Life is good if you’re selling clothes to China’s middle class. Thanks to the birth of a white collar workforce and a generation of fashion-hungry only children supported by the spending power of up to six adults, a new consumer culture has arisen for which clothing and fashion are becoming central pillars.
Despite growing concerns about China’s macroeconomic state, those in the clothing business are bullish.
“Basically our business plans don’t assume that things will slow up,” Wolfram Hail, president for Esprit Asia Pacific told CHINA ECONOMIC REVIEW. Hail said that Esprit has seen sales growth in excess of 30% over the past five years, and that he expects growth to hit new heights in 2008.
Estimates from multiple sources put China’s clothing market at anything from US$100 billion to US$127 billion, growing 5-10% per year. Furthermore, Yi Yin, a senior consultant with Kurt Salmon Associates (KSA) in Shanghai, notes that young consumers in key growth segments – sportswear and casual wear – are less influenced by shifts in the economy. This would insulate the clothing sector somewhat from a wider economic slowdown.
Clothing consumers worldwide – excepting luxury consumers – are primarily motivated by price, but this is especially true in China. KSA recently did a survey in which they asked respondents whether they would travel anywhere in Beijing for a 15% discount on a purchase. Over 50% of those questioned said they would.
Low levels of brand loyalty have also benefited local clothing firms that have failed to differentiate their products, according to Howard Abe, a consultant with A.T. Kearney in Hong Kong. “So many of the domestic apparel manufacturers are successful because they’re accessible, in terms of price and availability,” Abe said.
“Those are some of the key factors of being successful in China as a brand.”
While the low-end will always have its place in the China market, analysts say that companies able to isolate a niche in the broad middle range have the best chance of long-term success.
This tactic has worked well for local players like casual wear company Metersbonwe. Its approach has been to expand rapidly through second- and third-tier cities, targeting consumers with a taste for fashion but without the means to shop at Esprit.
Metersbonwe, which listed in Shenzhen this August, also chose to market its products through national television commercials featuring popular Taiwanese celebrities, a strategy tailor-made for a broad swath of price-conscious Chinese consumers.
“Advertising on television is still the best practice for companies that are selling low-price products,” said Yang Fan, a senior researcher with market research firm Euromonitor International in Shanghai. “When they advertise on television it reaches a maximum audience, more than the internet and magazines, and it has a strong visual impact on all kinds of consumers of all ages.”
High-end by necessity
Foreign brands have to position themselves at the higher end of the spectrum. This means that companies such as H&M, Zara or Uniqlo, perceived as mid-range in their home markets, arrive in China as high-end brands.
This is a strategy borne of necessity, according to Vincent Lui, a principal with Boston Consulting Group (BCG) in Hong Kong.
“It’s a consistent theme at winning at both ends,” he said. “You either have really good products at mass market prices or you have a strong heritage, brand equity and premium pricing. It’s very difficult to make a strong stand in the middle.”
Nowhere are the competitive dynamics of China’s apparel market more evident than in the high-growth sportswear segment. Zou Marketing, a Shanghai-based sports marketing firm, put China’s sportswear market at US$5.9 billion in 2007 and expects it to grow to US$15 billion by 2012. While local firms accounted for 80-85% of the brands on the market in 2007, sales were split 50-50 by foreign and domestic brands, underscoring the strength of market leaders Nike and Adidas.
Upon arriving on the mainland, both companies attempted to replicate the business model they’d employed in other markets by selling their products wholesale to distributors and retailers.
“What they found was that the retail infrastructure is not as established in China, so if you just let the franchisee or other outlets do it on their own they will ruin your brand quickly,” said KSA’s Yi.
Nike and Adidas responded by adopting a more hands-on approach to sales in China, instructing retailers on how to display their goods and set prices. They opened flagship stores in tier-one cities and as of 2007 held a combined 33.1% share of China’s sportswear market, according to Zou Marketing.
China’s homegrown sportswear firms, lacking the deep pockets of their foreign competitors, established themselves in lower-tier cities, employing a similar strategy to Metersbonwe. This paid off for Li Ning in particular. Analysts say the success was in part due to the company’s effective management of its franchise operations and its ability to punch above its weight with savvy guerrilla marketing.
Li Ning has global ambitions, though it told CHINA ECONOMIC REVIEW in a statement that its main priority remains the China market. However, the firm has faced difficulties breaking into top-tier Chinese markets and is virtually unknown overseas.
Foreign and Chinese firms in this space, while not exactly boxed in by their own strengths, are eyeing each other’s territory, according to Terry Rhoads, managing director of Zou Marketing.
“They both have something the other wants. Nike and Adidas own the major urban areas, which the second-tier brands covet because you have to be razor-sharp to compete in these areas,” he said. “What those brands have, though, is the second-, third-, fourth-tier markets and that’s really what Nike and Adidas covet.”
Analysts generally see Li Ning as a strong competitor in this area but note that the next few years will be crucial to its long-term success. Adidas and Nike spent big on Olympics-related marketing efforts. Free of that millstone around their necks, they may now be able to stretch their lead on domestic players through marketing and advertising.
Some Chinese companies have turned to a hybrid approach. By reinventing foreign brands in China, they they are seeking to unite the strengths of Western heritage with local market knowledge. In doing so, they’re making a strong play for the Chinese middle class.
Hong Kong-listed Dongxiang is one of these firms, having purchased the trademark for Italian sportswear brand Kappa in China, Macau and Japan. Kappa was originally licensed in China by Li Ning in 1997, which sold it on to Dongixang. In 2006, Kappa’s parent company, Italian firm BasicNet SpA, invited Dongxiang to purchase the brand.
Dongxiang saw its first half net profit grow by 95.6% year-on-year to US$96 million in the first half of the year on the back of US$204.6 million in sales. Of those sales, 91.9% came from its Kappa business.
“Kappa is doing very well,” said Shaun Rein managing director of Shanghai-based China Market Research. “They’re very savvy at being able to open up retail points.”
Dongxiang’s success here came from a crucial shift in strategy and positioning of the brand, according to the company’s chairman, Chen Yihong.
“We shifted our focus from purely functional sports products to sports fashion, the lifestyle element. Through integrating sports and fashion we have captured market share,” he told reporters in Hong Kong in early September.
Dongxiang hopes to repeat its success with Kappa by acquiring the rights to other global brands and is keeping an eye out for potential targets. But Dongxiang CFO Wang Zhiqiang said the firm hasn’t ruled out purchasing the Kappa brand in its entirety.
“It will depend on the time and the process … and whether we are ready to manage a global brand.”