The choice paid off.
AH Beard opened its first store there in 2013. Before the corona virus epidemic, sales in this country were growing by more than 30% annually. There are now 50 AH Beard stores across China, with plans to open another 50. But like most foreign companies operating in China today, AH Beard is thinking more carefully about its strategy.
Beijing’s strict policy for Covid-19 has taken a heavy toll on business. The company’s exports to China are no longer increasing.
This month, Chinese officials announced that the economy grew at its slowest pace since the early days of the pandemic. Unemployment is high, the housing market is in crisis, and nervous consumers — living under the constant threat of mass quarantine and testing — aren’t spending.
Now, China’s once-resilient economy looks shaky, and companies that have flocked to the country to participate in the boom are faced with a troubling reality: stagnant growth in what was once seen as a reliable economic opportunity.
“I certainly don’t see China going back to the growth rates we’ve seen before,” said Tony Pearson, chief executive of AH Beard.
So far, most companies are staying the course, but there’s a constant whiff of caution that wasn’t there just a few years ago.
Geopolitical tensions and the US-China trade war have created punitive tariffs for some industries. Covid-19 has disrupted the flow of goods, raising prices on almost everything and delaying shipments for months. China’s pandemic response to lockdowns and quarantines has kept customers at home and out of stores.
AH Beard opened its flagship store with a local partner in Shanghai almost 10 years ago. And like any high-end brand, it offers products at prices that defy belief. China became the best-selling market for its $75,000 mattress.
Since then, the cost of shipping a container has increased sixfold. The cost of mattress materials and components such as latex and natural fibers has increased significantly. Other worrying signs have emerged, including a housing slump. (New homes often mean new mattresses.)
Pearson said he hoped the Chinese Communist Party Congress later this year would clarify “China’s course of action” and instill more confidence in consumers. “The economy still has growth potential,” he said. “But there’s always a degree of risk.”
After the 2008 financial crisis, when the rest of the world contracted, China appeared as a more distant country and international businesses flocked.
European luxury brands set up flashy stores in China’s biggest cities, while US food and consumer goods companies battled for supermarket shelf space. German automakers opened dealerships, and South Korean and Japanese chip companies welcomed Chinese electronics makers. A booming construction market boosted demand for iron ore from Australia and Brazil.
Chinese consumers rewarded these investments by opening their wallets. But the pandemic has shaken the confidence of many buyers who now see rainy days ahead.
Fang Wei, 34, said he has cut costs since he left work in 2020. In the past, he spent most of his salary during frequent shopping trips on brands such as Michael Kors, Coach and Valentino.
Although he has been rehired and works in Beijing advertising, he now spends a quarter of his salary on food, transportation and other living expenses. He gives the rest to his mother and she puts the money in the bank.
“Because I’m worried about being fired, I transfer everything to my mother every month,” Fang said. It is very frustrating to go from enjoying life to making a living.
A more frugal Chinese consumer is a concern for foreign businesses, many of which offer products that are not a low-cost option but a great alternative. Jun Min, chief executive of Ginseng Bay Farm, a South Korean producer of ginseng products, said he too has noticed that “Chinese wallets are getting thinner.”
Sales of the company’s flagship product, a 2-ounce bottle of ginseng drink that sells for $18, are said to have peaked before the pandemic. The company shipped 600,000 bottles to China and Hong Kong in 2019.
Sales declined in 2020 as products were difficult to get into the country during the covid-induced quarantine. Business is mostly back, although still down 10-20% from the peak.
While An says he is concerned about slowing economic growth, he remains optimistic that China’s health products market and familiarity with ginseng — an aromatic root said to have health benefits — will continue to be good for sales. However, to hedge his bets, he is also seeking regulatory approval to sell in Europe.
This is a far cry from the unbridled optimism of the past.
In 2016, when China was its fastest-growing and most profitable market, adidas chief executive Kasper Rosted declared that the country was the company’s “star”. Adidas invested heavily in expanding its footprint. It has grown from 9,000 stores in China in 2015 to 12,000 stores now, although only 500 stores are operated by Adidas. Then the music stopped.
After initially predicting that sales in China would accelerate this year, Adidas lowered expectations in May as COVID quarantines continued to unfold. The company said it now expects China revenue to “decline significantly” and a sudden rebound is unlikely.
For now, Adidas remains disappointed. Rusted said in a call with analysts that the company has no plans to cut costs or withdraw from the country. Instead, “everything we can do to double and accelerate growth will do.”
Many foreign companies had bet on China’s rising middle class as a reliable source of growth. Bain & Co, a consultancy, said it expects China to become the world’s largest luxury market by 2025, driven in part by Federica Lovato, senior partner, as the “big wave” of the growing middle class continues.
But those kinds of predictions seem less enticing to some foreign companies that once relied heavily on the Chinese market.
Kamps Hardwoods, a Michigan-based producer of kiln-treated lumber used for homes and furniture, initially seized the opportunity to expand into China. At a Chinese trade show in 2015, Rob Kukowski, the company’s general manager, said a Chinese buyer surprised him with a large offer to buy enough stock to fill 99 shipping containers. The $2 million lumber order was four months worth of Camps business.
Chinese buyers at the time were so eager to buy wood that they visited the company’s booth and refused to leave until Kukowski accepted a $1 million deal on the spot. By 2016, China accounted for 80% of the company’s sales.
Campes soon realized that it was hard to make a profit on large Chinese orders because many buyers were not interested in quality and only wanted the cheapest possible price. The company began to focus its efforts on finding customers in the United States and other overseas markets who were willing to pay more for a better product.
The timing was fortuitous when China raised tariffs on U.S. lumber in 2018 as part of a trade war, leaving Kemps in a better position to weather the downturn. Today, China only accounts for 10 percent of Camps’ sales, but it still has a large indirect influence on the company. Kukowski said China is such a big buyer of U.S. lumber that when it stops spending, there will be an industry-wide downward price war.
“It’s very strong with their purchasing power, and a lot of our products go into that market,” Kukowski said. If their economy slows down, our industry will face significant problems.