Pin hopes on meaningful consumption and not 'revenge spending' on big-ticket items, as high savings rates in China could represent a hedge against uncertainty vs. pent-up demand.
Much of this year’s growth plan, discussed in this week’s China annual gathering known as the “Two Sessions,” or lianghui, is centered around stimulating consumer spending.
The country’s top lawmakers and political leaders said that it is necessary in 2023 to coordinate efforts and implement policy incentives to “release consumption potential, and continue to restore and expand consumption”, prioritising categories like automobiles, home appliances, home furnishings, and food and groceries.
While setting the tone for consumption to be one of the driving forces of economic growth, the government is paying attention to younger consumers as well as small and medium-sized brands. Domestic demand, composed of consumption and investment, is the main engine of growth. For 2023, China has set an annual GDP growth target of 5% and urges its people to spend more to support the country’s economy (China grew by 3% in 2022, missing last year’s target of 5.5% partly due to stringent Covid-19 controls).
The Two Sessions is also an opportunity for enterprise leaders (both private and state-owned) to present policy recommendations to the country’s top advisory bodies.
During January’s World Economic Forum (WEF) in Davos, China's economic tsar has announced with some fanfare that the country is “open for business” after the three-year zero-covid clampdown. Brands are also wondering: are Chinese consumers also going to be back with a bang?
Andrea Fenn, Group CEO at Adiacent China argued that “revenge shopping might not happen” in a presentation at the American Chamber of Commerce in Shanghai’s Marketing & Media Committee event in February 2023. Here’s why, according to Fenn:
“First, both foot traffic and e-commerce traffic have been decreasing for years now. Chinese people don't seem as interested in branded content and product info as in the past.
Second, Chinese household savings may be high (and started from an already high level), but consumption as a percentage of GDP has been dropping since the 1980s. This means Chinese families are thriftier and more moderate in consumption than in the West.
Third, with the emphasis on the ‘common prosperity’ fiscal intervention, the Chinese government is pushing for income redistribution and moderate consumption. China will not follow the consumeristic paths of Europe or the US”.
How China's housing problems affect consumption
China’s housing market’s difficulties are well documented: a liquidity crisis among developers has meant that they have struggled to finish pre-sold apartments and to raise money to start new ones; buyers have threatened to stop mortgage payments, and some banks are now offering mortgages that stretch across generations.
As a target audience of largely young people – yes, the young consumers that the government wants to pay attention to – are saving up for the purpose of buying homes or renting flats, Yum China’s CEO believes that price points are more crucial than ever in the fast-food sector.
“We certainly see that value for money is becoming a more and more important theme,” said Joey Wat, as reported by the South China Morning Post. “It is ironic that the young people in the first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen have tighter budgets than [their peers in] the lower-tier cities because of housing prices,” the CEO added.
“Our industry is quite a fragmented industry, so this is not an industry that few players can dominate. It is not about what type of food or what brand one serves. Instead, it is about the price point, or consumption per person,” said Wat.
While it’s a far cry from 1987, when KFC first entered China and a meal could cost a third of an average monthly income, the suggestion that housing prices are having an impact on the sale of 30-yuan meals may be replicated across other categories.
Similarly, China’s entry-level luxury consumers are also unlikely to be drawn into a spending spree as the economy begins to pick up after the easing of Covid restrictions, according to a February 2023 report from Bain & Company.
Bain predicts that luxury marketers in China are likely to find themselves targeting a significantly smaller audience than was the case pre-pandemic, with a greater focus on high-net-worth individuals and less on middle-class purchasers who will be more cautious in their spending. In addition, duty-free shopping in Hainan had become important during the Covid containment days. As international travel picks up, luxury brands may need to rethink their global pricing strategies.
In context, luxury spending declined in 2022 – 10% across the sector – but some categories were worse hit than others. Those with strong online penetration were less affected: luxury beauty, for example, has an online penetration of 50% and contracted just 6%.
Consumers’ economic concerns are also inevitably hitting China’s car market, and foreign models face new challenges as buyers increasingly opt for cheaper, domestic brands, especially in the fast-growing electric vehicle sector.
In a weaker economy, buyers are more likely to turn to cheaper mass-market models at the expense of the pricier foreign brands which dominated the market for many years. EVs from BYD, for example, sell for below 200,000 yuan – still less than a Tesla even after the latter’s two price cuts in recent months (which produced angry protests from earlier buyers who felt they’d overpaid).
“About half of the consumers in China believe that they do not have to pay more for a foreign-branded electric car because of their high quality and performance. They are rooting for emerging Chinese start-ups that produce smart EVs,” Guan Mingyu, partner at McKinsey told the SCMP.
For foreign brands selling in China, while we cannot blindly believe that revenge consumption will necessarily materialize, there is still valuable guidance from Adiacent’s Fenn. “Income redistribution means a larger middle class. Around 50 million people will join China's middle class in the next 3 years and will want to achieve a better lifestyle through moderate yet meaningful consumption,” he said.
What makes meaningful consumption better than impulsive shopping?
“Chinese want now a welcoming home (benefitting furniture, appliances, fragrances), a healthy life (benefitting health supplements, outdoor activities) and strong relationships (benefitting infant products, pet products) with growing opportunities for brands in these categories,” Fenn pointed out.