China's Consumer Outlook Remains Bright

Yesterday I gave commentary again on Bloomberg TV, "Rein Says E-Commerce, Online Game Sales to Rise in China: Video" to discuss what Chinese consumers are thinking in light of the malaise the world is finding itself in. With China's economy slowing but still seeing positive growth rates, what the Chinese consumer is thinking and how and what to sell to him or her is critical for multinational corporations.

We have seen declining optimism in the last month. Right now, 60% of respondents said that they would spend more in 2009 than in 2008 except for in the auto and real estate sectors. This is a drop from 70% when we last did the research in December. However, the situation is not all doom and gloom by any stretch of the imagination -- some sectors will boom in 2009 such as online games and e-commerce while many with get hit hard such as auto.

We remain cautiously optimistic for China's economy overall and see Q1 and Q2 being very challenging before the economy moves again in the final half as the stimulus package (both China's and America's) starts working more liquidity into the system and confidence goes up. The key is that there is little fear in China as there is in the US -- people here are just taking a wait and see attitude and are looking for more deals as they expect prices to fall. The name of the game for 2009 will be cautious spending. But there will still be spending.

Here are some key points to take note of our recent research:

1) The most optimistic segments are younger consumers between 22 and 28. They continue to buy, which is why retail sales boomed at a 19% clip in December. However, we think there will be a cutback in spending starting after the Chinese New Year when bonuses and salary increases might not be as high as previously hoped for. What is important to note, however, is that many workers in this age group sign guaranteed bonus contracts (1 month of salary as bonus) so bonuses should remain fairly stable. Widespread lay-offs are not happening (except for in the export sector) and this age group has little if anything invested in the equity or real estate markets. The government is worried about social stability and has been pushing companies to pledge not to cut workers in the same way that is whacking the US for companies like Sprint Nextel (S) and Caterpillar (CAT).

For this demographic, online games will boom as the price to play is cheap and consumers still need entertainment. They might not spend as much time drinking Johnnie Walker (DEO) in nightclubs, but they will still play games from Shanda (SNDA), Netease (NTES), and The9 (NCTY).

2) Women more than men remain optimistic and are still buying cosmetics from companies like L'Oreal, Revlon (REV), and Estee Lauder (EL) and clothes from Zara and Uniqlo. However, they might not buy high-end cosmetics for every item, in other words they might still buy expensive face cream but spend less on body cream. We just sent teams to Xinjiang and Fuzhou (3rd maybe 4th tier cities) as one of our e-commerce clients in the women's apparel sector found booming sales there in the last few months and wanted to know why.

We found that women will still spend, they are just looking for discounts which is why many are turning to online shopping. They see all the recent discounting as a time and opportunity to buy rather than an indication of a failing economy.

Expect Alibaba's (ALBCF.PK) Taobao to do very well this year as more consumers shop online for discounts and as more second hand items, like Apple iPhones (AAPL) phones or Dell computers (DELL) change hands. PC and mobile phone sales might drop but 2nd hand ones will continue to boom.

3) Consumers are still eating out. They are just being more cautious in what they buy, so they are trading down on restaurants rather than eating at home completely. Like what is happening in the US with consumers favoring McDonald's (MCD), mid-tier restaurants like Salzeriya and Ajisen noodles are still doing very well while Starbucks (SBX) and Haagen-Dazs cafes will see a slowdown as I wrote about in Seeking Alpha recently.

While there has been declining confidence in the last month in China, the consumer outlook remains fairly bright as consumers are still buying, just not with some of the reckless abandon that marked shopping trips in the last few years. For companies that focus on targeting the right age groups and right cities and launching effective marketing campaigns, the Chinese consumer will remain a driver for growth in 2009.

Comments

[Ortiz]

It will be interesting to see what the picture looks like after the Spring Festival is over.

You note the importance of the annual bonus season and the fact that bonuses this year may not be as high as people expect. It may turn out to be a bit more severe than this. Many employers are waiting until after CNY to introduce significant cost reduction measures. Q4 2008 saw the first major knotch down in the main drivers of the domestic economy (real estate and manufacturing). In December and January, companies finalized 2009 budgets in the face of radically declining leading economic indicators. As a result, most companies now widely expect Q1 2009 to be a significant incremental step downward across the board with extended uncertainty for all of 2009 at the very least. In this context and under the new labor laws, in many cases employers will introduce salary freezes and salary reductions rather than staff reductions.

Among the ranks of the Chinese newly middle-class, a certain sense of surreality has prevailed over the past six months. What many term "the American financial crisis" has not had much impact in day-to-day life. This "sentiment" may change very quickly when the reality of a truly global recession begins to hit 200 million middle class consumers in their wallet.

2009 Jan 27 08:44 PM