Analysis: China's discount wars risk cementing frugal consumer mindset

MINISO Holding

11/06/2024 08:35

By Casey Hall
       SHANGHAI, June 11 (Reuters) - An aggressive market grab
by low-cost Chinese retailers has delivered bumper earnings for
some firms but has also intensified a bruising price war,
exacerbating deflationary fears in the world's second-largest
economy.
    From coffee to cars to clothes, China's discount retailers
have cut prices on just about everything as they chase a
consumer whose confidence has been battered by a property
crisis, high unemployment and a gloomy economic outlook.
    While the retail downshift has propelled revenues for firms
like discount e-commerce platform Pinduoduo against larger
rivals such as Alibaba, economists fear their success is
entrenching a Japanese-style deflationary mindset in the
consumer that will be difficult to shake.
    As retailers compete on price above all else, they force
tough cost cuts onto their suppliers, squeezing profit margins.
This in turn leads to lower wage growth or higher dependency on
low-paid gig work, hurting household demand.
    "If this situation continues, China may end up with what we
call a vicious cycle: lower value added consumption, deflation,
low profit rates leading to low wages, which further pushes
consumers to downgrade their consumption," said He-Ling Shi, an
economics professor at Monash University in Melbourne.
    In the most recent earnings season, revenues for low-cost
firms beat market expectations and outpaced their competitors.
    Revenues of PDD Holdings  PDD.O , which owns Pinduoduo,
surged 131% while China's leading food delivery app Meituan
 3690.HK  saw 25% growth. Discount retailer Miniso and Luckin
Coffee reported growth of 26% for 42%, respectively.
    PDD, Meituan, Miniso and Luckin Coffee did not immediately
respond to requests for comment.
    China's consumer price data for May due on Wednesday is
expected to show a slight uptick in inflation to 0.4% from 0.3%
April.
    However, analysts expect the headline figures will mostly be
propped up by utility price hikes, masking more critical
deflationary pressures.
    
    RACE TO THE BOTTOM
    In an environment where consumer confidence is near rock
bottom, price is king.
    Car makers in China have been in a price war for almost two
years due to tepid domestic demand. Over the past two months,
some car dealers and auto financing firms have launched loan
programmes with no down payment and even zero interest.
    Starbucks, which saw its China revenues decline 8% in the
first quarter due to what CEO Laxman Narasimhan described as
"fierce competition among value players" has in recent months
increased its use of discount coupons to bring prices closer to
Luckin Coffee.
    CEO of food delivery giant Meituan, Wang Xing, said last
week the firm had expanded coupon offerings and onboarded more
delivery-only kitchens with lower overheads than dine-in
restaurants. The app's newer hotel booking business is pursuing
what Wang called a "low star" strategy targeting cost-conscious
domestic travellers.
    Alibaba's  9988.HK  domestic e-commerce unit Taobao and
Tmall Group and JD.com  9618.HK , which saw single-digit revenue
growth, said in post-earnings calls that price competitiveness
will be key to future growth.
    Both companies have introduced longer sales periods for
China's mid-year shopping festival, known as "618", with
lowest-price guarantees for millions of products. In response,
Pinduoduo has launched an "automated price-tracking system" to
enable merchants to monitor and beat rivals.
    An internal memo to staff sent by JD.com founder Richard Liu
describing his firm as "bloated" has led to speculation the
company will respond to the increased competition by cutting
jobs - which is the opposite of what China needs for domestic
demand to recover.
    Longer-term, price wars may take out weaker players in
various industries, allowing rivals to then lift prices and give
their supply chains some respite, said Albert Hu, professor of
economics at the China Europe International Business School in
Shanghai.
    He warned, however, that they would only be able to do so if
growth in other industries creates enough jobs and income growth
to compensate for any market exits triggered by price wars in
consumer goods.
    "Deflation is a serious issue, Japan has struggled with it
for over three decades," said Hu. "A critical factor is wage
growth."

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China's consumer confidence remains low    https://reut.rs/4bRZ7Cq
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 (Reporting by Casey Hall; Editing by Marius Zaharia and Sam
Holmes)
 ((Casey.Hall@thomsonreuters.com;))