Looking Ahead to Stronger Chinese Consumption

By? Andy Crawford (M.A) , Managing Consultant at China Skinny .

This article was published in the spring issue of the German Chamber Ticker. Read the full issue online?here .

China is the largest developing #consumption market in the world. In the years of the pandemic, real salary levels outpaced inflation year after year, so you would imagine consumption to be stronger than ever. In 2022, however, China hit one of the slowest years of economic growth in decades. China’s GDP grew just 3%, a rate so slow in #China , it hasn’t been seen since the pre-opening days in 1974. Last year, retail sales fell 0.2%, totaling nearly RMB 44 trillion (USD 6.6 trillion). The decline is reflected across product sales of apparel, cosmetics, and jewelry during the year.

The #COVID -19 pandemic and #ZeroCOVID policies have significantly impacted Chinese consumption. Throughout the pandemic, strict testing measures and near instantaneous city-wide lockdowns led to years of decline in consumer spending. This economic hardship of Zero-COVID was felt not only in the pockets of consumers, but among brands as well. The Business Confidence Survey conducted by the German Chamber of Commerce in China found that only 51% of businesses surveyed intend to increase investment in China within the next two years — compared to 71% from last year. Despite much of the world moving on, China felt as if it was stuck in an endless loop of lockdowns and daily nucleic acid testing.

However, in a surprise turn of events, China unveiled its optimized anti-COVID-19 measures in December 2022, leading to a gradual opening of borders and pushing the country into a state of cautious optimism unseen in years. While categories such as e-commerce, pets, and health & wellness were fortunate to see expansion within the Zero-COVID time, the same cannot be said for other market sectors. Today we look at three major categories in the China market which, despite high market volatility, show strong signs of a return to normality, both domestically and abroad.?

The Cautious Spark in Tourism

For years, both domestic and international #tourism was nearly impossible in China. Lockdowns without warning, rampant COVID-19, uncertainty, and long quarantine times for travel put a serious damper on travel. While many expected this category to remain quiet for some time, within thirty minutes of the relaxation of COVID-19 measures, travel platform Ctrip data showed searches for popular cross-border destinations like Japan, Thailand, and South Korea, had increased 10-fold. However, according to the National Immigration Administration, during the 2023 Lunar New Year, 2.39 million trips were made both out of and into China - still down 81% from the Lunar New Year in 2019.

While long-distance international travel will take time to recover, domestic tourism was particularly popular, growing 3.2 times year-on-year. Even with the possibility of catching COVID-19 at its peak, revenue generated from domestic travel during the New Year holiday in 2023 reached nearly RMB 386 billion (USD 57.6 billion) — 73% of that in 2019. These numbers come as a shock, considering the pessimism Chinese consumers feel about domestic travel. In recent years, traveling domestically would often mean an initial 72-hour quarantine, signing up for a local QR code, relentless testing, and quarantining both when you arrive and return home. As a result, domestic travel was undesirable, to say the least. Now, with many cities finally ending their extensive COVID-19 procedures, many can take more spontaneous domestic trips.?

This isn’t to say that consumers are rushing to the boarding gates and train terminals. Chinese consumers are dipping their toes in the water before jumping into the travel deep end. Some domestic airlines are trying to encourage the jump, with airlines such as Sichuan Airlines offering international flight packages as low as RMB 1,888 (USD 280) for a roundtrip ticket to locations such as Italy, Finland, or Turkey during the first six months of 2023. These packages were priced far lower than the market price to encourage substantial growth and enhance consumer confidence.?

Flight frequency increases following the reduction in travel restrictions also boost consumer confidence. While flights were operating at just 11% in January 2023, as of March, they have increased to 45% capacity, and are expected to reach 80% by the end of the year. Furthermore, while only 20 countries are approved, group tours with flight & hotel packages were allowed to resume. While outbound travel will certainly take time to reach its pre-pandemic levels, what is clear is the interest in the future to travel further and to stay abroad longer.?

We anticipate this growth in travel will continue to rise steadily and, within some time, numbers will exceed pre-pandemic levels as the travel bug spreads across the country. China is ready to have great travel experiences again, dearly missed after years of restrictions. Consumers far and wide will once again be sharing their positive experiences on social media and encouraging others to take part. Unique from pre-COVID times, consumer expectations will differ, as there is a much higher sense of finding “the one right trip” than before. Therefore, it will be important for countries to make the experience unforgettable.

Luxury Consumption in Transition

After years of impressive growth, COVID-19 put a major damper on luxury sales in 2020. With limited international travel allowed, consumers needed to get their fix elsewhere. This led to a 48% increase in the sale of personal #luxury goods domestically in 2020, and a 36% increase the following year. This impressive domestic growth was led by large expansions in retail stores and luxury online shopping. The shift to online luxury opened the door for many lower-tier cities to access goods they previously did not have access to.?

Yet in 2022, met with the real estate market slowdown and higher unemployment rates, foot traffic in luxury shops declined by 30-35%, according to Bain China. Last year there was a 6% decline in online luxury beauty sales, and a 20% decline in offline luxury fashion and lifestyle categories. To revive the once vibrant luxury market, China encouraged domestic purchases through duty-free shopping in Hainan during 2022 and into 2023. The annual growth rate of the Hainan duty-free market is expected to grow by nearly 33% from 2023 to 2026. The island’s duty-free center quickly became a leading attraction, as lower prices and the domestic location provide a sense of serenity for consumers looking to spend their New Year holiday bonuses. The 2023 offshore duty-free sales during the Lunar New Year holiday were reported at RMB 1.6 billion (USD 238.8 million), a year-on-year increase of nearly 5.9%, according to the Haikou Customs Office.?

While this is just one attempt placed to encourage more luxury sales, 2023 will see many more Chinese consumers hitting the road and traveling to Europe, North America, the Middle East, and other Asian destinations to get their fill of luxury goods from top international destinations. This time, they will come with higher expectations: the pandemic ultimately enhanced the offline and online experience of luxury purchases in China. Consumers are now used to the seamless connection between their online purchases, offline personal customer service agent, and integrated digital profiles. It’s safe to say that today, more than ever, brands need to offer something unique — both products and experience — to lure Chinese back to foreign stores and compete with Hainan and China’s developed omnichannel ecosystem.?

Movie Theaters Return to Life

We are now witnessing across multiple categories the desire to live a ‘normal life’ again. This can be best seen in a category hit worse than most - movie theaters. 2022 was an exceptionally painful year for the Chinese box offices, as total gross revenue reached RMB 6.4 billion (USD 957 million) — down by 84% from the previous year, according to IMDBPro. In 2022, 98% of cinemas across the country were temporarily shuttered due to the pandemic, and many never reopened, according to Beijing-based consultancy Top Century.?

The release of major films such as “Avatar: The Way of Water” has led to moderate hope for the film market's recovery and a boost in morale and confidence in the industry. In the final weeks of 2022, “Avatar: The Way of Water” made its way to the number two highest-grossing film of 2022 despite only being on the roster for two weeks.?

We saw much of the excitement to get back in the theaters during the 2023 Lunar New Year, where China ranked first in worldwide box office sales. Domestic hits such as “Man Jiang Hong” and “The Wandering Earth-2” totaled over RMB 3 billion (USD 447.8 million) alone. This was the first seasonal peak in the Chinese film industry over the last four years. There are great expectations to see these trends continue, as more movies are released in China and film studios hope to capitalize on the strong Chinese market.?

Conclusion

While China’s consumption is rebounding, it is important not to look at this trend with rose-tinted glasses. There is still much to be done to both enhance consumption and stabilize the economy. Nevertheless, the future is looking up for consumers and brands in China. Moving into 2023, China will likely regain its place as a leading consumption market on the world stage, and top tourist destinations will, once again, be met with groups of Chinese travelers. Brands looking to capitalize on these and many other market opportunities should act quickly — while the country is recovering — to capture the greater market share.

Andy Crawford?is a Managing Consultant at Shanghai-based research and strategy firm, China Skinny. He is fluent in Chinese with a master’s degree in economics from Fudan University and multiple years of experience in the China market. He applies his in-depth insights to answer some of the toughest questions international firms in China face across various industries.?

Since 2011, China Skinny has worked on over 700 projects with more than 280 clients across 26 categories. Reach out at [email protected] or check out chinaskinny.com for a range of services across branding, strategy, and market research.