We spent ten interesting and usually enjoyable days in and around Shanghai. Here’s what I learned that is of interest to investors in U.S. stocks.
The Boeing 777’s that took us out and back were full of Chinese tourists; they were probably seeking more freedom and less pollution. There is also plenty of domestic air travel in China, even though trains are excellent. Airlines such as United and aerospace names like BA, UTX, GE etc. will remain good China plays. Tourism / business travel plays such as Marriott also seem well positioned, although I suspect there is over-capacity of luxury hotels in Shanghai.
The city has several Apple stores which were extremely busy, though probably more with lookers than buyers. Still, this is one of the best brand plays on China; “everyone” owns a smart phone in Shanghai and most probably aspire to own an Apple.
The most ubiquitous western brand on Shanghai streets is Haagen Dazs, (owned by General Mills which licenses the brand to Nestle in Canada and the U.S.).
Nike is a fairly ubiquitous brand that meets the needs and taste of Chinese consumers; New Balance is also common.
Shanghai consumers enjoy tea shops, coffee shops, and even a chocolate shop (Cocoa Colony). Starbucks stores are ubiquitous and seemed busy though not mobbed. They face heavy competition from Costa and local brands. McDonald’s and KFC stores are common though less numerous than I expected. On the other hand, western big box stores such as Wal-Mart were not in evidence, with the exception of two IKEA stores in the suburbs.
There are several brands of Nestle bottled water—a necessity in a land where tap water is not potable. Coca-Cola is fairly common but far from a dominant brand. At a Shanghai history museum Coke had a brilliant promotion that is difficult to describe—a giant mirror set on a 45 degree angle, stretching over a horizontal space with fake window ledges, where kids could lie on their back. Parents took pictures in the mirror of their child appearing to hang from / stand on the ledge, with the Coke logo in the background. These photos will be shown again and again to relatives and friends.
Luxury Mall Glut. The official ideology of China’s Communist Party is “Socialism with Chinese Characteristics.” In Shanghai’s ritzy French Concession we discovered a gleaming “Short Hills Mall with Chinese Characteristics” or (for you parochial New Yorkers) “Madison Avenue with Chinese Characteristics.” All the big names were there—Prada, Fendi, Coach, Dolce Gabanna, etc. etc.—including a few names that, according to an expert on such matters (my wife), are not to be found in Short Hills Mall, such as de Beers and Baccarat. Unfortunately there are many similar malls in Shanghai, and while traffic is heavy on weekends the stores themselves are empty. In store after store, you see two or three eager store clerks but no customers. There are probably at least four factors at play:
- too many stores (due to a building boom and the eagerness of firms to establish their brands in China),
- the Internet is stealing sales from malls,
- slowing consumer demand as housing slumps,
- the government crackdown on “corruption” including gift-giving by officials.
Also, I suspect that as Chinese consumers become more sophisticated luxury malls are becoming passé. In the French Concession there are a few ground-level shopping compounds in old, converted buildings that feel more like London than Shanghai; the shops are indigenous rather than global brands. Anyhow, whoever owns the big luxury malls will be taking big write-downs eventually.
Luxury cars are hot in China, though not many can afford to own them. Next to our hotel (the JW Marriott) were Mercedes and Porsche dealers; a Maserati dealership was about to open around the corner. When you get married in Shanghai, you are driven to the altar in a Bentley, BMW, Mercedes, etc. I suppose this bodes well for Tesla. By the way, due to pollution concerns you have to bid for a license to own a car; the going price is $10,000.
I saw no signs that the building boom is “grinding to a halt;” there are still plenty of half-finished skyscrapers and apartment buildings in and around Shanghai. (We took two day-trips 50-120 miles outside city.) They are starting work on a major new business district in Shanghai. However, when you see how much has already been built—the huge airport, elaborate highway system, giant train stations, bullet trains, the dozens of huge skyscrapers in the Pudong Financial District, and thousands upon thousands of apartment buildings in the city and suburbs—it is easy to believe that building activity is slowing simply due to the “law of large numbers.” Admittedly, the situation may be different further to the West.
Copyright Thomas Doerflinger 2014. All Rights Reserved
