- Retail sales in China have remained generally lackluster since the onset of the COVID-19 pandemic in early 2020.
- “I hope we will see a gradual improvement over the next year,” said Daniel Zipser, head of consumer and retail at McKinsey in Asia. “But there are no signs that it should be a strong V-shaped recovery.”
- Zipser said there is a clear shift in China for consumers to spend on services rather than goods.
Consumers eat shabu shabu at a restaurant in Lianyungang City, east China’s Jiangsu Province, on November 26, 2023.
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BEIJING — Chinese consumers won’t be spending big anytime soon, which means companies need to be more strategic to tap into a still-huge market, according to McKinsey.
“I hope we will see a gradual improvement over the next year,” said Daniel Zipser, head of consumer and retail at McKinsey in Asia.
But there are no signs that it should be a strong V-shaped recovery, said Zipser, who is also a senior partner at McKinsey and author of a new report titled “It’s not going to be a strong V-shaped recovery.”China’s consumption: the beginning of a new era“.
Retail sales in China have remained generally weak since the emergence of the Covid-19 pandemic in early 2020. Although Covid controls ended at the end of last year, a decline in global demand for Chinese goods and a decline in the real estate market have affected the country’s overall economy.
Looking ahead, growth is expected to slow. The government is addressing long-standing issues in the real estate sector, while tensions have escalated with major trading partners such as the United States.
The overall economic recovery and real estate market recovery were not what people had hoped for.
Daniel Zipser
Senior partner, McKinsey
All of this has kept Chinese consumer sentiment at the same level as it was about 12 months ago, when the country was still living under Covid restrictions, Zipser noted in a phone interview on Thursday.
“The overall economic recovery and real estate market recovery has not been what people had hoped for,” he said. “People are aware of the geopolitical tensions and are fully aware… of the decline in exports,” he added.
“They don’t have the confidence yet that this will be different [in] 2024, 2025.”
Despite the general gloom, there is a difference in how Chinese consumer companies are affected.
McKinsey analysis Among the 80 publicly listed consumer companies that generate most of their revenue from mainland China, I found wide variation — many saw double-digit growth while others saw double-digit declines.
“I think in the old days, you could invest in whatever you wanted[ed]“Everything will grow, and most companies were doing well,” Zipser said. “Those days are over.”
He added that today’s market has become more competitive, pointing out that the product is more important and “the consumer is more sophisticated.”
These tastes have changed rapidly with the country’s economic boom in recent decades, creating a lucrative market for American companies like Apple and Starbucks.
Between 2012 and 2022, China’s per capita GDP will double to $12,720, according to the World Bank. The data showed that US per capita GDP rose by about 47% during those ten years to $76,398 in 2022.
China’s sheer size means that even if the economy slows from a high pace of growth to about 4% or 5% per year, the additional increase in retail sales in the country would be comparable to the combined total retail sales of South Korea, India and Indonesia. Zisser said.
Slow growth is still growth. Retail sales in China rose 7.6% in October from a year ago, beating analysts’ expectations.
Major e-commerce companies reported third-quarter revenue growth. While growth for most companies was modest, deal-focused Pinduoduo saw revenue nearly double from a lower base.
Zipser said consumers in China spend more on services, rather than goods.
“We see in particular that restaurant businesses are doing well,” he said, noting that related categories such as alcohol are also getting a boost.
He said he expects people in China to travel more internationally as it becomes easier to apply for visas and the cost of flights falls.
The McKinsey report found that international travel is only half what it was before the pandemic.
Zipser added that in contrast to the rise of value brands in more mature markets, premium brands generally perform well in China.
This is because when consumers in China “discount”, instead of buying a cheaper brand, they are actually finding discounted ways to buy the same product, spending less overall or buying a smaller package size, he said.
Companies that adapt to new consumer trends also perform well.
During the recent Singles’ Day shopping fest that ended Nov. 11, traditional e-commerce channels saw gross merchandise volume — an industry measure of sales over time — decline 1% from a year ago, McKinsey found.
In contrast, live streaming saw its GMV rise by 19% during that period, the report said.