Just Wait 'til They All Get Credit Cards

A recent report on retailing in China is a real eye-opener and not just because of the picture below, although the picture is a bit frightening when you think about it. Like an army more powerful than any sent to a battlefield, the rise of the Chinese consumer is a potentially greater threat to life as we know it in America.

At some point, they won't need us anymore.

Checkout aisle after checkout aisle they stand there, waiting to serve the rising consumer class. Waiting for the tide to turn, for ideals to change, for diligent savers to turn into emboldened consumers.

Get them to more easily part with their savings and internal demand will rise. Give them all credit cards and consumption will soar. Enable them to buy houses easily and then borrow against its rising value and they'll have one heck of a party.

But that's many decades away.

For the time being, plentiful jobs, relaxed purse strings, and a cultural change away from personal savings and toward personal credit are the first critical steps in transforming an export-led economy, fueled by overconsumption in the West, to one that can exist on internal demand.

As a reader commented here recently, generations ago in the U.S., individuals were told to keep an eye on their savings, to protect their savings. Today Americans are more likely to be told to protect their credit score.

The transformation in China will take many years, but it is a necessary change - much of the citizenry in the West, along with their governments, have about reached their credit limit.
Sure, there will be many bumps along the way, but the numbers speak for themselves. In the U.S. consumption now accounts for over 70 percent of economic activity as measured by GDP, while in China, it is closer to 40 percent.

Looking out over the coming decades, it will surely be much more enjoyable moving up from 40 than down from 70. After all, it's not really the destination, it's the journey.

This story from The Economist tells of the retailing revolution that has been accelerating in mainland China over the last few years - how foreign companies are setting up shop and attempting to make a buck or two by catering to the rapidly growing consumer class.

But it's not as easy as it might first appear.

Enormous numbers are luring global retailers to set up shop in China and take on a growing band of local operators. China's retail sales are set to expand by 13% to the equivalent of $860 billion this year, making the mainland the world's seventh-largest retail market. Annual compound growth rates of 8-10% will push this to an enormous $2.4 trillion by 2020.

There are more than one million affluent urban households, earning more than 100,000 yuan a year, who regularly buy luxury goods. But their spending power is rapidly being dwarfed by a vast emerging middle class. These households earn between 25,000 yuan (the threshold for becoming a serious consumer in China) and 100,000 yuan, says McKinsey. The consultancy estimates that the number of such households will rise from 42m in 2005 to 200m by 2015 (see chart).

Stores like the one in Shenzhen show how much has changed in Chinese retailing. Just two decades ago, shops had surly staff offering a few drab items, often locked safely away in glass cases. Yet there is still a long way to go. Even today, much of the population buys from daily markets or directly from producers. Organised retailing remains relatively new. Most Chinese stores are tiny, family-run outfits. China's top 100 chains account for just a tenth of total retail sales.

Maybe there's something wrong with the calculator today, but with about eight Chinese Yuan to one U.S. Dollar, that would put the middle class household income at between $3,000 and $12,500. That doesn't sound like much.

Considering The Economist's latest Big Mac Index($), that's not a lot of burgers even if they only cost 10 yuan ($1.25 U.S.) over there versus more than $3.00 here in the U.S.

But, then the Chinese probably don't eat a lot of Big Macs. More likely, visiting Western businessmen fill the lines at the American hamburger joints in China.

Between the cities and the suburbs, there is a great disparity in both income levels and spending habits, but that too is changing.

At the Shenzhen Sam's Club, 60% of the food is now imported, says Duan Lixia, the deputy manager, pointing to Chilean grapes, German chocolate and alligator meat from Australia. The store's customers can afford to own a car so there is parking for over 2,000. That helps to raise spending per customer. Car ownership in China is still low and most stores provide free shuttle buses, which limits what people can carry home. Sales per square foot at the Shenzhen store are more than double those at a typical Wal-Mart Supercentre in China. There are just three Sam's Clubs in China, but, excited by their success, Wal-Mart plans to open more.
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Move out of China's big cities or even into the suburbs, however, and shopping habits become more traditional as income levels fall. At a Vanguard supermarket in an unfashionable part of Shenzhen, manager Hu Fan tries to satisfy traditional and modern tastes. On the ground floor people net live fish and pick through tanks of frogs, trussed turtles and glistening chicken feet. But next to the unwrapped meat (shoppers traditionally like to handle meat to test its freshness), are plastic-covered pieces with reassuring expiry dates. Shoppers can choose from 130 types of fruit, twice the number found in a typical market.

Live fish, frog tanks, and unwrapped meat ... looking up trussed turtles would be easy enough to do, but the temptation will be resisted.

This story goes on at great length about the difficulties faced by foreign retailers adapting to local conditions. Wal-Mart and others are having a tough time adapting to the many and varied local cultures with their own unique customer demands.

It's not clear that Big-Box retailing will be as successful there as it is here due to the great variety of products needed for the many regions, but the potential rewards are near impossible to resist - a billion consumers.

Knowing Wal-Mart, they'll find a way.

One of the ironies in this story is that the Wal-Marts in China are filled with goods presumably marked "Made in China" - similar to past decades in the U.S. when Wal-Mart proudly promoted "Made in the U.S.A."

Prosperity is clearly headed China's way.