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3 Companies Trying to Win Over China's Booming Middle Class

By Bradley Seth McNew – Sep 6, 2016 at 10:37AM

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Even though China's GDP growth has slowed in recent years, its middle class is expanding at astounding rates. The new consumer purchasing power could benefit these companies immensely.


A port near Shanghai, China. Image source: Royal Caribbean.

China's economic growth is slowing; there's no doubt about it. From its high of around 14% GDP growth year over year in 2007, it's estimated to come in around 6% in 2016. That slower economic growth is still very significant compared with developed countries with far slower growth, such as the U.S. which hopes to come in at 2% GDP growth this year, but it's not overall GDP growth that has these three companies excited now -- it's the growing middle class. 

ANZ analysts estimate that more than 300 million people will jump to the middle-class bracket in China between 2014 and 2030, to a total of around 850 million. With this new middle class will come a rise in discretionary income and interest in more vacations, entertainment, and higher-quality fitness gear. Here are three companies working to provide these to China's growing middle class now. 

1. Royal Caribbean

Royal Caribbean (RCL 1.21%) has chosen China as one of its most important growth markets in the years to come. In June, Royal Caribbean sent its newest and most advanced ship to be full time in China. The cruise ship, called Ovation of the Seas, had a naming ceremony at a port in Tianjin, China, complete with Chinese celebrities and media fanfare. 

Ovation of the Seas is the first world-class ship to make China its homeport immediately after its delivery, and it can accommodate 4,180 guests. This will make five Royal Caribbean ships that spend at least some of their year in China. 


The new Ovation of the Seas cruise ship. Image source: Royal Caribbean.

The Chinese cruise market is growing rapidly. The seas around China are a great place for cruising, with many small, tropical islands in the South Pacific, much like in the Caribbean. China is the cruise industry's fastest-growing market in the world, and the demand has increased by double digits since 2013. China accounted for 1 million cruise passengers in 2015, about a 40% increase over 2014, and the Chinese Ministry of Tourism forecasts 4.5 million passengers by 2020. Other companies have taken note and have increased their own presence in China's ports, such as Carnival Cruise Lines. But, as of now, Royal Caribbean has the most capacity in China. 

2. The Walt Disney Co. 

The Walt Disney Co. (DIS 0.48%) is offering vacation options and other entertainment to Chinese audiences. On the vacation side, Disney recently opened Shanghai Disney Resort, its newest theme park. The $5.5 billion investment by Disney is finally starting to pay off after years of construction, with more nearly 1 million visitors in the park's first month open. 

Image source: Walt Disney.

The resort spans over 4 square kilometers (1.5 square miles), making it the second largest of Disney's theme parks behind Disney World in Orlando and three times as large as its closest neighbor, Disneyland Hong Kong. This new park is just one way Disney is seeking to serve China's growing middle class. Disney is also growing its specific localized TV and movies, consumer products, digital entertainment, and more. Analysts at Nomura have estimated that Disney received around $1 billion of its $50 billion in sales from China during the past fiscal year. With the new theme park and an increased focus on offering localized media, Disney's revenue from China is likely to grow rapidly in the coming years. 

3. Under Armour

As of the most recent quarter, Under Armour's (UAA 2.88%) (UA 2.43%) international revenue made up just 15% of total sales. The company is working to increase that number. While Under Armour is focused on expanding everywhere, CEO Kevin Plank has said that China is the most important opportunity now.

Basketball looks to be Under Armour's ticket to the Chinese middle class, led by Under Armour-sponsored athlete Steph Curry, who's been an icon of the NBA -- which in turn has made him an icon in China, where the NBA is highly viewed. Plank said during the most recent earnings call that "the social-media impressions for Stephen during the NBA playoffs reached over 2.7 million during that time, and helped drive extremely high sell-through rates in the Curry 2 throughout the first six months, making it our top-selling item in China year to date." He added: "This is a great example of what the opportunity and what the future looks like for UA in greater China -- great product and great marketing that is laser-focused on the consumer, combined with the hottest athlete in the NBA."


Steph Curry in an NBA commercial for China. Image source: NBA / YouTube.

Nike (NKE 0.75%) is also growing aggressively in China, but this is not a zero-sum competition, and there's plenty of room for both companies to continue growing there for years to come. However, because Nike is so large already and its international sales already make up about half of its total, rapid growth in China could mean much more to Under Armour's bottom line by really moving the needle in percentage of sales from international markets and overall revenue growth in the next few years.

Foolish takeaway: Look for real investment in China

Regardless of its slowing GDP growth, China's ballooning middle class and increased spending power translates into a huge opportunity for those companies that are not simply taking their American products or services and sending them to China, but are making a real investment in the country and making products specifically to the Chinese market. There are many companies trying to do that now, and these are just three examples of companies that are doing it well.

Seth McNew owns shares of Nike, Under Armour (A Shares), Under Armour (C Shares), and Walt Disney. The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Walt Disney. The Motley Fool owns shares of Under Armour (C Shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Walt Disney Stock Quote
Walt Disney
DIS
$96.15 (0.48%) $0.46
Under Armour (A Shares) Stock Quote
Under Armour (A Shares)
UAA
$9.66 (2.88%) $0.27
Royal Caribbean Stock Quote
Royal Caribbean
RCL
$58.80 (1.21%) $0.70
Under Armour (C Shares) Stock Quote
Under Armour (C Shares)
UA
$8.44 (2.43%) $0.20
Nike Stock Quote
Nike
NKE
$105.75 (0.75%) $0.79
Carnival Stock Quote
Carnival
CCL
$705.00 (-0.59%) $-4.20

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