AH Beard, a 123-year-old luxury mattress manufacturer based in Australia, began turning its attention to China around 2010. With 1.4 billion consumers and a growing middle class that prefers luxury brands, China seemed like the right place to expand.
The choice paid off.
AH Beard opened its first store in 2013. There are now 50 of his AH Beard stores across China, with another 50 to be opened. However, like most foreign companies currently operating in China, AH Beard is starting to think more carefully about its strategy.
Beijing’s stringent Covid-19 policies have hit business hard. The company’s exports to China are no longer increasing.
This month, Chinese officials said the economy had grown at its slowest pace since the early days of the pandemic. Unemployment is high, the housing market is in crisis, and nervous consumers are living under constant threat of lockdowns and mass testing, holding back their spending.
Now, with China’s once resilient economy faltering, companies flocking to China to capitalize on the boom face a harsh reality.
AH Beard CEO Tony Pearson said:
So far, most companies have maintained their policies, but there’s been a steady rise in vigilance that didn’t exist just a few years ago.
Geopolitical tensions and the US-China trade war have imposed tough tariffs on some industries. Covid-19 has disrupted the flow of goods, raising prices on almost everything and delaying shipments by months. .
AH Beard opened its flagship store in Shanghai with a local partner about ten years ago. And, like any other luxury brand, it offers products at incredible prices. China has become the best-selling market for top-of-the-line $75,000 mattresses.
Since then, container shipping costs have jumped sixfold. The cost of mattress materials and components such as latex and natural fibers has risen significantly. Other worrying signs are emerging, such as housing slump. (A new home often means a new mattress.)
Pearson said he hopes the Communist Party Congress later this year will clarify “China’s trajectory” and give consumers more confidence. “The economy still has growth potential,” he said. “But there is always some degree of risk.”
After the 2008 financial crisis, as the rest of the world contracted, China emerged as an outlier and was flooded with international companies.
European luxury brands set up glitzy stores in China’s big cities, while U.S. food and consumer goods companies scrambled for supermarket shelf space. German car makers opened dealerships, and South Korean and Japanese semiconductor makers approached Chinese electronics makers. A booming construction market stimulated demand for iron ore from Australia and Brazil.
Chinese consumers have rewarded these investments by opening their wallets. But the pandemic has shaken the confidence of many shoppers who now have rainy days ahead of them.
Fang Wei, 34, said he has cut back on expenses since quitting his job in 2020. He used to spend most of his salary on brands like Michael Kors, Coach, and Valentino when he often went shopping.
She was rehired and works in advertising in Beijing, but now spends a quarter of her salary on food, transportation and other living expenses. She gives her remainder to her mother, who deposits the money in her bank.
“I’m worried about getting fired, so I forward everything to my mother every month,” Fang said. “The transition from enjoying life to being self-sufficient is very depressing.”
The more frugal Chinese consumer is a concern for foreign companies, many of which offer products that are premium choices rather than lower-priced options. Ahn Jung-min, chief executive of Ginseng by Pharm, a South Korean ginseng product maker, also said he found the Chinese “wallet thin”.
Ahn said sales of the company’s flagship ginseng drink, which costs $18 for a 2-ounce bottle, peaked before the pandemic. The company said he shipped 600,000 of his bottles to China and Hong Kong in 2019.
Sales plummeted in 2020 as it was difficult to bring products into the country during the COVID-19 lockdown. Business has mostly recovered, but is still down 10-20% from its peak.
An said he was concerned about an economic slowdown, but his familiarity with China’s market for health products and ginseng, an aromatic root said to be beneficial to health He is optimistic that it will continue to contribute to sales. But to hedge his bets, he is also seeking regulatory approval to sell in Europe.
This is a far cry from the irrepressible optimism of the past.
In 2016, when China was the fastest growing and most profitable market, Adidas CEO Kasper Rorsted said: Declared The country was the “star of the company”. Adidas invested aggressively to expand its foothold. It has grown from his 9,000 stores in China in 2015 to his 12,000 today, but only 500 of his stores are operated by Adidas. Then the music stopped.
Adidas, which had originally expected sales in China to accelerate this year, lowered its forecast in May as the coronavirus lockdown continues to widen.The company said it is now expecting China’s revenues ‘significantly decreased’ And a sudden rebound is unlikely.
So far, Adidas hasn’t faltered. Rorsted said on a conference call with analysts that the company had no plans to cut costs or exit the country. Instead, it will “do whatever it takes to double down and accelerate growth.”
Many foreign companies were betting that China’s rising middle class would be a reliable source of growth. Consulting firm Bain & Company said it expects China to become the world’s largest luxury goods market by 2025.
However, such forecasts seem less attractive to some foreign companies that once relied heavily on the Chinese market.
Kamps Hardwoods, a Michigan-based manufacturer of kiln-treated wood used in homes and furniture, first seized an opportunity to expand its business in China. At a 2015 China trade fair, the company’s general manager, Rob Kukowski, said a Chinese buyer surprised him with a huge offer to purchase enough inventory to fill 99 shipping containers. The $2 million lumber order was Kamps’ four months’ worth of business.
At the time, Chinese buyers were so desperate for lumber that they visited the company’s booth and refused to leave until Mr. Kukowski accepted the million-dollar deal on the spot. accounted for 80% of the high.
Kamps quickly realized that it would be difficult to make a profit from large amounts of Chinese orders, as many buyers were not interested in quality and wanted the lowest possible price. The company began to focus on finding customers in the United States and other overseas markets who were willing to pay more for a better product.
It just happened to be the timing. Kumps was better positioned to weather the recession when China raised tariffs on her U.S. timber in 2018 as part of the trade war. Today, China accounts for only 10% of her Kamps sales, but still has a significant indirect impact on the company. China is a big buyer of U.S. timber, Kukowski said, and an industry-wide price war will occur when China stops spending.
“Their purchasing power is very strong and many of our products are in that market,” Kukowski said. “If the economy slows down, our industry will face serious problems.”
Jin Yoo Young Contribution report. Claire Who Contributed to the research.
