Western nations are bracing themselves for a difficult winter period as the coronavirus pandemic will coincide with seasonal flu threatening the burden on healthcare and increasing the level of restrictions.
China on the other hand have lifted restrictions as a result of successful track & trace system, boosting the consumer sector in allowing shops and restaurants to stay open.
Sarah Liu, head of China A-shares research at Schroders, said investment and export areas have so far led the recovery, but this is now being joined by the consumer sector.
Private consumption currently accounts for 39 per cent of gross domestic product (GDP) in China, a relatively low figure when compared to 68 per cent for the US and 54 per cent for the eurozone.
“Despite the setback this year, we expect this figure to rise further as the transition from an investment-led to consumption-driven economic growth model continues,” said Liu.
The International Monetary Fund (IMF) is projecting China’s economy to expand by 1.9 per cent in 2020, putting it on track to be the only major world economy to grow this pandemic-hit year.
By contrast, the US economy is expected to shrink by 4.3 per cent, while the eurozone is forecast to contract by 8.3 per cent, the IMF said in its latest update this month.
E-commerce is expanding and accelerating
Like the rest of the world, the rate in which e-commerce has accelerated since March has been one of the key themes of the pandemic.
In China, the largest beneficiaries have been the segments which were previously unpenetrated by online sales, according to Liu.
This has opened up markets where consumers were previously unaccustomed to buying products online, such as the delivery of fresh foods and groceries and the purchases of larger home appliances.
In education too, almost all of Chinese students made the switch to online learning during the year, increasing the penetration rate to over 90 per cent in the first half of the year.
“This was an area which parents and students were particularly reluctant to switch from offline in the past,” she said.
Dominance of market leading companies
The Schroders head of China research outlined that industry leading consumer companies are considerably increasing market share.
“The largest players have greater economies of scale, are growing faster and are able to cut prices in order to consolidate the market,” she said.
The growth of e-commerce has had the added benefit of providing consumers with better information availability and therefore better price awareness.
Liu gives the example of Midea, the world’s largest home appliance manufacturer, who cut prices of air conditioning units to the lowest point in a decade this year.
Higher levels of research & development (R&D) budgets allow for investment in new technology which accelerates the level of automation and enables costs to be cut that way.
Overseas consumption is returning to China
Chinese citizens are estimated to account for over a third of global luxury goods spending, yet only a “small fraction of this spending has historically been in China,” said Liu.
This is changing, however, and government measures have begun to encourage domestic spending to support its duty-free industry.
Cuts to value added tax (VAT) and lifting the duty quota cap have allowed for major domestic groups to benefit this year.
“The impact of the pandemic has been to fan this trend,” she said. “With international tourism constrained by lockdowns and quarantines, there has been a recovery in domestic tourism, which should continue to benefit after the pandemic abates.”
The split between luxury and mass market
China’s burgeoning middle class has increased average incomes and the preference for luxury goods and services.
This was apparent between 2008-2018 when average selling prices showed consistent increases.
“But this trend is not as uniform as it once was,” she added. “In fact, the reverse is true over the past few years for some segments. What we see today is consumer behaviour becoming somewhat polarised.”
Liu stated that luxury brands have seen strong growth in demand while mass market consumers have become more value conscious, exacerbated by the financial pressures of the pandemic.
“While companies offering value for money, or those with a strong luxury brand are performing well, it’s the brands in the middle who face the greatest pressure,” she noted.
Online integration of resources
Many of these companies in the consumer space are looking to integrate their online and offline businesses.
According to Liu, the aim is to share their stock, marketing campaigns and customers, which will improve supply chain efficiency by keeping stock closer to the end customer and reduce shipping costs.
This is also extended to the sales side, which has seen investment in supply chain and inventory management systems.
For example, ANTA Sports recently announced the acquisition of 30 per cent of its distributors.
Liu said that in the near term the focus on Covid-19 will still impact China’s global economic activity, but the consumer sector will become an increasingly important component of the economy.