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China’s Consumer Economy

Editorial

Apr 27, 2012 3:19 AM   By Avi Krawitz
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RAPAPORT... Forecasts that the pace of China’s economic growth will slow in 2012 have fueled some ‎additional caution in the diamond markets. Wary of the impact that a global slowdown will ‎have on the country’s exports, naysayers contend that Chinese consumers will curb their ‎spending.‎

With the May 1 Labor Day long weekend approaching - billed as one of the more ‎important retail periods on the country’s calendar - their concerns may be justified. ‎Shanghai’s diamond wholesale market is not as busy as it was this time last year. While ‎the value of China’s diamond imports was up 24 percent in the first two months of 2012, ‎the quantity of goods brought into the country fell 17 percent from the same period last ‎year, according to a report by Xinhua News Agency citing China’s General ‎Administration of Customs. ‎

Consumers there are looking at the global landscape, and with Europe being China’s ‎largest trading partner, the lingering European crisis will no doubt impact the Chinese ‎economy. In February, China posted a rare trade deficit but managed to return to a ‎relatively deflated March surplus.  ‎

Still, the dragon certainly has not lost its fire. From an economic viewpoint, the high pace ‎of growth seen in the past few years was perhaps unsustainable. And viewed in a ‎different light, China’s economy is showing signs of maturing, even if it is still in relative ‎infancy. ‎

One sure signal of its maturing economy is the country’s shift from being an investor-‎driven to a consumer-based market. The timing for this development could not have ‎been better.‎

While exports may decline in the face of global (or European) economic challenges, local ‎consumption is still on the rise and helping to sustain gross domestic product (GDP) ‎growth projections at around the 8 percent level. Retail sales grew by a healthy 15 ‎percent year on year in the first quarter of 2012, according to the National Bureau of ‎Statistics of China. ‎

Research recently published by McKinsey & Company suggested that this shift toward ‎being a consumer driven economy will to an extent hedge the impact that slower global ‎growth will have on China in the long run. Consumption will account for 43 percent of ‎total GDP in 2020, up from 33 percent in 2010, according to the McKinsey report entitled, ‎‎“Meet the 2020 Chinese Consumer.”  ‎

This is partly by design as the government attempts to spur consumption in order to ‎become less reliant on exports. But it is also by natural progression as consumers there ‎earn higher incomes, get more sophisticated and become increasingly brand conscious.  ‎

As a result, McKinsey stressed that China is seeing growing discretionary spending and ‎that consumers are “trading up” to better products. ‎

‎“It is the top end of the market that will most benefit from trading up,” the report stated. ‎‎“China had already become a leading luxury market by 2010 and could overtake Japan ‎to become the biggest luxury market by 2015.”‎

But for companies aiming to penetrate this market, changing trends in China offer ‎significant challenges to consumer-focused industries over the next decade. ‎

Companies ought to consider that despite their growing wealth, Chinese mainstream ‎consumers are still conservative by nature, have higher expectations regarding their ‎purchases, and are showing a rising sense of individuality. In addition, even as the ‎number of brands offered has recently increased, the young and affluent new consumers ‎are increasingly brand loyal, McKinsey explained. ‎

While it is true that Chinese consumers have a penchant for luxury brands, they are also ‎conservative buyers. They are less spontaneous than their counterparts in the West and ‎tend to plan their purchases by investing time to learn about the product and to get the ‎best deal, rather than just buy on a whim. McKinsey added that the Chinese could ‎become among the most dedicated and sophisticated of online shoppers.‎

Their affinity for brand loyalty could prove tricky for global companies seeking to ‎penetrate the Chinese mainstream market, and even more so for jewelers, given the ‎brand recognition enjoyed by the likes of Chow Tai Fook, Chow Sang Sang and Luk ‎Fook Holdings. Gaps in the luxury market may be more prevalent.  ‎

Therefore, careful strategic planning is vital for luxury brands seeking a presence in ‎China. Many have focused their expansion plans on China and the greater Far East, as ‎well they should. The next ten years could well see some aggressive marketing by these ‎companies to capture that high-end brand loyalty.    ‎

Harry Winston and De Beers-LVMH are two examples of diamond jewelers that have ‎recently rolled out new store openings in China, and others are expected to follow. These ‎companies will need to carefully consider geographic location and the vast cultural ‎diversity and taste in the country as they plan their strategy to capture their market ‎segment. ‎

For despite the maturing of the Chinese market, the country’s economic boom is still in its ‎infancy. If anything, by sheer population size, there are scores of new consumers waiting ‎to enter the fray. ‎

While 2012 presents some uncertainty due to the global environment, China continues to ‎becoming an important consumer market. The country still has a lot to contend with ‎before the 2020 Chinese consumer emerges. The rapid changes taking places may often ‎be accompanied by uncertainty. ‎

But in a global sense, China’s declining dependence on exports and its growing consumer ‎culture should be seen as a positive. It provides a tremendous opportunity for savvy ‎companies looking to spur their own growth in the long term - especially in the luxury ‎space. ‎

The writer can be contacted at avi@diamonds.net.

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.

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Tags: Avi Krawitz, China, diamond, diamonds, jewellery, Jewelry, McKinsey & Company, Rapaport
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