Thursday, April 25, 2024

What’s going on with China’s consumers

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Allan Barber takes a deep dive into the customer base that means so much to NZ’s farmers.
International markets have been mixed, with prices and demand for red meat – especially sheepmeat – falling in the first four months of the season.
Reading Time: 4 minutes

The rural sector’s immediate prospects for export growth are very limited, given the economic and consumer spending slowdowns in our main trade partner markets. 

It would be easy to criticise exporters for putting too many eggs in the China basket, although this isn’t the first time we have become disproportionately reliant on a single market. Global recessions come around at regular intervals, but not so frequently they can be planned for with any certainty, either their timing or depth.

It isn’t immediately possible to find new customers to replace those who place consistent orders during the good times and then cancel or postpone confirmed orders when their economy slows or grinds to a halt. But a degree of flexibility and fleetness of foot is a necessary skill for exporters that find themselves scrambling to move perishable goods in a recession. 

The ideal business model is a distribution of customers across several markets to guard against a downturn in some regions or product categories, but this presupposes some markets remaining strong. A global downturn offers limited escape routes.

As New Zealand’s largest export destination, taking over $20 billion of goods and services, China’s economy is hugely important to us with particular emphasis on dairy, meat, kiwifruit, cereal and wood products. NZ companies sell very little of this direct to consumers, but an understanding of the distribution channels and retail environment is an essential precondition of success.

At last month’s Red Meat Sector Conference, China marketing expert Mark Townsend, who founded the Shanghai-based company China Skinny in 2011, spoke about the complexities of the market, the importance of working back from the consumer and prospects for the future. His pointed to the huge differences between different parts of the country, including its sheer size with 79 cities having a population larger than NZ’s, each with its own distinct food preferences. An obvious example is the ease of finding lamb in Beijing compared with Shanghai, while in the far north mutton with good fat cover – which is rarely sold further south – is popular because of the very cold winters.

Townsend emphasised that while China’s economy is not performing to normal expectations for several reasons, there are also substantial changes in consumer habits as a result of covid and demographic trends in the population. Because of these factors the nature of food purchasing has changed dramatically, although the overall rate of protein consumption continues to exceed the growth in GDP. 

There are now 350 million urban households that since Covid have invested in making their homes more comfortable and, instead of eating out, now enjoy cooking at home. Kitchens are now better planned, with bigger ovens and freezers than before. This has a logical effect on how people eat.

Another factor is the so-called Lazy Economy, which demands “make life easy for me”. Consequently ready-to-cook meals are predicted to increase sixfold between 2019 and 2026 and they must be easy to find, buy and cook. 

Since covid the number of people living on their own has increased from 75 million to 92 million,which means a substantial growth in demand for small servings to satisfy the singles economy. 

Trends like sustainability are more about what is in it for the consumer than for the planet, while plant-based products are still a very small category because Chinese consumers don’t like them much; central government has also started approving GMOs, but as yet consumers are not keen. 

However, things happen much more quickly in China than in other markets, so this could change and it will be important for marketers to watch closely for new trends emerging.

One of these trends is for shoppers to buy on Douyin, a sister app to Tiktok, rather than through traditional retail channels. 

Also since covid China has felt itself unloved internationally, which has made consumers less willing to buy foreign brands, which have also lost touch with the Chinese market and as a result domestic products have become more relevant and popular. 

Townsend cited the example of liquid milk, which on the Alibaba platform has risen by 19% since last August and now comprises 35% of the dairy market. Overseas brands have failed to take advantage of this trend with market share dropping by a third from a comparable period last year.

David Mahon, a long-established expert on the Chinese economy, argues consumer purchasing is severely hindered by the dire state of the property and car markets, which are characterised by price competition attempting to provoke demand. Consumers will wait for the price wars to bottom out before they are willing to spend.

The Chinese government’s willingness to stimulate demand may determine whether or how quickly the consumption pattern improves, but Mahon maintains there is a serious need to correct the structural weaknesses in the economy before a real recovery can occur. 

Provincial and municipal governments have had a large proportion of their local taxes diverted to central government coffers, as well as restrictions imposed on land to boost agricultural production. 

The net effect has been an acute shortage of funds resulting in local government salaries being cut by half and the sale of land for industrial and residential property development, even insolvency, thereby causing a massive property oversupply.

According to Mahon, central government ideally needs to empower the private sector and reduce the influence on the economy of state owned enterprises, which currently make up 40% of GDP, while being very inefficient. 

Another negative factor in both the private and state economy is the level of corruption, which crushes the morale of ordinary working people and small business owners. Mahon believes this must be addressed to ensure the population continues to grant central government its uncritical support.

China will inevitably be a major trading partner for the foreseeable future, but continued growth cannot be taken for granted without concerted effort to understand the economic and political factors at play.

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