China’s New Normal Theory-Innovate, Adapt, Grow!

From the fast paced development double digit growth to single digit growth rates of 7 per cent to 8 per cent; Chinese economy is ushering in a new era that would be marked by innovation-led growth and economic restructuring. The era also promises new development opportunities in China for luxury industry. In this month’s Cover Story, Kavita Parab, tried to find how this “new normal” will affect to those doing business in China, especially the diamond industrialists.

Ever since China’s President Xi Jinping referred China’s “new normal” as slower growth during his visit to Henan province in May 2014, the term “new normal” became the new buzzword. China for the last two decades is known for the rapid growth. However, Premier Li Keqiang during annual government work report speech announced that China will, as expected, set its GDP growth target at “around 7 percent.” The new growth target is the lowest since 1990, which analysts looked at as the China’s willingness to accept slower and sustainable growth.

Decoding New Normal
New normal is lower rate of growth. But it also means new models of growth that focus more on consumption, especially domestic consumption and less emphasis on investment. The shift towards consumption and innovation-driven economy requires structural reforms and long-term policies. The newer approach of the China’s economy also means other emerging markets like India will get more opportunities to attract investors and foreign investment inflows (FIIs). Though growth stability is for a scheduled period of time, reforms would need longer time and efforts.

“In the ‘new normal’ chapter of China’s economy, the most important direction of reform and policy orientation is to re-balance the relationship between fairness and efficiency, which is the key to the transition from factor- and investment-driven growth to innovation-driven growth. Efficiency cannot grow sustainably without a level playing field. In the ‘new normal’, industry entry barriers and market monopoly must be eliminated in order for more players to take part in competition in a level playing field,” as pointed out by Prof. JIN Bei, Professor and Editor-in-Chief, China Economist.

China is definitely embracing a “new normal” of slower and sustainable growth, it is the only emerging country who is well under double digits. Hong Kong retailers - one of the biggest markets for jewellery and watches - have shifted strategy to cope with a sharp rise in people taking overseas breaks during the Easter and Ching Ming holidays and expecting fewer Mainland tourists. The tourism business is doing well, especially outbound tours, due to the major depreciation of currencies against HKD, which has made Japan, EU, and Australia appealing to local shoppers.

Challenges
Slower Sales
According to consulting firm Bain & Co's 2014 China Luxury Market Study, which was released in January, China's luxury market has experienced a negative trend for the first time after eight years of consecutive growth. Growth of luxury goods in mainland Chinese was down 1 per cent to 115 billion yuan (US$18.7 billion) in 2014, with watches, men's wear, and luggage and bags being hardest hit, the study showed. The amount of polished diamonds imported into China declined for a fourth consecutive month as reported by the Shanghai Diamond Exchange.

Decreasing power of traditional retail
The rise in online retail sales is gradually weakening the location based retail sales. As reported by National Bureau of Statistics of China, in 2014, the online retail sales reached 2,789.8 billion yuan, an increase of 49.7 per cent compared with last year and the online retail sales of the enterprises (units) above designated size stood at 440.0 billion yuan, up by 56.2 per cent.

Besides, the earlier significance of a specific location based retailing is slowly losing its importance with the emergence of new residential areas. For eg: In Shanghai, commercial distribution has resulted in forming of several centers thus posing a threat to urban commerce.

Opportunities
Shift in Economic Model
Like any other Asian country, China is still a culturally rooted country despite of its capitalistic ambitions. The shift in the economy is expected to bring a number of opportunities for the retailers. Commenting on China’s cultural inclination Pranava Bhargava, Executive Vice President, Shrenuj & Company Limited said, “Chinese consumers, like many of their Asian counterparts, are culturally inclined people. Despite their capitalist pursuits, largely they have not forgotten their roots. Purchase of gold and items of aesthetics are a part of their social behaviour and this factor will come further to fore once the economy moves towards a consumption driven approach from an export driven approach. They have a huge demographic consumer base that can provide them with a large and stable market. This shift in the economic model will bring more prosperity to the local consumers and this will, in turn, drive the demand for lifestyle products such as jewellery. So, I believe that this movement will strengthen the domestic economy and will lead to incremental sales for the jewellery retailers.”

Rise of new sales channels
In the face of change, adaptation to changing market scenarios and changing consumer preferences is crucial for retailers to survive. In order to keep up with the changing market dynamics, the luxury retailers are adapting to local sales channels like daigou (overseas shoppers who buy and send luxury goods to customers in China). Further, some of the luxury brands are increasingly making their presence felt on the China’s social networking sites while some of them are consciously slashing prices in China.

On changing consumer preferences, Harsh Maheshwari, G.G. Director, Kunming Trading Company said, “Chinese have not only started to focus on buying branded items locally, but they have shifted to buying abroad during their holidays. This can be seen through Chow Tai Fook's new expansion strategy, which will open stores in duty-free areas in Korea and the Middle East to meet demand from affluent Chinese tourists.”

This apart, mainstream luxury brands including Tiffany, Cartier and Chaumet invited popular fashion bloggers from China to their events.

Rise of Upper Middle Class
The upper middle class is poised to become the principal engine of consumer spending over the next decade, labelling consumers with household incomes in the RMB106,000 to 229,000 (US$17,538 to 37,893) range the upper middle class. By 2022, the upper middle class is estimated to account for 54 percent of urban households and 56 percent of urban private consumption, suggests McKinsey’s research.

The consumers from upper middle class shoppers are more experienced with different types of brands and therefore, they look for relatively high-quality products without paying as much attention to brands or will pick out products that merely reflect personal tastes.

This is reflected in the way the brands such as Louis Vuitton, Gucci and Coach are all actively shifting their strategies - doing away with flashy logos being the most notable trend – to attract this newly emerged group, who are believed to have a different understanding of "luxury".

New drivers of the economy
McKinsey & Co report had predicted that the nouveau riche in second and third tier cities would be the new drivers of the domestic luxury market. For the struggling luxury market brands, the priority is wooing the country’s growing middle class. Major retailers such as Chow Tai Fook and Chow Sang Sang have recognised the potential of the lower-tier cities for years, aggressively moving manufacturing efforts into these areas.

“New Normal” and diamond Industry?
Diamond industry is very agile and adaptive. The industry will continue to prosper in China by adapting to the new changes. The growth of the diamond industry in China is driven by demand. The demand is rising at a rapid rate. The northern part of China is still largely unattended. The industry will tap this potential by adapting to the local demographic realities. Once the initiatives in the direction of new economic models are announced, the industry will react and adapt to it.

Local Chinese retailers will surely see a new wave of opportunities in China well known brands as well may see an increased demand, for foreign retailers who are trying to get into China. However, there maybe quite a bit of red tape that the foreign retailers may have to go through, warns Sahil Shah of Diamrusa Ltd.

The diamond companies are expecting a business-conducive environment with the “New Normal”. Rajesh Shah, Partner, Venus Jewel hoping for the positive involvement of the Chinese government said, “The Chinese market is very important to us. With the positive intervention of the Chinese government, we are seeing the market mature and the demand from the consumers will continue to grow.”

Business Models for the diamond industry
Diamonds are all about emotions. As the demand for diamonds is still little latent in China, the business models need to adapt to the local cultural preferences and sensibilities. Jewellery, unlike mobile phones and gadgetry, is a lifestyle product and has to gel with the persona of the consumer. Once the retailers achieve that proverbial connect with the consumer persona, the sales conversion will flow automatically, points out Pranava Bhargava, Exe. Vice President, Shrenuj & Company Limited.

Besides, there is need to suitable logistics and communications model to be developed to explore the untapped markets. Rajesh Shah, Partner, Venus Jewel predicts, “We believe there will be growth in the Chinese market, but unlike the last few years it will come mostly from the consumer where even the market would not be a concentrated one.”

Looking forward
“In my opinion, retailers from the gastronomy and cosmetics industry will be focused on which are more resilient to sluggish consumer demand, rather than bigger ticket items like diamonds and jewellery,” said Harsh Maheshwari, G.G. Director, Kunming Trading Company.

Although China has set a lower growth targets, China might surpass the U.S. within the next decade. The country is looking at emphasising on the sustainable growth coupled with policies to develop domestic consumption. Besides, large numbers of Chinese citizens are expected to migrate to cities over the next decade, and less-developed inland cities are specifically targeted for growth. As flexible income will grow, especially in the third-tier and fourth-tier cities, the domestic consumption of goods, especially luxury goods such as jewellery are expected to rise.