A combination of rising incomes among China’s middle class and an emerging consumer demographic in smaller cities has kept retail sales on an even keel while other economic indicators have slipped.
Year-on-year sales growth hit a 12-year high of 23.3% in July and stayed at more or less the same level until November, when growth slipped to 20.8%. Paul McKenzie, consumer analyst at CLSA, saw the slowdown coming, having poured scorn on the October figure of 22%.
"Every retail company that we follow saw sales growth decline in October by a much bigger margin," he said.
With real income growth in urban areas likely to be in single digits this year – having spent the last five years in double-digit territory – consumption is expected to moderate in 2009. The question is by how much.
Paul French, chief China representative of market research firm Access Asia and a regular columnist for CHINA ECONOMIC REVIEW, is reasonably positive. He expects retail sales to grow by 12-14%, well down on the 21.9% rise seen during the first 11 months of 2008, but in tune with the widely predicted slowdown in GDP expansion. In contrast to McKenzie, French notes that most retail categories are still performing well, even in areas where consumption is discretionary, such as clothing and appliances.
Nevertheless, some analysts believe falling consumer sentiment in 2009 will make conditions less favorable for discretionary shopping. Purchases of big ticket items such as cars and houses are already showing signs of weakness, they say.
Apart from wishing for the rumored income tax cut, which would benefit the entire sector, firms may try to leverage their geographical coverage. Clothing retailer Giordano, for example, told CHINA ECONOMIC REVIEW it plans to focus on expanding its network in coastal tier-two and tier-three cities, which are exhibiting fewer signs of a slowdown in spending.
Analysts point to non-discretionary items – household staples and low-end food and beverage products – as being best positioned. Brand companies that produce these goods may prove more defensive than those that just sell them.
"People are unwilling to spend money like they did before, but our products – things like instant noodles and beverages – are must-haves," said Frank Lin, CFO of Tingyi, which is best known for its Master Kong brand.
Companies to watch: Tingyi (0322.HK), Want Want (0151.HK, food and beverage), Heng An (1044.HK, sanitary products such as baby diapers).