By Liangping Gao and Marius Zaharia
BEIJING/HONG KONG (Reuters) -Leo Liu, manager of the sprawling Wankelai store in the Chinese capital of Beijing, spoke into a microphone, announcing progressively steeper discounts in a flash sale, until he finally sold a cotton jacket and a woman’s undershirt.
In a symptom of China’s deflationary economy, Liu eventually found a customer for the jacket at 20 yuan, or less than a tenth of its initial price of 239 yuan ($33), but he ended up giving away the 39-yuan undershirt, for which nobody wanted to pay.
The exercise was one of four each day in the store that sells clothing, snacks and basic household products just outside Beijing’s financial district.
"We do flash sales to reduce inventory pressure," said Liu. "We run a small-profit, quick-turnover business model."
While his store was making "thin" profits, it sold some items at a loss, Liu said, adding, "We serve ordinary people."
Chinese consumers grappling with uncertainty about jobs and incomes are increasingly turning to discount stores at a time of expanding industrial capacity in the face of sluggish household demand.
But analysts say the success of such businesses is stoking deflationary pressures, which can start to drag on growth as their popularity grows at the expense of other retailers, as Japan experienced in the 1990s.
"The broader shift toward more value-for-money purchases will play a role in deflationary pressures," said Lynn Song, chief Greater China economist at ING.
"This sort of intense price competition likely adds some pressure on more traditional retail models as well."
Data on Sunday showed China’s consumer price index missed expectations in February, falling by 0.7% from a year earlier, while producer prices fell by 2.2%, stretching a run of negative readings dating back to September 2022.
While the growing industrial capacity has led to surging exports, it is also fuelling deflationary pressures at home.
Price wars have become ubiquitous, from restaurants that push 3-yuan breakfast menus to electric vehicle maker BYD (SZ:002594) cutting the price for one of its cars to below $10,000.
Coffee vendor Starbucks (NASDAQ:SBUX) lost its market leader crown to cheaper local rival Luckin.
"Corporate strategies often seem to prioritise market share instead of profits," in China, said Louis Kuijs, chief Asia economist at S&P Global Ratings.
"That can really complicate the situation for everybody in that sector driving down prices by just staying there, whether you make any profits or not."
In a work report last week Premier Li Qiang flagged a greater focus on boosting household spending while cutting the official inflation target to about 2% in 2025 from last year’s target of about 3%. Inflation was 0.2% in 2024.
WARY CUSTOMERS
Shoppers at Wankelai were not in a mood to splash the cash.
Lily Liu, 34, a financial auditor for a technology company, said she was earning less than before the COVID-19 pandemic.
"People like us, struggling a bit financially, are obviously going to shop here," she said. "I feel like my job could be gone at any moment. I’m working today, but I could be laid off ... maybe even tomorrow."
She said she has cut back on travelling and stays home on most weekends instead of dining out, only shopping during store sales.
Vivian Liu, a student browsing for a cheap snack, said she enjoyed going to stores with friends to window-shop, but rarely buys anything.
She failed to get a job after graduation two years ago with a diploma in biology, so she is continuing her studies while taking temporary part-time jobs to stay afloat. China’s youth unemployment, running at 15.7%, is also a drag on consumption.
"I don’t have much money to spend," said Liu. "I save a bit every month. I have no idea how the job market will be in the future. It’s kind of scary."
($1=7.2506 Chinese yuan renminbi)