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China's Consumers Are Still Spending

|Includes:The Walt Disney Company (DIS), FXI, NCTY, NTES, SBUX, SNDA

This commentary originally appeared in


Despite the slowdown in China's economy, consumers plan to open their wallets more in 2009, especially for entertainment and education.

The economic news coming out of China sounds dismal. Twenty million job losses. Ten thousand factory closings. Sputtering exports. Foreign direct investment receding fast. Even normally tight-lipped government officials have warned about social unrest. There are some reasons for optimism: Chinese banks opened their spigots and increased lending to an astounding $237 billion in January and another $157 billion in February. The stock market has rebounded 35% since the beginning of the year, and February sales grew 25% after the government announced tax breaks for cars with small engines. But the weak export sector continues to hurt the economy.

As China struggles with the global recession, one key issue for multinationals is whether Chinese consumers can make up for the shortfalls from declining exports. In the U.S., before the crisis crimped consumer spending, consumers accounted for 71% of consumption; in China consumers make up only 33%.

That Chinese number is likely to grow, despite the slowdown in China's economy. In interviews my firm, China Market Research Group (CMR) conducted with several hundred consumers in 10 cities in January and February, 60% said they expected to spend more in 2009 than in 2008, except for the real estate and auto sectors, with the highest spending increases coming in entertainment and education. Nearly 80% of respondents had full confidence the government would implement policies needed to right the economy within the next three years.

Opportunities Remain

This optimism fueled 15% growth in retail sales in January and February. China's 250 million-strong middle class is still consuming, and opportunities remain in China for multinationals to take advantage of weakened competitors and move to the front of the pack by focusing on the right consumer targets and the best marketing communication strategies.

Our research shows that the Chinese population between the ages of 22 and 28, and women under the age of 35, remain the most optimistic consumer segments. Unlike in the U.S., where consumers have lost confidence and seen sharp decreases in their net worth, younger Chinese have little if any money invested in stocks and real estate. Even older consumers remain confident. Despite recent declines in real estate prices, their homes remain above water since they put 30% to 50% down on their mortgages in the first place. In addition, the stock market is still higher than it was a couple of years ago, and the government has announced it will help reform the health-care system.

While consumers are cautiously optimistic about the strength of China's economy and are continuing to spend, they are also making value more of a priority and cutting back on some entertainment expenses. Pricey restaurants, hair salons, and spas have suffered the most as consumers forgo a massage or a latte at Starbucks (SBUX) in favor of cheaper forms of entertainment, or expensive entertainment of higher value.

E-commerce and online gaming will be important for China's economy during the global slowdown. These sectors are to younger Chinese consumers what nickel theaters were to scores of Americans who went looking for cheap forms of entertainment during the Great Depression. E-commerce is booming for the reasons I predicted in BusinessWeek a few years ago.

We have found that the slowdown will actually trigger more online sales as consumers go to the Web to hunt for deals. We expect business-to-consumer e-commerce to grow by 20% in 2009, driven by younger consumers looking for better prices on computers, cosmetics, and apparel, and to buy items not readily available due to a lack of foreign retailer penetration in second- and third-tier cities. As one consumer in Shanghai told us: "Why buy a ThinkPad computer in a store when I can find more variety and better prices online?"

Online Consumer Activism

In China, e-commerce has evolved into a form of entertainment as buyers talk on blogs and company sites about their likes and dislikes of different products, brands, and marketing campaigns. It has become commonplace for consumers to scour the Internet for information before making any kind of significant purchase, and online consumer activism has taken off as message boards and chat rooms have grown in popularity. Look for Alibaba's C2C auction site Taobao to boom as consumers start buying second- and third-hand mobile phones and other electronics items.

Online games from companies such as Netease (NTES), Shanda (SNDA), and The9 (NCTY) will also see growth as consumers switch away from eating out in expensive restaurants and drinking in nightclubs and instead turn to the Internet to entertain themselves. The sector boomed 76.6% in 2008 and a comparable increase is possible this year as consumers scale back on more expensive forms of entertainment. Consumers say they like online gaming because of the social element and because of the escape it offers from the mundane.

In addition to the relatively inexpensive entertainment available online, consumers are still spending on pricey forms of entertainment that they value. Even as some cut back on trips to spas, our research indicates they still plan to spend a lot on travel in 2009. The majority of women under the age of 35 told us they will spend more on travel this year than in 2008 and are expecting to take one trip domestically in the next year, with 30% planning to travel abroad to places such as Hong Kong and Italy for shopping trips.

One 26-year-old woman from Shanghai told us she had just returned from a vacation with her mother to Malaysia, where she spent more than two weeks' salary for one night in a hotel room to "treat her mother." In other interviews with women from Anhui earning less than $300 a month, we were told they would definitely make the trip to Shanghai with their children if Walt Disney (DIS) opened a theme park there. (Disney has been in negotiations with the government to launch a Shanghai version of Disneyland.) Consumers will still spend on entertainment such as expensive trips and theme park visits to make their families happy.

China is not immune to the financial crisis, of course. Real estate has been hit especially hard, and it will be some time before the sector recovers. But all is not lost, and the Chinese consumer is still spending on leisure and entertainment while looking for better value. The name of the game will be cautious spending in 2009. If Disney does close its Shanghai deal, the company will certainly benefit in the long term.