China Slowdown Forcing Discounting at Gome to McDonald’s

For years, China’s increasing affluence fueled surging sales for consumer companies. That boom is waning as slower spending translates into inventory overloads, discounting and losses for some brands.

To lure increasingly price-sensitive shoppers, companies from electronics retailers to footwear makers are being forced to offer discounts that are hurting margins and driving down earnings. Even McDonald’s Corp., the world’s largest restaurant chain, has introduced a value dinner starting from 15 yuan ($2.40) and reported slower same-store sales growth.

China’s second-largest electronics retailer, Gome Electrical Appliances Holding Ltd., in July forecast a first-half loss even as its website offered discounts of as much as 50 percent. I.T Ltd., a department store that sells brands including Levi’s and Puma in Greater China, cited discounting for narrower gross profit margins in the year ended February. Slower sales have left Nike Inc. with too much inventory in China, its second-largest market after the U.S.

The discounting and weaker sales reflect the escalating pressure on local and global brands in China, where two years of economic growth of more than 9 percent encouraged companies to expand. International brands have relied on Asia to offset a spending slump in the U.S. and Europe.

“Maybe previously, a PRC consumer didn’t even need to ask the price and just bought the product,” said Eugene Mak, an analyst at Core Pacific-Yamaichi International Hong Kong Ltd. “Now they’re more price sensitive.”

Economic Slowdown

Retail sales grew 13.7 percent in June, the slowest pace since February last year and near levels seen in early 2009 in the months after the Lehman Brothers Holdings Inc. bankruptcy.

Gross domestic product expanded 7.6 percent in the three months ended June, in a sign the government is yet to get the economy firing as quarterly growth cooled to the slowest pace in three years.

Daphne International Holdings Ltd., which sells shoes under its namesake brand and also has distribution rights for international lines such as Aerosoles and Aldo in China, last month said intense promotional efforts, together with rising production costs, were pressuring the group’s gross margin.

“Domestic consumption demand is slowing in China,” said Mak. “We do generally see an increase in promotions and discounts in both China and Hong Kong this year. Partly, it’s the inventory build-up, the other part is just slower demand.”

Retailers in expansion mode are getting hit as their investments in new stores are taking longer to pay off amid slowing consumer spending. Golden Eagle Retail Group Ltd. said earnings will be little changed in the first half of this year because of a deceleration in sales and stores’ startup costs.

Profit Declines

Gerald Qu, 36, who works in a bank in Jiangxi, China, said although his bonus could be cut, he has found it hard to rein in spending across the board. “You can’t save on children’s” shopping, he said. “I can only save on myself.” Cutting back means buying fewer clothes for himself and traveling less, he said.

Price wars have nicked results in the sportswear sector, where companies went on an expansion spree after the Beijing Olympics in 2008.

Li Ning Co., the Beijing-based sportswear retailer founded by the former Olympic gymnast of the same name, in July said Chief Executive Officer Zhang Zhi Yong stepped down, three weeks after it forecast a “substantial” profit decline.

“The sportswear industry in China has suffered from over-expansion,” Executive Vice Chairman Kim Jin Goon said on a conference call with reporters while discussing the CEO’s departure. “Growth in supply exceeded the pace in demand, leading to a short-term saturation.” Li Ning’s website carried a banner advertising a 50 percent discount on all items around the time of the CEO’s resignation.

Sophisticated Shoppers

Nike’s future orders for China grew 2 percent in constant currency terms in the fiscal fourth quarter, a “significant” slowdown from the previous period, Chief Financial Officer Donald Blair said on a conference call in June.

The potential growth of Chinese shoppers’ spending power is “still relatively very strong,” compared with developed economies such as the U.S., Mak said.

Still, shoppers are getting choosier in picking brands, adding to the pressure companies are facing in a slowing economy. Amanda Du, 18, visiting Hong Kong from China’s mainland, said she picks Nike for shoes even though she prefers Adidas for sports apparel.

Gome Slump

Beaverton, Oregon-based Nike needs to improve its products and merchandising to deal with a more discerning Chinese consumer and “sharper” competition in the country, Charlie Denson, president of the namesake brand, said in a June call with analysts. The company remains “enthusiastic” about long-term growth in China, Chief Financial Officer Blair said on the same call.

Among electronics retailers, Beijing-based Gome plunged to an all-time low in Hong Kong on July 25 after forecasting a loss on lower sales and losses at its e-commerce unit. Gome’s website, near the end of July, was offering online rebates of about 200 yuan for each 1,000 yuan purchase, and discounts as much as 50 percent on home and lifestyle products.

Larger rival Suning Appliance Co. said on July 13 that it expects first-half net income to fall by as much as 30 percent because of weaker sales and higher expenses.

Value for Money

BaWang International Group Holding Ltd., a seller of shampoos and conditioners, projected a loss for the six months ended June because of a decrease in sales of household and personal care products.

Oak Brook, Illinois-based McDonald’s second-quarter same-store sales growth in China slowed to 2.2 percent from 8.5 percent in the preceding three-month period.

In China, “consumers are reacting with greater caution as the economy has slowed” and value lunches and the newly introduced value dinner were driving sales, Chief Executive Officer Don Thompson said on a July conference call.

In the “current operating environment,” all businesses will increase “consumer-facing activities,” McDonald’s spokeswoman Jessica Lee said via e-mail. “McDonald’s is constantly finding ways to meet customer needs,” she said.

The fast-food chain in April introduced its first value dinner in China, where it already had other value offerings for lunch and breakfast. The evening meal offers an entree, drink and fries starting from 15 yuan between 5 p.m. and 8 p.m. every day. The Economist’s Big Mac index in July put the price of the Big Mac alone in China at $2.45, or 15.60 yuan.