What one key business indicator is saying about China’s consumer recovery

BEIJING — Businesses in China are spending cautiously on advertising this year as local consumption isn’t expected to bounce back for a while yet.

Marketing revenue rose in the first three months of 2023 for several Chinese internet giants — but not Alibaba, the largest of them all by dollar value. That’s on a year-on-year basis.

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

“For 618, generally of course brands will be trying, but compared to before it’s a bit more tired,” said Ashley Dudarenok, founder of ChoZan, a China marketing consultancy.

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

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

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

Dudarenok noted that ad agencies are also spending just to experiment with search engines. Baidu and Microsoft’s Bing have both been working with new generative artificial intelligence technology.

Sluggish economic growth and uncertainty about future income have weighed on Chinese consumer spending since the Covid-19 pandemic. In the absence of national stimulus checks, retail sales have rebounded moderately in the first four months of this year. Figures for May are due out June 15.

This year, consumers in China are looking to buy better quality products — and get more value for their money, said Dave Xie, principal at consultancy Oliver Wyman focusing on China’s retail sector.

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

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

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

Brands are keen to spend more on ByteDance’s Douyin, likely taking away from ad spending on Alibaba’s Taobao and Tmall e-commerce platforms, Oliver Wyman’s Xie said.

ByteDance isn’t publicly listed and doesn’t frequently disclose detailed numbers.

Among major U.S.-listed Chinese internet platforms, Pinduoduo saw the biggest year-on-year increase in revenue from ad sales in the first quarter. The company operates a group-buying app known for bargain discounts. That growth is likely a sign that locals aren’t willing to shell out.

“Lots of people around me are using Pinduoduo,” said Sun Hao, partner at Beijing-based Goodidea Growth Network, a media group whose website lists Nestle, P&G and Tmall among its clients.

He also noted “significant” growth for the Little Red Book, or Xiaohongshu, app since its users tend to be mothers and white-collar workers in cities with spending power. The app isn’t publicly traded.

However, Sun said that many brands didn’t meet their performance targets in the first quarter and his sense was that overall ad budgets were contracting, especially for traditional media.

And for brands spending on Douyin, he said the return on investment per ad dollar was getting lower.

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 spending on sales and marketing in the first quarter to 1.8 billion yuan ($256 million).

For iQiyi, nicknamed the “Netflix” of China, offline marketing has become more important since China’s reopening 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 selling, general and administrative expenses surged by 48% in the first quarter from a year ago to 1.1 billion yuan “primarily due to higher marketing spending,” a release said.

Slower growth in China’s domestic market is pushing more local consumer companies to look overseas — sometimes by acquiring or merging with other brands.

Largely thanks to that strategy, China-based consumer product companies saw the fastest growth among Asia-Pacific peers in international revenue over the past decade, according to a Bain & Company report released in late May.

More China overseas deal activity 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, he said the strategy is now to acquire brands so they can benefit from both the overseas market and in China.