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China Consumption: Gaining Momentum Amid Economic Uncertainty

2024-11-15

Since the last China Brief, consumption has witnessed a remarkable upswing. The unveiling of economic stimulus measures since September 24 has given it a significant boost. The highly anticipated Double 11 Shopping Festival, which concluded on November 11, exceeded all industry expectations, igniting excitement among industry executives.

Despite the Momentum, Uncertainty Lingers

Over the past year, the Chinese economy and consumption have been shrouded in uncertainty due to persistently low business and consumer confidence. Many economists are questioning whether the government's stimulus measures will be sufficient to stimulate growth by enhancing liquidity and revitalizing the slumping real estate market.

Stock Market Recovery and Property Transactions

The stock market has shown signs of recovery, with the CSI 300 Index rising by approximately 20 percent in the last two months. Moreover, property transactions in October and the first half of November witnessed a modest 2 percent increase, marking the first positive growth in this key indicator this year. An analysis of daily transaction data from 30 major cities supports this trend. (Exhibit 1)

Retail Sales Growth and Online Shopping Festival

Retail sales in October grew by 5 percent, in contrast to the 3 percent growth in the earlier months of the year. The early start of this year's online shopping festival, Double 11, played a part in this uplift, as evidenced by the strong growth in categories like cosmetics and home appliances. A more comprehensive picture will emerge when the October and November data becomes available next month.

Car Sales and Travel Growth

Overall car sales witnessed double-digit growth in October, driven by a more than 50 percent increase in electric vehicle sales. (Exhibit 2) Travel also remains a strong growth area this year. National holiday travel performed exceptionally well, with domestic travel visits increasing by 5.9 percent and travel spending rising by 6.3 percent compared to 2023. These metrics exceeded the same period in 2019 by 10.2 percent and 7.9 percent respectively. The recovery rate of overseas travel is improving each month and is expected to soon surpass pre-COVID-19 levels. (Exhibit 3)

Insights from Double 11 Shopping Festival

Double 11, the world's largest online shopping festival, still holds significant importance in China, although there have been some changes. The era of celebrating billions of dollars in a single day is over, but it remains a month-long promotional event with major platforms and offline retailers participating. This year, Double 11 was the longest ever, with pre-sales starting as early as October 8, extending the shopping spree to up to 31 days on some platforms.E-commerce data provider Syntun estimates that this year's growth is 26.6 percent. Although this figure is somewhat inflated due to the longer promotion season, it indicates more meaningful growth in gross merchandise value (GMV) compared to last year's modest 2.1 percent growth. While platforms no longer publish GMV numbers, Alibaba's platforms reported robust growth and a historical high in customer engagement. JD announced a 20 percent increase in shoppers. Livestreaming continued to expand, growing from 19 percent of total GMV in 2023 to 23 percent this year. On Alibaba's platforms, 589 brands exceeded RMB 100 million in GMV, an increase of 46.5 percent compared to last year, with 45 brands achieving more than RMB 1 billion in GMV.

Granular Strategies for Consumer Segments

During this year's Double 11 shopping festival, getting granular has been a key focus. Establishing direct one-to-one connections with consumers with the highest spending power has become crucial for brands. For instance, Alibaba's 88VIP members placed orders that increased by 50 percent year-on-year, accounting for over 90 percent of sales for some brands during their member-exclusive sales events. Currently, 42 million people hold 88VIP membership, and their average spending is nine times that of non-members.Brands need to engage consumers both offline and online across all platforms to effectively target the most important and diverse consumer segments. The one-size-fits-all approach no longer works.

Granular Strategies for Emerging Growth Categories

The same granular approach is essential for categories. New subcategories are evolving into multi-billion-dollar industries. For example, the sales of blind box collectible toys, which barely existed before 2019, may exceed $2 billion this year. This trend is driven by the desire of young Chinese consumers for enjoyable moments and the chance to express themselves. Brands can leverage this hobby-driven trend to introduce new products and expand into new categories. Often, these categories are developed with an online-first approach, and e-commerce and Double 11 play a unique role in supporting the "product drop" business model, where highly anticipated, limited-edition products are released in limited quantities to generate demand and excitement. For instance, a collection from PaperPresented alone generated RMB 200 million in GMV on the first day of sales on Tmall. This collection was based on the popular dating game Love and Deepspace. In addition to PaperPresented, three toy brands including miHoYo, Jellycat, and Pop Mart achieved the RMB 100 million GMV milestone on Alibaba. (Exhibit 4)Other high-growth categories include low-sugar and sugar-free teas, outdoor clothing and gear, consumer health products, and pet supplies.

Enhancing Consumer Experience

While price and promotions attract people to Double 11, opaque promotion mechanisms have dampened the excitement. Consumers often need to meet certain spending thresholds to avail discounts, making the shopping experience confusing and cumbersome. Brands have the opportunity to enhance the shopping experience by investing in areas beyond just price. This includes improving customer service and leveraging AI, such as AI-based skin consultations or custom-formulated products.

Cost Efficiency and Returns Management

Cost efficiency has gained significant importance. The rising cancellation and return rates make inventory planning challenging and have substantial cost implications. Brands can reduce returns and cancellations by enhancing product descriptions and improving promotion mechanisms. Platforms are providing merchants with more autonomy to handle disputes directly, reducing logistics costs and improving efficiencies through AI.Conclusion:Although there is clear momentum in China's consumption landscape, uncertainty remains. Companies must remain vigilant, plan for different scenarios, and be ready to adapt quickly to market changes. The pace of change in China is rapid, and businesses need to stay agile to navigate this dynamic environment successfully.

The diamond industry has long been a complex web of supply and demand. Historically, natural diamond prices and demand were in balance with mining supply. However, the COVID-19 pandemic disrupted this delicate equilibrium. Many marriages and engagements were postponed, while people at home splurged on self-care gifts, causing diamond prices to rise unexpectedly.

Unraveling the Dynamics of the Diamond Market

Supply Chain Disruptions and Their Impact

During the pandemic, the supply chain faced significant challenges. Rough-diamond prices initially increased, benefiting upstream players but squeezing out downstream ones. After reaching a peak in February 2022, diamond prices plummeted. Upstream producers stockedpile rough stones and canceled sales promotions in hopes of a price recovery. This highlights the vulnerability of the diamond industry to supply chain disruptions.

In addition to market fluctuations, diamond production is further complicated by the emergence of lab-grown diamonds (LGDs). These synthetic stones have not only similar physical properties but also lower costs, reducing the demand for natural diamonds. As a result, the industry is facing a new era of competition and change.

Shifting Customer Behavior and Its Implications

Demographic and behavioral changes are reshaping customer approaches to jewelry. Generation Z, in particular, is more interested in digital, branded, and socially conscious products. The rise of e-commerce is also changing the way diamonds are sold. Online purchases of fine jewelry are expected to increase significantly, and younger consumers are driving greater brand enthusiasm.

Moreover, consumers are increasingly purchasing fine jewelry for themselves and mixing and matching with casual apparel. This trend is contributing to the uptake of both new and used jewelry products. Diamond industry players need to adapt to these changing customer preferences to stay relevant.

Traceability and ESG Considerations

Rising awareness of ESG factors has led to a decrease in demand for natural diamonds in Western markets. Diamond traceability is becoming increasingly important as consumers demand transparency and trust. Digital transparency software, such as blockchain, is being used to track diamonds throughout their journey.

Meeting customer ESG requirements in the diamond industry requires vertical integration and new revenue streams. Diamond producers need to invest in marketing and technology to ensure traceability and tell the unique story of their stones. However, it's important to note that traceability alone may not always bias consumers towards LGDs over natural diamonds.

Competition from Lab-Grown Diamonds

LGDs are gaining popularity due to their perceived ethical and environmental advantages, lower prices, and physical similarities to natural diamonds. This has led to a shift in consumer demand towards synthetic stones, putting pressure on natural diamond producers.

Some branded jewelers are investing in lab-grown inventories, while others are phasing out natural diamonds. The quality and availability of LGDs are expected to continue improving, making them an attractive option for younger buyers in Western countries. However, in China, buyers still lean towards natural stones.

Supply Constraints and Technological Innovations

Natural-diamond production is expected to grow at a slower rate due to major mine closures and production ramp-ups. To stay competitive, mines are looking to increase their lifetimes by moving to underground operations and investing in operational efficiency and technology innovations.

New technologies, such as seismic or magnetic detection, X-ray transmission, and X-ray fluorescence, are unlocking new production possibilities. Digital and AI tools can also be used to increase mine productivity by analyzing real-time data. Government interventions and geopolitical tensions also pose challenges to the supply chain.

Financial Regulations and Practices

The diamond industry has experienced changes in financial regulation and financing practices. Stricter regulations and increased transparency are being demanded, especially in light of money laundering and terrorist financing concerns.

Financiers play a critical role in the diamond market, but stricter lending norms and increased regulatory requirements are posing challenges for smaller players. In India, lending in the diamond market has been volatile, and players need to adapt to these changing conditions.

Next Steps for Diamond Players

The diamond industry is evolving rapidly, and both natural-diamond and LGD industry participants have the opportunity to benefit if they can play to their differentiating factors. Strategies addressing upstream levers, such as building digital infrastructure and implementing traceability standards, are crucial.

Diamond players can also choose to build new businesses or reassess existing ones. This could include expanding into new markets or increasing their share of wallet across the value chain. However, the industry still faces many open questions and challenges, and staying ahead of the market will be essential for success.

Change in the diamond industry will not be fast or simple. Diamond players need to navigate these challenges carefully to find stability and stay ahead in the years to come.

Organizational health stands as a cornerstone for sustained long-term performance, yet it remains an ever-shifting entity. For over two decades, McKinsey's Organizational Health Index (OHI) has delved deep into the practices and outcomes that pave the way to better health. Through extensive research, we have unearthed emerging and evolving trends in various critical health factors such as technology, worker motivation, talent strategies, and leadership styles. Now, it's time to test your knowledge and explore these fascinating aspects in detail.

Unlock the Secrets to Organizational Well-being

Authoritative Leadership

For a considerable period, the conventional wisdom suggested that there are specific times and situations where authoritative leadership comes into play. By leveraging authority, pressure, and influence, tasks get accomplished. This authoritative leadership practice has been an integral part of our OHI survey right from the start. During the survey update process, we hypothesized that it would continue to hold its ground as one of the key leadership practices. It has proven to be a powerful force in driving organizational health, guiding teams towards success.In many organizations, leaders who exhibit authoritative leadership qualities are able to inspire and motivate their teams to reach new heights. They set clear expectations and ensure that everyone is on the same page. This not only leads to increased productivity but also fosters a sense of discipline and focus within the organization.

Employee Experience

The OHI not only measures the outcomes such as how well an organization aligns, executes, and renews itself to achieve sustained high performance but also focuses on the daily practices that leaders employ to achieve these outcomes. While measuring individual employee experience can provide valuable insights, we initially believed that it might not be a core aspect of the diagnostic. We thought that it might not add significant predictive value beyond what is already captured by management practices.However, upon closer examination, we realized that employee experience plays a crucial role in organizational health. Happy employees are more likely to be loyal and committed to the organization. They bring a positive attitude to work and are more willing to go the extra mile. By focusing on improving employee experience, organizations can create a more engaging and fulfilling work environment.

Purpose

In the past, employee involvement mainly revolved around getting people involved in the "what" and the "how" of interpreting, evolving, and executing an organization's strategy. But we predicted that purpose, which represents the "why" that inspires people, should be added as a new practice. This new practice would drive whether organizations effectively set a clear direction, leading to four direction practices instead of three: purpose, shared vision, strategic clarity, and employee involvement.Purpose gives employees a sense of meaning and direction. When they understand the purpose behind their work, they are more likely to be motivated and engaged. It helps to align individual goals with the overall goals of the organization and creates a sense of unity among employees.

Decision-making Excellence

Effective decision-making is of utmost importance for organizational health. We have all experienced situations where decisions are made haphazardly, based on inaccurate information, or postponed for too long. These scenarios can lead to inefficiencies and missed opportunities. In updating the OHI survey, we predicted that decision-making effectiveness and efficiency would become a new practice driving the outcome of coordination and control.Organizations that excel in decision-making are able to make timely and informed decisions. They have clear decision-making processes in place and involve the right people in the decision-making process. This ensures that decisions are based on accurate data and are in the best interest of the organization.

Tech and Digital Capabilities

Many organizations recognize the importance of investing in technology to enhance the employee experience. They believe that happy employees are more likely to be loyal and productive. We predicted that technology and digital capabilities would be added as a new practice driving the capabilities outcome. This new practice would focus on the role of technology in making work easier for employees.With the rapid advancement of technology, organizations need to leverage digital tools and platforms to streamline processes and improve efficiency. From automation to data analytics, technology can provide valuable insights and enable organizations to make better decisions.

Environmental Sustainability

Employees today are increasingly concerned about the environmental impact of their organizations. They want to know that their companies are taking responsibility and making efforts to make the world a better place. We predicted that sustainability, including a focus on net-zero goals, would be added as a new practice driving external orientation.Organizations that embrace sustainability not only contribute to the well-being of the planet but also gain a competitive edge. By reducing their environmental footprint and engaging with external stakeholders on sustainability issues, they can build stronger relationships and enhance their reputation.

Inclusion

The true value of a diverse and equitable workforce is only realized when an organization is inclusive. We expected to add two practices related to inclusion. One practice focuses on creating an inclusive work environment where every employee's unique perspectives are valued and they feel a sense of belonging. This practice drives an effective work environment.Inclusive leadership is another crucial aspect. Leaders who foster an inclusive environment include a diverse set of employees in decision-making processes and address inappropriate behavior promptly. This practice drives the leadership outcome and helps to build a more cohesive and productive organization.

Talent Deployment

All companies strive to have the best talent. Attracting external talent and retaining great employees is a challenging task. We predicted that the talent acquisition practice, which focuses on hiring the best external talent, should be expanded to a broader practice that includes strategically and dynamically shifting talent within the organization.By effectively deploying talent, organizations can ensure that they have the right people in the right positions at the right time. This helps to optimize performance and drive innovation within the organization.