January 8, 2014 1:58 pm

Chinese investment: picky, picky

Increased selectivity about the world’s second-biggest economy is good news

L’Oréal is pulling its Garnier brand out of China. Good. Last week Revlon said it would leave the country altogether, incurring a $22m charge. Also good. And they are not the only consumer companies taking a more sceptical view of China. Last year UK retailer Tesco decided to put its Chinese business into a joint venture with a local partner rather than go it alone. And Germany’s Metro closed its Media Saturn electronics stores in the country.

For too long all China investment has been seen as good investment. There is a map doing the rounds on the internet with a circle drawn around India, China and southeast Asia: more people live inside the circle than outside. Companies that led the charge into these markets (such as Unilever) have seen their share prices rise. Those perceived as slow to enter (such as Procter & Gamble) have underperformed.

This has been more about perception than profits. The US’s Home Depot and the UK’s B&Q have struggled to create a DIY market in China, for example. Those that have managed revenues have seen profits squeezed by competition. According to Bernstein Research, China makes up 71 per cent of Asian beer volumes, but 17 per cent of profits.

That does not mean brewers should abandon China. A small margin on a big revenue number can still equal a big profit. But it does mean all consumer-facing companies, be they retailers or manufacturers, need to be more selective about what is in reality a collection of markets. They also need to be more upfront with their investors about what China does and does not mean. Not one of Walmart, Unilever, Nestlé and P&G – to take four large consumer groups at random – details how much profit is made in China. There should be more coming out of China than sales growth numbers.

Email the Lex team in confidence at lex@ft.com

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