China's recovery from pandemic lockdowns is benefiting U.S. companies like Procter & Gamble, Starbucks, and MGM Resorts International, as Chinese consumers increase their spending while consumers in their home markets become more cautious with their spending. China's large population and growing middle class make it an attractive market for multinational companies. The country's zero-Covid policy, which involved strict restrictions to curb the virus's spread, negatively impacted its economy and the revenue of U.S. companies operating there.
China's economy grew by 4.5% in the first quarter after the rollback of the zero-Covid policy in December. U.S. companies are now witnessing a resurgence in demand in China, which is boosting their sales at a time when many American consumers are scaling back their spending. However, the recovery has not been as rapid or remarkable as anticipated, with most companies still striving to exceed their pre-pandemic sales in China. The travel retail segment is experiencing an even slower rebound, and Apple's sales in its China region, including mainland China, Hong Kong, and Taiwan, declined.
According to Morgan Stanley analyst Kelly Kim, the firm's China consumer team expects the recovery to occur in three stages: a spring break from February to April, summer "revenge spending" from May to July, and a stable recovery starting in August.
Restaurants rebound
U.S.-based restaurants have witnessed a return in demand in China, although sales have not yet reached the levels of 2019. Starbucks reported a 3% increase in same-store sales in China in its latest quarter, reversing the previous declines. However, some analysts were still predicting a decrease in same-store sales for Starbucks in its second-largest market.Yum China, the master franchisee of Yum Brands in China, also reported an 8% growth in same-store sales in the first quarter. China serves as KFC's largest market and Pizza Hut's second largest. While Yum China benefited from increased mobility and observed over 40% growth in transportation and tourist levels, same-store sales in these locations were still 20% to 30% lower than 2019 levels, according to Yum China CEO Joey Wat.
Travel boosts parks and casinos
The potential for increased travel in China could create opportunities for parks and casinos. Tapestry, in its greater China unit, expects a mid-single-digit gain in revenue for the fiscal year, including a projected 50% increase in the next quarter. The company's sales momentum in China is helping offset weaknesses in the U.S. market as North American consumers become more cautious.While many businesses have struggled with travel retail in China, one company is already experiencing a rebound in sales at duty-free shops and tourist destinations. Beauty giant Coty reported a return in consumer traffic to retailers, particularly in Hainan, a tropical island and shopping district where the company operates multiple stores. Coty's travel retail sales increased by over 30% in the quarter. Although Coty faced challenges with excess inventory in China in the latest quarter, its April sales surpassed those of the same period last year and two years prior.
Piper Sandler analyst Korinne Wolfmeyer identified Coty as one of her favorite beauty stocks, citing its performance in China. She expressed cautious optimism about the beauty market in China in the near term, and considered Coty's strategic investments in the region and key product launches as drivers of its market outperformance.
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