Little to cheer about

Reduced orders from european buyers push Chinese manufacturers to look to other avenues

An employee adjusts goods in a Christmas window display at a store on Oxford Street in London. UK retail sales have been down for six months in a row in November. Simon Dawson / Bloomberg

European retailers bracing themselves for a bleak midwinter of economic slowdown have cut back on orders of toys, games and other Christmas items from China.

But Chinese manufacturers, hit hard by the slowdown, have been offered some Christmas cheer by opportunities presented in the online and low-cost retail sectors, as European consumers search for bargains.

The Confederation of British Industry (CBI) announced yet another drop in high street sales in November, with the trend expected to continue into the Christmas run-up.

"Retailers remain hard-pressed, even as we get closer to Christmas," says Ian McCafferty, CBI chief economic adviser. "The relatively mild weather this autumn has hit clothing stores particularly hard, and retail sales are down year-on-year for the sixth month in a row."

The scope of the problem for China cannot be over stressed. An estimated 75 percent of European toys are manufactured in China. Any sharp downturn in sales will hurt manufacturers as much as retailers. As a result, both are keen to work together to offer customers affordable products.

"Our suppliers must deal with the real world of our markets, which are growing very slowly if at all," says Alan J. Simpson, a spokesperson for the Toy Retailers Association (TRA), which represents the toy trade in the UK and Ireland.

"The double digit growth of China in recent years means we must look to them for real efficiency gains. The years of investment in expansion of production in China must now be reapplied to product development."

Some have suggested the slowdown has given retailers in the key Christmas toy sector greater bargaining power with manufacturers in China, but Simpson insists this is small consolation. Instead, he argues that both retailers in Europe and manufacturers in China must work together to drag the industry out of this slowdown.

"If we are having to bargain for improved deals on the basis of poor trading conditions, as we certainly are, then everyone feels the pain. We all need to adjust constantly.

"Our suppliers need to respond to the real world that we face and work with us to protect our margins and ensure flexibility in difficult trading conditions. For the retailers, those adjustments include intensifying retailing and giving constant attention to our delivery to the customer."

Looking beyond the immediate future, Simpson argues that Chinese manufacturers must become more locally sensitive if they are to adapt to the new economic reality in Europe.

"The most obvious thing from our perspective in the UK and Europe would be for China to develop products and scales of production which allow us to meet the aspirations of our children and their parents more precisely.

"We will not see such specific products overtaking the US led blockbuster toys, but sensitivity to local needs would be mutually beneficial provided value for money did not suffer in the process.

"If real economic growth is to occur, China must leverage its efficiency and grow based on newer markets. To do anything else will injure us all as China's expectations will be unrealistic."

There are some encouraging signs for toy retailers this Christmas, with some companies outperforming the retail sector as a whole. As ever, retailers are looking for the season's "must-have" toy to boost flagging sales, and this year's has a distinctly Chinese feel.

Xia Xia, produced by US toy firm Sepia, might have a Chinese name but is reportedly selling at a rate of one every seven seconds across the US at the moment. European retailers are currently scrambling to release the product before Christmas this side of the Atlantic.

The toys, a range of four crawling crabs with changeable shells, are evidence that in the pre-Christmas retail frenzy, a simple idea can turn into big money, even during an economic downturn.

"There has certainly been a notable tightening of the purse strings this past year," says Shane O'Neill, co-founder of Enter the Panda, a company that helps connect overseas businesses with Chinese manufacturers. "But from the retailers, distributors and small business owners we've dealt with, their focus has been on cutting costs without reducing the overall quality of their products."

This will come as welcome news to Europe's consumers this Christmas. One way consumers are looking to save is by doing their Christmas shopping online. In Ireland, 82 percent of shoppers will do at least some of their Christmas shopping online this year, spending an average of 155 euros ($205) each, according to research by Visa Europe.

"China has always provided online retailers with opportunities to undercut the bulk distributors," O'Neill says. "To add a competitive edge, some online retailers now want to deal directly with factories in China. This gives them access to an infinite range of goods and services that allow them to develop new and exciting products for their home market."

As well as online retailers, the economic slowdown this Christmas offers low-budget retailers in Europe an opportunity. High streets across the continent are seeing an increasing number of low-budget stores appear, and many source a lot of their goods from China.

Poundland, the UK chain that announced record profits for the last financial year, is one retailer seemingly unaffected by the downturn.

"It is clear that the challenging economic climate is set to continue for some time and that an increasing number of consumers will continue to seek value for money," says chief executive Jim McCarthy. "We are perfectly positioned to serve the needs of consumers who place value for money at the heart of their purchasing decisions."

Poundland's success also offers a chance for Chinese manufacturers to sell to an estimated 3.5 million customers every week, looking to buy everything from toys to kitchenware.

In an effort to cut costs, the company runs an office in Hong Kong to better source suitable products from across China. It has even implemented a video-conferencing product approval process to lower factory to shop-floor time, and enable manufacturers thousands of miles away to react quickly to new trends in Europe.

Whether this challenge is accepted by China's manufacturing industry is another issue, but it shows that there are opportunities amid an otherwise frosty Christmas for European retail.

"China and the West depend heavily on each other and as such the many manufacturers that are aware of the economic problems of the West share in the concerns that trade may slow in many sectors," O'Neill says. "Some factory owners we have worked with for many years now come to us to try and find out how they can adapt in order to meet the change in demand.

"I think most people will agree that Chinese manufacturers need to improve payment terms in order to stay competitive and become more attractive to businesses with diminished turnovers. It is the point that we are trying to drive home to our factories."