US consumer giants face a big sales problem: China

BEIJING – The theme that has emerged in the latest string of U.S. corporate earnings reports is the negative impact of the Chinese market.

China’s economy—home to more than four times the population of the United States—has attracted multinational companies for decades because of its huge, fast-growing market. But slowing growth and intense domestic competition, amid tensions with the United States, are now weighing on corporate profits.

“Consumer sentiment in China is very weak” McDonald's Chairman, Chief Executive Officer and Director Christopher Kempczinski said of the quarter ended June 30:

“You see in our industry and in a wide range of consumer industries that consumers are very much looking for deals,” he added. “In fact, we’re seeing a lot of shift in consumer behavior, where whatever the best deal is, they end up going for it.”

McDonald’s said sales at its international developmental markets segment fell 1.3 percent from a year ago. The unit includes China, where the company noted a decline in sales but did not specify the size of the decline.

Chinese companies have also struggled, with nationwide retail sales growing just 2% in June from a year earlier.

In China’s main stock market, known as A shares, earnings are likely to bottom out in the first quarter and may “rebound moderately” in the second half of the year, Li Ming, China equity strategist at UBS Securities, said in a July 23 note.

Several US consumer giants pointed to the downward trend in their latest earnings reports.

apple The company said its sales in Greater China fell 6.5% year-on-year in the quarter ended June 29. Johnson & Johnson China is a “very volatile market” and a key business segment that has underperformed expectations, he said.

After a “strong start” to the year, General Mills Chief Financial Officer Kofi Bruce said the quarter ended May 26 “saw a real decline in consumer sentiment,” which impacted traffic at Häagen-Dazs stores and the company’s “premium dumpling business.” General Mills owns the Wan Chai Fairy dumpling brand.

The company's organic net sales in China fell by double digits during the quarter.

Regional outcomes also impact companies' longer-term outlook.

In China, “we don’t expect to return to the double-digit growth rates we saw before Covid.” Procter & Gamble CFO Andre Scholten said on an earnings call last week that he expects that over time, China will improve to mid-single-digit growth, similar to growth in developed markets.

Procter & Gamble said its sales in China fell 9% in the quarter ended in late June. Despite China’s declining birth rate, Scholten said the company was able to increase sales of baby care products by 6% and increase its market share thanks to its localization strategy.

Hotel operator Marriott International Accor Hotels & Resorts has cut its revenue per available room growth forecast for this year to between 3% and 4%, largely due to expectations that Greater China will remain weak, as well as weaker performance in the US and Canada.

Marriott's RevPAR in Greater China fell about 4% in the quarter ended June 30, as Chinese people chose to travel abroad and the domestic recovery was weaker than expected.

However, the company noted that it signed a record number of projects in the first half of the year in China.

McDonald's also confirmed its goal of opening 1,000 new stores in China annually.

Domino’s said its China operator, DBC Dash, aims to have 1,000 stores in the country by the end of the year. Last week, DBC Dash said it had just over 900 stores as of the end of June and that it expected revenue in the first half to grow by at least 45% to 2 billion yuan ($280 million).

coca cola The company cited “weak” consumer confidence in China, where sales volumes fell in contrast to growth in Southeast Asia, Japan and South Korea. Net operating revenue in the Asia-Pacific region fell 4% year-on-year to $1.51 billion in the quarter ended June 28.

“There is a general weakness across the macro economy as the macro economy works out some of the structural issues around real estate, pricing, etc.,” Coca-Cola Chairman and CEO James Quincey said on an earnings call.

But Quincey attributed the decline in sales volumes in China “entirely” to the company’s shift from unprofitable water products in the country to sparkling water, juices and tea. “I think the sparkling water sales volumes were a little bit positive in China,” Quincey said.

Having to adapt to a new mix of products and promotions was common on corporate America's earnings calls.

“We continued to face more cautious consumer spending and intensifying competition over the past year.” Starbucks “Unprecedented store expansion and price wars across broad segments at the expense of compensation and profitability have also caused significant disruption to the operating environment,” CEO Lakshman Narasimhan said on an earnings call.

Starbucks said its same-store sales in China fell 14% in the quarter ended June 30, much more than the 2% decline in the United States.

Chinese rival Luckin Coffee, whose drinks can cost half the price of a single Starbucks drink, reported a 20.9% drop in same-store sales in the quarter ended June 30.

But the company claimed that sales from those stores rose by about 40% to $863.7 million. Luckin has more than 13,000 stores that it operates itself, most of them in China.

Starbucks said revenue from its 7,306 stores in China fell 11% to $733.8 million during the same quarter.

The two companies face a host of competitors in China, from Coty Coffee at its lowest point to Peet’s at its highest. The only public disclosures about Peet’s business in China describe it as “strong double-digit organic sales growth” in the first half of the year.

Not all major consumer brands reported such difficulties.

Canada goose Uber reported 12.3% growth in sales in Greater China to C$21.9 million ($15.8 million) in the quarter ended June 30.

Sneaker brands also pointed to growth in China, while warning of slower growth in the future.

Nike Samsung Electronics reported a 7% year-on-year growth in revenue in Greater China — roughly 15% of its business — for the quarter ended May 31.

“While our near-term outlook has been tempered, we remain confident in Nike’s long-term competitive position in China,” said Matthew Friend, Nike’s chief financial officer and executive vice president.

Adidas company Samsung Electronics Co., Ltd. reported a 9 percent growth in revenue in Greater China for the quarter ended June 30. The region accounts for about 14 percent of the company's total net revenue.

Adidas was gaining market share in China every month, but local brands were fiercely competitive, CEO Bjorn Gulden said on an earnings call. “A lot of them are manufacturers that go directly to retail through their own stores. So the speed that they have and the price value that they provide to this consumer is different than it was before. We’re trying to adapt to that,” he said.

Skechers International Finance Group reported 3.4% year-on-year growth in China in the three months ended June 30.

“We still believe China is on its way to recovery,” Skechers CFO John Vandemoer said on an earnings call. “We expect the second half of the year to be better than we’ve seen so far, but we’re watching things carefully.”

—CNBC's Robert Hom and Sonya Heng contributed to this report.