U.S. Companies Continue to Invest in China Despite the Consumption Slump

China Readthroughs from Q2 U.S. Earnings (Part One)

First, a community message. You may have received a message about “Unsubscription for Daily Reflection on China”. This is because your complimentary subscription has expired or will expire soon. After that, you will be automatically moved to the free subscription plan. Regardless, you are still on our free subscriber list and can continue to read the public posts as they are published.

The paid subscription is $30 per month or $250 per 12 months. This grants you full access to everything including all of our posts and podcasts. That’s one dollar a day to keep the China surprises away. Here are the details on how the different subscription plans work. As a side note, MegaTrust clients will continue to enjoy the complimentary paid subscription without charge.

The 2Q U.S. earnings season is coming to an end. What did the multi-national U.S. companies experience in China? What are their views on the economic slowdown and the covid-related restrictions? And what’s the China outlook for the remainder of 2022? We extracted the following data points from their 2Q earnings conference calls.

Consumption Taking a Hit

All consumer-related U.S. companies we track reported a significant slowdown in their China sales.

• Coca Cola (KO) said its performance in China was “under pressure” due to the covid-driven lockdowns. The sales volume in China was down in all three months of the quarter. Interestingly, the pandemic has been going on for two and half years, yet this is the first time that Coke experienced a major China decline.

• For Startbucks (SBUX), Shanghai is the single largest city with 940 stores, which was “completely locked down” for two-thirds of the quarter, according to Belinda Wong, chairwoman of Starbuck China. In Beijing, one-third of its 150 stores were closed for nearly six weeks. This resulted in a 40% yoy decline in net revenue and a 44% yoy decline in same store sales in China last quarter. Ouch!

• Nike (NKE) reported a 19% yoy decline in China sales during 4Q (ending May 2022). The lockdowns not only forced Nike to make inventory reserves, but also increased its transportation and logistics costs, resulting in an 80 basis point hit to its gross margin. Nike is also losing market shares in China. Here is a story on its Chinese competitor Li Ning (2331.HK) if interested. Some believe the worst is not yet over for Nike in China.