| hinese economy continues its dynamic | | | | on population and per capita GDP, Shanghai, Beijing |
| performance, averaging around 10% growth for | | | | and Guangzhou are tier 1 cities. Report 3 explores |
| the last 5 years. As barriers to entry are reduced, | | | | in detail regional differences in the Chinese fashion |
| more and more businesses are considering their | | | | industry. |
| entry into China. This is in an effort to capture | | | | Fashion Industry in China |
| some percentage of the returns generated by | | | | Market Segments |
| China’s 1.3 billion consumers. | | | | Initially there were two markets for apparel in |
| China’s economy grew by 10.2% in 2006 | | | | China: 1. low priced basic apparel sold under local |
| and 10.7% in 2007 making it the fastest growing | | | | brand names and offered in Chinese department |
| major economy in the world. It is forecasted by | | | | stores, foreign hypermarkets or small family |
| the banks (Quarterly Bank reports) that GDP | | | | owned specialty chains |
| would drop to 9% in China in 2008. (Goldman | | | | 2. luxury brands sold either in franchised boutiques |
| Sachs), though in our opinion GDP rate may be | | | | or upscale department stores. Due to the rapid |
| higher due to increased production and | | | | growth of China’s middle class a new |
| consumption. In 2006 China’s urban living | | | | category has emerged, involving quality brands, |
| expenditure increased at a higher rate than GDP, | | | | both Chinese and foreign, being sold in department |
| both on a national as well as provincial basis. | | | | stores and specialty stores. Consumers in |
| Despite strong growth, inflation remains moderate | | | | China’s middle class are increasingly |
| with monthly inflation averaging 1.3% year on | | | | sophisticated, demanding higher quality, variety |
| year from January to September 2006. It is | | | | and innovation from their retailers. The new |
| forecasted that annual growth in consumer prices | | | | category is highly fragmented and is dominated |
| will reach 1.8% in the early 2007. This is because | | | | by specialty casual brands from Hong Kong, such |
| higher land prices would impact production costs. | | | | as Esprit (514 outlets), Giordano (644) outlets, |
| Increased investment would in turn feed | | | | Baleno (980 outlets) and Glorious Sun (1,076 |
| inflationary pressures. | | | | outlets). The new segment has significant growth |
| The government’s tolerance of greater | | | | potential as it is affordable to the middle class but |
| Yuan volatility and the higher GDP has caused | | | | positioned at a price point slightly higher than local |
| expectations of further exchange rate reform, | | | | brands. Prices in Clothing have dropped slightly in |
| which would result in faster currency appreciation. | | | | 2006. This is due to the increased competition in |
| The potential impact would be that foreign clothing | | | | the fashion industry in China (O&L, 2006). |
| brands would find that their prices could be more | | | | In recent years there are not only an increase of |
| readily accepted in the Chinese market. | | | | Hong Kong, local Chinese clothing brands and |
| Retail Industry in China | | | | international brands but also an increase of foreign |
| Increasing income in China and Government | | | | brands. These brands may be mid sized chains |
| efforts in encouraging consumer expenditure have | | | | that are well established in their home countries |
| resulted in rising domestic consumption. Statistics | | | | but not out of their countries. Example |
| show that total retails sales of consumer goods | | | | Singaporean chains like Samuel and Kevin. In |
| increased by 12.5% to RMB 6,718 billion in 2005. | | | | addition, there are brands that are created due to |
| However, it drops slightly to approximately RMB | | | | the popularity of other brands. Example the |
| 6,400 billion (US$770b) in 2006. One of the | | | | clothing brand, Fish, in China has spawned other |
| factors is the import quota imposed by US and | | | | similar brands like 3 Fishes, Fishes and so on. |
| European Union in 2006 (O&L). However, | | | | Expansion into Second Tier Cities |
| with the increase in income and domestic | | | | The retail market is beginning to reach maturity in |
| consumption, it is expected that the growth rate | | | | Tier 1 cities like Shanghai. Thus the need to |
| of retail sales can be maintained at about 10% in | | | | accurately target specific consumer groups is |
| the next 5 years (O&L projection & | | | | much more significant in these areas. As a result |
| Goldman Sachs Global Investment Report) | | | | retailers are increasingly expanding into second |
| China’s clothing market has been growing | | | | and third tier cities like Chengdu, Nanping, Tianjin. |
| at 7% and is now a USD40 billion industry. | | | | Major Brands like Jean West has now gone to |
| Department stores account for approximately | | | | secondary and third tiered cities as well. The |
| 40% of the market. This includes stores like | | | | attractiveness of these secondary regions is |
| Parkson, Shanghai Bailian and foreign brands like | | | | enhanced by the migration from the countryside |
| Wal-Mart. Clothing brands sold in these | | | | to the regional cities, increasing the size of the |
| department stores include both international | | | | second and third tier urban retail market. This |
| brands like Hugo Boss and local brands like Li Ning, | | | | would be elaborated in subsequent reports. |
| Borne, Joe One. Franchise chains and local individual | | | | Consumer Attitudes towards Brands |
| clothing outlets in China account for the other | | | | Consumers are highly brand conscious and the |
| 60% share. | | | | fact that one can afford these products is seen |
| Profit Margins for retail chains in China are high. | | | | as a status symbol. Luxury brands like LV, |
| Due to the lower costs of manufacturing in China, | | | | Christian Dior, are therefore often sought after |
| profit margins by these Clothing brands can be as | | | | when purchasing apparel and cosmetics. For many |
| high as 50.5% for brands like Giordano (2005) and | | | | segments, particularly younger consumers, foreign |
| Ports(70.4% in 2005) . The cities of influence for | | | | brands that are well known are still regarded as |
| fashion in China are Shanghai, Beijing and | | | | superior and are seen as a status symbol. Brands |
| Guangzhou. In addition locals and tourists travel to | | | | that are made in US and Europe are more highly |
| Guangzhou, Shanghai, Shenzhen for major fashion | | | | valued than those from Australia, or other Asian |
| brands at cheaper prices. For manufacturing, there | | | | countries like Singapore, Taiwan. Due to the high |
| are different specialty regions. For example, | | | | prices, there are also a lot of high end counterfeit |
| Ningbo is more famous for manufacturing of bags | | | | clothing and shoe brands in China. |
| while Guangdong especially Guangzhou is more | | | | Attitudes to domestic brands have changed as |
| famous for apparels. | | | | stated owned companies have been privatized |
| The Different Regions in China | | | | and produce better quality products. Brands like |
| Due to the geographical enormity of China and | | | | Borne, Li Ning, Hong guo are very popular locally. |
| the huge variation of economic development | | | | Hong Kong brands like Giordano are also popular |
| between cities, market potential differs from city | | | | though the market share has decreased recently. |
| to city. The table below shows the disparity in | | | | Pride in the nation’s accomplishments has |
| GDP per capita, where the wealth is located in the | | | | resulted in many consumers preferring local |
| coastal cities. Cities are classified into tiers based | | | | brands, all other things being equal. |