On the up, but over-hyped

A lot of guff is written about the Chinese consumer. If you believe excitable journalists and bone-headed consultants, France’s economy would sink into the English Channel were it not for the throngs of Chinese shoppers eagerly snapping up overpriced bags from Louis Vuitton (LVMH, MC.Euronext) and Chanel.
 
Sure, there is plenty of bling in China. Step into Chengdu’s new Louis Vuitton store and you’ll find a gaggle of young Sichuanese browsing glittery gold sandals. Preening young women while away their days sullenly working through sugar daddy’s bank account.
 
The macro numbers, meanwhile, are encouraging. Chinese consumption rebounded strongly in 2009 after a modest dip in 2008, with official retail sales clocking up 17% for the year. Sales were boosted by government spending on cars, dinners and whatever else officials like to waste the people’s money on, but their cash is real enough. According to a recent report by McKinsey, "the Chinese consumer sector is now arguably the healthiest of any major economy in the world."
 
Five years ago, consumption beyond purchases of everyday goods was limited to Beijing-Tianjin, Shanghai-Suzhou and Guangzhou-Shenzhen. McKinsey now identifies 22 viable urban consumer clusters spread across the country.
 
Yet China is still far from developing the kind of modern retail landscape seen in rich countries.
 
Chengdu is the most prosperous city in western China, but the pedestrian shopping streets just a few blocks north of the new Louis Vuitton store are a lackluster affair. Low-end local brands and mid-market national brands, such as K-Boxing and JeansWest, slug it out with tiny 10-square-meter shops peddling shoes and clothes for US$3-4. For all its supposedly middle-class affluence, Chengdu does not yet host the foreign high-street chains like Mango, Zara (Inditext, ITX.BMAD) and H&M (HMB.OMX) that thrive on widespread consumer wealth.
 
Glitzy shopping malls and foreign hypermarkets continue to pop up in China’s costal cities, but the retail landscape is not as modern as you might expect. Fresh food sales reached US$131.8 billion in 2009, accounting for 35% of total food sales, according to consultancy Access Asia. But two-thirds of these purchases were made at traditional vegetable markets where hygeine standards often leave much to be desired.
 
And half of China’s potential shoppers are not really consumers in any meaningful sense at all. The rural population is equal in size to those of the US and Western Europe combined – yet farmers spend just US$600 each per year, of which half goes on largely subsistence purchases of food and clothing.
 
Local governments are desperate to develop modern retailing to supply jobs, boost tax revenues and provide their cities with a veneer of prosperity. Beijing is serious about boosting consumption’s measly share in the economy, and has been encouraging rural chain stores and decentralizing responsibility for approving new foreign-invested stores to local officials. The result is that big foreign retailers like Wal-Mart (WMT.NYSE) and Carrefour (CA.Euronext) are approaching 200 stores each, while fourth-tier cities like Qinhuangdao in Hebei province now have a smattering of modern retail chains.
 
We are finally reaching a critical mass of consumers in China who can begin to tilt the economic balance away from an over-reliance on investment and exports. But outside major cities, it will take a decade or more before high streets genuinely resemble those of the developed world.