Despite the sharp drops in consumer spending following the 2020 Coronavirus outbreak in China, consumer sentiment has remained relatively strong. Overall, consumer confidence remains above 115, well above the contraction point of 100 and the all-time low of around 97 in 2016. According to surveys conducted by McKinsey, over 50% of Chinese consumers remain confident that the Chinese economy will rebound within 2 to 3 months of June 2020, as strong as or even stronger than before. In addition, despite significant trade frictions between the United States and China, foreign investors remain heavily invested in the Chinese market, with the number of foreign mergers and acquisitions over the past 18 months outpacing any other period in the past decade.
However, the current pandemic has both accelerated long lasting consumer trends and created artificial consumer trends that may only last if the regulations and general uncertainty around the Coronavirus situation continues to affect people’s lives. This situation may be contributing to uncertainty for foreign investors who wish to capitalize on these trends, but do not wish to be caught out in the event of unexpected shifts in the market. This article will highlight what industries represent significant growth opportunities for investors, and what industries investors should be cautious of, especially as China continues to open more sectors of its economy to foreign investment.
The most critical development in China’s massive economy largely mirrors that of the United States during the same period, an accelerated shift of retail sales to online platforms. Although retail sales decreased overall during the first third of 2020, online retail sales increased 8.6% to RMB 10.68 trillion ($1.5 trillion). Online retailer JD.com saw a 74% year-on-year increase in retail sales during its annual 618 Grand Promotion on June 1st, with supermarket sales notably increasing 100% during the sales event. This resilience, and even growth, in the face of precipitous drops in overall consumer spending, make clear that the global phenomenon of online retail will only accelerate its presence in a population less willing or able to shop in traditional brick and mortar retailers. Investors should be increasingly looking to online retail to generate the majority of the sales volume.
Young consumers continue to play an increasingly critical role in driving consumer trends in the Chinese economy. Several reports have made clear that much of this shift to online retail has been driven by young Chinese consumers going home to provincial cities and helping older family members make their first purchases online. This trend should also lead to a greater penetration of foreign, high-quality products in China’s less developed cities. Foreign investors should be prepared to cater to the taste of these young consumers, who will play an increasingly important role in their household’s overall purchasing decisions.
The specifics of JD.com’s June 1st 618 Grand Promotion provide other insights into what products Chinese consumers are considering more important post-lockdown. Sales of Apple products tripled, and foreign brands L’Oreal, Lancome, and SK-II were the most popular in terms of transaction volume during the promotion. Demand for foreign products clearly remains high in China despite the emergence of domestic competitors.
One thing that the 618 Grand Promotion made clear is that, for many Chinese consumers, 5G has already arrived; JD.com reported transaction volumes of 5G capable mobile phones increased by 1400%. Sales of 5G sim cards and insurance packages are increasing nationwide in China, and the country is expected to have over half the world’s 5G connections by 2025. It is clear that for foreign investors and retailers to have a significant share of this critical market in China, the time to get serious about designing and producing 5G capable products is now.
The following other industries have seen increased acceptance and even enthusiasm from Chinese consumers during this period:
- Video streaming
- Contactless pickup
- Wellness Applications
- Online fitness
- Contactless payments
Foreign businesses and investors who actively work in these industries should consider scaling up or even pursuing new greenfield investments in China over the coming years.
Shrinkage and Caution:
Overall, several industries have been negatively affected by the general severity of the coronavirus lockdown and the resulting contraction in consumer spending. Discretionary spending has been hit particularly hard: spending on clothing, jewelry, and household furniture has all decreased notably over the first four months of 2020. Moreover, Chinese consumers report that they are less likely to do certain activities outside the home like going to movie theatres, bars, and restaurants, with a majority reporting they are staying at home more in general, even with restrictions lifting nationwide.
Foreign investors should prepare for a Chinese consumer who, despite having more disposable income, does not spend it in industries traditionally considered lucrative for foreign investors, especially the leisure and entertainment industries. This has dire implications for foreign movie studios, restaurant chains, and tourism companies that increasingly rely on Chinese consumers going out and spending more in order to drive global growth.
Foreign investors should also take care not to get swept up in short term market distortions born out of government restrictions and necessity. Although some specific industries, like online education for children, cosmetics, and video conferencing services, have boomed due to the lockdowns, consumers generally regard these products and services as stopgap measures. Even if these industries good fortunes last for months, or as much as a year or two due to domestic and global complications of coronavirus, they will eventually decrease in popularity as people return to a certain level of familiar normality and efficiency in their daily lives.
As foreign investors have experienced time and time again, being caught in this kind of situations can be highly unforgiving in the Chinese marketplace. Therefore, they should take the time to conduct the due diligence and market research needed to make sure industry growth caused by the Coronavirus represent longer-term trends in consumer behavior that began before the lockdown measures further increased their adoption.
Post-coronavirus the global economy is entering a difficult period that could have long-term implications for the future of consumption worldwide. Despite this, China remains a driver of global economic growth, and the Chines consumer continues to be of enormous importance int the this altered global economy. The coronavirus accelerated many long-standing developments that already promised to change the overall landscape for foreign investors in China. This will hurt some industries, while also creating whole new industries and new opportunities for investors to take advantage of. Software developers and companies that produce products like 5G connected technology and streaming services will find it increasingly easy to succeed in the Chinese market, while foreign airliners, restaurants, and movie studios will likely find market conditions difficult in a way they have not seen before.