Where are Chinese consumers willing to spend?
CHINESE consumers are resuming spending on travel and dining out, but are not buying necessities and other consumer goods as much as before the pandemic.
“Consumers are still cautious about how they want to spend,” said Bruno Lannes, a senior partner at management consultant Bain & Co. “When they dedicate some of their income to experience spending, like restaurants, hotels or travel, then they have less discretionary spending available for other things and, in particular, buying products.”
Spending on services was the main driving force for the first-quarter rebound in consumption. Retail sales of consumer goods in Q1 rose 5.8 per cent year on year, significantly rebounding from a decline of 2.7 per cent in the fourth quarter of 2022, data from the National Bureau of Statistics (NBS) showed.
Per capita spending on services grew 6.2 per cent year on year in the period, faster than overall consumption growth, indicated a report by KPMG.
In the first four months, restaurant sales jumped 19.8 per cent year on year, significantly above the pre-Covid growth of 0.3 per cent in the same period of 2019. Meanwhile, retail sales of goods gained only 7.3 per cent on a low 2022 comparison base and fell short of the 2019 period’s 7.9 per cent.
The retail industry’s revenue was 283.3 billion yuan (S$53.5 billion) in Q1, an increase of 4.8 per cent year on year but still below the pre-epidemic level.
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At an Apr 28 meeting of the Political Bureau of the Central Committee, the Communist Party’s top decision-making body, policymakers said that China’s post-pandemic recovery remain challenged by weak internal dynamics and insufficient demand, while economic transition and upgrading faced new headwinds.
A recovery of consumption ultimately depends on the repair of income and employment expectations, several people told Caixin.
In April, China’s surveyed urban unemployment rate fell 0.1 of a percentage point month on month to 5.2 per cent. However, the surveyed urban jobless rate among those ages 16 to 24 increased 0.8 of a percentage point from March to 20.4 per cent, the highest on record going back to 2018.
The consumer confidence index reported by the NBS fell to a record low of 86.7 in April last year, and started to recover only in January. The index climbed to 94.90 in March but was still well below the 124.10 recorded in March 2019.
Meanwhile, Chinese people have continued to save at a high rate, indicating that they remain reluctant to spend and tend to favour precautionary savings. Household deposits reached a staggering 130.2 trillion yuan as at the end of March. Fixed-term deposits, also known as CDs, accounted for as much as 71.2 per cent of households’ total – the highest level in data going back to 2007.
Cheap shopping wins
Consumers’ reluctance to shop has prompted even more aggressive competition among retailers, especially online platforms. The surge in promotions benefits discount platforms.
A report in April by Goldman Sachs indicated that discount online retailer PDD Holdings’ market share increased from 10 per cent in 2019 to 18 per cent in 2022, while JD.com’s remained stable at 20 per cent and the combined share of Alibaba’s Taobao and Tmall fell from 66 per cent to 44 per cent.
In Q1, Pinduoduo’s revenue surged 58 per cent, eclipsing Alibaba’s 2 per cent gain and JD.com’s 1.4 per cent. Bloomberg analysts projected that JD.com’s revenue growth would slow to 5.8 per cent in 2023 from 10 per cent in 2022, well below a projected gain of 28 per cent for Pinduoduo.
JD.com and Alibaba’s struggles are emblematic of the challenges faced by China’s online retailers.
Amid economic instability, the recovery of durable and big-ticket items – such as electronics and home appliances – which account for half of JD.com’s sales, has been relatively slow. It may take some time for consumer demand to rebound, said former JD.com chief executive Xu Lei, who stepped down this month.
Alibaba CEO Daniel Zhang described a similarly pessimistic outlook on the Q1 earnings conference call.
All online retailers now have to adjust their strategies in response to consumers’ reduced spending. JD.com in March launched a “10 billion yuan subsidies” scheme, offering subsidies to suppliers and vendors on the platform so that they could sell goods at more competitive prices.
In April, Taobao added a channel for low-price products on its app’s home page and announced that this year’s Jun 18 shopping extravaganza, known as “618”, will be the biggest yet.
E-commerce analyst Li Chengdong is not optimistic about JD.com’s low-price strategy. The e-retailer is known for its value-added services such as delivery and after-sales support. The pursuit of low prices may affect its core user base, Li said.
Physical stores under pressure
The increasing penetration of online retail has added to pressure on physical stores. Since the pandemic, traffic in shopping malls and supermarkets has recovered, but actual sales were still far lower than expected.
Among the 14 publicly traded supermarket operators, nine reported net losses last year and four continued to post red ink in Q1. More than half of them reported revenue declines.
Weak performance at physical retailers has led to store closures and rising vacancy rates at commercial properties. The average vacancy rate of prime retail commercial real estate projects in China peaked at 11.1 per cent last year, the highest level in nearly 13 years. Data from leading commercial real estate operators showed that the trend continued in Q1.
Commercial property landlords have lowered rents to lure tenants. Of more than 1,600 retail commercial real estate projects monitored by property consultancy JLL, nearly 80 per cent reported that average first-floor rents fell by the end of 2022, the highest rate in nearly nine years. Rents did not rebound in Q1.
The property consultancy expects retail property rents in Beijing to return to the pre-Covid level of 2 per cent annual growth in three to four years, and it will take at least five years for prices to return to pre-pandemic levels, Ji Ming, director of JLL China’s research team in Beijing, told Caixin.
People are reducing spending not only on discretionary goods such as clothing, jewellery and beauty products but also on necessities. Retail sales of grain, oil and food rose just 1 per cent in April from a year earlier, when people stockpiled necessities over worries of lockdowns. Sales of beverages declined 5.1 per cent in March and 3.4 per cent in April.
Bain’s Lannes attributed the decline in food and beverage sales to destocking and more dining out as people “didn’t have to buy too much food in April because they had enough food at home”.
Sales of home appliances and home renovation materials were particularly weak amid a slow housing market. Home appliance sales declined 0.3 per cent year on year in the first four months, and those of home renovation materials dropped 4.5 per cent.
A series of supportive measures to shore up the property industry are expected to help a turnaround in the market in the second half, which will in turn drive up demand for home appliances and furniture, said Gao Jingdong, an analyst at Shanxi Securities International.
Lannes said that he is also optimistic about the positive effect on consumption in general of an improving situation in the property industry. “It’s going to be a slower recovery than people expected”, but each quarter in 2023 will “progressively show improvement versus the previous quarter”, he added.
The economic cycle determines that it is difficult to maintain high growth rates of 6 per cent to 8 per cent forever, said Ang Yiwen, managing director of Brookfield Asset Management’s real estate group. The market and consumers need to adjust their expectations to normal, stable growth, Ang noted. CAIXIN GLOBAL
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