Any and all companies have been rushing into the China market to serve the consumers. Aside from being a very large population, its an economy in its infancy – the wild west. Companies are able to maintain their healthy margins that are no longer available at home.  There are no outlet stores in China for luxury brands vs outlets stores and discounters everywhere in the USA.  In the US, the large population provides the means for companies to pass on the savings to the consumer. In China, it’s the exact opposite as the large population provides the means for companies to maintain their margins and reap great profits. This mentality is abound in all sectors resulting in the Chinese consumers going abroad and consuming like locusts, to the dismay of the locals.

The lack of discount retailers in China and the inability of retailers to use their buying power to their advantage is a lose lose situation for everyone.  The supermarkets are controlled by a relative few and rather than passing on the discounts from buying in large quantities, they rely on the fact their consumer base is not well educated enough to make better decisions.  Hong Kong is a prime example.  Park’N’Shop (PNS) is controlled by the richest man in HK.  The buying power of being of duopoly in HK gives PNS strong bargaining power.  If you want your brand in PNS, you play ball.  Yet PNS sells all the house brand items of other discount food chains rather than pushing their own products.  If you step into PNS, you will see house brand products from British and French giants (Casino).  All the premium products are foreign imports yet all the expats know the ‘foreign’ products available is junk back home.  The inability of the supermarket duopoly to change the status quo has left a large niche for others.  As a Costco shareholder, I wish I had the clout to force Costco into HK.  Costco is in Taiwan and Japan.  Que up Kai Bo, Prizemart, 759 and Best Mart 360.  Best Mart 360 is HK’s version of Costco as they sell Costco’s Kirkland products.  The ability of a business to buy Kirkland products at Costco and resell for a slight mark up shows the demand for bulk products at a affordable price outstrips current supply.  The speed at which the discounters expand also show their business model works.

If you make goods that sell in supermarkets, forget about Park’n’shop and Wellcome.  The discounters 759 and Best Mart 360 are the future for the HK market.  Citysuper is HK’s version of Whole Foods.  The product selection is broad and they will have the majority of the products to make you feel at home.  If you plan to use HK as the best of operations for future expansion to China, the products that will sell well will be things that break the status quo providing consumers with a wider variety of options.

The China consumers make great strides in educating themselves on products. They are savvy and cunning with a winner take all mentality. They overspend knowing that tomorrow is a new day with new opportunity. They operate using loss leader models solely to get access to technology, experience and know-how; thus, arming themselves to succeed in the future. Loss leader models can be seen in their mining industry(for rare earth metals, manufacturing steel, San Fran bridge fiasco), automobile (JV with foreign manufacturers only to start their own supply chain next door), telecommunications (low cost bids to oversea governments), transportation (JV with big conglomerates to build mass transport lines in China only to turn around with their technology and bid against them in other areas – South America and Africa), armed forces (russian tech in their jets, reverse engineering supply chains) and any other industry one can imagine.

A prime example of why it pays to lust over China consumers, Macau.

In Macau, the minimum bet at the tables is $500MOP which makes it $62USD.  An amount unheard of anywhere else in the world.  In the US, minimum bets start at $5USD in Las Vegas.  If you venture to the casinos on native reserves the minimum bets are even lower.  All the US casinos have been rushing into Macau over the past decade.  The whales gamble in private VIP rooms inside the casino but run by junkets (triads).  The casinos are dependent on the junkets for this business as they are the only source of industry able to extend credit.  China has rules limiting the amount of money their residents can take abroad and the junkets are able to circumvent it with their associates able to collect debts within the confines of China.  Casinos have been smart.  Junkets represented a necessary evil to get their business set up and printing money, but the casinos were able to collect the data on the whales thereby slowly weaning the whales off the grasp of junkets.

Macau casinos are a great indication of the overall health of the China market.  VIP gambling via the junkets represent the majority of the profits.  So long as Macau is still reaping excess profits, the whales are still gambling.  The new regime in China has made a big push to weed out corruption.  If you’re a whale, the government will be watching the VIP rooms closely.  One does not accumulate the type of wealth togamble inside VIP rooms (using junkets) in any legitimate manner.  The sole purpose of using junkets and VIP rooms is to circumvent the China laws to get their money out.  I dwell on this topic as Macau and its customer base makes the perfect test case to ride China’s seemingly never ending boom.  It’s best to be an investor in the casinos with Macau exposure: LVS and MPEL.  I would gamble to leverage this investment to juice the returns.  Gaming companies are still trading below their 2008 highs and their ability to attract money has no boundaries.

Investors are scared over a slow down in curbing the amount of visitors into Macau and the length of their stays.  Macau enacted laws that require gamblers to provide details on the origin of the funds and all sorts of things to make them jump through hoops.  It’s an onerous process.  Investors forget one thing, the whales would never be privy to this and the Chinese are degenerate gamblers.  Even with the onerous processes they put in place, they will find a way to gamble.  It’s not easy for China Chinese to travel outside the country, they lack the ability to come and go as the please.  Macau and Hong Kong is one place they all aspire to visit.  The Macau casinos are already growing to diversify away from Macau.  The newly minted Chinese seek knowledge abroad and to that end, Macau casinos are trying to get into Australia, Russia and Japan.  Any area to which you may find gambling Chinese people, they will need a presence.  It helps that most economies see Casinos as a piggy bank and welcome the gaming sector with open arms.

The regime change has been a disaster for anything related to luxury.  Luxury products see a direct correlation between the current anti-corruption graft and profitability.  The consumption and demand for fine French wines have fallen off a cliff.  It’s trajectory mimics the typical boom and bust cycle.  The era of Xi is alive and well.  It remains to be seen if the era of Xi is really the end of corruption or if its using the corruption graft to purge officials from the previous administrations to maintain his power.

China represents a very interesting economy to which it will continue to be news fodder for the foreseeable future.  It’s going to be hard to sell directly to the Chinese consumers, and until which time I can think of the right product mix, I will continue to add to my positions in gaming companies with Macau exposure.  The right product mix will be selling items that the majority of the people require, educating them on the benefits of the products and breaking the current status quo prevalent in the market.  Most of the locals don’t know the extent of the deceit until they travel abroad.  Once they travel abroad, they buy enough supply until their next trip.  It would be best if options were available so they no longer have to travel abroad to utilize arbitrage.

ps. I think the new Louis XIII casino will be a bust.  The China government is cracking down hard on corruption.  The only people that can afford the new Louis XIII casino won’t dare to step foot inside it.  If you are truly rich beyond imagination, one would be best served to hide the wealth rather than flaunt it for everyone to see.  I’m sure the China government will be paying close attention to its patrons of Asian descent.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s