What a key business indicator says about China’s

Harris Marley

Global Courant

People go out for dinner at a restaurant in Beijing on May 26, 2023.

Jade Gao | Afp | Getty Images

BEIJING — Companies in China are spending prudently on advertising this year, as local consumption is not expected to rebound anytime soon.

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Marketing revenue increased in the first three months of 2023 for several Chinese internet giants, but not alibaba, the largest of all in dollar value. That is on an annual basis.

Heading into the 618 shopping festival this month, brands remain cautious.

“For 618, of course, brands will generally try their best, but compared to before, it is a bit more tired,” said Ashley Dudarenok, founder of ChoZan, a marketing consultancy in China.

“We know that it takes exactly the same amount of money to bring the customer to your store today as it will in 2021, but the customer is going to spend about 30% less in your store,” she said.

In the first quarter, the median disposable income of urban residents in China officially stood at 12,175 Chinese yuan ($1,739), up 3.9% from a year ago. Education, healthcare and travel were the top three categories for planned spending, a central bank survey found.

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“The general consensus in the industry is that 2024 will be the year of growth and recovery,” said Dudarenok. “2023, let’s just get out of the recession, stay connected to the platforms, to the customer,” she said.

Dudarenok noted that advertising agencies also spend money experimenting with search engines. Baidu and Microsoft’s Bing have both worked with new generative artificial intelligence technology.

A focus on affordability

Slow economic growth and uncertainty about future earnings have weighed on Chinese consumer spending since the Covid-19 pandemic. In the absence of national stimulus measures, retail sales rose slightly in the first four months of this year. Figures for May are expected on June 15.

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This year, consumers in China are looking to buy better quality products – and get more for their money, said Dave Xie, director of the Oliver Wyman consulting firm that focuses on the Chinese retail sector.

He pointed out that by promoting product functionality and affordability around the 618 shopping festival, domestic cosmetic brands have increased their market share over international brands.

When asked on Tuesday about the outlook for Chinese consumers this year, a JD Retail representative said growth could be bumpy.

Businesses are also seeing different results by platform as online shopping trends shift.

Brands are eager to spend more on ByteDance’s Douyin, which is likely to drive away ad spend on Alibaba’s Taobao and Tmall e-commerce platforms, Oliver Wyman’s Xie said.

ByteDance is not listed on the stock exchange and does not often publish detailed figures.

Among the major US-listed Chinese internet platforms, pin duo saw the largest year-over-year increase in ad sales revenue in the first quarter. The company operates a group buying app that is known for its great value discounts. That growth is probably a sign that the local population is not willing to pay.

“A lot of people around me use Pinduoduo,” said Sun Hao, a partner at Beijing-based Goodidea Growth Network, a media group whose website lists NestP&G and Tmall among its clients.

He also noted “significant” growth for the app Little Red Book, or Xiaohongshu, as its users are mostly mothers and servants in spending power cities. The app is not listed on the stock exchange.

However, Sun said that many brands fell short of their Q1 performance targets and he felt that overall advertising budgets were shrinking, especially for traditional media.

And for brands that spend on Douyin, he said return on investment per ad dollar got lower.

Offline and abroad

The end of China’s strict Covid controls and the pandemic itself have undoubtedly boosted travel and in-person events. Travel booking site Trip.com said it doubled its sales and marketing spending in the first quarter to 1.8 billion yuan ($256 million).

For iQiyiNicknamed the “Netflix” of China, offline marketing has become more important since China reopened due to the recovery in foot traffic, according to branding director Kelly Shi. The company has used billboards and interactive experiences to promote its content.

IQiyi’s sales, general and administrative expenses rose 48% in the first quarter from a year ago to 1.1 billion yuan “primarily due to higher marketing spending,” according to a press release.

Learn more about China from CNBC Pro

Slower growth in China’s domestic market is forcing more local consumer companies to look abroad, sometimes through acquisitions or mergers with other brands.

Thanks in large part to that strategy, China-based consumer products companies saw the fastest growth among their Asia-Pacific peers in international sales over the past decade, according to a Bain & Company report released in late May.

More overseas deal activity in China is expected in the next six to 18 months, said Philip Leung, Shanghai-based leader of Bain’s Asia-Pacific M&A practice.

For many China-based companies, the strategy now is to acquire brands so they can capitalize on the overseas market as well as in China.

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