Chris Morley, Managing Director, The Nielsen Company, China
SUMMARY: As the effects of the financial crisis started to impact economies, consumer confidence slipped and consumer spending in many sectors collapsed. And while China has not been immune to these changes, their economy has held up better than most and their consumers are among the top ten most confident in the world.
The Economist magazine has already heralded the beginning of China’s recovery, while commenting that other nations are still wondering if the worst is yet to come. The internal demand in China so far is maintaining modest growth. And while Chinese consumer confidence has been negatively affected in 2009—showing a 7 point decline in the March 2009 Nielsen Consumer Confidence Index versus September 2008—it is relatively small in comparison to other countries.
The Chinese turnaround can be attributed in part to the government’s quick response to launching a stimulus plan that, based on the published level of investment, would be one of the largest rescue packages globally, relatively—13% of China’s GDP. Additionally, consumers in China had become even more inclined to save at the beginning of the crisis, and they have become more price sensitive. Chinese consumers are also putting off large or discretionary purchases more frequently, and as retailers increase promotions to stimulate footfall, gradual changes in shopper behavior are beginning.
|Chinese consumers feel confident that their economy is well protected…|
Among the world’s most confident
The Nielsen Consumer Confidence Index places China tenth globally as the world’s most confident country. As diverse cultures think differently about confidence, the most useful metric is to watch how the trend changes. Chinese consumer confidence has fallen much less heavily than other BRIC (Brazil, Russia, India, China) nations, for example. Since the second half of 2008, Russian and Brazilian consumer confidence dipped by 29 and 21 points respectively, while India—whose domestic market is also considered large enough to support a domestic lead recovery—saw its consumer confidence decline by 15 points. China’s relatively small drop of seven points may therefore highlight that Chinese consumers are showing respect for the impact of the downturn by changing their behavior somewhat, but still feel confident that their economy is well protected in the medium term.
|Consumers understand the risks involved with investing…|
Saving is a high priority
In Q4 2008, there was a much higher propensity to save in Asia and in China. According to Nielsen, the swing away from the stock market and commodities towards savings was high even for Asia—tipping the savings rate to nearly 60%. In Q1 2009, however, there has been a sharp swing back, suggesting that consumers understand the risks involved with investing in shares right now, but are still prepared to speculate.
Commentators suggest this savings swing is a natural and long-standing reaction of Chinese consumers who feel it is necessary to prepare to provide for themselves in a downturn and that, until there is a bigger social safety net in China, it may be difficult to unlock large proportions of these savings. There is no doubt that if confidence continues to increase, even a modest release of these savings could further stimulate growth—especially in the more affluent consumer segments in key cities.
|In China, urban unemployment remains below 5%…|
The 9-to-5 less of a grind in a downturn
In line with global consumer sentiment, solid confirmation that the economy is on the mend and that better job prospects are improving are two areas that Chinese shoppers will closely watch before feeling more confident. In China, while unemployment among rural migrant workers has reached around 15%—due largely to the decline in exports—urban unemployment remains below 5%. There is, however, increased concern over job security across the board—up 16% in the first half of 2009.
Bank savings remain at high levels
With the specter of a reduction in American consumer spending hanging over the world economy, attention was focused on whether the Chinese were likely to unlock their near three trillion dollars (USD) in household bank savings. With even a 1% decline in bank savings—equating to over $290 billion USD—it is easy to see why.
|China is a long way from being the world’s biggest shoppers…|
However, China is a long way from being willing or able to take over the title of the world’s biggest shoppers, at least in dollar terms. It would be easy to assume China was in a spending boom as city malls and department stores still tend to be bustling with shoppers. Average individual monthly incomes in China urban centers is low on a global platform at around $300 USD per month and although this average doesn’t reflect the large number of growing young professionals who now earn a more comparable salary versus their Western counterparts, the overall pool of disposable income remains relatively shallow.
According to the Nielsen Consumer Confidence survey, the percentage of consumers who say they will put spare cash into the bank has increased seven points to 59% over the past 18 months, while investing in shares has dropped 10 percentage points. However, in Q1 2009, this has bounced back somewhat—the propensity to save dropped slightly and investing in shares increased 18 points, according to Nielsen’s Personal Finance Monitor.
Keeping out of debt also appears to be of increasing importance with 31% of Chinese consumers—up 5 points since 2008—indicating they will be looking to pay off debts, credit cards and loans. And while lower interest rates will not tempt the majority of Chinese consumers to take out loans, property loans may be the exception, as urban property prices grew for the first time in March 2009. Institutional finance is a massive opportunity in China. Considering the rural population of China—an estimated 700 million—is not exposed to financial services at the moment, the potential market opportunities are tremendous as development continues.
|Consumers are moving away from quick-fix savings strategies…|
Savings strategies reduce long-term spend
Trends in the Nielsen Consumer Confidence suggest that consumers are moving away from quick-fix savings strategies toward those that will save money over the long-term. In the second half of 2008, Chinese consumers indicated that they would spend less on holidays, out-of-home entertainment and on clothes. However, in 2009, there has been a sharp increase in those that say they will be looking for better deals on home loans, insurance and credit cards and a moderate increase in those that will delay the replacement of household goods.
While cutting down on out-of-home entertainment is still considered a key way of saving money, the number of people who prefer this strategy has dropped, as has the number of consumers who are looking to cut spending on holidays, clothes and groceries.
Nothing like a holiday to calm the nerves
Over 50% of consumers taking part in the Nielsen Travel Monitor plan to travel domestically over the next 12 months compared to 16% who look to explore international markets. Of those travelers planning to discover their homeland, almost four out of ten say that the financial crisis has had no impact on their travel plans, while one in four indicate they will be looking to reduce their travel budget. Only 4% indicated that they’ve canceled their holiday outright.
A similar picture is painted for those planning to venture overseas—30% say the current economic crisis has not affected their travel plans and one in four indicate they will adjust their travel budget down. While international travel is down two percentage points from 2008, those planning to travel domestically increased significantly from 30% to 42%. The large increase in domestic travel is likely an indication of the growing domestic wealth that is allowing households—potentially for the first time—to travel.
|FMCG retail figures have been slipping…|
Retail sales figures drop
Despite the economic pressure towards the end of the year, total fast-moving consumer goods (FMCG) value sales, as measured by Nielsen, increased around 21% year-on-year in 2008 compared to 2007. However since October 2008, FMCG retail figures have been slipping—with a sharp dip in February 2009. This plunge is mirrored in the retail sector in general, with government figures showing that from January to February 2009, growth in the sales of consumer goods dropped from 18.5% to 11.6%. To understand the reasons behind this trend, Nielsen asked Chinese shoppers how the current economic downturn has affected their behavior.
An average 60% of Chinese consumers indicated that the downturn has affected what goes into their shopping basket, with almost a quarter indicating they now look to purchase goods when on promotion. Food categories appear more vulnerable to economic troughs—15% of shoppers say they will reduce overall spending on food compared to only 5% for non-food. Surprisingly, super premium and luxury brands in FMCG seem to have been less affected—an indication perhaps that the wealthiest in China are not yet feeling the pinch.
It should also be noted that the slower growth in FMCG sales can be largely attributed to less inflation and sometimes modest deflation within those categories that experienced high inflation during 2008. There is also evidence in some categories that consumers are downgrading to less expensive products—more likely a cheaper branded variant than a retailer own label (private label/house brand) product to date. The level of acceptance of retailer’s own brands is generally low and price differential is smaller than in other markets presently due to the relative scale of production, which is quite different from Europe and the U.S. where retailer brands are much more accepted, developed and different in price.
|Understand what consumers are looking for in-store…|
Modern and traditional trade continues to grow
According to Nielsen’s retail census, modern trade continues to expand, fueled by a store expansion program especially in the lower tier cities (B Cities), where like-for-like store sales are growing at only around 2%. The implication for this is significant, as there is a need to better understand what consumers are looking for in-store to help fuel sales growth and there will be an increased focus on range, price, and customer acquisition to compete for shoppers—a natural phenomenon as the market further matures.
With like-for-like sales fairly flat for many retailers, the appetite for expansion in China for the bigger local—and especially multinational retailers—will need to be seen by their parent companies as an investment for future profitability as near-term margins are likely to be under severe pressure.
Traditional trade is continuing to grow with large gains recorded in the second half of 2008. Interviews conducted by Nielsen with proprietors discovered that almost nine out of ten stores have seen an increase in customers and almost four in ten have seen an increase in the number of villagers shopping in their store. Only two out of ten attribute their growth to improved shelving and product assortment, despite the Retail Index Store Panel highlighting that over half of traditional trade stores have increased the categories their store handles.
The traditional trade in China is huge (3.2 million stores as of year-end 2008) and much of it spans areas not yet penetrated heavily by the modern trade. Some consolidation to larger and more successful outlets, continued economic growth in many of the areas these stores serve, plus continued urbanization are some of the key factors in the hypothesis for these stores’ steady growth rates.
The future looks bright
Buffered by high-savings and maintaining a modest GDP growth that would be the envy of the Western world, China’s consumers are generally optimistic about the next 12 months. The stimulus package has also sent a strong message to the domestic market that the government is serious about averting a prolonged downtown.
So despite a slowdown in GDP growth, China’s economy is performing quite well so far in 2009. The combination of a quietly confident middle class (estimated 250 million), coupled with huge potential demand from the other billion consumers in China, makes China an attractive place for both local and foreign businesses to flourish for the foreseeable future.