China goes shopping

On the most recent Singles’ Day – a shopping event in China that began as an unofficial holiday for bachelors – the country’s e-commerce giant Alibaba generated more revenue in 24 hours than its US rival Amazon did in an entire quarter. What are the emerging trends in the Chinese consumer goods sector, and how can investors reap the rewards?
Andres Döring

An article by Andreas Döring

Equity Portfolio Manager at Union Investment

11 November 2019 was a record-breaking day. Within just 68 seconds, Chinese online retailers made sales worth US$ 1 billion. Countless live shows recorded the events, fuelling this festival of consumerism. The success of Singles’ Day dwarfed that of its US equivalents, Black Friday and Cyber Monday, and showed in no uncertain terms that China is in the mood to shop. Whereas Chinese economic data has generally weakened in recent months, consumer confidence is strong. In 2019, the Land of the Dragon finally overtook the US to become the world’s biggest retail market.

Structural support for consumer spending

The reasons for how this came to pass can be explained primarily by structural factors. For a number of years now, the Chinese government has been looking to shift the focus of its export-heavy economic model to the domestic market. To achieve this, Beijing has been strengthening the consumer goods sector, for example by subsidising the purchase of energy-efficient household appliances. Of course, the fact that average incomes are rising has also helped. Chinese citizens can simply afford to spend more, and that appears to be what they are doing.

Singles’ Day revealed something else too: local Chinese brands are on the up. Seven of the 15 brands that sold the most on 11 November were Chinese. They included names such as smartphone behemoth Huawei and electrical appliance manufacturer Midea. Brands such as L’Oréal, Nike and Nestlé are still held in high regard by the Chinese, but domestic companies are definitely catching up.

Chinese consumers are becoming more diverse

But there is no one single type of Chinese consumer, of course. Spending patterns vary considerably depending on where people live – in a city or in the countryside – and how old they are. Western brands have a greater pull for urbanites than they do for people from rural regions, for example. And spending behaviour is becoming increasingly diverse. This is because millennials, those born into Generation Y between 1980 and the late 1990s, are now making their mark as a new breed of consumers. They not only behave differently to their parents, part of the Generation X cohort, they also spend their money differently. In major German cities, such as here in Frankfurt, we know all about these Chinese Gen X consumers. They arrive on guided European tours booked with a domestic travel agency and are particularly keen on luxury products. They think nothing of queueing outside a Chanel boutique in Paris to snap up a sought-after designer item, for example. Generation X consumers are willing to pay for prestige and are very selective in what they buy.

Millennials do things differently. They speak better English, book their flights themselves and explore Europe under their own steam. China’s one-child policy means that most of them do not have siblings. It is not uncommon for their parents to have bought them an apartment. This means they have more or less their entire income to do with as they please. And they mostly spend it on experiences, flying to South Korea or Japan to see a band, for example. It is less about having been somewhere and more about what they did or experienced there.

Investing to capitalise on consumer spending trends

Various trends are crystallising that investors can take advantage of in their portfolio. Sport and fitness, for example, are on the rise among the Chinese, though the exercise culture is still far removed from the western one. We therefore like companies that are active in the sports sector. We have also identified a preference for premium products. Take the beer market, for example, which is saturated and so has stopped expanding. But a closer look reveals that premium beer brands are recording double-digit growth. The Chinese are also extremely digitally minded, making 60 per cent of their purchases on a smartphone.

Chinese brands are not only becoming more popular domestically, they are also making inroads into foreign markets. Telecoms giant Huawei is known in Germany mainly for its smartphones and because of the 5G debate. Young people in Germany will probably be familiar with video app TikTok, on which home-made videos are set to music. TikTok is currently ranked second in the list of the world’s most popular apps as measured by analytics platform Sensor Tower. Some young Germans also buy from online retailer AliExpress, the international version of Alibaba, China’s answer to Amazon. Other companies may not be so instantly recognisable, but that does not mean they are not being used. One of them, online travel agent Trip.com, has a portfolio that includes flight search engine Skyscanner. It is also worth noting that China is already leading the way in a number of fields. For example, US video games company Activision Blizzard called on the expertise of Chinese internet giant Tencent to develop the app version of its Call of Duty game.

Summary

Consumer spending is playing an ever greater role in the Chinese economy. And Chinese brands are not only becoming more popular locally, some of them are also making waves on the global stage. We are keeping track of the various trends and investing in the most promising equities so that investors in Germany can also reap the rewards of China’s shopping frenzy.

 

As at 17 January 2020