China’s Zero-COVID Policies and Consumer Pullback Test Global Brands’ Resilience
Three years in, China continues to weather fallout from the pandemic. And that fallout, as lockdowns and civil unrest wrack an already volatile economy, may have negative knock-on effects for global marquee brands — Apple, Nike and Starbucks among them.
This, as weekend protests have flared up in China over the country’s “zero-COVID” policies and lockdown restrictions, which keep individuals and families at home and continue to threaten supply chains.
Apple is one of the more visible examples of disruption wrought by the latest spate of pandemic pressure. The tech giant announced that cutbacks at its Zhengzhou-based manufacturing operations would hamper production of its iPhone 14 Pro and iPhone 14 Pro Max models.
Longer Lead Times
Although demand has been “strong” for those offerings, Apple said, customers will experience longer wait times to receive the phones. In the meantime, Apple partners such as Foxconn, which assembles the iPhones, is in the midst of shifting its own operations to other parts of China to help blunt the impact of a resurgence in COVID-19 cases in the country. Shifting supply chains takes time, and Apple still depends on the greater China region for a significant slice of its sales — at 17% of its consolidated top line, according to its most recent quarterly earnings report.
Beyond the vagaries of supply chains, the question remains as to just how the new waves of lockdowns will impact the Chinese consumer. Economic growth has slowed to 3.9%, where the country has targeted a 5.5% rate. Unemployment has been stubbornly high, at about 5.5%, and is significantly higher among the younger demographics, at about 18% for individuals 16 to 24, as noted on sites like the South China Morning Post.
Tough Sledding for Younger Consumers
It is the younger consumer that is a critical (and receptive) audience for hardware and software sales — and for retail in general. Overall retail sales in China slipped 0.5% in October as measured year on year, the first decline since May of this year. As lockdowns proliferate and as retail spending drags, the double whammy might also be keenly felt by Nike and Starbucks, which depend, in part, on in-person foot traffic.
For Nike, which gets about 15% of its footwear-related revenues from China, the decline has already been evident as revenues here were down by 11% in constant currency terms. Starbucks just opened its 6,000th store in China, and those expansion plans have continued into a period where revenues for the quarter ended in October, at $775 million (and 4% of the top line) were down 20%.
During a conference call with analysts, Interim CEO Howard Schultz noted that with COVID’s resurgence and lockdowns, the fallout has been a reduction of in-store traffic.
“We anticipate the current COVID-related uncertainty to continue … while our long-term aspirations for China remain undiminished, we expect the recovery of our business in the country to be nonlinear,” he said.
The comments indicate a perfect storm — a slowing economy, pressures on discretionary spending and a hampering of the ability to go out and spend even if consumers wanted to — ahead for global brands that have viewed China as a greenfield opportunity.
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