China's reputation as one of the most attractive emerging consumer markets has come under pressure in recent months, with jitters around its slowing retail growth, combined with a series of profit warnings from local brands. However, reports that China is loosing its lustre may be premature, as Petah Marian reports.

Retail growth in mainland China has been slowing since December last year, with growth falling from 18.1% to 13.7% in June. As far as clothing is concerned, sales grew 26.7% in December last year, but slowed to 20.2% growth in June.

These declines have sparked headlines referring to the "painful" Chinese slowdown or describing how the trend is "taking its toll" on businesses with operations in China. 

However, industry watchers are quick to point to the fact that while growth is slowing, it is not in decline. "I don't think we should get overly concerned about the slowing growth rate in China, which is often confused with a decline overall," Mintel's chief China market strategist Paul French tells just-style.

"This is a sign of maturity and growing sophistication among consumers in tier 1 cities and is completely understandable and expected after half a dozen years of go-go spending. All the conditions remain for strong continued retail sales in tier 1 China - white collar wage rises are still in the 6-7% per annum range," says French.

He adds that the slowdown is a sign that the 300m middle class people in tier 1 and a few in tier 2 are reaching maturity.

"These people benefited from the reforms massively in the last few years with white collar wage rises in excess of 10% per annum and the transfer to the private property market and asset ownership.

"This group is now saving for larger ticket purchases [booming sales of cars and growth in international tourism travel from China] and financial products like insurance, healthcare, critical illness, education funds and old age funds."

Retail market levelling out
French emphasises that much of the slowdown is coming from tier 1 cities, while stronger growth is taking place in tier 2, 3 and 4 cities.

"This is completely natural too, and good in the long term as it will address the unevenness of China's retail market with a western level of consumption and retail infrastructure in Shanghai, Beijing and a few other places and retarded retail in tiers 2/3 and below.

"That would not be the pattern of growth seen anywhere else and it won't be in China either. Tier 2/3 is where China's middle class is now growing and where wage rises are upwards of 10% per annum and property prices far less inflated than in Shanghai and Beijing."

The Mintel market strategist believes that the next few years will be about bridging the gap between blue and white collar workers, with blue collar workers receiving 10% annual wage increases alongside big rises in minimum wages.

"This is the government's policy to let the middle class stand alone now and raise up the incomes and consumer level of the working class to prevent too big a gap in society," says French.

While growth remains positive, the slowdown has had some casualties. Chinese sportswear brand Li Ning appointed a new head, replacing CEO Zhang Zhi Yong after it downgraded its full-year expectations.

Chinese apparel company Ever-Glory also lowered its second-quarter guidance after achieving weaker than expected sales. It attributed the slowdown to a decline in domestic consumption in China.

"The eroding global economy in the first half year of 2012 affected China's economic environment. As a result, domestic consumption decreased significantly," the company said earlier this month.

Increased competition
However, French argues that the slowdown recorded by companies is more about increased competition than subdued consumer sentiment.

"There's plenty of money being spent, but on more brands as everyone enters this market. In clothing, this year we get American Eagle, Forever 21 and more new players. The pie is getting bigger, but the individual slices might be thinner."

For brands already in China, growth is set to continue apace. Sunny Wong, the managing director of Trinity, a luxury men's wear retailer in China which operates over 500 stores, tells just-style that while the slowdown has led to a "very flat kind of business" the major companies are not slowing down their expansion strategies.

"Because everybody is bullish about China's long-term future, what you see is that the expansion plans of most companies and brands are pretty much intact. You'll still see a lot of vibrancy in all consumer goods businesses, including opening new shops, upgrading stores, hiring new people, and so forth," says Wong.

Indeed, earlier this month, Burberry highlighted the "enormous opportunity" for the brand in China, revealing plans to open as many as 100 larger format stores in the country.

Wong suggests the only way that retailers in China will struggle with the slowdown will be if costs begin rising faster than sales. "I think that's the biggest problem faced by most companies," he emphasises.

Short-lived slowdown
Li Gang Liu, ANZ Banking Group's chief economist for Greater China, also tells just-style that the slowdown is expected to be short-lived.

"We think that third-quarter GDP growth should turnaround, and we should see a stronger turnaround in the fourth quarter. Monetary policy has been eased substantially and the government has sped up the implementation of fiscal policy."

Indeed French highlights the government's efforts to drive growth through issuing more visas, increased lending to construction of both low income housing and retail property, combined with investment in infrastructure.

For those involved in the market, China still remains an attractive proposition and Liu argues that now is a good time to enter.

"I still think that China is a good market to get into. The Chinese economy is rebalancing at this moment. But going forward, consumption will have to lead economic growth, and this is a very good opportunity for businesses to get involved in China's retail sector," says Liu.