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How China is fueling the growth of beauty brands, luxury players

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SHANGHAI, CHINA: A woman checks out the lipsticks at a department store in Shanghai, 16 August 2004.

LIU JIN | AFP | Getty Images

China is the biggest driver of the outsized revenue that the beauty industry has seen in the past few years, according to a new report by J.P. Morgan.

The country has quickly gained on the United States in beauty sales and is set to overtake it by 2023, even if growth slows. In 2018, beauty sales in China grew 12.9%, compared with just 4.6% in the States. And prestige cosmetics companies such as L’Oreal, Estee Lauder and Shiseido are reaping the benefits. As of June, Estee Lauder grew more than 40% in China over the past year, on top of the 67% growth seen in the previous 12 months, according to the report.

“What makes these companies so attractive is that they’ve been investing a lot more in digital over the past few years,” said J.P. Morgan senior equity research analyst Andrea Teixeira. Many Chinese customers outside of the most developed cities tend receive products through e-commerce sites such as Alibaba, which has been developing more quickly than department stores.

“There’s also the fact that they have an aspiration aspect or quality, which makes it more attractive,” said Teixeira. Prestige cosmetics are considered luxury products, and being able to purchase them can be a sign of class or status.

China’s growing middle class or young customers with increased spending power, subsidized by their parents and grandparents, are also new shoppers fueling the growth, according to the report.

Teixeria said China has historically been dominant in the skin-care market. “Chinese women tend to engage earlier than most [in skin care.] They realize that they have to prepare the skin as a canvas … that’s the difference between the West and East on that aspect,” she said.

Globally, skin care grew 7.6% in 2018, compared with a 5.2% increase in color cosmetics and 5.5% in fragrance, as consumers in the U.S. also begin to realize the importance of skin care. In its most recent earnings call, Ulta Beauty said skin care was one of its strongest growth categories for the quarter, delivering double-digit comparable sales.



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Surging SUV demand is canceling out the environmental benefit from electric cars

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A woman fuels her SUV at an Exxon Mobile gas station in Chicago.

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If worldwide demand for SUVs continues to grow at its current pace, the carbon emissions from these larger vehicles will outweigh the benefits from electric vehicles, a new study from the International Energy Agency found.

The number of SUVs on the road around the world grew from 35 million in 2010 to over 200 million last year, representing 60% of the increase in the global car fleet over the 8-year period.

The surge in popularity is having a big impact on the environment since SUVs are less fuel-efficient than their smaller counterparts.

From 2010 – 2018, SUVs were the second-largest contributor to the global increase in carbon emissions behind the power sector, the study found. This places SUVs ahead of trucks and aviation in terms of carbon footprint. The study also found that 100% of the increase in demand for oil for passenger cars was driven by the popularity of larger vehicles.

“If consumers’ appetite for SUVs continues to grow at a similar pace seen in the last decade, SUVs would add nearly 2 million barrels a day in global oil demand by 2040, offsetting the savings from nearly 150 million electric cars,” the researchers found.

48% of car sales in the United States last year were SUVs, which was the highest percentage worldwide, but other countries are catching up. Large cars can be seen as a status symbol, and sales are rising in countries like China and India where the middle class is growing.

The shift towards bigger, less fuel-efficient cars is somewhat at odds with the auto market generally, where heavy R&D spending is fueling developments in energy-efficient vehicles.

Given the advances in electric vehicles, as well as the knowledge that SUVs are less fuel-efficient, the researchers called the growing number of larger cars and the impact on global emissions “nothing short of surprising.”

WATCH: Why station wagons are much more popular in Europe



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China’s pork shortage could give US farmers a chance to cash in

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Pigs raised by farmers are seen at Linquan county on December 5, 2018 in Fuyang, Anhui Province of China.

Visual China Group | Getty Images

BEIJING — China needs more pork imports than ever as the country grapples with an outbreak of a swine disease — and that could become a business opportunity for U.S. farmers if the two countries can reach an agreement on trade.

African swine fever hit Chinese pig farms last year, causing a severe shortage in the meat that is a staple for hundreds of millions of Chinese households.

Prices have nearly doubled, and publicly available data indicate China’s production of pork this year will likely fall a few million tons short of demand.

In December, a kilogram of pork cost about 22.50 yuan, or $1.46 a pound, according to Beijing-based BRIC-Agri Info. By last week, a kilogram of pork had jumped to 42.46 yuan, or $2.75 a pound, according to figures released by the Ministry of Commerce.

At the same time, one of the U.S. demands in ongoing trade negotiations is that China purchases billions of dollars’ worth of American farm products. At the conclusion of the latest round of trade talks last week, U.S. President Donald Trump said China agreed to a “very substantial phase one deal” that includes purchases of about $40 billion to $50 billion American agricultural products. Beijing has yet to publicly confirm the figure.

China to buy US farm products

The phased aspect of the deal is encouraging to the Chinese side, said He Weiwen, executive council member of the China Association of International Trade, which comes under the leadership of the Ministry of Commerce.

According to a CNBC translation of his Mandarin-language remarks, He said the Chinese will show their sincerity by increasing purchases of American agricultural products.

However, there’s a catch. It’s become increasingly clear that Beijing would like to push the U.S. to remove the tariffs it’s applied on billions of dollars’ worth of Chinese goods.

“If China has promised to buy agricultural products, but the U.S. only delays the additional tariffs instead of lifting them, then it doesn’t make much sense to China,“ He said. “This is the crucial point.”

On Thursday, China’s Ministry of Commerce spokesperson Gao Feng emphasized that Beijing would like the U.S. to cancel all additional tariffs in order to reach a final deal on trade. Gao noted that Chinese companies are increasing their purchases of American agricultural products according to market needs and market-based principles, and that the two trade delegations remain in communication with hope of reaching a phased agreement as soon as possible.

“I think there will be talk for more pork purchase,” He said earlier in the week, noting he does not speak on behalf of the Chinese government. “China’s soybean shortage is not that big. China can cope with it by adjusting feed formula.”

Soybeans are used as animal feed in China and a shrinking pig herd is dampening demand for the oilseed.

China’s import of US pork

U.S. pork accounted for about 14% of Chinese imports of the meat in 2017, about the same as the year before, according to CNBC analysis of Chinese customs data complied by BRIC Agri-Info Group.

That proportion dropped to 8% in 2018 as trade tensions escalated, falling as low as 2% in the fourth quarter of last year, the analysis showed. As of May 2019, the data showed U.S. pork recovered a market share of about 8%, still far short of pre-trade war levels.

US market share of China pork imports, % by year

Source: BRIC Agri-Info, China Customs

That gap potentially creates an opportunity for American farmers, such as those from the nation’s largest pork producing state of Iowa.

Pork prices to remain high for now

China’s pork shortage will likely persist for at least a few months, if not longer. On Thursday, China’s Ministry of Agriculture and Rural Affairs said that it expected pork prices to remain at a high level through the New Year holiday and China’s Spring Festival in late January 2020, according to a press conference transcript from financial database Wind Info.

Authorities have also released pork from national reserves in an effort to ease the shortage.

Chris Rogers, research analyst at supply chain data company Panjiva, also pointed out that Chinese imports of U.S. agricultural goods covered by retaliatory duties climbed 317% year-on-year to $8.3 billion in August. “(The rise) suggests Chinese purchases are already being increased aggressively even before the new deal has been signed,” Rogers said.

However, it’s not a given that China’s increased need for pork will result in more purchases from the U.S.

“China will import from all its trade suppliers, including the U.S., but the American price has to be competitive as well,” He said. “There have been cases where the transaction price did not have market competitiveness and the company had to drop the purchase.”

Chinese pork producers such as Muyuan have also seen their share prices soar as traders bet on greater profits.



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Don’t expect IBM shares to rebound any time soon

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IBM’s stock tanked after earnings and investors should not expect the situation to improve any time soon.

The technology company issued weaker-than-expected revenue for the third quarter, marking the fifth-straight quarter of falling revenue.

IBM shares dropped over 5% after its Wednesday earnings. The stock stayed down on Thursday and it could face more negative pressure in the weeks ahead based on an analysis of recent trading history.

A month after similar declines, shares of IBM trade negatively 71% of the time, and underperform the broader stock market, according to hedge fund analytics tool Kensho. The similar negative trading periods that were studied occurred seven times across the past five years.

In the third quarter, IBM had lowered its full-year earnings estimate to take into account the impact from its acquisition of Red Hat, among other factors.

The company’s cloud business has not done enough to offset sluggish sales in its services, hardware and financing businesses. Even with contributions from Red Hat, an acquisition that closed in the third quarter — and Red Hat revenue growing 19% in the quarter on a normalized basis which was better than its growth rate during its last quarter as an independent company — IBM’s Global Technology Services unit, its largest, struggled with revenue of $6.7 billion down 5.6% from the year ago period and slightly below the consensus estimate.

Some Wall Street analysts remain positive on IBM.

“We think the combination of new products should enable the company’s Systems segment to revert to growth in CY20 following recent declines (wind down of z14 cycle),” Evercore ISI analyst Amit Daryanani, who has the equivalent of a buy rating on IBM stock, wrote in a note distributed to clients on Monday.

IBM shares are up about 25% since the beginning of the year.

IBM said it continues to forecast at least $12.80 in earnings per share, for the full year 2019. It beat by a penny in the third quarter — $2.68 per share vs. $2.67 analyst expectation. Analysts polled by Refinitiv expect $12.81 in earnings per share for the year.



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