the tacit feeling that the government will bail-out the banks. We have even interviewed foreigners in Shanghai who are wiring their money from Citibank (NYSE:C) to the Bank of China because, as one senior American executive said, "Chinese banks are way more stable than Citibank and are not going to go bust." Without the fear of losing everything in a bank or an insurance company collapse like AIG (NYSE:AIG), Chinese middle class consumers are not as panicked as American ones.
Another key difference between the US and Chinese consumer is that middle class Chinese have little if any at all savings tied up in the stock market. So even though the A-share market has collapsed 70% in China in the last year, most people have not lost significant chunks of their savings like in the US where the investing class permeates not just the wealthy but the everyday middle class American.
Moreover, the Chinese indices are still higher than just a few years ago – so people do not feel that they lost decades of work as many Americans and Japanese feel. Inflation of staples like cooking oil, eggs, and pork has plummeted in the last few months leaving consumers feeling wealthier.
The confluence of these critical areas leads to more optimism and a willingness to continue to spend, albeit with more discretion in the last few go-go years, hence the continued robustness in mobile phones from Nokia (NYSE:NOK), cosmetics from Estee Lauder (NYSE:EL), dining out at KFC or Pizza Hut (NYSE:YUM) and shoes from Nike (NYSE:NKE) while much slower growth for the auto sector. We also see a major drop-off for companies like Starbucks (NASDAQ:SBUX) that have not really become mainstays in the daily diet of Chinese consumers. In a difficult time, mid-tier good value brands will do well in China.
Our research findings suggest that critical for the consumer sector is whether younger Chinese get the bonuses and salary increases during the Chinese New Year period that they expect. If they do not, expect retail sales to drop big-time in February. We see a decent in sales in December with strong growth numbers in January leading up to the Chinese New Year holidays and then a potential growth dip in February (again, still growth!). Overall, we estimate 16-18% retail growth in 2009. This is still a very healthy growth number, same as 2007 when I wrote China's Booming Retail Sales in a commentary for BusinessWeek and most pundits were bullish about the Chinese consumer.
Overall, we remain cautiously optimistic for the retail sector in 2009 in China. The key is for companies to develop the right brand image and marketing communication and sales strategies. Just throwing money into every marketing channel without thought for effectiveness will no longer work. Companies need to become more ROI focused in their marketing strategies and more disciplined as they create long-term, sustainable brand positions.
The next few years will see the winners not only surviving but thriving while the losers get decimated. In times of economic difficulties, our research indicates that this is the best time for companies to move to the head of the pack or for leaders to increase the gap with the competition through cautious but calculated marketing campaigns.