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Cancel Your Sell Orders, Retail Investors: The China Ride Isn't Over Yet

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China's retail sales growth headline figure slowed in the first two months of 2013, but that doesn't mean Chinese consumers aren't still spending.

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By now, you likely know that China's retail sales slowed to 12.3% in January and February. According to journalists, this represented a "sharp" decline from the 14.7% growth last year during the same period. Sure, it's a notable deceleration.

But what you may not know is that despite the slower pace of growth, Chinese consumers are not necessarily spending less. The headline figures measure the spending in the Mainland, not by Chinese. So cancel your sell orders, Coach (NYSE:COH) investors. The China ride isn't over just yet.

While Xi Jingping's recent crackdown on corruption is partially responsible for a slower start to the year in terms of consumption, one major factor plays a large role in the lower growth numbers. During the Spring Festival in February, a weeklong holiday in China celebrating the Lunar New Year, a record number of Chinese traveled overseas

The China Tourism Academy estimates that a record 211 million Chinese (in absolute terms that's nearly 70% of the total US population) went overseas during the festival. Niu Yue, a spokesman at Ctrip.com (NASDAQ:CTRP) claimed that the travel agency saw bookings for outbound trips grow 50% compared to the Lunar New Year last year. Hong Kong, America and Europe were, as always, hot destinations, particularly because of the alluring retail environments the country's offer.

You might be wondering how traveling can really impact retail sales. But do you know what the Chinese do when they travel abroad? They shop till they drop.

To put this in perspective, imagine if during the Christmas season more than 15% of the American population left the country to do all of their holiday shopping, or even most of their annual shopping. Consider that they shopped for their friends and family as well. And then factor in that the 15% shopping abroad consisted of the wealthier, higher spending consumers.

Products available in China, such as jewelry from Tiffany (NYSE:TIF) and apparel from Ralph Lauren (NYSE:RL), are marked up at least two to three times the price offered in the US. Variety is limited. And new product launches often lag those in the West.

The Internet is allowing a growing number of Chinese to become more savvy and educated consumers. They know that products available overseas are dramatically less expensive and that by purchasing outside of the Mainland, they eliminate the possibility of buying a counterfeit product. Moreover, they have access to an assortment of products or variations of products not accessible at home.

Shopping has been seamlessly integrated into the travel and tourism industry for Chinese consumers. So much so that Barack Obama ordered the State Department to decrease the time Chinese tourists have to wait to receive a visa and to ramp up the number of visas extended to Chinese tourists by 40%, specifically citing their ability to stimulate the US retail sector. No surprise, given that Chinese visitors to the United States spend nearly $2,500 on shopping per day, per person, according to Nihao Media research.

The point I'm trying to make is that despite the reported slowdown, the Chinese are still spending, just not necessarily in China. This applies particularly to apparel, accessories, and cosmetics. Because the retail sales are occurring outside of China, lower growth figures hit headlines, making it appear as if Chinese consumers are spending less and threatening the US retailers investing on the Mainland.

In reality, retailers still have a Chinese consumer to rely on and invest in. Of course how much a retailer or consumer brand should invest in physical locations in China is dependant on what is being sold and at what price. For many retailers, stores in the Mainland can be thought of as showcase rooms and brand awareness strategies.

Retailers need to identify not only what a Chinese consumer wants, but from where they will buy it. Some retailers in the US have caught on to the trend and prepared for the influx of Chinese travelers during the 2013 Spring Festival.

Many stores, including Bulgari on Fifth Avenue in New York, added Mandarin-speaking staff. Saks (NYSE:SKS) installed PIN pads at its registers in New York so that Chinese travelers could use China UnionPay credit cards. And its San Francisco stores gave away hongbao, traditional red envelopes exchanged during the Chinese New Year, filled with Saks gift cards at varying amounts. Disney (NYSE:DIS) stores offered a "Year of the Snake" collectible pin.

According to a report from Beijing-based World Luxury Association, overseas consumption by Chinese reached USD $8.5 billion, or roughly half of all global luxury product buying, between January 20 and February 20. This represented an 18% increase from the same period in 2012. So retailers aren't going to hurt from any "China slowdown" being mentioned in the media headlines. They just need to know where to look to find the Chinese consumer.

Kristin Graham, CFA, is currently a consultant partnered with CRG, a multi-channel retail services company that assists retailers entering and expanding in China. She lives in Shanghai.
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No positions in stocks mentioned.
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