Chinese retailers run the risk of permanently ingraining the nation’s recent deflationary trends into the second-largest economy in the world if they change their approach to offering lower-priced goods and services in an effort to attract budget-conscious customers.

Price reductions, the emergence of discount retailers, and businesses selling reduced-price, downsized versions of their goods may start a vicious cycle of declining profit margins that would limit the rise of wages and jobs and further stifle consumer demand. This is likely to make China’s faltering post-COVID recovery even more difficult.

The country’s retail scene is changing due to the intense battle to attract frugal Chinese shoppers, and the deflation worries are evoking fresh similarities to Japan’s “lost decades” of stagnation.

According to Wang Dan, an analyst at Hang Seng Bank in Shanghai, “companies are lowering prices to maintain their market share and avoid being squeezed out,” which is normalising decreased consumption in China. As a result, several industries are seeing declining revenue.

“It is definitely a price decrease or low inflation environment now. Though it is hard to forecast how long the situation will last, but for sure it is bad for the economy,” she said.

In response to consumers’ cost-cutting efforts, there are several instances of Chinese retailers providing less expensive options.

The largest hotpot restaurant chain in China, Haidilao, is renowned for its attentive and high-quality service. In late September, the company opened two locations of its lower-end brand, Hailao Huoguo, which sells beef dishes for as little as 28 yuan ($3.92), as opposed to 70 yuan at its flagship location. Huoguo serves its cuisine in a cafeteria-style as well, which lowers labour expenses.

Spirits manufacturer Moutai debuted chocolate and latte items this year that are infused with the booze and sell for as little as 35 yuan. Their famous 500ml baijiu bottles retail for 1,499 yuan ($209.89).

For the last five months, Alibaba’s Freshippo and Walmart’s Sam’s Club have been engaged in a price war wherein both companies have slashed prices on popular items like durian puff pastries by as much as 34% at Sam’s.

Consumers’ quest for “value of money” “is reversing years of trading up across almost every category,” according to Mark Tanner, founder of the marketing firm China Skinny, with headquarters in Shanghai.

He said, “The average selling price of several product categories, including supplements, dairy, skin care, and cosmetics, had fallen as a result of discounting and the introduction of cheaper products.”

Although data earlier this month showed factory gate deflation intensifying and consumer prices falling at their sharpest rate in three years, policymakers have stated that they expect inflation to go up.

With teenage unemployment at an all-time high and some office workers making less money, consumers are not enjoying the benefits of the economy’s predicted 5% growth this year, which is being driven by state-directed lending and investment.

Beijing student Andy Yang recently visited Hailao Huoguo with pals with the intention of eventually moving from Haidilao. “Even though I’ll graduate the next year, I haven’t had any excellent employment offers. Cheaper is better, in my opinion,” he declared.

Haidilao stated that the brand was “still an experiment”. 

A new breed of bargain stores has also emerged as a result of the climate; these stores are relatively new in China and their presence is encouraging larger rivals to announce significant price reductions.

“The People’s Snack” is the tagline of the six-year-old snack brand Lingshi Henmang. The Changsha-based company claims that its products are less expensive than those found in supermarkets and that it intends to grow from its existing 4,000 locations to 10,000 by 2025.

Lingshi Henmang, the company’s public relations representative, stated in a statement that the growth was brought about by high demand.

“The market has undergone significant changes in the past three years due to the epidemic, and consumers are becoming more rational in their purchasing decisions,” the statement said.

The largest snack brand in China, Bestore, retaliated in November with its biggest-ever price reductions, slashing costs on 300 products by an average of 22%, with the largest product seeing a 45% decrease.

Hotmaxx, a company that specialises in offering things that are about to expire at a lower price, has stated on its website that it wants to grow from its existing 250 locations to 5,000 locations over the next three years.

(Adapted from Asahi.com)

Categories: Economy & Finance, Entrepreneurship, Regulations & Legal, Strategy