About a year ago, Chinese shoppers were in full-on conspicuous-consumption mode. Executives routinely spent $12,900 on Rolexes and other high-end watches to give to business contacts and suppliers, much to the delight of Cartier, Financière Richemont (CFR:VX), and Swatch Group (UHR:VX). Gold bars carved with Chinese characters signifying good luck were also in vogue as gifts.
This year’s economic slowdown has crushed the market for high-end corporate swag and set off a wave of discounting across Chinese retailing. Executives are now choosing watches that cost 40 percent less, says William Li, chief financial officer of Hong Kong jewelry retailer Luk Fook Holdings. Switzerland will likely feel the pain. China’s per capita spending on Swiss timepieces is six times that of the U.S. and double the level of France, according to research by Frankfurt-based investment bank MainFirst Bank.
To lure increasingly price-sensitive shoppers, companies from electronics retailers to footwear makers are cutting prices even if that means driving down earnings. Retail sales grew 13.7 percent in June from the year before. That may seem blisteringly fast, but in China it’s the slowest pace since February 2011 and near levels last seen in early 2009, months after the Lehman Brothers bankruptcy. Gross domestic product expanded at a 7.6 percent annualized rate in the three months ended June, the slowest in three years.
McDonald’s (MCD) recently introduced a value dinner starting at 15 yuan ($2.40) and still reported slower second-quarter same-store sales growth of 2.2 percent, down from 8.5 percent in the preceding three-month period. Chinese “consumers are reacting with greater caution as the economy has slowed,” Chief Executive Officer Don Thompson told analysts during a July conference call.
China’s second-largest electronics retailer, Gome Electrical Appliances, in July forecast a first-half loss even as its website offered discounts of as much as 50 percent. The Hong Kong fashion retailer I.T., which sells Levi’s and Puma in Greater China, said discounting led to a narrower gross profit margin in the year ended February. Making discounting all the more painful, global and local retailers spent aggressively on new stores and branding campaigns during the last two years, when the Chinese economy was clocking growth at 9 percent.
International brands have relied on Asia to offset a consumer spending slowdown in the U.S. and Europe. “Previously, a [Chinese] consumer didn’t even need to ask the price and just bought the product,” says Eugene Mak, an analyst at Core Pacific-Yamaichi International Hong Kong. “Now they’re more price-sensitive.”
Daphne International Holdings, which sells shoes under its namesake brand and also has Chinese distribution rights for international lines such as Aerosoles and Aldo, last month said intense discounting, together with rising production costs, were pressuring the group’s gross margin. “We do generally see an increase in promotions and discounts in both China and Hong Kong this year,” says Mak. “Partly, it’s the inventory buildup; the other part is just slower demand.”
Price wars have also hurt results in the sportswear business, where companies went on an expansion spree after the 2008 Beijing Olympics. At Li Ning, the Beijing-based sportswear retailer founded by a former Olympic gymnast, CEO Zhang Zhi Yong resigned in July three weeks after the company forecast a “substantial” profit decline, partly a result of price cutting. Nike’s (NKE) future orders for China grew 2 percent in the fiscal fourth quarter, a “significant” slowdown from the previous period, Chief Financial Officer Don Blair said on a conference call with analysts in June. Slower sales have left Nike with too much inventory in China, its second-largest market after the U.S., and resulted in discounting, the company says.
Among electronics retailers, Beijing-based Gome shares plunged to an all-time low in Hong Kong on July 25 after the company forecast a loss because of lower sales and losses at its e-commerce unit. Gome’s website near the end of July was offering online rebates of about 200 yuan for each 1,000 yuan purchase, and discounts of as much as 50 percent on home and lifestyle products.
That kind of discounting is what it takes these days to get the attention of budget-conscious consumers. Gerald Qu, 36, who works in a bank in Jiangxi, China, welcomes the discounting. He worries about his bonus being cut and is trying to rein in spending across the board. “You can’t save on children’s” shopping, he says. So he’s cutting back on his own clothing and travel budgets. “I can only save on myself.”