Pictured here’s a McDonald’s store in Yichang, Hubei province, China, on July 30, 2024.
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BEIJING — One theme emerging within the recent spate of earnings reports from American firms is the pressure from the Chinese market.
The Chinese economy – which has greater than 4 times the population of the United States – has attracted multinationals for many years due to its large, fast-growing market. But slower growth and intense local competition, in addition to tensions with the United States, at the moment are weighing on corporate profits.
“Consumer sentiment in China is quite weak,” MC Donalds Chairman, CEO and Director Christopher Kempczinski said of the quarter ended June 30.
“In our industry, as well as in a variety of consumer goods industries, we see that consumers are very, very bargain-seeking,” he added. “In fact, we’re seeing a lot of switching behavior among consumers. They’re choosing the best deal.”
McDonald’s said sales within the international development licensing markets segment fell 1.3 percent year-on-year. This segment includes China, where the corporate reported a decline in sales, but didn’t specify by how much.
Chinese firms are also struggling. Nationwide retail sales rose by just 2 percent in June in comparison with the identical period last yr.
In the Chinese stock market (often known as A shares), returns likely bottomed out in the primary quarter and will “pick up slightly” within the second half of the yr, said Lei Meng, China equity strategist at UBS Securities, in a July 23 note.
Several US consumer goods giants have confirmed the downward trend of their recent earnings reports.
Apple said sales in Greater China fell 6.5% year-on-year within the quarter ended June 29. Johnson & Johnson said China was a “very volatile market” and a crucial business segment whose performance had fallen in need of expectations.
After a “strong start” to the yr General Mills Chief Financial Officer Kofi Bruce said the quarter ended May 26 saw “a real deterioration or worsening in consumer sentiment,” which impacted customer traffic at Haagen-Dazs stores and the corporate’s “premium dumpling business.” General Mills owns the Wanchai Ferry Dumpling brand.
The company’s organic net sales in China double-digit decline through the quarter.
We don’t expect a return to the expansion rates we experienced before Covid.
The regional results also impact the corporate’s longer-term prospects.
In China, “we do not expect a return to [double-digit] growth rates we saw before Covid,” Procter & Gamble Chief Financial Officer Andre Schulten said this during a conference call last week. He expects growth in China to enhance over time to a mid-single-digit range, just like that in industrialized countries.
According to Procter & Gamble, sales in China fell by 9 percent within the quarter that resulted in late June. Despite declining birth rates in China, the corporate was capable of increase sales of baby care products by 6 percent and increase its market share due to a localization strategy, in keeping with Schulten.
Hotel operator Marriott International The forecast for revenue per available room (RevPAR) for the yr has been reduced to three to 4 percent growth. The reason for this is especially expectations of continued weak development in Greater China and weaker development within the USA and Canada.
Marriott’s Greater China RevPAR declined roughly 4% for the quarter ended June 30, partly as a result of Chinese travel abroad along with a weaker-than-expected domestic recovery.
However, the corporate said it signed a record variety of projects in China in the primary half of the yr.
McDonald’s also reiterated its goal of opening 1,000 latest stores in China annually.
Domino’s said its Chinese operator DPC Dash goals to open 1,000 stores within the country by the tip of the yr. Last week, DPC Dash said it had just over 900 stores at the tip of June and expects first-half revenue to grow at the least 45% to 2 billion yuan ($280 million).
Local competition
Coke noted “muted” consumer confidence in China, where sales fell in contrast to growth in Southeast Asia, Japan and South Korea. Net operating revenue in Asia Pacific fell 4% year-on-year to $1.51 billion within the quarter ended June 28.
“There is a general macroeconomic weakness as the overall economy works through some of the structural issues around real estate, prices, etc.,” said James Quincey, Chairman and CEO of Coca Cola, at a Conference call on quarterly results.
However, he attributed the decline in sales in China “exclusively” to the corporate’s shift from unprofitable water products within the country to sparkling water, juices and teas. “I think sparkling water sales in China were slightly positive,” Quincey said.
The must adapt to a brand new product and promoting mix was a standard topic in conference calls about quarterly earnings for U.S. firms.
“We continued to face more restrained consumer spending and increased competition last year,” Starbucks CEO Laxman Narasimhan said at a Conference call on quarterly results. “Unprecedented store expansion and price wars in the mass segment at the expense of comparables and profitability have also led to significant disruptions to the operating environment.”
Starbucks reported a 14 percent drop in sales at its Chinese stores within the quarter ended June 30, far worse than the two percent decline within the U.S.
Chinese competitor Luckin Coffee, a few of whose drinks cost half as much as a Starbucks drink, reported a 20.9% decline in comparable-store sales for the quarter ended June 30.
However, the corporate claimed that sales from these stores increased by nearly 40% to $863.7 million. Luckin has greater than 13,000 self-operated stores, mostly in China.
Starbucks said its 7,306 stores in China saw revenue fall 11% to $733.8 million in the identical quarter.
Both firms have many competitors in China, from Cotti Coffee on the low end to Peet’s on the high end. The only public announcements about Peet’s China business described it as “strong double-digit organic sales growth” in the primary half-year.
Rays of hope
Not all major consumer goods brands have reported such difficulties.
Canada Goose Sales in Greater China increased 12.3% to C$21.9 million (US$15.8 million) for the quarter ended June 30.
Sports shoe brands also reported growth in China, but warned of an impending slowdown.
Nike reported 7% year-over-year revenue growth in Greater China for the quarter ended May 31 – nearly 15% of its business.
“Although our outlook for the near term has clouded, we remain confident in Nike’s long-term competitive position in China,” said Matthew Friend, the corporate’s CFO and executive vp.
Adidas reported 9% revenue growth in Greater China for the quarter ended June 30. The region accounts for about 14% of the corporate’s total net revenue.
CEO Björn Gulden said in a conference call that Adidas is gaining market share in China every month, however the local brands are tough competition. “Many of them are manufacturers who then go directly into retail with their own stores,” he said. “So their speed and value for money for the consumer was different than before. And we are trying to adapt to that.”
Skechers reported year-on-year growth of three.4% in China within the three months ended June 30.
“We continue to believe China is on the road to recovery,” Skechers CFO John Vandemore said on a conference call. “We expect a better second half of the year than we have seen so far, but we are monitoring things closely.”
— CNBC’s Robert Hum and Sonia Heng contributed to this report.
