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What would get China’s consumers spending?
Clues from a grocer in a fourth-tier city
The Economist
Finance & economics
May 9th 2024 |
676 wor
ds | ★★
☆☆☆
On a regular Tuesday morning, a large crowd has gathered outside a grocery store in Xuchang, a city of 4m people. Visit Pangdonglai at the weekend and things are even busier. Thousands, some having travelled hundreds of kilometres, arrive before dawn to take their place in a queue that snakes back and forth in front of the store’s entrance. At a time when China’s ritziest shopping centres are often desolate, and the country’s economy is struggling, the success of Pangdonglai’s 13 outlets is captivating executives who want to understand consumer sentiment.
The latest economic data make the queues still more intriguing. Retail spending grew by just 3.1% in March year on year—well below expectations. In the same month, listed retail firms revised down their expected earnings by an average of 7%. In Shanghai, where per-person consumer spending is three times higher than in Pangdonglai’s home province, high-end grocers are closing down. One such chain, CityShop, announced in April that it would shut its doors for good after 29 years. Pangdonglai’s success contains lessons about both what may be needed to revive China’s economy and the shape that such a revival might take.
What people are buying is plain to see. Shoppers clamber to fill trolleys with regular goods: fresh produce, pastries and local specialities, such as menzi, a steamed tapioca dish. Some grab stacks of a popular cake before it sells out. Customers have a variety of explanations as to why they have travelled to what appears to be a nice but unspectacular store. Many acclaim the service. Superior produce also helps: unsold fruit and vegetables are discarded after a day on shelves, shoppers say. Prices are not low but are considered fair. Several customers report being impressed by Pangdonglai’s employment policies. The firm is said to pay more than three times the local average among industry peers and give staff at least 40 days off a year, an exceptional amount for China. Some may just appreciate the atmosphere. Amid squeaky-clean aisles, the words “Freedom & Love” are printed in bold lettering throughout.
Firms across China have been sending managers in “study groups” to Pangdonglai. One finding ought to be that Chinese consumers want more and more for their money. Analysts have been tracking growing discernment for years, and many have found low levels of trust as a result of years of food-safety scandals. Pangdonglai goes to great lengths to address concerns. It prints the margins it makes on some price tags and provides the names and phone numbers of the suppliers of many products. It also tests the level of pesticides on fruit and publishes the results. Investors note that publicising low margins on some products, while earning higher margins on others, is a wise strategy.
These quirks have helped Pangdonglai become an internet sensation. The ability to tap into a trend known as “special forces” tourism—where young people travel long distances to briefly visit a cheap attraction before heading home—is increasingly important in China. Thousands of videos of shoppers descending on Xuchang have circulated on social media. Even as national retail spending was lacklustre, travel to third- and fourth-tier cities shot up during this year’s May Day festivities, as holiday-goers flocked to cheap places. As both a grocer and a travel destination, Pangdonglai probably benefited.
Perhaps the most profound aspect of the chain’s rise is its part in a nascent consumer revival outside China’s big cities. Although their economies lag behind coastal cities, inland towns are home to growing cohorts of young, affluent shoppers. Zhou Yangmin of Zhengzhou University recently noted that Pangdonglai’s success reflects its decision to target affluent shoppers in a place with few other options. Spending on cosmetics, dining and sportswear seems to have fallen in China’s largest cities in the final quarter of last year, according to a survey by UBS, a bank, whereas similar spending in smaller cities was either flat or growing. Until recently Xuchang was mainly known for the production of wigs made from human hair. Now it has a better claim to fame. ♦
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