Global brands set too much store in China recovery

A woman wearing a face mask rides a shared bicycle on the street in the Central Business District (CBD), amid the coronavirus disease (COVID-19) outbreak in Beijing, China, May 12, 2022. REUTERS/Carlos Garcia Rawlins

LONDON, May 13 (Reuters Breakingviews) – China’s Covid-19 “new normal” will challenge Western multinationals’ hopes for a quick rebound in the world’s second largest economy. Big groups from Apple (AAPL.O) to General Electric (GE.N) suffered a hit to revenue in the first quarter as renewed lockdowns paralysed factories and distribution networks and dented retail sales. Many companies are downplaying the impact as temporary. That’s overly optimistic.

Estée Lauder (EL.N) Chief Financial Officer Tracey Travis is probably not alone in making a bold call that China could reopen domestically in mid-May, and that pent-up demand would help it recover recent lost sales. The American cosmetics group’s revenue in Asia declined for the first time in two years in the three months to March. That was mainly due to China, where the company generates 36% of total sales, Jefferies analysts estimate. Remy Cointreau (RCOP.PA) insists its growth potential for the year remains unchanged, even though the French premium liquor maker’s revenue fell in the quarter ended in March, driven by a double-digit percentage drop in China.

The thinking is based on past experience. Foreign firms in China benefitted from the country’s rapid recovery from the pandemic’s early wave. Authorities also minimised economic damage by adopting targeted restrictions, especially in the key production and logistics hub of Shanghai. Both the American and European Chambers of Commerce in China said most of their member firms remained profitable in 2020 and 2021.

But the Omicron outbreak that crippled Shanghai in March triggered a profound change in Beijing’s approach. Authorities have introduced regular mass testing in nearly a dozen of the country’s top cities by GDP, even if no new cases are reported. Residents have to show a negative test result as frequently as every two days to enter public venues. Cheap testing kits will enable more cities to adopt the same approach.

In theory, this pre-empts another Shanghai-style flare-up read more . But it also makes reopening much tougher. The harsh treatment of those who catch the virus may discourage people from travelling 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 (SFER.MI), which on Tuesday said it expects its sales to double in 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 setting too much store in China’s rapid recovery.

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CONTEXT NEWS

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

– Marco Gobbetti, chief executive of Salvatore Ferragamo, on May 10 vowed to increase investments, revamp stores and attract younger customers to double revenues to almost 2.3 billion euros by 2026. The Italian luxury group forecast a rise in sales in 2022 despite problems in China, where retail revenues declined in the first quarter due to new Covid-19 restrictions.

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

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

Editing by Peter Thal Larsen, Katrina Hamlin and Oliver Taslic

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