China: Consumers seek luxury items, but still don't eat out

An article published by Bloomberg highlights the recovery of consumption in China, especially of luxury goods. The medium indicates that "Chinese consumers have once again" gotten drunk "with handbags, cosmetics and luxury cars. But this enthusiasm for shopping does not extend to the mass consumption of sporting goods, beer and restaurants ”.

An uneven recovery is taking place in China as the world's largest consumer market also becomes one of the first nations to recover from the coronavirus pandemic that continues to devastate the global economy.

Bored after months of strict social distancing measures and unable to vacation abroad, wealthy Chinese consumers seek solace in retail therapy. This bodes well for dozens of luxury goods makers, whose growth was fueled by a growing influx from China in the past decade.

Bloomberg analyzed the June quarter revenue of more than two dozen companies that are market leaders in China in key categories of consumer goods. Three trends unleashed by the pandemic emerged, driven primarily by a pent-up desire to spend, focus on healthy lifestyles, or the wariness of public spaces.

Wealthy buyers

High-end brands recover faster as Covid does not hurt wealthy buyers much (as seen in the graph)

Premium products versus massive products

Luxury goods manufacturers posted double-digit revenue growth in the latest quarter compared to the same period last year, underscoring a stronger recovery trend. The inability to travel abroad has boosted business in domestic tourism hot spots and duty-free shops.

"The pent-up demand of almost two months of closure between February and March likely led local buyers to buy more aspirational brands than mass brands," said Catherine Lim, an analyst at Bloomberg Intelligence based in Singapore. "Consumers are definitely looking to pamper themselves after the outbreak scare."

For example, LVMH's sales in China last quarter rose 65% from a year earlier, while the group's overall revenue fell 38%. The luxury watches and wines group has seen "very good compensation in China for the rest of the business, which is suffering," said Jean-Jacques Guiony, LVMH's chief financial officer, in an earnings call in late July. Likewise, the Kering SA boot brand in mainland China increased its sales by more than 40%. Other firms such as Anta Sports Products Ltd. and appliance maker Midea Group Co. have seen little or no sales growth between April and June. Total retail sales were still slowing in July, highlighting the continued economic pain from the coronavirus outbreak.

Chinese government data, as well as market research, show that the pandemic "deals a major blow to low-income consumers who have to tighten their belts even more," said Luo Yixin, consumer analyst at Huatai Financial Holdings. "That is why the performance of brands in China has become polarized in recent months."

China's Ministry of Commerce will launch “Consumer Promotion Month” starting today September 09, with activities including food carnivals and e-shopping campaigns, to further unleash pent-up demand and accelerate recovery.

Healthy life

Businesses that promote healthy living, dairy businesses in particular, have been another huge beneficiary as consumers strive to take better care of themselves. China Mengniu Dairy Co. reported 19% revenue growth for the June quarter and 86% profit increase compared to last year. Inner Mongolia Yili Industrial Group Co. saw a 23% increase in revenue and a 72% increase in quarterly profit, recovering from a drop in profit in the March quarter.

"The growing awareness of consumer health amid the coronavirus outbreak is providing growth opportunities for health-related products, especially the dairy business," Yili said in an interim results statement in August. Mengniu also expects sales and earnings growth to continue for the same reasons, UOB brokerage Kay Hian said on Aug. 28.

By-health Co., a Chinese supplier of protein powders and vitamins, launched a marketing campaign aimed at "boosting immunity" and recorded a sales increase of nearly 17% in the second quarter after a drop of 5 % in the March quarter.

But the drive toward healthy lifestyles isn't helping all fitness businesses, as people still resist going to gyms or engaging in outdoor activities due to persistent fear of crowds.

They avoid socializing

While people have started to leave their homes again to work and shop, they are wary of going out to dinner and socializing.

Yum China Holdings Inc., the operator of KFC and Pizza Hut restaurants in the country, continued to post a drop in sales in the second quarter. Budweiser Brewing Co. APAC Ltd. cut its sales decline in the second quarter, driven by supermarkets and online sales, but the slow reopening of nightclubs and bars remains negative.

Analysts expect luxury goods sales growth to moderate somewhat after pent-up demand is met.

"Mainland Chinese buyers will likely be selective in their purchases in the second half of the year," said Lim of Bloomberg Intelligence. "Spending, in general, will slow down from the increase we had seen during April and June."

Source
SimFRUIT according to Bloomberg

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