International brands put a lot of stores in China’s recovery

A woman wearing a face mask rides a shared bicycle on the street in the Central Business District (CBD), amid the outbreak of the coronavirus disease (COVID-19) in Beijing, China, May 12, 2022. REUTERS/Carlos Garcia Rollins

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LONDON, May 13 (Reuters) – The “new normal” of China’s COVID-19 virus will challenge hopes of Western multinationals for a quick recovery in the world’s second-largest economy. Large groups from Apple (AAPL.O) to General Electric (GE.N) took a hit on revenue in the first quarter as renewed shutdowns paralyzed factories and distribution networks and slashed retail sales. Many companies downplay the impact as temporary. This is too optimistic.

Estée Lauder (EL.N) Chief Financial Officer Tracy Travis may not be the only one to make the bold call that China could reopen domestically in mid-May, and that pent-up demand will help it regain recently lost sales. The US cosmetics group’s revenue in Asia declined for the first time in two years in the three months to March. This is mainly due to China, where the company generates 36% of all sales, Jefferies analysts estimate. Remy Cointreau (RCOP.PA) insists its growth potential for the year remains unchanged, even though the French luxury liquor maker’s revenue declined in the March quarter, driven by a double-digit decline in China.

Reasoning is based on past experience. Foreign companies in China have benefited from the country’s rapid recovery from the early wave of the epidemic. The authorities have also minimized the economic damage by adopting targeted restrictions, particularly in the major production and logistics hub in Shanghai. Both the US and European Chambers of Commerce in China said most of their member firms remained profitable in 2020 and 2021.

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But the Omicron outbreak that crippled Shanghai in March led to a profound change in Beijing’s approach. Authorities have introduced regular mass testing in nearly a dozen cities in the country by GDP, even if no new cases have been reported. Residents must show a negative test result repeatedly every two days to enter public places. Cheap test kits will enable more cities to adopt the same approach.

In theory, this preempts another Shanghai-style escalation. But it also makes reopening more difficult. Harsh treatment of people who contract the virus may discourage people from traveling and spending.

China’s 400 million middle-class consumers make the country a key growth market for companies like Italian luxury-goods maker Salvatore Ferragamo (SFER.MI), which said Tuesday it expects sales to double within four to five years from 2021. One option is It is to expand online sales and invest more in marketing, but even so, Covid-19 restrictions may interfere with deliveries. The alternative is to develop new consumers in other countries. But for now, companies are putting a lot of attention in China’s rapid recovery.

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– WHO Director-General Tedros Adhanom Ghebreyesus said in a briefing on May 10 that China’s zero-tolerance policy for Covid-19 is not “sustainable” given what is now known about the virus.

– Marco Gobetti, CEO of Salvatore Ferragamo, pledged on May 10 to increase investments, renovate stores and attract young customers to double revenue to nearly 2.3 billion euros by 2026. The Italian luxury group forecast sales to rise in 2022 despite problems in China, where Retail revenue fell in the first quarter due to new Covid-19 restrictions.

Beijing Daily — On May 4, Beijing closed more than 60 subway stations and 158 bus routes. The Chinese capital on April 29 ordered its 22 million residents to submit a negative Covid test before entering public places.

The cosmetics group reported May 3 that Estée Lauder’s sales in the Asia Pacific region fell 4% in the first three months of 2022, mainly due to new restrictions in place in China. Chief Financial Officer Tracy Thomas Travis told investors on a call that the company believes China could open its doors in mid-May.

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Editing by Peter Tal Larsen, Katrina Hamlin and Oliver Taslik

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The opinions expressed are those of the author. They do not reflect the views of Reuters News Agency, which is committed under the principles of trust to impartiality, independence and freedom from bias.

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