With the economic downturn in mainland China leading to weak consumer spending, foreign brands are facing fierce competition and some well-known brands are beginning to consider the option of withdrawing from China. General Mills, the parent company of Häagen-Dazs, is considering selling its more than 250 stores in China; Starbucks is considering selling a portion of its shares in China; and sports goods retailer Decathlon SA has started selling about 30% of its business in China.
Looking back to the 1990s when these Western brands first entered the Chinese market, they did not face much competition. However, the situation is different now. Domestic Chinese companies are familiar with retail operations, and they have started engaging in “internal competition” – slashing prices drastically to increase market share.
Brands like Apple and Nike are now facing increasingly strong competition from local companies such as Huawei, Xiaomi, Anta Sports, and Li-Ning.
One of the most well-known aspects of retail business in China is the vicious price competition, where products are sold at extremely low prices, even below cost, to capture market share.
According to the law of supply and demand, all products have their appropriate value, but products in China break the natural market rules, artificially cutting prices to unimaginable lows. The end result is extremely low profits for businesses, or even operation at a loss, leading to unemployment or low wages for workers, further contributing to a downgrade in overall consumption.
In the coffee market, for example, the topic of Luckin Coffee entering the “6.9 yuan era” trended on Weibo. During the Dragon Boat Festival, Luckin Coffee once again heavily promoted its products, dropping the price from 9.9 yuan to 6.9 yuan. Previously, Luckin Coffee’s management emphasized maintaining a competitive price strategy of 9.9 yuan.
As a result, Luckin Coffee franchisees suffered the most. Some franchisees pointed out that the cost of a 9.9 yuan coffee is about 7-8 yuan (including raw materials, labor, and rent), selling at 6.9 yuan means losing 1 yuan per cup.
Even CooCafe is not far behind, offering coffee for as low as 1.68 yuan. On June 3, a woman in Hangzhou purchased a cup of CooCafe’s orange C Americano, originally priced at 15.99 yuan, for 1.68 yuan on JD.com, totaling 2.68 yuan including a 1 yuan packaging fee, cheaper than convenience store bottled water.
This kind of intense competition forces Starbucks to join the price war. Starting from June 10, prices for dozens of Starbucks products like Frappuccinos, iced teas, and tea lattes were collectively reduced, with an average price reduction of 5 yuan for a grande size drink, which can now be purchased for as low as 23 yuan.
In this vicious cycle of low-price competition, consumers also ultimately do not benefit. Many domestic products on the market are very cheap, but this indicates lower production costs, combined with a lack of business ethics and regulation, leading to the proliferation of various substandard products, counterfeit goods, and tech products in China.
This has also led to serious food safety issues in China. In March this year, reporters exposed several food safety problems at a well-known franchise of Yang Mingyu’s braised chicken and rice, such as the use of spoiled ingredients stored for days, and beef that turned black overnight being dyed with artificial coloring to pass off as fresh beef.
Reporters also warned, “It’s better not to order takeout before 11 a.m.” because “leftover food from the previous day may be sold to the person who orders first the next day,” sparking public outrage.
To buy high-quality products, people can only turn to expensive foreign brands or shop abroad, which was a major reason for many Chinese people flocking overseas to buy powdered milk in recent years.
Due to the domestic market price war in China and Chinese consumers tightening their wallets, leading to weak consumption, foreign brands are gradually shifting their supply chain or selling their businesses in China, and they also have to find ways to meet the current consumer mentality in China.
Young Chinese consumers are slowing down on luxury goods consumption, becoming more budget-conscious, but recently a trend of “self-indulgent consumption” has emerged, where people spend a little money to enjoy emotional value, paying for interests and emotional experiences.
According to Bloomberg, in response to competition, Häagen-Dazs and Starbucks have introduced products more suitable for the Chinese market, such as Chinese New Year mooncake ice cream and braised pork latte.
This strategy contrasts sharply with their business models in the US. In the US, Starbucks is streamlining its menu, focusing on coffee as its main product.
McDonald’s has also adjusted its menu in China, offering products like congee and luncheon meat burgers; KFC and Pizza Hut not only offer fried chicken and pizza but also provide egg tarts, Peking duck wraps, and durian pizza.
In response to weak consumption, even luxury brands have started selling coffee in stores, engaging in cross-border dining operations.