Chinese consumers help growingly to support the domestic economy

Chinese consumers help growingly to support the domestic economy

Income is climbing for large segments of the Chinese population reports WSJ, the Wall Street Journal. Between 2005 and 2012, roughly 50 million urban households graduated into the middle class, which now numbers around 147 million households, roughly 49% of China’s urban population, according to the Boston Consulting Group. Those consumers started buying products like Dove shampoo from Unilever PLC and Crest toothpaste from Procter & Gamble Co. rather than local goods

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Major luxury and retail brands as well as car makers piled in, becoming as prevalent on the streets of Shanghai as they are in New York or London. China became the world’s largest car market—a critical venue for companies like General Motors Co. and Volkswagen AG. Sales of luxury goods in China jumped 30% to 266 billion yuan ($41.4 billion) in 2011, and by 2012, Chinese shoppers made a quarter of all global luxury purchases. Giorgio Armani SpA had around 300 stores in China then, just shy of Wal-Mart Stores Inc.’s 380.

Now, the fastest shift is in households moving to the equivalent of upper-middle class, with monthly incomes between 12000 yuan and 20000 yuan (USD 1,868 to USD 3,114) and a taste for spas, organic food and vacations in Tokyo and Bangkok. BCG estimates there are more than 25 million of such households now, and the number will more than triple by 2020.

To be sure, plenty of consumer-facing firms are also struggling. Purveyors of luxury goods like Prada SpA have seen sales in China pummelled by a government crackdown on corruption and extravagance. Companies like Unilever and P&G that peddle basic consumer goods have seen sales eroded by a host of savvy local rivals with soap and shampoo brands that now rival theirs in popularity. Global car makers have cut back production as sales fall, amid Chinese government complaints that the companies were overcharging consumers.

Consumer spending isn’t enough to replace the industrial investment that powered China’s economic boom, and if economic fallout continues, many consumers may lose the jobs that are fuelling their spending. Already Chinese wage growth has slowed in the past year. Smaller cities, which have been targets for corporate expansion, may no longer be bright spots for growth.

Adidas China head Colin Currie said executives plan to keep a close eye on business, tracking real-time sales data to see if there is any fallout in China’s smallest cities, where the brand has rapidly expanded in the past five years. The company clusters its store data by regions and store formats, enabling executives to compare what strategies are working and to switch everything from design to distribution for those that aren’t.

“We know that the Chinese consumer changes very quickly,” said Currie. “As a brand and a business, we have to watch these changes. It’s one of our strengths.”

Multinationals have seen promise—and sometimes disappointment—in China’s vast consumer market for more than a century, embodied by an oft-repeated 19th-century saying that if every man in China added an inch to his shirttail, then the mills of Lancashire, England, would run for a generation.

Consumer companies were among the first to invest when China began opening its economy to outsiders in the late 1970s. Coca-Cola Co., which entered the market in 1978, said in 1980 it would build its first bottling plant in Beijing. Kentucky Fried Chicken—now KFC—opened its first outlet in the 1980s and quickly became the most popular foreign food chain in China.

Heavy industry investment jumped after China joined the World Trade Organization in 2001. By 2002, foreign direct investment had jumped to USD 52.74 billion from USD 40.4 billion in 1999. By 2011 it had more than doubled to USD 124 billion before easing, and last year totalled USD 119.57 billion.

www.wsj.com


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