Chinese Consumer Demand Flows Like Electricity

Post by 
Thomas Piachaud
Published 
April 24, 2024

Chinese consumer demand is like electricity – it finds the path of least resistance and finds it quickly.

This demand has shifted rapidly and using an incredibly simple (and electronically useless) circuit diagram we can visualize this:

💡During COVID the domestic Chinese market was able to saturate consumer demand. Brands poured investment in to build their muscles through eCommerce, footprint expansion, and media spend.

💡The resilient, early-COVID economy fueled the battery of consumer demand, the consumer resistance did not matter as the demand only had one circuit to flow through – or did it?💡The development of the grey market during COVID created another path for demand to travel, and the resistance to the channel has been decreasing.

💡A combination of factors including increased professionalization and platformization, coupled with a lack of global wholesale excellence from brands in terms of managing pricing made this path more and more attractive to consumers.Now, the Travel Switch returns to being on.

💡Travel has surpassed pre-COVID levels (in Asia) and the relative resistance in this channel has been driven down significantly by factors such as optimizations of the Chinese consumer experience in foreign markets, favorable currency fluctuations driving down relative price points, and the ease of obtaining tax refunds at point of purchase (with many others thrown in to the mix too).

💡With multiple routes available for demand to flow, it all becomes about the relative resistance of each path, and judging Chinese consumer demand by only looking at the Domestic route, likely leads to the conclusion that demand is drying up, when in fact it’s just taking a path with less resistance.

💡This may not be a bad thing – if you earn more margin from selling a bag in Japan than in China, revenues and net profitability can improve. Looking at Hermes’ performance in Japan vs Rest of Asia highlights this.

💡But with the grey market channel also in play, selling items at wholesale margins can severely limit profitability and undermine investments in the domestic market as well as foreign markets.

💡Alongside this whole picture is the question of whether consumer spending power has decreased? We have certainly seen this as an overall trend as the economy moves into a period of uncertainty and consumers tighten their belts.

So what must brands do?

✔️Reevaluate cost structures in China.

✔️An understanding that the point of purchase and the point of influence may be occurring in very different places should lead to shifts in budgets in marketing, retail, and operations. Each brand will be different, and, in the end, it takes a global, top-down effort to ensure the current of Chinese consumer demand keeps flowing.

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