31 Oct 2014
Shift in Mainland Holiday Spending Sees New Focus on Mass Market
Some 20 months on from the launch of the mainland government's drive to promote greater austerity in the public sector, the move continues to have dramatic repercussions on festive spending.
The central government's eight-point regulations designed to curb extravagant spending in the public sector have had clear repercussions in the holiday spending. Those sectors affected by the so-called "three public spendings" -business trips, cars used for official business and official entertainment – have been particularly hard hit. Overall, while conspicuous personal consumption has declined, the price of certain luxury items, long artificially inflated by public sector spending, have returned to a more reasonable level.
Despite the changes in the market, a number of companies have managed to ride out the fall in public spending, with a number of clear trends now becoming apparent.
I. High-end demand sees sustained fall
1. Cold spell for gift market
There has been a notable decline in the sales of those products typically purchased as gifts for members of staff. The items affected include a number of notable delicacies, such as sea cucumbers, cordycep, old Pu'er tea, top-class hairy crabs, bird's nests and ginseng. Traditionally, the Mid-Autumn Festival, New Year's Day and the Spring Festival were the peak period for corporate gift giving and entertaining. That business, however, has dropped off dramatically.
In previous years, some government units would order calendars, desk diaries and greeting cards as gifts for clients. Following the public spending ban, most departments have ceased to order such items and cancelled existing orders. Overall, sales have dropped by more than half.
The larger department stores – those formerly frequented by corporate buyers purchasing via gift and spending cards - have been most seriously affected. In the first half of this year, the total sales of the top 100 department stores dropped to Rmb52.3 billion, a fall of 9.3% compared to the same period of last year. Among them, some 84 registered a sales decline compared to 2013.
2. High-end mooncakes: big price discounts
Traditionally, people have opted for luxury and extravagance in their choice of presentational mooncakes. This saw abalone, shark's fin and bird's nest varieties of mooncakes all available. Mooncake gift boxes frequently incorporated imported wines and chocolate, even gold coins, gold mooncakes, cell phones and diamond rings. Prices for such ostentatious offerings ranged from a few thousand yuan to over Rmb10,000. Some even sold for hundreds of thousands of yuan. One significant aspect of these "mooncake gift boxes", of course, is that the buyer is not the end-consumer.
Following the edict from the Central Commission for Discipline Inspection of the CPC discouraging the giving of mooncakes as gifts for Mid-Autumn Festival and National Day, sales of the top-of-the-range variants suffered a noticeable fall. As a result, the price of certain mooncakes was slashed before they even went on sale. Some brands have even pulled out of the sector altogether.
3. Luxury market shrinks
According to figures released jointly by the World Luxury Association and the China Council for the Promotion of International Trade, the total consumption of luxury goods during the seven-day 2014 Spring Festival holiday dropped by 57.8% in year-on-year terms. Compared to Spring Festival 2012, the decline was even more significant - 80%. Tellingly, the number of new shops opened on the mainland by the 47 global brands that participated in the World Luxury Association survey dropped from 280 in 2012 to just 100 in 2013. With sharp falls in sales, many luxury brands have already indicated plans to suspend opening new stores in China for the duration.
4. From "sky-high costs" to "down-to-earth prices"
The price of certain commodities skyrocketed as a result of consumption courtesy of the public purse. While a bottle of 53% proof Feitian Moutai cost around Rmb300 a decade ago, prior to the spending ban, the price hit a high of Rmb2,000. It has now returned to the treble-digit level. Pu'er tea, knife fish, bird's nest, cordyceps and other items that once commanded record prices, have also seen their stock drop. The prices of Longjing green tea, Maojian green tea and hairy crabs from Lake Yangcheng are all noticeably down.
In short, the more a commodity or venue relies on the three public spendings, the more it is affected by the eight-point regulations and, thus, the more sizable is the subsequent fall in its sales volume and price. According to the recently released interim reports of a number of listed mainland companies, the performance of the A-share companies operated in areas affected by the government clampdown all showed declines.
In the case of the premium alcohol sector, for instance, a sector that relies heavily on public spending, a number of companies have clearly struggled. Luzhou Laojiao, one of China's truly classic spirit brands, for instance, reported a 30.8% drop in income and a 47.23% drop in net profits in the first half of this year compared to 2013. Similarly, Shui Jing Fang, a premium Baijiu distillery, sustained losses of Rmb85.48 million in the first quarter of 2014 and foresees greater losses across the whole year.
5. Scalpers out of business
In previous years, spending fuelled by public funds during festivals also made scalping big business. The circulation of mooncake coupons by scalpers made it possible for some mooncake manufacturers to play a significant role in selling mooncake coupons short. The situation was very different this year, however. There were relatively few people selling the coupons and even fewer people buying them. As a result, most of the would-be scalpers found themselves out of business.
II. Market can no longer rely on public spending
Overall, it could be argued that, while the "gift economy" seems to boost spending, it actually risks raising the operating cost of businesses and public bodies, pushing up prices and adversely affecting the normal spending pattern of individual consumers. This is regardless of any role it may have in corrupting the public service ethos. The current official thinking is that natural consumption patterns should be encouraged, while reliance on stimulus from the "three public spendings" is to be discouraged.
Stimulating domestic demand, however, does not mean encouraging waste. The government line is that promoting diligence and thrift, while opposing extravagance and waste, is conducive to the formation of a civilized, eco-friendly and low-carbon mode of consumption and is more sustainable in the long-term.
When the prices that have been driven unnaturally high by official spending return to a more appropriate level, commodities once deemed unaffordable may again be within the reach of the ordinary consumer.
While it seems clear that the lull in high-end consumption will affect business in the short term, it is likely that, in the long-term, the return to more rational spending will oblige companies to readjust their development strategies, allowing for a gradual improvement in the commercial sector.
III. Business transformation inevitable
At present, it seems likely that the age of windfall profits based on the "three public spendings" has come to an end. Targetting the mass market is now intended to be the norm. In order to benefit from this, businesses in the luxury sector will need to change their approach and operating model, segment their markets and improve their services.
1. Transformation: A "systems engineering" project
In terms of those commercial enterprises looking to move into potentially profitable new territories, their focus should be on those communities with a high population density, including new suburbs and new towns. Those in business districts, with a high concentration of office workers, should focus more on the lunchtime market.
In terms of manufacturing companies, the important thing is to develop new products, improve product quality, discard excessive packaging, reduce costs, and raise the price-performance ratio. For retail enterprises, the best move would be to increase the proportion of self-service stores, develop own-label brands and produce unique products, with distinctive business characteristics.
In the hospitality sector, reasonably-priced breakfasts and the provision of lunch to the elderly in residential communities will offer considerable potential. In order to benefit from this, all the relevant businesses need to make adjustments and upgrades in terms of their service, ranges, price and environment.
2. Mass consumption does not simply mean low price
Spending power will continue to rise and the trend of diversification in consumption will become more obvious as the level of income increases. It is likely that spending on wedding banquets, bridal photography and other matrimonial items will mainly be in the mid- to high-end range.
After the move away from high-end consumption, there is a hope that there will be shift in spending towards more quality-of-life and spiritual pursuits. While it seems likely that personal consumption on luxury items will continue to grow, it may well become more rational and individual, a reflection of more personal preferences. To this end, specialty stores, outlets, overseas purchasing agents and cross-border online shopping will all have their own dedicated customer bases. In the age of mass consumption, it would seem prudent that business operators seek to provide customers with goods with a better price-performance ratio. Those that can make a clearer statement of their quality should benefit from securing a larger market share.
3. Businesses need constant innovation
This year's developments in the mooncake sector help highlight the need for reinvention. When sales of high-end mooncakes plummeted, a number of long-established firms came up with new ideas rather than adhering to their traditional business strategies. Wufangzhai, Xinghualou, Rongqinghe, Kuisheng, Daoxiangcun and other key firms in the sector maintained their popularity by producing mooncakes for the mass market. Quanjude, for example, prospered this year by offering simply packaged mooncakes for Rmb49 a box.
The hot sellers this year were fresh-meat mooncakes, many of which attracted long queues and did great business. A number of well-known food shops and restaurants - notably Zhenlao Dafang, Guangmingcun, Taikang Foods, First Food, Laodachang, Harbin Food Factory, Lubolang and Dafugui - all produced their own fresh-meat mooncakes. In total, nearly 70% of superstores sold their own variety of fresh-meat mooncakes.
The mooncakes made by these firms were not only value for money, but also demonstrated considerable innovation. Wang Jia Sha, for instance, launched its fresh-meat mooncakes with hot pickled mustard tubers, while the Quanguo local delicacies store's matsutake fresh-meat mooncakes prospered thanks to their unique flavour. Lubolang even went as far as to make curry, spicy and crabmeat mooncakes. Wang Jia Sha was said to have sold 10,000 crabmeat mooncakes a day at its peak. The booming sales of own-brand fresh-meat mooncakes also boosted the sit-down business of these restaurants, as well as their sale of other takeaway dishes, notably cakes, wines, gift boxes and other related commodities.
4. Readjustment inevitable
A number of luxury hotels have lowered their target consumer threshold by offering fewer menus featuring costly items, notably reducing the emphasis on bird's nest, abalone and shark's fin. Several have shifted their focus more on to wedding and birthday banquets, as well as value-for-money family meals. Others have capitalised on their business district locations by offering inexpensive "white-collar lunch" and "business lunch" menus in the hope the fast turnover/small profit model might prove successful. It was also hoped that the increased footfall resulting from this would have a knock-on benefit for onsite retail and entertainment opportunities, among other offerings. A number even went as far as to dispense with minimum charges for VIP rooms and allowed patrons to bring their own drinks. As a further alternative, some began offering takeaway/part prepared dishes.
A couple have taken even more drastic measures. XE Flavour, a high-end restaurant chain, for instance, has closed a number of its outlets in the wake of the curb on spending. It recently switched its focus to the Big Data sector, where it trades as the Cloud Live Tech Group.
Away from the hotel sector, other hard-hit suppliers have also rethought their business models. Several manufacturers and wholesalers of desk diaries and greeting cards, for instance, have switched to producing office appliances and decorations.
With fewer people travelling at public expense, the personal and family travel sector is on the rise, with the level of outbound tourism starting to show a significant increase. This is a development that should be of keen interest to travel agencies, hotels, airlines, tourist destinations and souvenir manufacturers/distributors.
Qi Xiaozhai, Special Correspondent, Shanghai