Daily Management Review

Revenue Boost For US Companies In China As Their Domestic Consumers Cut Down On Spending


Revenue Boost For US Companies In China As Their Domestic Consumers Cut Down On Spending
China is emerging from economic lockdowns, and U.S. firms such as Procter & Gamble, Starbucks, and MGM Resorts International claim the country's recovery is boosting their total sales while consumers in their home countries keep a close eye on their wallets.
China, with its vast population and growing middle class, is a tempting market for many multinational corporations that have seen their US operations mature. However, its zero-Covid policy, which placed stringent limitations to prevent the virus's transmission, harmed the country's economy — and earnings for the many American companies that sell their goods or services there.
China's GDP increased 4.5% in the first quarter after the policy was reversed in December. Companies in the United States are saying that demand in China is returning, boosting sales at a time when many Americans are cutting back on their spending.
However, the recovery has been slower and less dramatic than many investors had planned. In China, most enterprises are still waiting to outperform pre-pandemic sales. The travel retail sector is taking much longer to recover. Furthermore, Apple's sales in its China area decreased, which comprises the mainland, Hong Kong, and the nearby self-governing island of Taiwan.
Morgan Stanley analyst Kelly Kim stated in a research note that the firm's China consumer team forecasts a three-stage recovery: a spring break from February to April, summer "revenge spending" from May to July, and a stable rebound beginning in August.
Restaurants established in the United States were among the businesses that saw demand rebound in China. However, sales have yet to return to 2019 levels.
Starbucks announced that same-store sales in China increased by 3% in the most recent quarter, reversing previous declines. Some Wall Street analysts continued to forecast declining same-store sales in the company's second-largest market.
A year ago, the coffee giant cancelled its forecast for the year, citing Chinese lockdowns as one of the reasons. Starbucks' same-store sales in China fell 23% in that quarter.
Yum China, Yum Brands' master franchisee in China, also reported 8% growth in same-store sales in the first quarter. KFC's largest market and Pizza Hut's second largest is China.
“We benefited from increasing mobility and saw a 40%-plus growth at transportation and tourist levels. However, same-store sales at these locations in the first quarter were still 20% to 30% below 2019 levels,” Yum China CEO Joey Wat told analysts on the company’s conference call.
As restrictions ease, Chinese consumers appear to be travelling again, visiting theme parks and casinos. The rise in travel and leisure spending aided a variety of US businesses at the start of the year.
"Improved financial results" at Disney's Shanghai and Hong Kong resorts were highlighted.
“We’ve been really gratified to see the bounce-back from the pandemic closures that we had,” Disney CFO Christine McCarthy told analysts Wednesday on the company’s conference call.
Macao, the world's largest gambling hotspot, has seen a spike in visitors when testing requirements for inbound visitors from the mainland, Hong Kong, and Taiwan were eliminated. Tourism peaked in late January during the Lunar New Year vacation.
MGM Resorts International owns and runs the MGM Cotai and MGM Macau casinos in the region. Earlier this month, the gambling conglomerate claimed a rapid return to profitability as foot traffic in its Chinese casinos surpasses pre-pandemic levels. Its properties in China generated adjusted earnings of $169 million in the first quarter, accounting for 88% of the division's adjusted earnings four years ago.
Airbnb reported that its Asia-Pacific segment achieved the highest year-over-year growth in nights and experiences booked in the most recent quarter. In 2022, the company shut down all mainland listings and concentrated on assisting Chinese users locate housing abroad.
“We are encouraged by China’s recent lifting of its travel restrictions even though we anticipate the outbound recovery to be gradual due to challenges with limited flight capacities,” the company wrote in its quarterly letter to shareholders.
While many US-based businesses are profiting from China's resurgence, the travel retail industry is still waiting for the same.
With the notable exception of its travel retail category, SK-II, a luxury skin-care brand owned by Procter & Gamble, has seen its sales rebound in China. In China, Procter & Gamble's organic sales increased by 2%. As consumer mobility increases, the consumer packaged products behemoth anticipates sales to expand even further.
Tapestry, the parent company of Coach, Kate Spade, and Stuart Weitzman, said Thursday that the firm has begun to observe an increase in internal Chinese tourism, notably in Hong Kong and Macao.
However, he emphasised that worldwide Chinese tourism is still below pre-pandemic levels — and that the potential for increased travel may provide opportunities in the future.
Tapestry predicts a mid-single-digit rise in revenue in its Greater China unit for the fiscal year, with a 50% increase predicted in the next quarter. As North American consumers become more cautious, the company's sales strength in China is helping to offset difficulties in the United States.
Despite the fact that many firms have struggled with travel retail in China, at least one company is already experiencing a rebound in sales at duty-free shops and tourist sites.
Coty, the beauty giant, said consumer traffic has returned to retailers, and it has increased flights to the tropical island and shopping district of Hainan, where it has dozens of stores. Covergirl, Kylie Jenner's beauty lines, and a bevy of designer perfume and cosmetics brands are all owned by the French-American conglomerate. In the third quarter, Coty's travel retail sales increased by more than 30%.
A glut of inventory dragged on Coty's China sales in the most recent quarter, although April sales were still higher than both the year-ago period and the previous two years.
In a note to clients following Coty's quarterly results report, Piper Sandler analyst Korinne Wolfmeyer dubbed the company one of her favourite beauty stocks. She referenced its performance in China as an example.
“We are remaining cautiously optimistic on China for the beauty market in the near term, but for COTY specifically, we view the company’s strategic investments in the region and key product launches as a driver of market outperformance,” she wrote.