June Social Retail Review: How bad is consumption really?

The National Bureau of Statistics released the "data package" for the macro economy in June, with the following key points:

1. In June, the year-on-year growth of total retail sales of consumer goods in China only increased by 2%, slowing down from the 3.7% growth in the previous month, marking the lowest point in 24 years. What are the main reasons leading to the rapid decline in retail sales? Firstly, from the perspective of the base number, based on the compound growth rate from 2021 to now, the compound growth rate in June was 2.7%, compared to 2.9% and 2.5% in the previous two months. From this perspective, in fact, domestic consumption has been weakening since the second quarter, rather than a sudden decline in June.

2. As mentioned last month, this year's 618 promotion was advanced, leading to some online consumption demand being brought forward to May, resulting in a "siphoning effect" on June. Reflected in the data, the year-on-year growth of online physical retail sales in May was as high as 12.9%, but in June it decreased by 1.4% year-on-year. However, the combined growth of online physical goods in the two months was only 5.1%, still relatively weak. This is consistent with the tone of the second quarter performance forecasts of several e-commerce companies.

3. Looking at different categories of goods, the drag on total retail sales of consumer goods from the largest category, automobile consumption, continued to increase this month, with automobile sales in June already showing a year-on-year negative growth of 1.9%. The two largest industries in terms of volume, real estate and automobiles, failed to provide support. Among other major categories of goods, apart from essential food and tobacco products which continued to grow steadily, categories like clothing, cosmetics, home appliances, and mobile phones all showed a significant decline in growth or were already in negative growth. On one hand, this was influenced by the early 618 promotion, and on the other hand, optional goods are more likely to be cut back during overall weak consumption.

4. The service consumption that showed strong recovery growth last year has also been continuously declining to the lowest point in 24 years, with restaurant consumption expenditure maintaining a growth rate of 4% to 6% for three consecutive months up to June. The disclosed cumulative growth rate of service consumption has also been declining for six consecutive months, reaching 7.5% by June. Service consumption has also failed to play a significant driving role.

Here is a detailed analysis:

1. What are the main reasons behind the significant decline in retail sales in June?

Overall, the year-on-year growth of total retail sales of consumer goods in China in June increased by 2%, significantly slowing down from the 3.7% growth in the previous month, hitting the lowest point in 24 years. From the data, the consumption sentiment in June was undoubtedly very weak, with a clear decline. So, what are the reasons behind this?

Firstly, in terms of the base number, if we smooth out the fluctuations in the base number by using the compound growth rate from 2021 to now, the compound growth rate in June was 2.7%, a slight decrease from the 2.9% in the previous month, but not significant. Since April (with a compound growth rate of 2.5%, the lowest this year), the compound growth rate of total retail sales has been hovering below 3%, from this perspective, domestic consumption has clearly cooled down since April, rather than experiencing a sudden drop in June.

2. The early 618 promotion benefited May but affected June negatively Another factor contributing to the slide in the year-on-year growth rate of online retail sales in June is the sharp decline in online retail growth. In May, the year-on-year growth rate of physical online retail reached 12.9%, but in June, it dropped by 1.4% compared to the same period last year. The main reason is that as mentioned last month, this year's top e-commerce platforms started the 618 promotion early and canceled the pre-sale system, leading to the early release of shopping demand during the promotion in May. However, the combined year-on-year growth in May and June is only 5.1%. Despite extending the duration, increasing discounts, enhancing consumer services such as free shipping and refunds, the performance of this year's 618 promotion should be quite poor. Several e-commerce companies that have recently announced their 2Q performance forecasts have also largely confirmed this situation.

The penetration rate of physical online retail decreased by 1.2% year-on-year in June, mainly due to the situation where shopping demand during the promotion was shifted to May. In fact, looking at the combined online penetration rate in May and June, it still increased by about 0.6% year-on-year, but the rate of increase has significantly narrowed.

3. Service consumption is also bottoming out.

Within offline consumption channels, the adjusted growth rate of commodity retail has slightly accelerated to 3%, but this does not necessarily mean that offline consumption has warmed up. It is more due to the fact that online consumption during the 618 promotion was shifted to May.

The growth rate of catering retail in June was 5.4%, slightly higher than the previous month, but catering has maintained a platform of 4% to 6% for three consecutive months. After experiencing the recovery dividend period last year, in the overall sluggish environment, service consumption is also showing signs of fatigue.

The National Bureau of Statistics separately disclosed that the cumulative growth rate of domestic service retail (including catering, tourism, transportation, cultural tourism, etc.) this month has fallen to 7.5%, a decrease of 0.4 percentage points from the previous quarter. For the past 24 years, the growth rate of service consumption has continued to decline and has not yet bottomed out.

4. Strong performance in electrical products, while clothing and cosmetics still need to be observed.

Looking at individual product categories, the largest single category is automobile retail (accounting for about 1/4 of total retail sales above the quota), which continued to drag down overall retail sales in June, with the decline in automobile retail reaching 1.9% year-on-year. Excluding automobile retail, the overall year-on-year growth rate of retail sales is 2.4%

In other major commodity categories, essential food and tobacco and alcohol products maintained relatively good positive growth in June, while optional goods such as clothing, cosmetics, jewelry, as well as home appliances and mobile communication products in the 3C category either showed a significant decline in growth compared to the previous month or have already entered into deep negative growth.

On one hand, clothing, beauty products, and 3C electronics are all categories with advantages in online channels, and the sluggish sales may have also been affected by the early impact of the 618 shopping festival. On the other hand, under the overall economic downturn, optional categories are more likely to be the first to be cut back.

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