Shift in Chinese retailers' strategy risks entrenching deflation

Haidilao International Holding

19/12/2023 23:00

By Sophie Yu and Brenda Goh
       BEIJING, Dec 20 (Reuters) - A shift in Chinese
retailers' strategy toward lower-priced goods and services to
win cost-conscious consumers risks embedding the country's
recent deflationary trends more permanently into the world's
second-largest economy. 
    Price cuts, the proliferation of bargain stores and
companies offering cheaper, scaled-down versions of their
products may create a vicious cycle of lower profit margins that
curtail wage and job growth and further depress consumer
appetite. This stands to create more headwinds for China's
stuttering post-COVID recovery.
    The fierce competition to draw the attention of thrifty
Chinese consumers is reshaping the country's retail landscape
and the deflation concerns are drawing further comparisons with
Japan's "lost decades" of stagnation. 
    Falling income growth is normalizing lower consumption in
China, with some industries experiencing declining revenue, as
"companies are lowering prices to maintain their market share
and avoid being squeezed out," said Wang Dan, a Shanghai-based
economist at Hang Seng Bank.
    "It is definitely a price decrease or low inflation
environment now. Though it is hard to forecast how long the
situation will last, but for sure it is bad for the economy,"
she said.
    Numerous examples of Chinese retailers offering lower-priced
alternatives have appeared in response to consumer's
cost-cutting.
    Haidilao  6862.HK , China's largest hotpot restaurant chain
known for premium, attentive service, in late September opened
two outlets of a lower-priced brand, Hailao Huoguo, that offers
beef dishes for as low as 28 yuan ($3.92), down from 70 yuan at
the flagship chain. Huoguo's food is also served
cafeteria-style, reducing staffing costs.
    Spirits maker Moutai  600519.SS , whose trademark 500ml
baijiu bottles sell at 1,499 yuan ($209.89), this year unveiled
latte and chocolate products infused with the liquor that sell
for as little as 35 yuan.
    Walmart's membership chain  WMT.N  Sam's Club and Alibaba's
 9988.HK  Freshippo have been locked in a price war for the past
five months with both sides cutting prices on popular items such
as durian puff pastries by up to 34% at Sam's.
    The pursuit of "value of money" among consumers "is
reversing years of trading up across almost every category,"
said Mark Tanner, founder of Shanghai-based marketing agency
China Skinny.
    Discounting and the roll-out of cheaper products had led to
a fall in the average selling price for several product
categories, including supplements, dairy, skin care and
cosmetics, he added. 
    Policymakers have said they expect inflation to pick up, but
data earlier this month showed consumer prices falling at their
fastest pace in three years and factory gate deflation
deepening. 
    While the economy, spurred by state-directed credit and
investment, is expected to expand 5% or so this year, consumers
are not feeling that growth, with youth unemployment running
high and some office workers earning lower wages. 
        Andy Yang, a student in Beijing, recently went to Hailao
Huoguo with friends and planned to switch from Haidilao in the
long run. "I'm graduating next year but I still don't have any
good job offers. For me, the cheaper the better," he said.
  
        Reached for comment, Haidilao said the brand was "still
an experiment". 
        
  
        BARGAIN STORE EXPANSION
  
        The climate has also given rise to a new breed of
discount stores, a relatively new phenomenon for China, whose
emergence are also spurring larger rivals to announce big price
cuts. 
  
        Lingshi Henmang is a six-year-old snack brand with the
slogan "The People's Snack". Its products are cheaper than
supermarkets and it plans to expand to 10,000 stores in 2025
from 4,000 currently, according to the Changsha-based company.
  
        In a statement released by its public relations
representative, Lingshi Henmang said the expansion was a result
of strong demand.
  
        "The market has undergone significant changes in the
past three years due to the epidemic, and consumers are becoming
more rational in their purchasing decisions," the statement
said.     
    Bestore  603719.SS , China's biggest snack brand, in
November fought back by cutting prices on average by 22% on 300
products, with the largest at 45%, in its biggest reductions
ever.
    Hotmaxx, which specializes in selling soon-to-expire
products at cheaper prices, has also set a target of expanding
to 5,000 outlets in the next three years, from 250 currently,
according to its website. 


($1 = 7.1417 Chinese yuan renminbi)

 (Reporting by Sophie Yu, Brenda Goh; Editing by Christian
Schmollinger)
 ((Sophie.Yu@thomsonreuters.com; 861056692136;))