The company is opening new outlets across China as fast as it can, but so far its two joint ventures with local partners are not making a profit. Paul Smith, who runs their operations in Asia, says Costa Coffee is in China “because we are committed to a global expansion of our business”.

“If you come here to make money in China you have to remember it will take you some time to do so,” he says. “It’s a country that you need to invest in in many ways. That’s not just money, that’s people, that’s resources, and you have to understand you need to be necessarily patient in China in every aspect.”

Companies like Costa Coffee are betting that tomorrow’s prospects will be rich enough to compensate for the lack of profits today.

But it is right to characterise this as a gamble, and fair to say that some here are starting to complain the odds are stacked against them.

I don’t think Costa has any branches in Wuhan, but I visited one of their cafes in Hangzhou when I was on the hunt for wifi and couldn’t find a Starbucks. I remember it being incredibly expensive — even more expensive than Starbucks, which already feels like it must be targeting the upper crust of China’s consumers. (Also, no wifi, apparently that’s an explicit choice to maintain the right mood in their cafes). But presumably Costa has crunched the numbers and decided that the luxury market is the place to be — and that it’s going to be so important that it’s worth losing lots of money in the short term in order to get a foothold in the market before it’s too late.

A lot of foreign brands have made this gamble (it would be interesting to know which foreign brands are actually making money in China, and how long it took them to get there). As far as cafes go, Starbucks seems to be winning the race hands down — they seem to be essentially creating a modern cafe culture in major Chinese cities where it didn’t exist before (much in the way they take credit for creating a cafe culture in the US), and even though a Starbucks frappuccino is incredibly expensive relative to the cost of living in Chinese cities, almost every Starbucks I’ve been to in China has been buzzing. At the one closest to Wuhan University, it was usually so busy that it was hard to find a seat on weekends.

It must be daunting to try to compete with the brand that’s essentially creating the market. But presumably Costa is hoping that once Chinese consumers have started to fall in love with Starbucks coffee, they’ll branch out to other brands, and at that point Costa will be ready. And maybe it does make sense to come in once someone else has done the groundwork — there are a lot of knock-off cafes in China that are obviously copying Starbucks’ brand, and I’ve read that rather than going after them for IP infringement, they’ve found it easier to let the knock-off cafes do the groundwork and then to step in and buy them out when the time is right — so even Starbucks appreciates having someone else break in the market before they step in and take over.

The seller went to great lengths to prove that they were originals, providing a lengthy explanation on how to tell real Uggs from fake Uggs, complete with a picture of dead sheep being skinned. At 180 rmb though (as opposed to the US price of $180), I’m pretty sure mine are not authentic. But the seller had a very good rating on the website and had already sold something in the region of four or five thousand pairs, so I kept my fingers crossed that the quality would still be ok.

Next step was payment, which proved a little bit trickier, since I don’t have a Chinese credit card, and I haven’t set up online banking with my Chinese bank account. Not to worry though — they also accepted cash or credit card payments at pre-approved payment spots (like grocery stores or shopping malls), as well as refill cards for pay-as-you-go cell phone plans. I went for the refill card option — a really good way to make online shopping available even to people who don’t have a credit card (which I assume doesn’t just include hapless foreigners like me).

The next step in the process was a little bit more surprising — it turns out that Taobao is also a social networking site, and after creating my account, I was prompted to fill out my profile information, upload a profile picture, and connect with friends. For each day that you log onto your account, you get rewards points, which in turn, it seems, can be used on the shopping section of the website. It seems like a brilliant (and dangerously addictive) way to drive shoppers back to their website — one of my friends told me a few weeks ago that she spends most of her online time on Taobao, which makes more sense to me now that I know there’s more than just shopping. There’s even a Taobao Happy Farm.

My shoes arrived in a very professional-looking box, with a free scarf as a bonus, so I completed the transaction by giving the seller a top rating. I can see why Taobao has been so successful — I may need to spend some more time “researching” their model in the future, it seems like I’ve only scratched the surface of what Taobao has to offer…

Fresh out of the box

The government said the city is facing a shortage of about 1 million cu m of natural gas. The surge in demand is mainly due to increasingly popular gas-powered home water heaters. Homes in areas south of the Yangtze River have traditionally been unheated, but many now have air conditioners and home water heaters.

We have a gas-powered water heater in our apartment as well, and I’m very thankful that it’s still working. (The foreign students dorm at Wuda has apparently only had electicity intermittently these past few days).

Still, the economic impact of this must be huge. There’s certainly something to be said for the returns on basic infrastructure investment. At times I have my doubts, at least in terms of the scale of investment in roads and real estate (and railway lines) — sometimes it can seem like money is being spent on “roads to nowhere” simply as as a way to pump money into the economy and powerful pockets. But energy definitely seems to fall in the category of desperately needing further investment (even though infrastructure is just one aspect of addressing China’s energy problem) — demand for staying warm in the winter is just going to increase, not to speak of the industrial demand for natural gas, and the cost of having to cut off supplies of gas to industry on weeks like this must be huge.

According to our textbook, there’s a growing group of people who spend their entire monthly income, not because they need to in order to obtain the necessities of daily life, but because they’d rather put their money into consumption that improves their short-term quality of life rather than into long-term savings. Most people in this group are apparently young people under 30, who are generally unmarried and with stable jobs.

Their spending patterns stand in sharp contrast to those of the older generation, among whom many save every penny, even when they have reached a level of financial security that should allow them to spend more money on improving their standard of living. Our book calls these two types of consumers “超前消费” and “滞后消费”， “pre-income consumers” and “post-income consumers”, and claims that they represent 12% and 26% of total consumers, respectively.

So why is there such a disconnect in spending patterns between the older and younger generations? According to the textbook, young people who spend their entire income are characterized by a high level of confidence in their job security and their future earning power. They feel safe spending their money, because they’re sure they’ll be able to make more. In addition, they see money not as a good in itself but as a means to acquiring a more comfortable lifestyle. Some might see spending money on clothes or gym cards as an investment in themselves which will in turn increase their future earning power — especially in the context of low interest rates that make savings account at the bank less attractive (and maybe a less developed system for channeling small savings into other forms of investment). More often than not, they’re young women, who presumably expect that they’ll eventually get married to someone who will hold the main responsibility for providing for the family.

On top of these reasons, I’d speculate that having parents who belong to the other extreme — parents who save every penny because they’ve lived through lives where they’ve had to, and in many cases now have pretty significant savings account that they’re fulling willing to spend on their only child — also provides a safety net that allows young people to spend their disposable income with more confidence. In other words, the 超前消费 exist precisely because the 滞后消费 exist.

The book is a few years old and it’s unclear where these numbers come from, but either way, 10-15% of consumers who spend most of their disposable income is a pretty big group of big spenders. Even if these young people are only making somewhere between 1500 and 3000 rmb a month, if a lot of these people aren’t saving any of their money, maybe live with roommates or even with their parents and don’t have any major expenses, then that could help explain how they can afford Starbucks frappuccinos and even Versace purses.

edit, 18/10/2009: I talked to my students this evening about how much they expect to make when they graduate from university, and those who were finance majors said that starting salaries in Wuhan for jobs in the finance sector are around 800 yuan per month, which might rise to 2000 yuan after two years of working. They also said that if you go to Beijing, Shanghai or Shenzhen, salaries are significantly higher, as much as 8000 yuan or more  per month for starting salaries in finance.  A few students said that they would probably continue to get money from their parents for the first few year while they’re working, and those who weren’t getting money from their parents just live extremely frugally. The 12% or so of consumers who belong to the high-spending and low-savings group clearly don’t represent everyone under 30 — it would be interesting to see a more detailed break-down of incomes and spending habits.

I won’t go into a discussion on China’s supposed superpower status, but there certainly are a lot of luxury brands here — here in Wuhan in particular there seem to be more luxury shops that the purchasing power of the population should be able to support. A few possible explanations are that 1) even though the average income is still relatively low by Western standards (and relative to the price of a Versace bag), there’s a significant and growing chunk of the population who do have money to burn — maybe not a big chunk in terms of percent, but given the size of the population, enough people for there to be a big market for luxury brands, 2) the cost of opening and running a Versace store or luxury shopping mall is much lower in Wuhan than in New York, and so the sales volume perhaps doesn’t need to be as high to make it profitable, and 3) a lot of brands are trying to establish themselves in China in anticipation of the day when purchasing power will be much higher, and might be willing to open shops with lowers profits or even at a loss in order to build their brand here.

Definitely an issue that needs more research — anyone interested in funding a Versace shopping spree?

”Om någon undrar så är det Kina som gäller.”

Att Kina håller på att segla upp som en supermakt vid sidan av USA, en position som Sovjetunionen hade på sin tid, blir allt tydligare. Ett av dem är att lyxmodehuset Versace lämnar Japan efter 30 år. Men under de tre senaste åren har de öppnat 20 butiker i Kina.