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Spending on food and basics leaves little for fancy baubles
March 29, 2011, Tuesday
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EDITOR'S note: This is the first of two parts on Asian economies by Wharton Business School.
IT'S easy to see why executives at multinational companies (MNCs) get starry-eyed when they talk about Asia's emerging markets.
While business in mature markets in the United States and Europe continues to slow - or even dry up altogether - prospects are much brighter in Asia's vibrant economies.
But as panelists at the recent Wharton Asia Business Conference in Philadelphia noted, Asia's consumers are changing as quickly as their economies are, leaving both domestic and foreign companies scrambling to keep up.
Consider China, the focal point for many Western MNCs today. At the start of last year, consumer confidence was riding high, reaching levels not seen since 2007, said Mitch Barns, president of China for The Nielsen Company, citing the firm's ongoing research based on quarterly interviews with 3,500 Chinese.
Poor farmers
But over the course of 2010, their mood changed as growing concerns about rising food prices, the overheating property market and wage disputes began to take their toll. By the third quarter, consumer confidence in China fell for the first time in six quarters.
But with further analysis, the quarterly poll suggested an important trend for anyone interested in understanding China's consumers: "What drove the decline in that quarter was not an across-the-board decline, but a drop in consumer confidence in the villages and towns in the rural areas," he said.
Rural areas - classified by the Chinese government's five-tier system as "Tier 5" - saw an 11-point drop in consumer confidence.
"Because Tier 5 represents 45 percent of the population of 1.3 billion the economy of Tier 5 almost solely represents the decline we saw for China as a whole," Barns noted during the panel discussion.
He attributed the decline to the fact that rural consumers spend about half of their income on food and housing, compared with about one-third among urban consumers.
"That has a huge impact on consumer psychology," Barns said. "If you spend a lot of your money on food and food prices are going up, it starts to make you a little less confident about your ability to stretch your budget to meet your needs."
However, in the fourth quarter, though higher than in most other countries, the decline in consumer confidence spread to China's cities, and willingness to spend decreased significantly across all city tiers, according to Nielsen's research. And concerns look unlikely to dissipate anytime soon.
In early February, the Rome-based UN Food and Agriculture Organization said its global food price index (a benchmark basket tracking the wholesale cost of 55 commodities such as wheat, corn, rice, vegetable oils, dairy products, sugar and meats), hit a record since it began monitoring prices in 1990.
Meanwhile, the Chinese government announced that its consumer price index rose 4.9 percent in January from a year ago, with nonfood items rising 2.6 percent and food increasing 10.3 percent, raising concern among retailers and other businesses in China that consumers won't be spending as much as they would like.
All this is happening at a time when China's government wants to rebalance the country's economy over the next five years, boosting domestic consumption while reducing its reliance on exports, noted Kris Knutsen, senior manager of the Chinese services group at Deloitte, a consulting firm.
No small feat
That's no small feat, given not only the enormity of China's exports (which are putting the country on track to become the world's largest economy in about 15 years, experts predict), but also the propensity of Chinese households to save. The average saving rate as a percentage of disposable income in both rural and urban China has been rising steadily, reaching more than 25 percent, according to the country's National Bureau of Statistics. Nonetheless, the country's growth in per capita disposable income is "head and shoulders" above other countries in the region, he said.
Research firm Euromonitor International shows that China's per capita annual disposable income grew 9.9 percent year-on-year in real terms to 14,410 yuan (US$2,110) in 2009, while its per capita consumer expenditure rose 9.7 percent in real terms to 9,121 yuan.
But as companies come to grips with China's consumers, other countries in the region - including Thailand, Vietnam, Singapore and Malaysia - warrant their attention, too, pointed out Alexander C. Feldman, president of the US-ASEAN Business Council.
The region's economy grew 4.4 percent in 2009 "while most of the world was going the other way," Feldman said.
In aggregate, the region might not be as large as India or China, he said, but it is growing, dynamic and young. When these countries become a single economic community in 2015, Feldman said, "it's going to be an EU-like area that has free trade agreements with China and India, among others. Together, it will have 600 million consumers."
Feldman, who spent the early part of his career in Asia building up media brands such as MTV, added, "When I was at MTV, we spent a lot of time on China and India, but when it came down to looking at our numbers and our bottom line, MTV made its money in Southeast Asia. It lost money in China and it made a little in India," he recalled. "At least in the television market, Southeast Asia was a key market where you could make money now."
(To be continued tomorrow. This is an excerpt from an article from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the full, original article, please visit: http://xpo.sh/1nj)
IT'S easy to see why executives at multinational companies (MNCs) get starry-eyed when they talk about Asia's emerging markets.
While business in mature markets in the United States and Europe continues to slow - or even dry up altogether - prospects are much brighter in Asia's vibrant economies.
But as panelists at the recent Wharton Asia Business Conference in Philadelphia noted, Asia's consumers are changing as quickly as their economies are, leaving both domestic and foreign companies scrambling to keep up.
Consider China, the focal point for many Western MNCs today. At the start of last year, consumer confidence was riding high, reaching levels not seen since 2007, said Mitch Barns, president of China for The Nielsen Company, citing the firm's ongoing research based on quarterly interviews with 3,500 Chinese.
Poor farmers
But over the course of 2010, their mood changed as growing concerns about rising food prices, the overheating property market and wage disputes began to take their toll. By the third quarter, consumer confidence in China fell for the first time in six quarters.
But with further analysis, the quarterly poll suggested an important trend for anyone interested in understanding China's consumers: "What drove the decline in that quarter was not an across-the-board decline, but a drop in consumer confidence in the villages and towns in the rural areas," he said.
Rural areas - classified by the Chinese government's five-tier system as "Tier 5" - saw an 11-point drop in consumer confidence.
"Because Tier 5 represents 45 percent of the population of 1.3 billion the economy of Tier 5 almost solely represents the decline we saw for China as a whole," Barns noted during the panel discussion.
He attributed the decline to the fact that rural consumers spend about half of their income on food and housing, compared with about one-third among urban consumers.
"That has a huge impact on consumer psychology," Barns said. "If you spend a lot of your money on food and food prices are going up, it starts to make you a little less confident about your ability to stretch your budget to meet your needs."
However, in the fourth quarter, though higher than in most other countries, the decline in consumer confidence spread to China's cities, and willingness to spend decreased significantly across all city tiers, according to Nielsen's research. And concerns look unlikely to dissipate anytime soon.
In early February, the Rome-based UN Food and Agriculture Organization said its global food price index (a benchmark basket tracking the wholesale cost of 55 commodities such as wheat, corn, rice, vegetable oils, dairy products, sugar and meats), hit a record since it began monitoring prices in 1990.
Meanwhile, the Chinese government announced that its consumer price index rose 4.9 percent in January from a year ago, with nonfood items rising 2.6 percent and food increasing 10.3 percent, raising concern among retailers and other businesses in China that consumers won't be spending as much as they would like.
All this is happening at a time when China's government wants to rebalance the country's economy over the next five years, boosting domestic consumption while reducing its reliance on exports, noted Kris Knutsen, senior manager of the Chinese services group at Deloitte, a consulting firm.
No small feat
That's no small feat, given not only the enormity of China's exports (which are putting the country on track to become the world's largest economy in about 15 years, experts predict), but also the propensity of Chinese households to save. The average saving rate as a percentage of disposable income in both rural and urban China has been rising steadily, reaching more than 25 percent, according to the country's National Bureau of Statistics. Nonetheless, the country's growth in per capita disposable income is "head and shoulders" above other countries in the region, he said.
Research firm Euromonitor International shows that China's per capita annual disposable income grew 9.9 percent year-on-year in real terms to 14,410 yuan (US$2,110) in 2009, while its per capita consumer expenditure rose 9.7 percent in real terms to 9,121 yuan.
But as companies come to grips with China's consumers, other countries in the region - including Thailand, Vietnam, Singapore and Malaysia - warrant their attention, too, pointed out Alexander C. Feldman, president of the US-ASEAN Business Council.
The region's economy grew 4.4 percent in 2009 "while most of the world was going the other way," Feldman said.
In aggregate, the region might not be as large as India or China, he said, but it is growing, dynamic and young. When these countries become a single economic community in 2015, Feldman said, "it's going to be an EU-like area that has free trade agreements with China and India, among others. Together, it will have 600 million consumers."
Feldman, who spent the early part of his career in Asia building up media brands such as MTV, added, "When I was at MTV, we spent a lot of time on China and India, but when it came down to looking at our numbers and our bottom line, MTV made its money in Southeast Asia. It lost money in China and it made a little in India," he recalled. "At least in the television market, Southeast Asia was a key market where you could make money now."
(To be continued tomorrow. This is an excerpt from an article from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the full, original article, please visit: http://xpo.sh/1nj)
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