M SCIENCE BLOG

Exploring China’s Consumer Behavior and Economic Slowdown

FEATURING

Vinci Zhang

Research Analyst

China is confronting an economic slowdown. After COVID pandemic-related shutdowns and changes in consumer behavior, major E-Commerce companies like Alibaba (BABA), JD.com (JD), and PDD Holdings (PDD) are experiencing shifts in their business.

Evolutions in the market and reactions from affected companies are likely to have global consequences, too. “With the consumer economy in China, everyone’s interconnected and very intricately. Given indications that growth remains constrained for the Chinese consumer, concerns about its impact on global trade are likely to persist, near-term,” said Research Analyst Vinci Zhang, who covers China E-Commerce and China Consumer for M Science.

So, what’s going wrong?

  • Supply Surge

There are several factors that explain China’s ongoing slowdown. For one, there is a lack of demand and an excess of supply. “There are a lot of talks about Chinese electronic vehicle makers flooding the world with their abundant supplies, driving prices down,” Zhang said. “But this isn’t limited to EVs and solar, for example, with similar impacts observed across consumer categories as well.”

Chinese companies are continuing to produce, even though the domestic consumer base cannot support the influx of product.

“China has continued to develop their factories and production on the supply side. Now, we’re seeing an imbalance where there’s a very rapid supply side recovery and oversupply, whereas the recovery on the consumer side continues at a slower pace than many anticipated,” Zhang added. This production power is causing extra pressure. “All these Chinese factories have to figure out a way to keep their utilization rates high.”

  • COVID’s Lingering Impact

Chinese companies remain impacted by the lasting impact of the COVID pandemic. This is especially true for Alibaba. From 2013 to 2021, Alibaba’s Gross Merchandise Value (GMV) grew about 27% per year. In 2020, the country effectively handled the initial Covid outbreak with various containment efforts.

Things started to change as the pandemic persisted, especially with the emergence of the Omicron variant. “Starting in 2022, the world moved on, but China locked down harder,” Zhang said. M Science insights indicate that between 2021 and 2023, there were close to zero shopping activities in certain cities during the periodic lockdowns. During this time, the compound annual growth rate for GMV was about -1%.

“There are a lot of talks about China rebounding and recovering. While we remain optimistic about the potential for a more fulsome rebound in the Chinese consumer, long-term, from the data that we’re seeing right now, the GMV growth remains in the single digits and has not yet reached the double-digit growth many have been expecting,” said Zhang.

  • Chinese Internet Competition

Since 2020, Alibaba has faced increasingly fierce competition, notably from PDD Holdings’ retailer Pinduoduo Inc. “We can look at the rise of Pinduoduo and also the slowdown of Alibaba, how COVID has catalyzed this market share shift between the two platforms,” Zhang said.

Zhang described the two years before the pandemic as the “golden period for China Internet.”

“Right around 2019, China started to develop all these discussions around low-tier penetration,” he said. In the tier-one cities – Beijing, Shanghai, Shenzhen, and Guangzhou – and 15 other provincial capitals, companies started to recognize that these communities have become saturated. These 19 cities constitute roughly 20% of the population and drive around 80% of China’s GDP growth. “Everyone has a mobile phone. China has one of the highest mobile phone penetration rates in the world in its developed regions. It’s close to a 110% penetration, meaning for every 10 people, there are 11 mobile phones,” Zhang explained.

What does this mean for E-Commerce companies like PDD Holdings and Alibaba? “It’s important because it’s an ecosystem. Everything is done on mobile, on the apps,” Zhang said. So much activity ramps up the competition in these densely populated cities. “It becomes increasingly costly to gain new customers, acquire traffic, and attract merchants to use them,” he added. M Science data indicates that Chinese mobile in-app transaction growth has decelerated, with Alibaba logging low- to mid-single-digit in-app transaction volume growth Y/Y on its Taobao app in recent quarters.

From there, brands started to turn to smaller cities for expansion. During this shift, PDD picked up steam, growing in national popularity. With millions of people stuck at home, they turned to their devices and streaming.

  • Consumer Behavior

Lockdowns also triggered new shopping habits from Chinese consumers.

“People became more rational in a sense, when it comes to shopping,” Zhang explained. During 2020, categories like beauty and apparel grew at about 30% year over year every month for Alibaba. Yet spending in this segment fell into the negative growth territory this year. “Right now, it’s growing again. But when we talk about a spending slowdown, we can see it in these discretionary spend categories,” Zhang said. “Cosmetics are considered a necessity by many people, but even a category like that is falling.”

PDD is seizing some of this lost territory by Alibaba. “Some of their major offerings are apparel and household products, but the much cheaper ones are stealing share from Alibaba,” Zhang said. “From a relative GMV share standpoint, PDD has been growing nicely. Alibaba has failed to defend. And really, in the stock price of these two companies, it is reflected as well.”

Notably, PDD tends to supply more low-cost options. But that’s not stopping consumers. “Most people know that the products of PDD are of lower quality. They’re trading down, which is direct evidence of spending downgrade, especially for consumable and regular household products,” said Zhang. PDD has been gaining on Alibaba in areas such as Home Décor, Household Products, Furniture, and Small Home Appliances. Instead of spending more on paper towels and t-shirts, shoppers are opting for PDD’s cheaper selection. “Spending habits are changing. PDD has been successful in capturing this as it has played out, resulting in share loss by Alibaba,” Zhang said.

In comparison, JD.com has managed to defend its share, however, not without difficulty. Electronics and Home Appliance categories typically constitute a stronghold for JD. Recently, sales from this segment are contributing less to its topline, indicating that purchasing rates on big-ticket items may be declining, perhaps exacerbated by a challenged real estate backdrop.

Growth expectations for Alibaba remain under pressure, with projections suggesting the company’s growth may align with, but not exceed, the broader market’s pace. Combined with a change in operating structure, now comprised of six distinct operating units, the company has pivoted more toward share buybacks and dividends in its shareholder return strategy as the company looks to be transitioning from a growth stock to a value stock, inviting a unique set of opportunities.

  • Future Trends

With this insight, how will companies like Alibaba, JD.com, and PDD Holdings go forward?

Zhang predicts these brands will alter how they price their items. “Throughout the last few years, these platforms have been competing on pricing. I think going forward, the competition will be much more normalized and rationalized,” he said.

Evidence of this trend appears in the latest 618 sales. The June 18th shopping day originated from JD.com decades ago, but other retailers have joined in. Previously, confusion spread among buyers, as pre-sale offers complicated shopping activity. “In the last few years during 618, we observed uneven discounting, leading to consumers losing confidence that if they purchase early, would they lose on any potential discounts that happen later on.” For 2024, E-Commerce companies removed pre-sale options to alleviate logistical challenges.

“The whole emphasis is just on showing as many products as possible, letting consumers decide what they want to buy. So, there’s no longer a need to arbitrarily drive GMV higher,” Zhang said. “This improves the competitive landscape. Maybe the headlining GMV growth number won’t be that high, but in terms of average selling price or average GMV per customer or order, it will increase,” he added.

To expand their reach, Zhang predicts these companies will begin to augment their client base internationally. “There are a lot of discussions and emphasis on Chinese merchants going overseas,” Zhang revealed. “It’s very possible for a company to pivot towards international or outbound international E-Commerce again.”

Meanwhile, Temu, an E-Commerce brand owned by PDD Holdings, has already taken this leap. They even promoted their platform during the 2024 Super Bowl, reaching millions of American consumers, some for the first time.

“Temu is doing extremely successfully in the U.S. Their average price-per-order is only about 5 to 10 dollars. They are trying to push that towards 15 to 20 dollars,” Zhang said.

Competing against established American brands and marketplaces, Temu has started to make inroads. According to M Science data, Temu has seen its share of spending among peer marketplaces grow over the past year, though it remains in the low-single-digits in our analysis. However, Temu will need to make significant improvements if it wants to continue growing in the U.S.

“They are very low-quality items.I think ultimately that’s going to be a problem for them, because if they want to push pricing higher, they need to sell better products,” Zhang adds. “They also need to move into categories like mobile phones, home appliances, and larger ticket items. Whereas right now, they offer small things that break.”

The M Science Difference

How will M Science continue to monitor these dynamics in the Chinese consumer industry?

M Science relies on several sources to inform its Chinese consumer and E-Commerce insights. We leverage web-harvested data with visibility that predates Alibaba’s IPO.

“That’s a unique advantage,” Zhang said. “We see millions of SKUs. We have a mapping system that maps these products across 21 categories.”

Within these segment insights, M Science data can offer even more granularity. For example, the team can leverage data comparing the favorability of eye cream versus facial cream.

The firm also employs mobile app data to observe the performance of major E-Commerce apps. 

Through this data, the team can observe weekly changes in the number of paying users as well as transaction volumes on apps such as Taobao, JD, and PDD Holdings.

Utilizing our various data sources, M Science can better understand consumer activity shifts from multiple viewpoints, much like the inflection present today. 

“It gives us a lot more conviction than if we’re just looking at one data source,” Zhang said.

M Science publishes data-driven research reports on Alibaba Group Holding Limited (BABA), Bilibili Inc. (BILI), H World Group Ltd. (HTHT), JD.com (JD), NetEase Inc. (NTES), PDD Holdings Inc. (PDD), Tencent Holdings Ltd. (0700.HK), Trip.com Group Ltd. (TCOM), and Vipshop Holdings Ltd. (VIPS).

In addition to our written coverage, the team maintains several China-related dashboards: Alibaba Tmall Transactions, Bilibili, China E-Commerce, China Mobile Games, China PC Games, China Travel and Leisure, and Tencent.

If you would like to speak to Research Analyst Vinci Zhang on
China E-Commerce and China Consumer trends and insights, send us a message!

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