China Reopening: The Implications for Global Brands
By Elena Gatti Managing Director of Azoya Europe
China reopening had been one of the main development in the past few months. However brands are seeing mixed result from the China market with some of the brands like Starbucks benefited from increased sales both domestic and offshore, while other brands such as Estee Lauder, Adidas, Pandora reported drop of revenue & customer traffic on Q1 2023. What’s the real truth in China? In this article we try to analyze the topic of China reopening and the opportunities for global brands.
Restrictions no more – but short-term anxiety are impacting consumer confidence
China is reopening after months of strict measures to control the spread of COVID-19. The Chinese Government is lifting restrictions on wearing masks for public transport and shopping malls, which is a positive sign for the country’s recovery. Moreover, the offline foot traffic in China is returning to normal and surpassing expectations, as seen in Q1 2023 Starbucks same-store sales increase for the first time since 2021.[1]
The average forecast for the year-on-year growth rate of total retail sales of consumer goods in April is 21.69%, which is a significant increase compared to the previous month’s announced value of 10.6%. [2]
The Shanghai Consumer Confidence Index for the first quarter of 2023 at the Shanghai University of Finance and Economics was 111.9 points, an increase of 11.2 points compared to the previous quarter, and a 7.5 point increase year-on-year, according to a recent Shanghai Social Survey and Investigation Center report[3].
While in some of the cities showing faster rebound, anxiety about the income outlook remains the main blocker on nationwide Chinese consumer confidence recovery, which impacts average Chinese consumer’s decision to spend more on non-essentials items. Consumers are becoming more selective on the products they buy and present to be more price-sensitive.
Despite the current cautiousness, people are looking for good investment opportunities. In March 2023, new stock trading accounts reached 189 million, according to the Shenzhen Stock Exchange. This indicates that people are optimistic about the country’s economic recovery.
It is essential to note that the downgrade of consumption is likely a short-term impact. As consumer confidence increases, they will return to shopping center and online to shop for premium products. This will provide a boost to the economy and drive growth. Overall, the reopening of China is a positive development, and we can expect to see continued progress as the country recovers from the pandemic.
Chinese lining up to renew passport and visa
The return of Chinese tourists to Europe and North America had created a hype earlier this year, but the actual data showed that major duty-free sales are slowly recovering. However, the Labor Day holiday revealed a strong urge among Chinese citizens to travel and consume domestically. Domestic travel is growing much faster than international travel, and this trend has continued for some time.
Interestingly, TD Wealth recently shared in the media that many Chinese tourists are lining up for visa and passport renewals, which has been confirmed by German consulates and visa centers that are adding more staff to meet the surging demand. This surge in demand for passports and visas indicates that Chinese tourists are eager to resume international travel, despite the weaker domestic consumption recovery. Back in 2019, it was estimated that Chinese tourists spent a total of 5.6 billion EUR in Germany. Once these tourists return to Europe, they will become an important drive for sales of luxury and premium fashion & cosmetics products.
In May 15, China Immigration Inspection Center will further improve the convenience for both Chinese citizens and foreigners passing through the borders. This move will likely facilitate smoother entry and exit processes for travelers and help support the recovery of the outbound travel. Hong Kong and Macau will benefit from the short-term surge of mainland Chinese consumers.
Moreover, according to the Japan visa center, they will soon relax restrictions on Chinese tourists, exempting the taxation report for multi-entry visa applications. It will be only a matter of time before consumers return to GINZA TOKYO, one of the most visited luxury retail outlets in Japan, and this will undoubtedly support the recovery of the retail industry.
Benefited from increased domestic and international travel, industry insiders are expecting Chinese major airliners to return to a profitable position at the end of 2023[4]. Increasing international flights and cargo space could also mean a gradual decrease of airfreight price, as seen with latest Baltic Exchange Airfreight Index (BAI) the rates are returning close to pre-pandemic level.
Luxury retail sales gradually recover
Luxury retail sales are gradually recovering, as indicated by recent reports. LVMH reported strong growth in China during their latest investor call. However, offshore sales are growing faster than domestic sales. LVMH is relocating its management team from Hong Kong to China to focus more on the country’s market growth. LVMH noted that consumer desire for luxury goods as China emerges from its long COVID lockdown has helped drive a 17% increase in sales.
Mytheresa, the German luxury retailer, is also looking to tap into China’s growing luxury market. CEO Michael Kliger stated that the company will begin employing personal shoppers and staging in-person events to carve out a space in the market. He added that their expectation from China in the coming years is double the global growth rate of 20%, as they focus on a very special customer base[5]. Currently MyTheresa is selling to China via own global website and JD.com cross-border flagship store.
On the other hand, there are mixed expectations about Chinese customers’ behavior in the coming months. TODS CFO Emilio Macellari stated that Chinese customers are buying mainly at home, and he does not expect large numbers of Chinese travelers around the world before the end of the summer[6]. TODS sales in China were not very good at the beginning of the year, but they started to improve from the second half of January. However, sales in the Greater China region were up 29% in the first three months, according to Reuters.
Overall, the luxury retail sector is showing signs of recovery in China, but there are still uncertainties surrounding the behavior of Chinese consumers in the near future.
More digital than pre-pandemic
In the ever-changing Chinese market, global brands planning to make a comeback must be prepared to cater to consumers who have undergone significant transformations over the past three years. From a shifting e-commerce landscape to the rise of livestream sales and the emergence of innovative retail technologies, understanding and adapting to these changes are crucial for success.
One notable change is the evolving e-commerce landscape. Chinese consumers are now spending more time on short video platforms, where they discover new brands through engaging video content. Leading the way in this trend is Douyin, the Chinese version of TikTok. Riding the wave of the short video boom, Douyin’s e-commerce arm is rapidly gaining momentum. According to a report by Late Post, Douyin E-commerce is projected to become the fourth-largest e-commerce platform in China, with an estimated Gross Merchandise Value (GMV) surpassing 1.5 trillion RMB in 2022.
Livestream sales have also witnessed a surge in popularity. Fueled by the increasing number of hours consumers spend watching livestreams, Chinese livestream e-commerce generated a staggering 3.5 trillion RMB in GMV in 2022, with an impressive year-on-year growth rate of 48.2%, as reported by Taobao Livestream. The power of livestreaming as a sales channel cannot be ignored, as it provides an interactive and engaging experience for consumers, fostering a sense of urgency and trust.
WeChat Mini-programs have become indispensable for retailers seeking to capture the Chinese market. Luxury brands, in particular, have recognized the importance of launching mini-program shops on WeChat. These mini-programs offer a seamless shopping experience within the WeChat ecosystem, allowing brands to build stronger customer loyalty. To further enhance customer engagement, businesses must consider building private domains and providing personalized shopping assistance, ensuring a tailored and exclusive experience for their customers. It was also speculated that in 2022, total GMV of WeChat Mini-program surpassed 3 trillion GMV RMB, according to analysts.
Looking ahead, the rise of 1-hour real-time e-commerce is poised to revolutionize the retail landscape. Market forecasts predict that by 2030, the 1-hour real-time e-commerce market in China will reach a staggering 11.8 trillion RMB. This exponential growth will be propelled by the increasing adoption of online-to-offline (O2O) platforms (notably Meituan), and the utilization of unmanned delivery drones and automated vehicles. This innovative approach to retail not only offers convenience and efficiency but also opens up new opportunities for global brands to reach Chinese consumers in real-time.
Beware of the expansion of Chinese domestic alternative
The expansion of Chinese domestic alternatives is a trend that global brands should be cautious about. In the beauty sector, traditionally dominated by global giants like P&G, Estee Lauder, and L’Oreal, Chinese brands are increasingly capturing market share in the mass-market segment and gearing up to compete in the premium market. During the absence of global brands in the surge of Douyin & short video hype, several domestic players such as Proya, Winona, and QUADHA have swiftly gained market traction.
Similarly, in the milk powder industry, Chinese domestic brands are reclaiming market share after the milk powder scandal. According to a report by Nielsen, three out of the five most popular baby milk powder brands are now Chinese-made. Leading the charge is FEIHE, the prominent Chinese milk powder manufacturer, which holds a substantial 20% share of the baby formula market[7].
The new generation of Chinese consumers is driven by increasing national pride and confidence. This sentiment has led to a preference for domestic brands who understand better about Chinese culture and are willing to communicate, as seen in the case of Chinese car maker Li Auto replacing BMW in some consumer choices. Chinese brands are also adept at adapting to trends on social media and possess the advantage of being more locally attuned and able to react swiftly. Many digital native Chinese brands are also expanding into offline retail, adopting an omnichannel approach to capture a wider attention.
Is International brands still relevant in the market?
While Chinese domestic brands are gaining momentum, international brands still hold relevance in China. They bring global recognition, reputation, and quality assurance that resonate with the middle-class citizens in China who are more educated, and have a global vision. However, global brands must adapt and find ways to stand out amidst growing competition from domestic alternatives. Understanding the unique preferences of Chinese consumers, leveraging digital platforms effectively, and providing localized experiences are essential to maintaining relevance and capturing market share in this dynamic landscape.
Key takeaways
- China’s reopening and lifting of restrictions indicate a gradual return to normalcy and economic recovery.
- Luxury retail is recovering, with global brands witnessing growth in China. Adaptation to the digital landscape is crucial for success.
- Chinese domestic brands are emerging as strong alternatives in sectors like beauty and milk powder, driven by changing consumer preferences and increasing national pride.
- International brands still hold relevance in China, offering global recognition and quality assurance.
- Brands should stay attuned to consumer preferences, embracing digital transformation, and delivering unique value propositions
[1] https://apnews.com/article/starbucks-earnings-coffee-china-c89909fc03c185d40ded02345154f077
[2] Yi Cai Finance: https://new.qq.com/rain/a/20230510A03KL200
[3] Shanghai Social Survey Investigation Center: https://finance.sina.cn/2023-04-12/detail-imyqcazn3973856.d.html
[4] https://www.yicaiglobal.com/news/20230510-10-chinese-airlines-are-likely-to-return-to-profit-this-year-insiders-say
[5] https://www.pymnts.com/news/retail/2023/mytheresa-hopes-carve-space-china-luxury-market/
[6] https://www.reuters.com/business/retail-consumer/italian-fashion-group-tods-sales-jump-q1-beating-expectations-2023-05-10/
[7] https://www.yicaiglobal.com/news/chinese-brands-reclaim-china-infant-formula-market
