A US$3 KFC combo featuring a chicken sandwich, fries and soda. A US$1.20 beer from a German supermarket. A new chain of grocery stores that stocks only deeply-discounted soon-to-expire foods.

These are some of the deals foreign and domestic brands are rolling out to woo Chinese shoppers trying to stretch every penny as consumer confidence in the world’s second-biggest economy fades. Across Chinese high streets, discounts and special deals are being advertised from clothing to cosmetics, a reflection of an alarming shift in consumption attitudes that has sent retailers scrambling.

Alibaba’s grocery chain Freshippo, a top draw among China’s growing middle and upper classes for its high-end meat, seafood and bakery products, announced in October that it was slashing prices on more than 5,000 items. It is also adding more “food outlets” that sell items closer to their expiration dates to attract price-sensitive customers.

While the German discounter Aldi positioned itself for years as a higher-end chain in China, it switched gears last year, declaring itself a budget community supermarket and unveiling a new slogan: “Good quality and low enough price.”

These cheaper fares are being rolled out by brands and companies that traditionally projected themselves as premium choices for the aspiring Chinese middle class. The pivot to discount offerings marks a sea change in their strategy to drive sales in the new Chinese economic reality and is weighing on their prospects. And those that are not slashing prices, such as Starbucks, are losing ground to cheaper rivals.

“No player is immune” to the headwinds caused by China’s slowing demand growth, which stems from the softening economy, deteriorating unemployment and fragile consumer confidence, wrote JPMorgan Chase & Co analysts including Kevin Yin. The discounts will erode profit margins until the price war – which is currently accelerating – normalises, they wrote in a note on Friday (Jan 5) downgrading Yum to neutral.

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Chinese consumer prices are now falling at the steepest pace in three years, triggering fears that the country will enter a deflationary spiral. While central banks in many parts of the world are focused on taming inflation, the People’s Bank of China has vowed to use monetary policy to push prices higher.

Race to bottom

The higher-end companies that have not yet joined the fray to provide products at the lowest possible prices are suffering the consequences.

Starbucks, which once accounted for more than half of China’s coffee market, lost its crown as the biggest chain last year to local rival Luckin, which sells a cup for as little as 9.9 yuan (S$1.88). The US coffee chain posted US$822 million and US$841 million in China revenue in the past two quarters, while Luckin reported 6.2 billion yuan and 7.2 billion yuan in the comparable periods.

“The low-price strategy was widely used by consumer brands last year as the economy was under pressure and consumer confidence was weak,” said Jason Yu, managing director of Kantar Worldpanel Greater China, an analytics company that is tracking the spending behaviour of 62,000 families across the country. And there’s no end in sight. “The deflation trend will continue in 2024,” he said.

As consumers become more value-conscious, Yum China’s KFC has doubled down on promotions and launched a cheaper Chinese burger in a combo with fries and soft drinks that cost as little as 20.9 yuan. The deals have led Yum China to join a list of retailers – including Apple, Nike, hotpot king Haidilao International Holding and Starbucks – that are seeing sales expectations fall or price targets reduced amid sluggish economic growth and weak consumer sentiment.

“Almost all catering brands have been adding promotions in order to meet consumers’ needs for value-for-money products,” the JPMorgan analysts wrote. “Major risks include how long the price war lasts, how quickly demand picks up, and whether 2024 targets are revised.” BLOOMBERG