After the success in China of KFC and McDonald’s, US burger chain Shake Shack is hoping to emulate them by opening its first outlet in Shanghai in early 2019. The debut outlet in Xintiandi, where Pizza Marzano (the name used in China by Pizza Express – a chain acquired in 2014 by private equity firm Hony Capital) used to be located, is banking on consumers finding its affordable fare more attractive than the premium pizza restaurant.
After years of “consumption upgrades” in which the Chinese traded up from local sportswear brands to Nike, or from local tea to Starbucks latte, there is now more chatter online that the nation’s consumers are looking to curb their spending. With the country’s economy slowing and the stock market in a slump – not to mention the ongoing trade war with the US – many Chinese are not feeling so bullish about the future.
In early September, a blog post headlined, “This Generation of Young Chinese, Brace for the Bitter Days Ahead,” went viral. In the post, the female blogger advised young people to stop going to shopping malls and nightclubs because “the age of the consumption downgrade has arrived with a big crashing sound”.
What exactly is “consumption downgrade”?
“A bite of pickled vegetable and a sip of erguotou [a cheap hard liquor],” one popular meme explains. “Ride Mobike and shop for products that cost Rmb9.9 ($1.6).”
There are signs that consumers are indeed curbing their spending. Back in May total retail sales went up only 8.5% compared to a year ago, which was the slowest increase since 2003, and since then news of thriftier shoppers has increased. For instance, much has been written about Pinduoduo, an e-commerce platform that mainly targets bargain-hunters has risen in popularity (see WiC404).
Foodmaker Master Kang reported an 8.5% increase in revenue in the first half of this year to Rmb30.9 billion ($4.51 billion). ‘Cheap’ instant noodles were the biggest driver for the growth, accounting for Rmb6.3 billion in revenue and an increase of 8.4% from last year. Similarly, pickled vegetable maker Fuling Mustard (see WiC408) also saw net profit reach Rmb300 million, an increase of 77% from a year ago.
Analysts reckon the Chinese are spending less simply because more of their disposable incomes are being eaten up by soaring home prices as well as higher rental costs.
In 2005, housing accounted for only 10% of Chinese consumer spending. By 2015, that figure went up to 22%. Rents have been soaring over the past 12 months (see our Talking Point in WiC422) – according to a recent survey Beijing was the least affordable city to rent in globally (based on disposable income), while even in second-tier city Chengdu rents rose 30.9% over the past year.
One white-collar worker at telecoms equipment giant Huawei says that after paying his mortgage on a house in Shenzhen, he never has more than Rmb500 in his WeChat wallet account. His wife, too, hasn’t bought a luxury handbag for years, he wrote on a blog.
“When home prices far exceed income levels – the house price-to-income ratio in first- and second-tier cities is higher than 20 [for comparison, Hong Kong is 18.1] – people will have to cut consumption because of the pressure of downpayments and mortgages. So it’s no wonder that most middle to low-income families can no longer afford to shop,” reckons Real Estate Intelligence, a portal.
Still, the macro data does not paint so pessimistic a picture. When it comes to per capita disposable income for urban residents – which includes tax payments – the growth rate was 7.9% in the first half of this year. That’s only slightly lower than the 2017 rate of 8.3%.
Analysts question whether the current worries about consumption downgrades instead reflect a shift in tastes. For instance, in the past, Louis Vuitton was the most desired brand in China, but today some consumers associate it and other luxury brands with the nouveau riche. Instead, some have started shopping at Uniqlo, which sells practical fashion at low prices. The same middle class types are now shunning sharks fin and abalone, opting for healthy and organic meals. They spend more of their money on experiences, such as foreign travel. So are they spending less or do they just have different priorities?
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