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Big U.S. firms adopt cautious tone on China recovery

Published 05/10/2023, 07:44 AM
Updated 05/10/2023, 07:46 AM
© Reuters. FILE PHOTO: Bottles of Pepsi are pictured at a grocery store in Pasadena, California, U.S., July 11, 2017.   REUTERS/Mario Anzuoni/File Photo
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(Reuters) - Several U.S. companies, including PepsiCo (NASDAQ:PEP), Qualcomm (NASDAQ:QCOM) and Cummins (NYSE:CMI), struck a cautious note on their growth prospects in China, blaming what they said was a slower-than-expected recovery after the country lifted COVID curbs in December.

China's economy grew faster than expected in the first quarter but remarks from American companies with substantial operations in China suggest that demand has not returned to pre-pandemic levels.

In April, China's imports contracted sharply, underscoring signs of weak domestic demand as a battered property market, worries over job stability and global economic uncertainty kept shoppers wary.

"China is getting better, but slowly," PepsiCo Chief Financial Officer Hugh Johnston told Reuters late last month.

"We grew mid-single digits in China, which had previously been a double-digit growth market for us pre-pandemic. I think it's going to take some quarters before it really gets back to where it was before."

Rival Coca-Cola (NYSE:KO) echoed the sentiment.

Starbucks (NASDAQ:SBUX), the world's largest coffeehouse, posted a 3% rise in China comparable sales in its second quarter, but said growth in average weekly sales will be at a more moderate pace in the second half of the year.

Cosmetic maker Estee Lauder (NYSE:EL) Cos Inc last week forecast weaker sales and profit for the year than previously estimated, blaming slow recovery at duty-free and travel destinations including China.

"Consumer confidence remains weak and shaken because many Chinese faced job and salary cuts in 2022 and Chinese New Year bonuses in 2023 were low," said Shaun Rein, managing director at China Market Research Group. 

"The result is Chinese are trading down: think Luckin Coffee (OTC:LKNCY) over Starbucks, Anta over Adidas (OTC:ADDYY). (Consumers) are looking for good value and cheap product lines and cutting big ticket items like cars and houses."

Still, a rapid recovery in domestic travel demand propped up sales at hotels.

Marriott International (NASDAQ:MAR) Inc reported better-than-expected quarterly results last week as revenue per available room in mainland China recovered to 2019 levels.

Europe's biggest hotel group Accor (EPA:ACCP) has also said China saw a clear acceleration in the quarter, especially after the Lunar New Year holidays.

NO SUSTAINED IMPROVEMENT

Apple Inc (NASDAQ:AAPL) in its latest quarterly report said sales in China fell 2.9%. Chipmaker Qualcomm, which forecast current-quarter results below estimates, said, "We have not seen evidence of meaningful recovery (in China) and are not incorporating improvements into our planning assumptions."

Truck engine maker Cummins said truckmakers in China were ramping production to restock inventory but the company was "not yet seeing signs of sustained improvement."

© Reuters. FILE PHOTO: Bottles of Pepsi are pictured at a grocery store in Pasadena, California, U.S., July 11, 2017.   REUTERS/Mario Anzuoni/File Photo

Car maker General Motors (NYSE:GM), which faces stiff competition from domestic brands in China's crowded auto market, said it did not expect an improvement in its income from the country until the second half.

"China will be a growth driver for many multi-national companies but will not be at the high growth rates many analysts predict," China Market Research's Rein said.

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