Q: Has VF’s first-mover advantage in China translated into sales?
A: The early days in China were challenging. The first few years, volumes were low. But since the turn of the millennium, the trajectory has been very strong. The China market is now second only to the US in terms of size. It evolved very rapidly and continues to grow at a very healthy rate. If I look over the last two or three years, our compound annual growth rate has been north of 30 percent, and we are still seeing the opportunity to grow. Our total business growth is projected to remain at 30 percent.
Q: Have you felt the market tightening?
A: The market has gotten more competitive as everybody has awoken to the China opportunity. It’s arguably been even more intense in the last year as corporations put more emphasis on China. There are a lot of good local players, plus all the main international brands. The market is only going to grow around 15 percent per year, so we have to gain share.
Q: Who are your local competitors?
A: On the jeanswear side, the biggest local player is Apple Jeans, also known as Texwood. But there’s a lot of competition from the vertical players like Jack and Jones, H&M, and Zara’s. Then there are the premium international brands like Calvin Klein. There’s competition at both levels.
Q: How much room is there for innovation? Aren’t jeans just jeans?
A: I would beg to differ about innovation. I think that was true of the market ten years ago. Jeans were blue jeans. A lot of the interest in jeans and differentiation was driven by marketing. Levi’s did a very good job at that. But the market has changed significantly, driven substantially by innovation. The great thing about denim is there’s so much you can do with it as a fabric: washing, stress, and what we call "fit, features and finishes." There’s been innovation across all elements of that and there are more details and innovation in fabrication. In fact, most of our product in China is made with Japanese fabric, really top quality. Innovation is driving youth interest. The Chinese market has evolved significantly in that aspect, influenced by trends from Japan and Europe. When we think about the Lee brand, we look to our European market for innovation, as opposed to the US, which has been a lot more basic.
Q: What are the differences between types of denim fabric?
A: Two things. One is the feel of the fabric, and there are significant differences between jeans built for durability and ones made for youthful consumers. Denim for youthful consumers fits better, feels better and you can do more with washes. You’ve noticed there’s a lot of distressed product and sanded product that gives it a very vintage look. You’re essentially recreating the look of a worn pair of jeans. Of course, those jeans command a price premium.
Q: And don’t last as long.
A: Well, some jeans can be engineered to be durable even though they look distressed. A lot of work at the mills goes into fabric that is both comfortable and durable so that the fabric can be distressed without breaking down the structure of the jeans. But it doesn’t really matter how long it lasts. The consumers aren’t expecting top-end jeans to last five years. Jeans are predominantly a fashion product. It’s a relatively new product in China, like it was in the Europe in the 70s, as opposed to the US where it evolved from work wear. Denim has possibilities that a lot of other fabrics don’t have. It’s incredibly flexible. Beyond developing the brand, our key is delivering market innovation.
Q: Where are you going in terms of new markets?
A: Clearly the tier-one cities are the most competitive, but for any brand you have to work to increase your share in the opinion-leading cities. That’s key, so we will continue to place more emphasis on the tier-one cities to make sure our brands are visible and we connect to those consumers. But we do see increased interest in tier-two through tier-four cities. In terms of penetration, we have about 400 locations for Lee, and outside the tier-one cities we provide the look, the fitout and the product, but the operation is done by a local partner.
A: First of all, they have the local connections which are important in those cities. And as we scale up we want to focus on the areas where we have expertise, such as branding, marketing, and innovation, as opposed to running a huge retail network across China. I’ve been talking about jeans, but including all our other brands, we already have 1000 total stores, of which 80 percent are through franchisees.
Q: How is your logistics network working?
A: It works pretty well. We have three hubs in China. It was difficult when we first established operations, but now it runs pretty smoothly. It hasn’t been a challenge for us.
Q: So what is the biggest challenge?
A: There are a couple of things. One is getting local talent at the right levels. There’s so much competition for talent that can execute growth plans, that understands China and that understands the multinational environment as well. The other challenge is pitting investment against the growth opportunity. We are running a portfolio of brands, and we need to make sure we pick the right brands and invest appropriately.
Q: Some have observed that brands which have died in foreign markets can be revived in China. Do you agree?
A: I think there are some brands that are working well in China that aren’t working so well on a global basis, but on the whole, the brands that are working in China are the brands that work well elsewhere. Chinese consumers are increasingly aware of what’s happening globally. For example, we launched Vans last fall in China, and there were a number of surprises for us. The brand had never been present in China, so as far as were concerned, it was a new brand launch. We did some research in tier-one and tier-two cities and to our astonishment the brand had near universal awareness, even though it wasn’t present in the market. We attribute that to its strength in Japan, Hong Kong and Korea. We had this brand that is very successful, that is growing in all of our geographies, that already had a high level of awareness in the opinion-leading cities, and that brand has gained immediate traction in China. It’s vastly exceeded our expectations. And we haven’t customised it for the local market, although we are looking at that. That’s another challenge, to keep the global brand DNA yet connect with local consumers. We aren’t willing to be too flexible in China, because we believe that while Chinese consumers have their local preferences, what they like about global brands is that they are global. They want to be part of the global community.