The Strategist

Chinese consumers are refusing American brands

01/25/2019 - 11:54

China with its billions in population has been attracting the largest American brands for more than a decade. The double-digit growth rates of the Chinese economy are a thing of the past, but the 400 million middle class created during the boom years still drinks expensive coffee, watches American films and uses smartphones. However, now they are becoming more stingy, and these changes in the mood are also felt overseas.

Public Domain Pictures
Public Domain Pictures
Starbucks, Apple, Walt Disney and other American companies attacked the Eastern country with Chai Frappuccinos, gold and pink iPhones and Hollywood blockbusters, in which they shot Chinese actors and inserted shots of Chinese cities. When Apple Inc. lowered the profit forecast on the Chinese market due to weaker demand for the first time in almost two decades, Americans began panicking. American businessmen were frightened that the trade war declared by Beijing by Donald Trump would do what Chairman Xi’s anti-corruption campaign, air pollution, rising cost of living in China and slow wage growth couldn’t do — shake the high spirit of Chinese consumers.

“The good times are over,” Michael Every, head of the Asian financial markets at Rabobank, told Bloomberg. “Economic growth will slow down. But if this does not happen, the growth of nationalism will force the Chinese to change their attitude towards American goods.”

The growth rate of the Chinese economy slows down, and investment in the real estate market, traditional growth drivers in the PRC, decline. Consumer spending comes to the spotlight. Beijing supports rebalancing of the economy and approves growth of wages, despite the fact that it reduces competitiveness of Chinese goods abroad.

Consumer attitudes began to change last year after a sharp rise in real estate prices in Beijing, Shanghai and other megacities struck a strong blow to the wallets and savings of young and energetic Chinese, the main buyers of Western goods. The first serious signal, indicating that Chinese consumers are beginning to change their habits, appeared in November 2018, when Alibaba Group Holding Ltd., the operator of the Tmall platform, through which many US companies sell their goods, reduced the annual profit forecast by as much as 6 %

Chinese consumers have given Estée Lauder Cos., which sells perfumes and other cosmetics on Tmall, as well as in stores in about 120 cities in the country, a 61% increase in the fiscal year ending last summer. A year ago, such a strong dependence on China was considered useful, but now the situation has changed.

In this fiscal year, Estée Lauder is still counting on double-digit growth in sales in China, mainly due to the new Darphin and Jo Malone London brands that can be bought at Tmall.

"We are committed to China and Chinese consumers in the long term," the company said in a statement, "and we believe that our growth is quite steady, because it is based on fundamental characteristics."

Weaker demand for perfumes and skin care products, of course, is not the most alarming indicator of changes in the mood of Chinese consumers. Car sales in China fell in 2018 by 4.1%. This is the first decline in 28 years. According to the China Automobile Manufacturers Association, last year, 23.7 million cars were sold to the PRC. In this case, it was the American automakers that suffered the most. For example, sales of the Chinese branch of General Motors Co. last year fell to 3.6 million cars. This is 10% less than in 2017.

Most economists believe that the main reason for the decline in car sales in China was the trade war between the United States and China, negotiations on the termination of which are difficult.

The Walt Disney Co. film studio, which is currently filming a remake of the cartoon "Mulan," which is set in China, is also under pressure as a result of a decline in demand.

“We see a slight decline in consumer confidence in China,” explains executive director Robert Iger, “but it has a negative effect on business.”

Starbucks Corp. is worried about its one of the most important markets, and set a goal to increase the number of its cafes in the PRC from almost 3,600 to 6,000 over four years. The company’s statement says that revenue growth in China for the year was only 1 %, which, of course, worries the company's management.

The list of companies which managers are concerned about the performance of Chinese branches can be listed for a long time. Hyatt Hotels Corp., for example, has been aggressively expanding in China in recent years, but in the third quarter of 2018 recorded revenue growth in Asia and the Pacific.