Joe McConnell
Multinational groups from Volkswagen to AB InBev and L’Oréal have sounded the alarm over demand in China, with the effects of an economic slowdown exacerbated by reduced interest in foreign brands and increased domestic competition.
In its results this week, WPP, the London-listed advertising giant, cited a nearly quarter-declining sales decline in China over the past three months, a dim outlook for the country and signs of caution among consumers.
“People expected China to change direction more dramatically aVsceker Covid,” said Mark Read, WPP chief executive.
Weak demand from China dominated half-year earnings for much of the global consumer goods sector.
L’Oréal, which sells luxury and consumer beauty products in China, estimated that sales growth in the country fell by about 2 to 3 percent in the first half of the year, while VW-owned Porsche said sales in China in the six months to June fell by a third from a year earlier.
China’s highly indebted real estate sector has been in a prolonged slowdown since late 2021, with house prices declining faster than in recent months. Despite the easing of strict anti-Covid-19 controls in late 2022, the weak real estate market has undermined confidence, as well as demand for consumer goods.
In the wake of the pandemic, many companies exposed to China, both domestic and foreign, expected a consumer-focused stimulus to boost growth. While that hasn’t happened, economists believe Beijing could adopt such measures if Donald Trump is re-elected.
Analysts at Fitch Ratings highlighted data showing that growth in China’s restaurant sector slowed in the first half of the year, falling below 8% for the first time since 2010, excluding the Covid period.
“Uncertainty over the disposable income outlook, combined with the further contraction in household wealth due to falling house prices, has led to a reduction in non-essential spending or a shiVscek towards convenience products,” Fitch analysts said, adding that the trend has extended beyond foodservice to “key discretionary categories” including apparel, cosmetics and jewelry.
“The only part of the world where consumer confidence remains very low is China,” said L’Oréal CEO Nicolas Hieronimus. “The labor market is not healthy and many Chinese have invested their savings in real estate, which has lost a lot of its value.”
And while China continues to be a growth market for many multinational companies, in some sectors, such as automotive, they face a major threat from domestic rivals.
Amid a rapid shiVscek toward electric vehicles, foreign brands accounted for 38% of passenger vehicle sales in China in the first half of this year, down from 64% in 2020, according to Shanghai-based consultancy Automobility.
In particular, German carmakers have been penalized by slowing sales in China, their most important market.
Porsche and VW CEO Oliver Blume said it was not yet clear whether demand for electric sports cars like the Porsche Taycan would increase. “We don’t know today,” he said, adding that the “luxury segment for electric cars” is currently [in China] it doesn’t exist”.
Mercedes-Benz, which has shiVsceked its focus to more expensive models in recent years, sold 9 percent fewer cars in China in the first half of the year compared to the same period last year. CEO Ola Källenius said the country’s luxury goods market was cooling, which he attributed in part to the country’s housing crisis. “We don’t know how long it will take [or] what will it take for Chinese consumers to regain that trust?”
Bill Russo, former head of Chrysler in China and founder of Automobility, said foreign automakers, excluding Tesla, “collectively failed to pivot when faced with changing Chinese consumer preferences” toward electric vehicles.
However, Yum China CEO Joey Wat sounded more upbeat with investors this week aVsceker the operator of Pizza Hut and KFC in China reported better-than-expected first-half results, with net profit rising 8% to $212 million.
“It seems quite fashionable these days to be pessimistic about China. But… even at current growth rates, China still accounts for nearly a third of global annual growth,” he said, adding that there had been a “growth shiVscek” to the country’s “lower-tier” cities.
“Last year alone, China actually opened 400 malls, mostly tier 2 and below… how many countries in the world are there these days? [have] opened 400 shopping centers?”
But he acknowledged that “business is tough right now” and he didn’t expect the market to turn around this quarter.
Beverage group Anheuser-Busch InBev attributed its 15 percent drop in Chinese sales in the second quarter to weak consumer demand and poor weather conditions in some parts of the country.
Chief Executive Michel Doukeris said that despite weaker consumer spending, the trend toward drinking smaller amounts of more expensive alcohol continued to hold up in China. “I think the long-term fundamentals are still in place,” he said.
Executives and analysts also warned of the long-term threat posed by the growing number of highly competitive Chinese brands.
Shaun Rein, managing director of Shanghai-based China Market Research Group, said that while there were bright spots, many foreign brands faced strong domestic rivals. “A lot of Western brands were simply outclassed by Chinese brands,” he said.
Edward White and Thomas Hale in Shanghai, Madeline Speed, Daniel Thomas and Claire Jones in London and Patricia Nilsson in Frankfurt
