As China’s Economy Slows, Consumers Pick Up Some of the Slack
Apple, Nike, Starbucks and others gain by tapping country’s growing upper middle class
BEIJING—China’s economic slowdown has pummeled global suppliers of raw materials and industrial equipment, but business has remained surprisingly brisk for companies that cater to the country’s growing upper-middle class.
Indeed, Chinese consumers appear to be weathering the slowdown better than the economy’s traditional growth engines like manufacturing and construction, which are sputtering. At least for now, they have redrawn the line between winners and losers.
Among the winners are sportswear maker Nike Inc., coffee-store chain Starbucks Corp., clothing retailer Hennes & Mauritz AB and gadget giant Apple Inc. Behind their success are people like 24-year-old Jiang Yang, a technology officer at a state-run factory in the northern Chinese city of Shenyang, who recently bought a new rose-gold Apple iPhone. Not only have Mr. Jiang and his affluent young peers been a bright spot in China’s economy, but many economist think they hold the key to its long-term growth.
Mr. Jiang, who insists he had to have the latest iPhone, said his monthly salary ranges from 2,500 yuan to 5,000 yuan, or roughly $395 to $790, depending on his workweek. When coupled with his family’s income, that puts him in the upper-middle class, defined by consulting firm McKinsey & Co. as households with annual income of 106,000 yuan to 229,000 yuan. The firm expects such households to account for 54% of the country’s total household income in 2022, up sharply from 14% in 2012.
Their growing clout is one reason why China remains a big driver of Apple’s profit. “We saw no signs of a slowdown in China,” Apple Chief Executive Tim Cook told The Wall Street Journal last week after the company said its operating income from Greater China, which includes Hong Kong and Taiwan, more than doubled to $23 billion in the fiscal quarter just ended.
Starbucks said it plans to open 900 stories combined in China and the Asia-Pacific region next year. PHOTO: BRENT LEWIN/BLOOMBERG NEWS
It isn’t clear how long that strength might last. China’s upper-middle-class consumers could still get hit if China’s slowdown were to deepen.
On Tuesday, China’s leaders announced plans to further boost consumption over the next five years by speeding financial and social reforms in the country. But while it has risen over the past five years, household consumption still makes up less than 40% of China’s economy, according to official figures. And it remains vulnerable to further declines in exports and manufacturing. Mild inflation data and falling imports also suggest weaker overall domestic demand.
What’s more, economists and businesses say consumer confidence is uneven. Less-developed cities—called tier two, tier three and tier four cities for their population and economic sizes—have been hit harder by the slowdown than wealthier ones, often along the coast.
Still, Apple isn’t the only company reporting gains. “When I read about the difficulties in China, it seems like a parallel universe, because I’m not experiencing that in my business,” said Richard Gelfond, chief executive of the big-screen movie theater company IMAX Corp. IMAX, whose pricier tickets are more of a splurge for Chinese consumers than those for conventional movies, says its 275 screens in China made an average of $300,000 in the third quarter, up from $287,000 a year earlier. It has another 215 screens in the pipeline.
Overall, the country’s movie theaters generated box-office revenue of 33 billion yuan in the first nine months of this year, up 53% from a year earlier, though discounting also played a role.
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“People have lots of savings, lots of liquidity and we expect that a temporary setback in the macroeconomy is not going to affect their consumption pattern in a fundamental way,” saidJoseph Tsai, executive vice chairman of Alibaba Group Holding Ltd., on the Chinese e-commerce giant’s conference call with investors last week, after it reported better-than-expected revenue growth.
A recent McKinsey survey of 1,200 Chinese consumers found that 71% expect wages to increase this year, and 84% expect to spend more. That jibes with official data that show retail sales growth in September accelerated slightly from a year earlier to 10.9%, while the growth rate for industrial production slowed. Retail-sales growth has accelerated modestly in four of the past five months as other economic indicators have weakened.
Not only are young, well-heeled consumers buying iPhones and filling theaters. Chinese air traffic was up 12% from a year earlier in the first nine months of 2015, fueled by strong increases in foreign flights. Consumers between the ages of 21 and 30 accounted for more than 60% of China’s outbound tourists, according to Credit Suisse. Citing AC Nielsen data, Credit Suisse says consumers in that age group will account for 35% of China’s total consumption in 2020, up from 15% last year.
“There is room to be optimistic about consumer growth for the foreseeable future,” said Bruno Lannes, a Shanghai-based partner for consulting firm Bain & Co.
Nike, which has long urged the Chinese to exercise more and buy more athletic gear, said its Greater China sales rose 30% in the fiscal quarter ended Aug. 31, while earnings before interest and taxes jumped 51%. Swedish retailer H&M, which targets China’s upper-middle class, said its China sales grew 11% in the third quarter in local-currency terms.
Even China’s wine market, which was hurt by a government crackdown on corruption that curbed lavish gift giving, is bouncing back. Treasury Wine Estates Ltd., one of the world’s largest wine companies by sales, is expanding online and at retail. “Disposable income isn’t declining,” said Robert Foye, who leads the company’s Asia division.
Not all the news is good. Passenger-car sales have fallen from a year earlier in three of the past four months, and have risen a disappointing 2.8% in the first nine months of the year, hit by China’s stock-market slump and new limits on car buying in several cities.
Nor are all consumer-focused businesses thriving. “It’s about accessible aspiration,” said Tom Doctoroff, Asia Pacific chief executive of advertising agency JWT, pointing to brands like KFC, which entered China in 1987. Once considered cool and modern here, the fried-chicken chain has struggled as companies like Starbucks have followed, with menus featuring pastries and sandwiches. KFC owner Yum Brands Inc., Hershey Co. and General Mills Inc. and other companies that target a broader range of consumers have hit speed bumps.
Yum’s same-store sales in China for the quarter ended Sept. 5 rose just 2% from a year earlier, short of the 9.6% analysts expected. Last month, the company said it would shed its China operations. By contrast, Starbucks last week said it opened 1.5 stores a day in China during the third quarter, and plans to open 900 stores combined in China and the Asia-Pacific region next year.
“We particularly see challenges in two, three-tier cities,” said a General Mill spokeswoman, citing purchasing power declines.
In response, General Mills is emphasizing higher-end items, the spokeswoman said, launching vegetable dumplings that appeal to health-food enthusiasts and earlier this year rolling out its Yoplait yogurt brand, which can sell for twice the price of many other brands in China.
Last week, Hershey blamed China’s slowing economic growth for its woes in the third quarter, when its China sales dropped 14%. The candy maker’s products, which include chocolate Kisses and Reese’s peanut butter cups, are losing out to premium products that Chinese consumers buy as indulgences and gifts, while “Hershey’s is stuck at midlevel mass-market position,” said James Roy, retail analyst at Shanghai-based consulting firm China Market Research. “There are no must-have products,” he said.
A spokesman for Hershey said Chinese consumers are making fewer trips to the grocery store, which has hurt business. Hershey is now expanding its sales online, he said.
