Global brands place too much emphasis on China’s recovery

Reuters
Reuters

LONDON (Reuters Breakingviews) – China’s Covid-19 “new normal” will test the hopes of Western multinationals for a rapid rebound in the world’s second-largest economy. Major groups ranging from Apple https://www.apple.com/newsroom/2022/04/apple-reports-second-quarter-results to General Electric https://www.ge.com/sites/default/files /ge_webcast_presentation_04262022. pdf suffered a major hit to revenue in the first quarter as further lockdowns crippled factories and distribution networks and hurt retail sales. Many companies downplay the impact as temporary. It’s too optimistic.

Tracey Travis, CFO of Estée Lauder, probably isn’t the only one making a bold call *_ga*OTAwMjQyMzU1LjE2NTE2NjcwMDM.*_ga_V9QZ4PSDRY*MTY1MTg1NDE1NC41LjAuMTY1MTg1NDE1OC41Ng that China could reopen domestically in mid-May, and that pent-increased demand would help it recover recently lost sales. Le chiffre d’affaires du groupe américain de cosmétiques en Asie recule pour la première fois q3-fiscal-2022-earnings-release.pdf?_ga=2.83323606.1380716619.1651831252-900242355.1651667003&_gl=1*1ggbyh8*_ga*OTAwMjQyMzU1LjE2NTE2NjcwMDM.*_ga_V9QZ4PSDRY*MTY1MTg1NDE1NC41LjAuMTY1MTg1NDE2NS40OQ in two years in the three months to March. This was mainly due to China, where the company generates 36% of total sales, Jefferies analysts estimate. Remy Cointreau insists its growth potential for the year remains unchanged, even as the French premium liquor maker’s revenue fell in the quarter ended March, due to a double-digit decline as a percentage in China.

Reflection is based on past experience. Foreign companies in China have benefited from the country’s rapid recovery from the first wave of the pandemic. Authorities have also minimized economic damage by enacting targeted restrictions, particularly in the main production and logistics hub of Shanghai. The American and European Chambers of Commerce in China said most of their member companies remained profitable in 2020 and 2021.

But the Omicron outbreak that paralyzed Shanghai in March triggered a sea change in Beijing’s approach. Authorities have introduced regular mass testing in nearly a dozen of the country’s top cities by GDP, although no new cases are being reported. Residents must show a negative test result as often as every two days to enter public places. Inexpensive test kits will allow more cities to take the same approach.

In theory, this prevents another Shanghai-style surge. But it also makes reopening much more difficult. The harsh treatment of those who catch the virus can discourage people from traveling and spending.

China’s 400 million middle-class consumers make the country a key growth market for companies like Italian luxury goods maker Salvatore Ferragamo, which said on Tuesday it expects sales to double by four to five years from 2021. One option is to expand online sales and invest more in marketing, but even then Covid-19 restrictions may interfere with deliveries. The alternative is to cultivate new consumers in other countries. For now, however, companies are placing too much emphasis on China’s rapid recovery.

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BACKGROUND NEWS

– World Health Organization Director-General Tedros Adhanom Ghebreyesus told a May 10 press conference that China’s zero-tolerance policy on Covid-19 is not “sustainable” given what is now known about the virus.

– Marco Gobbetti, managing director of Salvatore Ferragamo, pledged on May 10 to increase investment, reorganize stores and attract young customers to double revenues to nearly 2.3 billion euros by 2026. The Italian luxury group expects sales to rise in 2022 despite problems in China, where retail revenue fell in the first quarter due to new Covid-19 restrictions.

– Beijing on May 4 closed more than 60 subway stations and 158 bus lines. The Chinese capital on April 29 ordered its 22 million inhabitants to present a negative Covid test before entering public places.

– Estée Lauder’s sales in the Asia-Pacific region fell 4% in the first three months of 2022, the cosmetics group announced on May 3, mainly due to new restrictions put in place in China. Chief Financial Officer Tracey Thomas Travis told investors on a call that the company believes China could open in mid-May.

(Editing by Peter Thal Larsen, Katrina Hamlin and Oliver Taslic)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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