It’s an interesting twist that few would have expected a couple of years ago. The companies that adapt to it will do fine. The ones that don’t adapt — and there will be at least a few — won’t do so well. And investors that understand which names are going to win and lose might end up navigating their way through a tricky minefield.
That minefield is China … China’s middle-class consumers, to be precise.
In 2010, the nation’s well-funded and expanding middle class was a prime target for decidedly American businesses like Yum! Brands (NYSE:YUM), Coach (NYSE:COH) and The Gap Inc. (NYSE:GPS), just to name a few. Now, however, China’s tastes have started to slip back into something more traditional. Not every U.S. brand name that has enjoyed China’s growth opportunities to date will be singing the same song a year from now.
Two years ago, when the global economy was rolling again and China’s government had little to worry about on the fiscal front, the state really didn’t care what brand of chocolate bar its citizens chose. With its economy slowing down, though — and with Europe’s economy at a relative standstill — China finally has realized how much money it sends overseas. The realization has rekindled the country’s effort to not just be a consumer-driven economy, but a consumer-driven economy of Chinese goods … everything from snacks to shoes to silverware.
Beijing has good reason to be proactive on this front, too. Its most recent economic growth report indicated that spending on Chinese goods and services was only 35% of last year’s GDP, versus 46% of the nation’s GDP in the year 2000. The state’s economic leadership further deems the country’s reliance exports for growth as “unsustainable.” Ergo, that same leadership is starting to make changes to encourage consumption of “home-grown” goods.
It’s still not clear what the Chinese government is actually doing to effect such change, but the state’s heads have given the idea more than just a little bit of lip service … too much for U.S. companies with a presence in China to ignore.
Simultaneously — and not necessarily related — Chinese consumers have dialed back their love for “all things American.” Consumer companies that don’t truly understand that might find themselves abruptly hitting a wall.
The Difference Between Success and Failure
Most Starbucks (NASDAQ:SBUX) investors know that the western world’s most successful coffeehouse also is a big hit in China — quite an impressive feat considering that tea was, and still is, a cultural favorite. What most investors might not realize is that Starbucks is a success in China largely because the company didn’t cram its American way of doing things down the throats of its potential customers.
The typical Starbucks experience in China, in fact, is quite Chinese … and even tailored to a specific locale’s market. As an example, the new store in Fuzhou — where incomes tend to be lower than incomes in Beijing or Shanghai — feels more like a courtyard that would be found within one of its customers’ homes, while Beijing’s or Shanghai’s Starbucks are more akin to what you might find in the United States. It’s in contrast to what consumers find in the U.S., where cultural and income lines have no real impact on the crowds the coffeehouse draws.
Nestle SA (PINK:NSRGY) has figured out a winning formula for China, too — so much so that it expects its Chinese-based business to expand by 20% this year to about $5 billion worth of sales, and to grow similarly next year. Interestingly, however, Nestle is not expecting to do it with its Kit Kat candy bars and Nescafe instant coffee. Both brands exist in China, but neither are game-changers for the Swiss food company.
Rather, Nestle is driving the bulk of that growth through its relatively new 60% stake in Hsu Fu Chi snack and candy company, and Yinlu Foods Group. Both are familiar brands on China’s store shelves, even if they’re mostly foreign-owned.
Heck, Best Buy (NYSE:BBY) has figured out how to succeed in China … even if the electronics retailer hasn’t learned how to survive in North America.
For quite a while after Best Buy entered the Chinese market, it was adamant about delivering the same in-store experience it gives its American shoppers … big identical “box” stores, well-organized promotions and service delivery, and an almost sterile feel to the whole thing.
As it turns out, while the Chinese love consumer technology and gadgets, they don’t love the big-box store feel or concept. It wasn’t until Best Buy closed all of its so-named stores in 2011 and focused on its “Five Star”-named electronics stores that it found success. What changed? Five Star stores feel more like what American consumers would view as an outlet/closeout store … and a poorly managed one at that, with bins chock full of like-priced sale items rather than neatly stacked merchandise waiting on shelves, organized by form, function and brand. The impromptu-warehouse-sale feel plays in China … everything that Best Buy stores aren’t.
Moral of the stories? There’s such a thing as being too American to do business in China.
The Chinese government’s new push for consumers to buy local goods still is in its infancy, so it’s not clear what the ultimate impact will be for American brand names doing business in China. What is clear, however, is that all of them will need to adapt if China is to live up to its previous promise as a growth arena.
Investors would do well to keep closer tabs on companies heavily reliant in the emerging market, because the era of ultra-easy money in China is coming to a close.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.