The gap between U.S. and Chinese spending power is becoming more pronounced

At Starbucks’ earnings presentation on Nov. 2, the first question from equity analysts was: “The number of customers in China is up, but the unit price is down?” But there are worrying factors in the US. Will a “double slowdown” in Chinese and US consumption happen?

In the U.S. stock market on November 2, the Dow Jones 30 index rose for the fourth consecutive day and closed at 33,839.08, up 564.5 points from the previous day. The release of economic statistics in the United States shows a moderating tendency of wage-driven inflation, and the sense of caution that monetary tightening policy will be prolonged has diminished. Stock prices rose, led by tech-related stocks, on the back of lower long-term interest rates in the United States.

Companies began to release financial reports from July to September 2023. In recent days, the trend of Chinese consumption has become a regular topic at the earnings presentations of consumer-related companies.

At Starbucks’ earnings presentation on Nov. 2, the first question from equity analysts was: “The number of customers in China is up, but the unit price is down?”

Considering the impact of the epidemic prevention and control measures implemented in China in the spring and summer of 2022, the current performance recovery momentum of Starbucks is weak. Starbucks CEO Laxman Narasimhan noted the bright side: “In China, morning sales have returned to pre-pandemic levels,” but it’s hard to say that will dispel concerns.

Despite a price increase in its largest U.S. market, Starbucks saw positive growth in both customer numbers and unit prices, sending its stock up 9% from the previous day. But it is precisely because US consumption, hitherto seen as the biggest risk, has shown unexpected strength that the market is more aware of the gap in spending power between the two countries.

Estee Lauder, a large luxury cosmetics company with a large sales volume in duty-free shops such as tourist resorts and airports, reported a direct hit to its results on Nov. 1 from a drop in Chinese travel demand. In order to adjust the remaining inventory, Estee Lauder was forced to sell at low prices, and sales in the Asia-Pacific region, including China, fell 6 percent. Although the stock price rebounded on the 2nd, it is still down more than 50 percent from the beginning of the year.

On November 1, Canada Goose, a high-end down jacket brand with large sales in China, lowered its sales forecast for fiscal year 2023 (as of March 2024) to 1.2 billion to 1.4 billion Canadian dollars, a decline of about 10%. Stock prices have fallen more than 40 percent since the beginning of the year due to worsening economic expectations in China.

From late September to early October 2023, consumption during China’s National Day increased by 9% year on year, but many opinions, such as Christiane pan of UBS Securities, believe that the increase is still lower than before the epidemic. The reason is that real estate accounts for a large proportion of Chinese household assets, and consumers are generally worried about the impact of the current real estate market.

There are also worrying factors in the United States. Us retail sales have risen for six consecutive months. Retail sales have increased by more than 30% compared with 2019 before the epidemic. But the outlook for spending is uncertain in the face of record-high interest rates and chronic inflation. The National Retail Federation (NRF) announced on November 2 that the latest sales of the United States at the end of the year is expected to increase by 3 to 4%, which will be a new low since 2019.

Brian Cornell, CEO of Target, a large retail company, pointed out on CNBC that “there has been a decline in consumer options, and now even food consumption has decreased.” He revealed that the inventory of the year-end commercial war is also a “conservative” estimate.

In November, retail enterprises officially entered the settlement period. Whether the “double deceleration” of consumption in China and the United States will occur, market relevant people are increasingly concerned about this biggest risk for American enterprises.