Ad sales in China are pointing to a soft recovery for the consumer

Important Points

Several Chinese internet giants saw their marketing revenue rise in the first quarter of 2023 -- but not Alibaba. Pinduoduo, a major U.S. listed Chinese internet platform, saw the largest year-on-year growth in revenue from advertising sales in the first three months. The company runs a group buying app that is known for its bargain discounts.

BEIJING - Businesses in China will spend less on advertising as the local economy is not expected to recover for some time.

Several Chinese internet giants saw their marketing revenue rise in the first quarter of 2023, but not Alibaba. This is on an annual basis.

Brands remain cautious as they prepare for the 618 Shopping Festival this month.

"For 618 brands will try, but it is a little more tired than before," said Ashley Dudarenok. She founded ChoZan, an advertising consultancy in China.

She said, "We know that it costs the same money to bring a customer to your store today as compared to 2021. However, the customer will spend around 30% less at your store."

The median income for urban Chinese residents was 12,175 Chinese Yuan ($1,739) in the first quarter of this year, an increase of 3.9% over the previous year. A central bank survey revealed that education, health care, and travel are the three most popular categories of planned expenditure.

Dudarenok stated that the general consensus is that the year 2024 will be one of growth and recovery. "Let's get out of this downturn in 2023, stay connected to the platforms and with the customers," Dudarenok said.

Dudarenok pointed out that advertising agencies also spend money to experiment with search engine. Baidu and Microsoft Bing are both working with generative artificial-intelligence technology.

Focus on affordability

Since the Covid-19 pandemic, sluggish growth in China's economy and uncertainty over future incomes have affected consumer spending. Retail sales in China have moderately rebounded this year, despite the lack of national stimulus checks. The figures for May will be released on June 15.

Dave Xie is a principal at Oliver Wyman, a consultancy specializing in China's retail industry.

He said that domestic brands of cosmetics have increased their market share by promoting the affordability and functionality of products around the 618 Shopping Festival.

A JD Retail representative responded to a question Tuesday regarding the Chinese consumer's outlook this year. He said that growth could be uneven. As online shopping trends change, companies are seeing different results based on platform.

Oliver Wyman's Xie stated that brands are eager to spend more money on ByteDance Douyin. This is likely to take away from ad expenditures on Alibaba's Taobao or Tmall ecommerce platforms.

ByteDance doesn't publish its numbers and does not often provide them.

Pinduoduo, a major U.S. listed Chinese internet platform, saw the largest year-over-year growth in ad revenue in the first quarter. The company runs a group buying app that is known for its bargain discounts. This growth could be a sign of locals' unwillingness to spend.

Sun Hao, a partner at Beijing's Goodidea Growth Network (a media group) whose website lists Nestle P&G, Tmall and P&G as clients, said: "Many people around me use Pinduoduo."

The app Little Red Book (or Xiaohongshu) has also seen "significant" growth, as its users are mostly mothers and white collar workers who live in big cities. The app's not publicly traded.

Sun, however, said that many brands did not meet their performance goals in the first three months and that his impression was that overall advertising budgets are contracting, particularly for traditional media.

He said that for brands who spend on Douyin advertising, the return on investment is getting lower.

Offline and Overseas

Travel and events have been boosted by the end of China's Covid restrictions and pandemic. Trip.com, a travel booking site, said that it had doubled its sales and marketing spending in the first quarter.

Kelly Shi, branding director at iQiyi (nicknamed "Netflix of China"), says that offline marketing is more important for iQiyi since China reopened due to the increase in foot traffic. Billboards and interactive experiences have been used to promote the company's content.

IQiyi’s selling, general and administration expenses grew by 48% from a year earlier to 1.1 billion yuan in the first three months of this year. This was "primarily due" to increased marketing expenditures.

The slowdown in China's home market has pushed more local consumer brands to expand overseas, sometimes through acquisitions or mergers with other brands.

According to a Bain & Company study released late May, China-based consumer products companies have seen the fastest growth in Asia-Pacific in terms of international revenue in the last decade.

Philip Leung, Bain's Asia-Pacific M&A leader based in Shanghai, predicts that more China-related deals will be made overseas over the next six to eighteen months.

He said that for many China-based firms, the strategy now is to acquire brands in order to benefit both from the overseas market as well as the Chinese market.