- China's luxury slump is spreading to more consumer brands.
- Companies like Starbucks, Estée Lauder, and Nike have reported falling sales in the region.
- Consumer confidence continues to be weak, leading to an overall tightening of belts.
For the better part of this year, China has experienced a slump in the most opulent of sectors. Sales for luxury powerhouses like LVMH, Richemont, and Burberry have fallen in the region that once seemed to represent limitless growth for high-end goods.
Now, that downturn is coming for a wider set of consumer industries. Chinese people aren't just saving on Gucci and cognac but also cutting back on spending on cheaper products like beer and lipstick. It's hitting Western brands particularly hard, as reflected by companies across the consumer sector reporting muted sales in China in the most recent quarter.
Consumer spending in China never fully recovered after the government started lifting COVID-19 curbs in late 2022. Since then, the country has struggled with weak consumer sentiment and multiple economic challenges, including a property crisis, deflation, and high youth unemployment. China's third-quarter GDP grew 4.6% year-on-year — the slowest pace in over a year and below Beijing's growth target of around 5%.
In late September, Beijing announced aggressive stimulus measures to boost the economy, but analysts say much more is needed to spur and drive consumer confidence.
Meanwhile, China's once-free-spending consumers are holding back and prefer to save — in cash or gold. Cautious spenders are also trading down to knockoffs and lower-priced or local alternatives across a range of products from beauty and fashion to travel.
The prevailing zeitgeist in China is about "aiming to live well while spending less," MingYii Lai, a strategy consultant at Beijing-based market research firm Daxue Consulting, told Business Insider in September.
Last week, AB InBev, the world's largest beer producer, announced declining revenue in the region, joining rival Carlsberg in reporting disappointing results. AB InBev, which makes Budweiser, has struggled in China all year and reported a 16% sales drop in the country for the third quarter.
People in China are skimping on on-trade alcohol purchases, meaning they are spending less at bars and restaurants, Spiros Malandrakis, Euromonitor's head of research in the alcohol sector, told Business Insider.
"There is some flexibility, but it is not entirely recession-resistant," he added.
It looks like they aren't going out for coffee or burgers, either. Negative sales in China brought down McDonald's results for the third quarter. And Starbucks, which announced its fourth-quarter earnings last week, saw comparable store sales fall 14% in China.
"All indications show me the competitive environment is extreme, the macro environment is tough," Brian Niccol, the coffee giant's new CEO, said about China during the company's earnings call.
A similar phenomenon has arisen in fashion and beauty, where nonluxury brands are seeing consumer confidence, leading to an overall tightening of belts.
Beauty brands like Estée Lauder and L'Oréal have reported worse-than-expected results in the region. Sales for the former decreased 11% in the most recent quarter, driven by mainland China, where the company noted a declining appetite for skincare. It doesn't expect recent government stimulus to help sales in the current quarter.
Those results came on the heels of Nike's, which had lowered its full-year guidance over the summer, blaming China's unstable economy. The sneaker giant cited "softness" in the country, its third-largest market by revenue.
Even Apple, once bulletproof in the region, missed revenue estimates in the Greater China division.
Despite the headwinds, there have been bright spots.
Adidas managed to buck the trend, reporting sales up 9% in Greater China in the third quarter. Heineken, too, saw growth in the region last quarter.
Sectors offering discretionary "eat, drink, and play" experiences outperformed the wider consumer sector in China earlier this year, though their momentum has slowed in the past few months, wrote Lynn Song, the chief economist for Greater China at ING, in an October 28 note.
"More consumers appear to be gravitating toward higher value-for-money options," Song wrote.