Fitness China

For 26-year-old Vera Han from Shanghai, a gym membership, an overseas trip and skincare products top her wish list for the new year.

“The gym membership and the need to splurge on skincare products is something that I owe myself,” said Han, who works in the city as a media professional.

Han is not alone. As disposable incomes rise, Chinese consumers are turning to premium products with health benefits, according to analysts.

“The government wants to tackle the unbalanced development between urban and rural households,” said Wang Jun, an analyst at Hua Chuang Securities. “This is expected to enlarge the scale of communities in second and third-tier cities and thus boost sales of goods like braised food, beer and flavouring sauces.”

China has seen high-speed economic growth for the past three decades. But the massive investment pouring into property and infrastructure projects have led to worrying debt levels, which has prompted the government to roll out curbs to contain spending by local governments.

Meanwhile, a national push for developing domestic consumption has taken off since 2013, when Chinese president Xi Jinping pledged to lead the push for a more balanced and sustainable “new economy”.

The growth contribution by consumption to GDP has risen from 47 per cent in 2013 to 64.5 per cent as of the third quarter in 2017, while the contribution from investment to GDP has fallen to 32.8 per cent from its peak in 2009. Citi Group forecasts that private consumption as a share of GDP will reach 43.8 per cent by 2020, compared to 39 per cent in 2016.

For the most part, China’s young, urban consumers, are increasingly spending more on experiences and health-related products, according to analysts.

For instance, sales of instant noodles in China and Hong Kong plummeted nearly 17 per cent from 46.2 billion packets in 2013 to 38.5 billion packets in 2016, according to the World Instant Noodle Association.

Japanese instant noodle maker Nissin Foods, which ranks No 5 in China’s ramen market with a 2.6 per cent market share, ended lower during its trading debut in Hong Kong on December 11, reflecting investors’ concerns over the shift in consumer preferences.

Meanwhile, shares of Chinese sportswear giants Anta Sports Products and Li-Ning Co both enjoyed strong share price gains in 2017, rising 49.3 per cent and 40 respectively, outpacing the 35 per cent increase of the broad Hang Seng Index.

“In general, when comparing between companies that make products supporting China’s health conscious trend, and companies that do not, the first group saw much better share performance than the second group,” said Pascal Martin, partner at OC&C Strategy Consultants.

Chinese dairy makers Mengniu Dairy Co and Yili Group, also fared well in terms of stock prices in 2017, as the growth in demand for yogurt products is expected to continue in 2018, according to Martin.

Jessica Ye, a consumer analyst from Jefferies, said she was bullish on Anta and Li-Ning, in the expectation they will continue to benefit from growth in health-related consumer spending in the next three to five years.

“Especially for niche sports like yoga and skiing, companies who churn out products, even as small as a pair of yoga pants, could flourish as more Chinese are opting for those sports,” said Ye.

Other analysts point to the growth in premium products and spending among younger consumers.

“Companies which have ticked these boxes have enjoyed a great year in 2017,” said Jacques Penhirin, a partner and head of Greater China at consultancy Oliver Wyman.

“If they missed one of them, chances are that they have struggled in an environment of declining sales in traditional markets and limited inflation with a more demanding consumer,” said Penhirin.

Meanwhile, many traditional retailers struggled in 2017. In some instances, companies producing candies and chocolates saw sales decline because they were slow to embrace the shift towards healthy consumer choices.

Martin highlighted the success of a mainland company that introduced herbal-flavoured toothpaste. The company was able to double prices and gain market share, even while competing against US consumer giant Procter & Gamble Co.

“Brands that cannot distinguish themselves from other brands through more innovative and more premium products are likely to see declines, together with the overall category decline,” said Martin.

Source: SCMP

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