The Biggest Trend in Retail for the Next 10 Years
By Graham Summers
February 04 , 2008
Greed killed Communism.
In 1979, Chinese leadership was divided between two men: reformist Deng Xiaoping and moderate socialist Chen Yun. Both had been with the Communist party virtually since its beginning. But when it came time for reform in the late 1970s, Deng and Chen disagreed on what to do and how quickly to do it.
To help settle matters, the Chinese Communist party's head of propaganda was sent to Japan to do a comparison study of the two countries' economies. However, instead of the pro-Communism report Chinese officials had hoped for, they received an astonishing account detailing Japan's wealth.
Half of Japanese households owned a car and nearly every house had a TV, refrigerator, and washing machine. At one point the department head detailed how "no two [women] wore the same style of clothes." In contrast, the average Chinese citizen, brutalized by Mao Tse-tung's regime and an extraordinary drought, was living off a dollar a day.
The head of propaganda's report was the nail in Communism's coffin. Only a few months later, China began introducing its Special Economic Zones (SEZ) – pro-business areas where Chinese entrepreneurs can operate with greater freedom.
Its economic growth has been staggering ever since. Per-capita income doubled from 1978 to 1987 and again from 1987 to 1996. In those 20 years, more than 300 million Chinese ascended out of poverty.
China is no longer a Communist state. It is a capitalist state with Communist social mores. And as legendary investor Jim Rogers puts it, the Chinese are "the best capitalists in the world." The country's stock market boom and SEZs have helped create 320,000 millionaires on the mainland.
China is comprised of 23 provinces, five autonomous regions, and four municipalities. It has 56 ethnic groups, 10 of which have populations of more than 5 million.
The differences in culture and attitude range from the bang-bang jun – illiterate men in Chongqing who make their living transporting parcels using poles – to billionaire Yang Huiyan, the mainland's wealthiest citizen thanks to the explosive rise in shares of Country Garden, her family's real estate company.
Yet all of these people, to some degree or another, are beginning to spend a little more on items that until a decade ago were considered luxury goods – items like shampoo, cooking oils, and ice cream. Asia is expected to add one billion consumers to the world in the next 10 years. A substantial portion of them will come from China.
International retailers are piling into the market. Wal-mart, Home Depot, and others are currently seeing their biggest growth come from China. The rise of the Chinese consumer will be the biggest trend in retail for the next 10 years.
My colleagues Brian Hunt and Steve Sjuggerud have often written the way to make money in China is to sell them whatever they can't live without: coal, iron ore, and anything the country needs to grow and build. That strategy has been incredibly profitable for the world's biggest commodity companies. Two of the largest diversified producers, BHP Billiton and Anglo American, are up 592% and 250%, respectively, in the past five years. Much of that success was built on selling China raw materials.
I think selling China "finished materials" – things like beauty products, packaged food, beer, and electronics – will be a path to wealth as well... Tsingtao, for instance, is the largest brewer in China. China 3C is the leading electronics retailer. When the uptrend in Chinese stocks eventually resumes, basic stocks like these will be worth keeping an eye on.
Good trading,
Graham Summers
