One Year on the Frontlines of China’s Apparel and Luxury Markets<br />Michael Zakkour<br />Principal, Technomic Asia<br />Credit: Jewel Willett<br />Fashion Institute of Technology<br />October 3, 2011<br />
“Daywear, eveningwear and beachwear…”<br />In 1985, we were told what cold war Russian women and fashion were<br />like….<br />
Communist China has no fashion, no luxury, & no botox…<br />
Not true: But there really was no luxury, status or beauty for a long period<br /> In the Mao era, people gave little thought to their appearance. Worrying about beauty was regarded as vain and decadent. Film actresses were more likely to wear sack-like clothes to cover their curves than sexy dresses that showed them off. <br /> Beauty pageants were banned and the act of trying to look beautiful was often equated with prostitution. Women were encouraged to look ordinary. They wore sexless Mao suits as did the men. Things like make up and stockings were regarded as symbols of bourgeois decadence. <br /> During the Cultural Revolution women were taught to conceal their femininity. They could be beaten for wearing the slightest amount of lip stick or eye liner. Red Guards sometimes stopped women in the street whose hair was deemed too long and cut it. <br />
And now…<br /><ul><li>With the end of the Mao era and the dawn of the “To Get Rich is Glorious” era, looking good has become desirable once again, even among the poor. “All women want is to look pretty, and poorer women want it even more. Without a good education or rich parents, appearance is what they count on to move up the social ladder.”
“Before the economic reforms we weren’t getting enough food to eat, so we paid little attention to how we looked. Today we have enough to eat and we care a lot about how we look.”
“Ten years ago, it was difficult to identify who was a cute girl and who wasn’t. They all looked the same. But today they know how to make the most of themselves.” </li></li></ul><li>Late Adolescent<br />Young Teen<br />Toddler<br />Infant<br />China’s market evolution<br />China is in a “late adolescent” phase of growth…<br />
Focus on domestic market development</li></li></ul><li>“In China for China” is growing<br /><ul><li>A majority of US companies:</li></ul>Say they produce or source goods and services in China for the China market as a primary strategy<br />Have or are designing unique products or services to sell in China <br />Import finished goods or parts from the U.S.<br /><ul><li>87% of confident companies are in China for China*
80% of successful companies are in China for China**</li></ul>*i.e. those with long-term market growth target >15%, increasing China investment and are optimistic or very optimistic about China<br />**i.e. those who are very profitable in China with positive cash flows<br />
How US companies are faring<br />2010 was a strong year for U.S. companies in China, achieving record results…<br />Source: Amcham-Shanghai 2010 China Business Report; Technomic Asia<br />
For many luxury brands, the goal seemed a long way off…<br />
Digital is key</li></li></ul><li>The China apparel and accessory market<br /><ul><li>Domestic firms have strong performance in mass market; and they are becoming more competitive.
Foreign brands have a dominant presence in the luxury market; and the market is now truly open to brands in the mid- to high-end segments.
Department stores and specialty stores are the major distribution channels for branded apparel.
Online apparel sales have boomed in the last 18 months.
Brands and retailers are investing in Tier 2, 3, 4 cities.
Franchises are gaining a foothold, especially among companies with mass market positioning.
Multi-brand stores and multi-brand boutiques are increasing in importance.
Companies invest heavily in marketing and branding.</li></li></ul><li>Apparel market<br /><ul><li>Casual wear, which comprises 60% of clothing purchases, is growing 19% a year, for example. This reflects a shift toward occasion-based dressing – that is, wearing different outfits for work, social occasions and at home.
Children’s apparel is another boom category, growing at an annual rate of 15%; casual and sports footwear is growing almost as fast, and could reach annual revenues of $7 billion by 2013.*
Chinese consumers are brand conscious, but not brand loyal. A 2010 McKinsey survey found that 45% of Chinese consumers think well-known brands have better quality.*
Established brands, both domestic and foreign, are expanding aggressively into specialty stores. Other foreign brands are hot on their trail. Even for latecomers, then, there is still a lot of potential in investing in a brand.*</li></li></ul><li>Market overview: China’s handbag/ accessories industry<br />Different brands take different approaches to selling in more vs. less developed urban areas.<br />Handbag/Accessories Brands in China<br />Retail Geography (# Stores by City Tier)<br />Ferragamo<br />Burberry<br />Coach<br />Louis Vuitton<br />Gucci<br />Tod’s<br />Hermes<br />Marc Jacobs<br />Celine<br />Prada<br />Fendi<br />Dior<br />Chloe<br />BottegaVeneta<br />Chanel<br />Source: Technomic Asia Research<br />
Affordable luxury/niche brand explosion<br />The following are companies that are succeeding in the affordable luxury, premium brand, SME space in China - based on our interviews and secondary research<br />
Channels<br />There are two key channels and three emerging channels for the apparel and accessory brand to consider selling through:<br />Department stores and shopping malls are found in commercial areas of all levels of cities, more in tier 1 and 2 cities:<br />Targeting mid- to high-end customers and known for high price but reliable quality<br />They rent space to distributors and many brands rent space for their own shops <br />Still dominate apparel and accessory sales today<br />Fierce competition means the brand has to perform or they will be dropped<br />Standalone stores<br />Apparel retailers can open standalone single brand stores anywhere in China<br />They give more control over brands, sales and inventory but can be expensive to open<br />Real estate deal is key<br />Demographic and consumer behavior is critical to understand<br />
Emerging channels<br /><ul><li>E-commerce</li></ul>Increasingly important to luxury and affordable luxury brands and retailers<br /><ul><li>Multibrand retailers</li></ul>Beginning to gain traction as more manufacturers/distributors have learned the business and <br /><ul><li>Multibrand boutiques</li></ul>Catering to well-heeled and fashion conscious consumer<br />
At the end of 2010, China had 457 million Internet users, 35.1% of whom shop online.<br />Popularity of Online Activities (2010)<br />Internet Use and Penetration (2010)<br />Note: Growth represents % increase in # users, not % users.<br />Source: China Internet Network Information Center Statistical Report on Internet Development in China; Note that broadband internet users above do NOT include mobile internet users.<br /> e-commerce in China<br />
Cosmetics, Beauty Care + Fragrances<br /><ul><li>Skin care driving growth.
45% of the overall cosmetics and toiletries sales in 2010. We anticipate this segment to continuously rule the market with strong double-digit compound annual growth rate (CAGR) forecast for 2011-2015.
Moisturizers, whitening agents, advanced therapy will grow at least 12% per year for five years.
Female dominated, but men’s and boy’s market catching up -.
New middle and upper classes demand foreign color cosmetics and skin care products and will pay a premium for it – Estee Lauder, L’Oreal and Sephora are all doing very well in China.
Fragrances, while trailing other product categories are growing at more than 10% per year – no tradition so market must be built.</li></li></ul><li>Cosmetics, Beauty Care + Fragrances<br />Women spend an average of 10-15% of their income on cosmetics and skin care.<br /><ul><li>Some women rubbed their lips with sandpaper to create the illusion they were wearing lipstick.
Chinese women are not used to using perfumes. They prefer skin care and beauty products, favor neutral colors and eschew make up or hair styles regarded as aggressive. Bit that is changing.
In China, Wal-Mart sells moisturizers made with sheep placenta, which is purported to reduce wrinkles; spas offer seaweed wraps; and breast implants have names like Magic Peach and Dream Xcell. </li></li></ul><li>Car, Watches and Luxury Travel<br /><ul><li>China’s luxury car sales are likely to reach 600,000 units this year, and more than double to 1.4 million units by 2015
The proportion of female buyers is the highest of any country in the world, and the average age of buyers is lower than in the US and Europe.
“Ask any middle-class Chinese what would be his or her first luxury purchase and the answer will most likely be a Swiss watch.” PatekPhillipe, Rolex and Omega
Spend more per trip than any traveler in the world.</li></li></ul><li>Who are these 400 million new customers?<br />Chairman Wu – Age 64, former government official, CEO of Internet company. Income $4 million. Preferred brands: Omega, Zegna, Moet, Ritz Carlton. Supports large family, community and 15,000 workers. Travels to US, Japan and Europe for business and pleasure. Image is important for face, respect, international business and impressing the Party. “You may be working for me someday.”<br />Lawyer Yang – Age 42, partner at major international law firm in Beijing. Income $200,000. Preferred brands: Prada, Chloe, Shiseido, Kate Spade. Lawyer, mother, socialite. She wants to be the equal of her peers in the developed world and left NY for Beijing three years ago. Holiday in Thailand. “We are the new creative class.”<br />
Who are these 400 million new customers?<br />Account Executive Liu – Age 28, AE at the Shanghai office of a major UK Advertising Agency. Holds BA (Tsinghua) and MBA (Liverpool) Income $35,000 per year. Spends 50% of income on clothes, makeup, shoes, music and movies. Preferred brands: Burberry, Apple, Pizza Hut, Shanghai Tang. “Saving is for mom. I’m a woman on the move.”<br />Students at Fudan University (Never heard of it? You will.) The millennial generation. Have never known the “old” China, spend a lot of time and money online. Truly little emperors. Preferred brands: McDonald’s, EA Video Games, Disney, Li Nang. “We are the world.”<br />
What works in China?<br /><ul><li>Branding, branding and branding