Ground shifting on consumer companies used as China plays
Shopping gift cards used to be popular presents for mainland officials but they’ve lost their shine due to the ongoing anti-corruption campaign, and that’s forcing foreign investors to change the way they do business in China, AXA Investment Managers Group says in a report.
Mark Tinker, head of AXA Framlington Asia, part of the investment group, said one “largely overlooked” aspect of China’s anti-corruption campaign was the end of the common practice of giving out gift cards to officials, which had previously benefited the department stores or retailers that issued them.
“Without gift cards, more of that spending has gone online, where the traditional ‘shelf dominance’ of large brands counts for relatively little,” Tinker said in the report, adding that it was a new challenge for foreign companies that had sold products in traditional stores.
“In effect, the first-mover advantage has eroded and the ‘moat’ (to use a Warren Buffet term) that had been built through control and dominance of the distribution chain has been breached.”
Tinker said such a trend has left a number of big global fast moving consumer goods (FMCG) companies stranded. “Many international investors have owned these FMCG companies as a proxy for China and have in many cases misinterpreted the slowdown in sales as a macro phenomenon,” Tinker said. “Closer inspection reveals that it is a market-share story and a mix shift.”
He said the FMCG proxy strategy had started to unwind and foreign firms needed to think of new ways, such as teaming up with domestic Chinese partners, to capture online shoppers. The hardest hit companies include Unilever, Nestle, Colgate Palmolive and Beiersdorf, which have suffered from overstocking in stores.
“New China is in a bull market, old China is in a bear market,” Tinker said. “Global investors can no longer rely on global companies with exposure to China as simple proxies for Chinese growth. The growth model has changed and so will the winners and losers.”