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Navigating the Recovery: China’s Consumer Renaissance
Published on: July 12, 2023
As the dust settles after the whirlwind of the 618 shopping festival, it’s an opportune time to step back and evaluate the broader trends that shaped China’s consumption landscape in the first half of 2023.
The past six months have seen China grapple with its post-pandemic recovery, a journey that has drawn much attention from around the globe. That recovery has meant that China is one of the few markets delivering meaningful growth for Brands.
Want proof of that? Look at the strategic plans outlined from the world’s most successful consumer brands, from Nike to LVMH, which have pledged to double down on their China investments this year given the strength of the recovery and the unparalleled opportunity of the market.
We are in the business of helping global brands drive revenue growth in China and greater APAC. Based on everything we saw out of China in H1, our thesis is simple: the Chinese consumer is resilient and China continues to offer enormous growth potential.
With the world’s most successful companies throttle up in China, other brands should take note and consider making China a central part of their growth strategies.
Here are our main takeaways from the first half of the year.
Consumer Confidence Trending Upwards
For all the talk of “missed expectations” about the recovery, there has been a palpable buzz in the air in China this year. Malls, restaurants, and airports have been packed. With restrictions gone, Chinese people areshopping, eating out, going to movies, and taking vacations in record numbers. And they are continuing to shop for consumer goods in record numbers.
The buzz has been described by Chinese commentators and journalists, as well as by foreign visitors who have made their first trips to the market since before the pandemic.
Here’s what Nike President and CEO John Donahoe had to say about his recent trip to China:
“[It’s] clear is that consumer is back in China…
And so, we’ll continue to invest in China. Our China for China strategy, I think, is going very, very well. And looking ahead, we’re optimistic about Nike’s brand, Jordan’s brand, the momentum we have.
As well, we think it’s a—structural tailwinds in the region make us optimistic over the long term. Gen Z is the most active generation. There’s a growing middle class, increased focus on health and wellness. So, a very energizing visit and makes us very confident about our brands and our business in China.”
That feeling of optimism is not just an anecdote from his trip, or from WPIC’s observations on the ground: it’s backed up by the data.
Chinese consumers accumulated a record-high household savings during the pandemic. Consumers have still been cautious in 2023. But as the year has progressed, the data shows a steady increase in the consumption of both goods and services, as consumers have felt increasingly confident dipping into those savings.
Alibaba reported that online sales growth turned positive in March, after a slow start to the year as consumers were feeling cautious. Official data showed that retail sales were up 10.6% in March, 18.4% in April, and 12.7% in May. Most significantly, retail sales grew sequentially during that time, with consumers spending more each month than the year prior.
That momentum carried into a strong 618 shopping festival, which recorded a whopping $111 billion in sales, up 14.8% from the year before. Again, US$111,000,000,000 on 618!
Growth in several discretionary categories during the festival—especially beauty, which was hit hard during the pandemic––shows that consumers are increasingly willing to spend.
Multinational consumer companies from every sector have reaped the rewards of China’s consumption resurgence, driving revenue growth for their brands.
In the quarter ending May 31, Nike’s China revenue was up 25% YoY, compared to 5% globally. That remarkable China result drove global revenue up 8%.
Starbucks reported an 11% uptick in China for the first quarter, and continued its expansion with 153 new stores opened last quarter with an aim to operate 9,000 stores in China by 2025. Canada Goose’s Asia Pacific region revenue saw a 65.4% leap in Q1, thanks primarily to China’s rebound, while Lululemon’s revenue in China rose by an impressive 79% YoY while celebrating the opening of their 101st retail store in China. Luxury goods giant LVMH’s sales in Asia (excluding Japan) rose by 14% in Q1, compared to an 8% decline in Q4 of 2022. Another luxury behemoth, Hermès, experienced a 23% upswing in Asia (excluding Japan), driven by China’s robust recovery.
These are among the most successful consumer companies in the world. Recognizing the growth opportunity, they are increasing investments in the market.
In addition to retail, the services sector has experienced a significant recovery in 2023. During the recent Dragon Boat Festival, there were 106 million trips made, up 32% YoY, and surpassing pre-pandemic (2019)levels by 13%. This surge led to a 44.5% growth in tourism revenue, amounting to $5.2 billion USD, with Fliggy, Alibaba Group’s travel booking platform, recording a 160% increase in travel orders. This year’s festivalsaw the second-highest box office revenue on record.
The May Day holiday saw 274 million people making trips, injecting over $20 billion USD into the tourism sector, representing a 71% and 129% YoY increase, respectively. Alipay, China’s most used digital wallet, reported a 70% increase in travel-related transactions during May Day from 2019 levels.
Restaurants, too, have enjoyed a renaissance. The first four months of 2023 saw restaurant sales jump 19.8% YoY, significantly above the pre-Covid growth of 0.3% during the same period in 2019.
Given the size of the Chinese economy, these growth numbers are enormous in absolute terms—and as China’s middle class is set to expand even further over the next five years, it’s why WPIC and so many global brands are bullish on China.
The data is clear that goods and services consumption has steadily grown throughout 2023. And despite economic headwinds, consumption has been a relative bright spot in China’s economic recovery.
The economy grew by 4.5% in Q1, with consumption contributing 66.6% to GDP growth. That’s notable, since historically consumption has lagged behind investment as the main driver of China’s growth.This is very important to understand.
Consumer Trends: Unpacking Preferences
As consumers are feeling more confident, what are they spending their money on?
One clear winner has been tourism, a result of pent-up demand from the pandemic, when even domestic vacations were difficult.
But what about in the consumer goods sector?
The most notable lifestyle trend we observe is the growing emphasis on health and wellness, which is benefiting multiple consumer segments.
Nutraceuticals, for instance, are enjoying double-digit growth, as consumers invest in their well-being and adopt a preventive healthcare approach.
The focus on wellness even extends to pets, with owners investing in the well-being of their furry friends, creating major demand for a wide range of pet food and pet care products.
People’s lifestyles are becoming increasingly active, evidenced by the rise of niche sports and outdoor activities. Non-traditional sports such as ultimate frisbee, pickleball, American football, rock-climbing, and surfing are gaining traction.
In their leisure time, Chinese people want to join social communities, have fun with friends, and develop new skills—and they’re spending their money on the hobbies that make their lives more fulfilling. Sales of skateboard-related items on Tmall spiked by 290% during 618, while imported bicycle sales surged tenfold.
Beauty is another sector benefiting the wellness trend—skincare, clean beauty, and beauty devices in particular have shown promising upticks. For instance, during the first 10 minutes of 618 on JD.com, 150 skincare and beauty brands doubled their transaction volumes YoY.
The recovery even extends to the luxury tier. On Tmall, Chanel’s skincare, makeup, and fragrance sales recorded an impressive 70% YoY growth, while Dior Beauty’s revenues surged by over 50% YoY, during the first few hours of the 618 festival.
Overall, these figures underscore a promising recovery for China’s beauty and personal care sector—and speak to the power of the focus on wellness.
From average consumers to luxury consumers, the first half of 2023 displays a Chinese economy powered by resilient consumption. We believe foreign brands can seize these growth opportunities, and in the following sections, we will delve into why they continue to thrive in China and analyze the dynamic e-commerce landscape.
Embracing Foreign Brands: The Continuing Love Affair of Chinese Consumers
Adding to the negative narrative around China’s consumption recovery, there has been growing concern about the state of the business relationship between China and foreign countries. Yet, in light of recent developmentsand the strong performance of foreign brands in the market, such worries seem to be largely unfounded.
U.S. Secretary of State Anthony Blinken recently visited China, where both nations underscored the importance of their commercial relationship. It might seem surprising to casual observers given the noise around “decoupling”, but trade between the two countries reached an all-time high in 2022, a testament to the enduring economic ties. And that number is set to be even higher in 2023 given China’s economic recovery.
Even for companies at the heart of the “decoupling” fire, China is simply too alluring and important a market to ignore. For example, Micron, the U.S. semiconductor company, just announced a landmark $600 million investment in China.
Since China opened its borders at the beginning of the year, prominent foreign business leaders such as Apple’s Tim Cook, Microsoft’s Bill Gates, JPMorgan Chase’s Jamie Dimon, LVMH’s Bernard Arnault, and Nike’s Donahoe have visited China and met with high-level officials, reflecting the significance these industry leaders assign to China-U.S. business relations.
In the consumer space where WPIC is most active, there’s also been talk of the rising popularity of Chinese brands, especially in the beauty and apparel industry.
But what we see is that Chinese consumers continue to harbour a deep affection for foreign brands—and any local competition is the result of strong product offerings and marketing, rather than nationalism.
During the recent 618 shopping festival on Tmall, nine of the ten top performing cosmetics brands wereforeign, reflecting the enduring allure of these brands to Chinese consumers. However, one emerging tactic for foreign brands in the beauty and apparel sectors is to collaborate with local designers, to ensure that their product offerings and branding align with local preferences.
In a recent op-ed for The Globe and Mail, I examined the phenomenon of Canadian brands flourishing in China, despite diplomatic tensions between the two countries. While many Canada-based analysts have warned of potential boycotts of Canadian brands in China due to diplomatic issues, the reality on the ground tells a different story.
Take Canada Goose as an example. You only have to walk through the streets of Beijing in February to lose count of the number of Canada Goose jackets you see. But you’ll also notice jackets from other Canadian brands like Rudsak and Nobis.
By May, the number of people wearing items from Lululemon, another Canadian brand, is equally remarkable. The athleisure giant opened its 101st store in China recently and plans to operate in 36 Chinese cities. Lululemon’s China revenue increased 70% year-on-year in 2022 and as mentioned, is up big already in 2023.
And that’s not all. Tim Hortons operates over 600 shops in China, with 2022 revenue up by 60%. Chinese consumers can get their double-double fix in 20 cities, and by 2026, Tim Hortons plans to operate 2,700 shops across the country.
This sustained success of Canadian brands is not a fluke. Instead, it is a testament to the alignment between the strong product offerings of these brands and the aspirations and lifestyle choices of Chinese consumers. This trend is also noticeable in the case of health and wellness products, where Canadian brands are global leaders and well-positioned to capitalize on the surging interest in these products, which I just described.
Even the recent diplomatic tensions between Canada and China have had little to no impact on the consumer’s perception of Canadian brands.
Despite occasional political headwinds and the rise of domestic competition, foreign brands that deliver value and align with Chinese consumers’ aspirations continue to thrive in the Chinese market.
And as China’s consumption recovery continues into H2, we’re extremely confident about the growth potential for foreign brands in the market.
Conclusion
In conclusion, China’s consumption landscape in the first half of 2023 has showcased resilience and growth, defying the narrative of missed expectations and sluggish momentum. Chinese consumers have displayed a palpable buzz, driving consumption growth in various sectors and offering significant opportunities for global brands.
Global consumer brands, including the world’s most successful ones, have recognized the strength of China’s recovery and the immense market potential it holds. Companies like Nike, LVMH, Starbucks, and Canada Goose have reported impressive growth in China, outperforming their global figures. This trend of major brands investing in China serves as a clear signal to other brands that China should be at the center of their strategic considerations.
Consumer confidence has been trending upwards, with Chinese consumers engaging in shopping, dining out, and leisure activities in record numbers. The data reveals a steady increase in consumption, both in goods and services, showcasing the resilience of the Chinese consumer.
Chinese consumers’ preferences have also evolved, with a growing emphasis on health and wellness. Nutraceuticals, pet care products, niche sports, and outdoor activities have gained traction, reflecting a desire for active lifestyles. Beauty and personal care sectors have also seen promising growth.
Despite concerns over the China-foreign country relationship, trade between China and other nations has reached all-time highs, highlighting the enduring economic ties. Foreign brands, including Canadian brands, have flourished in China, demonstrating that consumer preferences are driven by product offerings and marketing rather than nationalism.
China’s consumption recovery has been a bright spot in its post-Covid economic story, with consumption contributing significantly to GDP growth. The Chinese consumer’s resilience and the market’s growth potential make it an attractive destination for global brands. As the world’s most successful brands invest in China, other brands should take note and consider making China a central part of their growth strategies.
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