Hmmm

China’s Devaluation May Lead to Unintended Consumer Consequences

As U.S. retailers look for price concessions from China in the wake of last month’s currency devaluation, margins may tick up, for now anyway. But there could be a blowback in the form of reduced enthusiasm, and buying power, from China’s consumers, which could impact retail and beyond.

China’s devaluation of the yuan may have had unintended consequences, at least within the retail industry.

Reuters reported Wednesday that retail behemoth Walmart wants price cuts from suppliers in China and therefore seeks to share in the cost savings ostensibly generated by the currency move, in which China’s central bank devalued the yuan last month by 2 percent, the most in more than 20 years.  Unnamed sources told the newswire that Walmart managers have spent several weeks getting in touch with more than 10,000 suppliers globally, all of them with manufacturing operations based in China.  And as part of communications Walmart has been requesting cost cuts of between two and six percent, tied to merchandise that spans apparel, health and beauty items and furniture, among other things.

Such a move is calculated to allow Walmart to continue with its “everyday low cost” initiative, which keeps low prices in place for the end customer.

 Of course, with $500 billion in annual sales, Walmart can be seen to have superior leverage over its supply chain, and thus likely to wrangle concessions, but other retailers in the United States have been pushing back on their cost structures post Chinese devaluation, including Toys R Us and Home Depot. 

So begins a trend, it seems.  The devaluation, of course, led to an even further slide in China’s currency versus the dollar, down 2.9 percent thus far in 2015.  As dollars are used as the common currency when negotiating and finalizing supplier terms, the relatively stronger dollar buys more goods and services, and while it benefits large retail players, the question remains: What could happen to retailers beyond the initial cost savings from a cheaper yuan? 

Though the focus of investors and others seems to have been the macroeconomic impact of China’s move last month – in a nutshell, that demand for Chinese exports would go up as the dollar (and other currencies) grow stronger, the Chinese consumer may bear a disproportionate amount of pain, with an unpleasant ripple effect in tow.

 That’s because with a cheaper currency in hand, China’s burgeoning middle class may suddenly find that the reach for luxury goods exceeds the collective grasp.  The thirst for a luxury handbag may abate.  The craving for watches and fashion and even imported foodstuffs may dwindle, even just a bit. Perhaps enough for retailers to take notice in a world where cross-border commerce has been a nascent but fast growing movement.  The currency devaluation may ultimately be remembered as a speed bump for cross-border transactions, at least as far as Chinese consumers.

Should devaluation have spurred an ever-prolonged drop in the yuan, and sales, as consumers no longer feel flush but then pull back on spending in other areas. Companies not strictly retail, like Uber and, say, food delivery outfits with headquarters and domiciles outside the U.S., could pull back on expansion.  Or they could even raise prices in countries beyond China to reflect and offset a slowdown there, especially as they grapple with rising labor costs in the United States. 

It’s an old proverb that states a flap of a butterfly’s wings can result in a hurricane.  In this case, the float of the yuan may snap shut a billion wallets and purses.

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