What to do about China? The question facing many Western advertisers

As Q3 results roll in, we’ve already seen companies, including agency groups like Omnicom and Publicis, report their numbers. Their results—and comments—have generally been well received. But the overall picture is less rosy than in recent quarters. According to Factset, 79% of S&P 500 companies reporting by October 18 have posted positive earnings surprises. Yet ominously, nine companies have cut their full-year earnings guidance, while only five raised theirs.

One market is emerging as a red flag: China.

The alarm bells rang loudest when luxury giant LVMH reported an unexpected 3% drop in Q3 revenues, against expectations of a 1% gain. Lower growth in Japan was named the decisive factor, but the key underlying concern is China, with LVMH stating that consumer confidence in mainland China was back down to Covid levels. In fact, Asia sales, ex-Japan, fell 16% YOY. LVMH’s results have raised concerns over wider Chinese consumer sentiment, which is vital for many luxury goods companies. Unsurprisingly, most of the luxury goods sector sold off post-results.

There are two obvious questions here. The first is whether we should consider LVMH as typical of the outlook in China, given its focus on luxury goods. The answer, for now, is yes. While Nestle, which reported its Q3 revenues last week, did say it had seen organic revenue growth of 2.5% in Greater China in the quarter, it did state that its pricing was down 1.5%, and that reflected a general low-price environment in the country. That would seem to support the claim that China faces deflationary pressures, exacerbated by consumers who are not spending money because of concerns over the economic outlook.

The second question is more loaded: are these effects temporary, or is this the new normal? Globally, economic news has mostly surprised on the upside over the past year—but not in China. Advertisers had hoped 2023 would see a surge in Chinese consumer spending as Covid restrictions lifted. It didn’t happen. The hope then shifted to 2024. But as we approach year-end, that too seems unlikely. So, what will change the dynamic? The Chinese government’s $1+ trillion stimulus package is the obvious answer, but with over 60% of household wealth tied up in a shaky property market, its effectiveness is questionable.

Western advertisers might soon be forced to face hard truths about China. While this rethink won’t happen overnight, it’s increasingly likely in the medium term. If companies can squeeze out growth in established markets through a combination of modest volume and pricing gains, along with some efficiencies, that’s still a decent—if unspectacular—story. But unless Chinese consumer spending rebounds quickly—and especially if Donald Trump returns to the White House—many global advertisers may decide it’s less of a headache to focus on their traditional markets.

As always, this is not investment advice.

Ian Whittaker is the founder and managing director of Liberty Sky Advisors. He writes regularly for Campaign about the advertising landscape from a financial standpoint.