LRLCY Loreal Co (PK)

By Trefor Moss 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 20, 2020).

SHANGHAI -- The coronavirus pandemic has created a divide in China's consumer economy, with makers of premium products rebounding strongly but those catering to mass-market consumers finding it tougher to return to growth.

Driving the trend: the relative stability of upper middle-class incomes in China throughout the pandemic, with many white-collar workers able to work and ride out the crisis from home. In contrast, up to 80 million Chinese people, mainly lower earners in services and manufacturing, have lost their jobs this year as a result of the pandemic, according to the state-backed Chinese Academy of Social Sciences.

From cars to sportswear and liquor, foreign and Chinese companies that provide luxury items have seen sales growth return more quickly in the second quarter. While Chinese retail sales declined 9.9% between January and July from a year earlier, many brands targeting affluent consumers continued to grow.

"The second-quarter business in China bounced back," said Nicolas Peter, BMW AG's chief financial officer during a recent earnings call. "Our second-quarter sales were already higher year-on-year," rising 17%, he said. Daimler AG, which makes Mercedes-Benz cars, had a record June quarter in China, the company's chief executive, Ola Källenius, said.

Volkswagen AG, whose brands span the luxury and entry-level segments, saw only a gradual recovery in China overall, said Christian Dahlheim, VW's head of group sales, but the premium Audi unit delivered record sales in May and June.

The trend has been repeated across China's consumer sectors. Clothing and footwear as a whole have been generally slow to rebound in China, with sales declining 9% in the second quarter from a year earlier. But luxury jacket producer Moncler S.p.A. and premium sportswear brand Lululemon Athletica Inc. both saw their quarterly sales grow by double-digit percentage points over that stretch.

"Our China business has really returned to where it was pre-Covid-19," Lululemon CEO Calvin McDonald said.

Likewise, Chinese liquor and tobacco sales fell 3% between January and June when compared with a year earlier, but top-shelf labels outperformed, most notably Kweichow Moutai Co. -- a local producer of high-end grain spirit -- which increased its revenue by 13% and 9% in the first two quarters, respectively.

In the cosmetics sector, which was down slightly overall in the first half, premium brands also prospered, with L'Oréal S.A. -- seen as a high-end brand in China -- reporting a 6% and 18% year-over-year sales increase in the first two quarters, respectively.

"In China especially, the market rebounded very quickly and was back to double-digit growth in Q2," said Jean-Paul Agon, L'Oreal's chief executive.

Though suffering globally, luxury brands were helped in China by travel restrictions that kept affluent consumers at home and away from splurging in foreign boutiques, where luxury goods have traditionally been cheaper than in equivalent stores in Beijing or Shanghai. The China unit of LVMH Moët Hennessy Louis Vuitton SE grew 65% year-over-year in the second quarter, while Kering SA, whose brands include Gucci, was up over 40%.

Demand for luxury items had rebounded so strongly by mid-August that Gucci and Hermès stores in Shanghai were among those limiting visitor numbers to prevent overcrowding, staff at two of the brands' outlets said Wednesday.

Autos were among the Chinese economy's worst-hit sectors overall, with sales down 23% year-over-year in the first half, the China Passenger Car Association reported. Yet premium brands collectively increased their sales by about 1% on-year, it said.

As the overall car market returned to growth in July, increasing nearly 8% from a year earlier, premium cars led the way, surging 30% from the year before.

Sales of Tesla Inc.'s premium electric cars more than doubled in China in the first six months of the year, as the company began delivering cars from its new Shanghai plant in December. But while premium sales remained strong in the first half of 2020, mass-market players such as state-run BAIC Motor Corp. watched their sales collapse by roughly two-thirds, according to passenger-car sales data from LMC Automotive.

Covid-19 persuaded many Chinese people to ditch public transportation in favor of private vehicles, but "affluent households are better equipped to put those types of decisions into practice quickly," said Robin Zhu, an analyst at Bernstein Research, adding that rising unemployment mainly sapped demand for mass-market vehicles.

Premium auto makers also have been offering big discounts and generous financing, tempting some buyers to trade up and further weakening demand for midrange alternatives.

"This is a rare window of opportunity," said Aries Huang, a product manager at a videogame company in the southern tech hub of Shenzhen, who took advantage of the post-Covid market in July to buy his first car -- a BMW, a brand he had long dreamed of owning.

"Everything is encouraging us to choose premium cars," he said.

With videogame sales booming during the pandemic, Mr. Huang's $5,700 monthly paycheck was never in jeopardy. He said that when he saw the BMW X1 sport-utility vehicle that he had wanted on offer for just $34,000, down from a list price of $39,700, he pounced.

The deals available on new cars aren't much help to those jolted financially by the pandemic.

"I know it's a good opportunity to buy a car. Salesmen call me all the time to update me on their latest promotions," said an accountant surnamed Yuan whose employer, a toy manufacturer in the southeastern city of Xiamen, stopped paying salaries in May as foreign orders dried up. "But I just can't spend the money and take on the debt right now."

Mr. Yuan was planning to buy an entry-level car from state-run auto maker SAIC Motor Corp. but has abandoned the idea. "Now I have to make sure the basics are covered," he said, "and go without things like cars, holidays and fancy meals."

Raffaele Huang and Zhao Yueling contributed to this article.

Write to Trefor Moss at Trefor.Moss@wsj.com

(END) Dow Jones Newswires

August 20, 2020 02:47 ET (06:47 GMT)

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