Fashion Trends and Brand Opportunities in China

One Year on the Frontlines of China’s Apparel and Luxury

Markets

Michael ZakkourPrincipal, Technomic Asia

Credit: Jewel Willett

Fashion Institute of Technology

October 3, 2011

2Copyright © 2011 Tompkins International. All rights reserved. www.tompkinsinc.com

“Daywear, eveningwear and beachwear…”

In 1985, we were told what cold war Russian women and fashion werelike….

soviet fashion.mp4


They lied…


Communist China has no fashion, no luxury,

& no botox…


Not true: But there really was no luxury, status or beauty for a long period

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.

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.

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.


And now…

• 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.”

screencast.mp4


China is in a “late adolescent” phase of growth…

China’s market evolution

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Inward Direct Investment -- US$Mn Real GDP at 2009 Prices

Infant

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AnhuiChongqingGuangxiHainanHebei

Heilongjiang Henan Hubei HunanJilin

Liaoning ShanxiSichuan

BeijingFujian

GuangdongJiangsu

ShandongShanghai

TianjinZhejiang

Inner MongoliaJiangxi

ShaanxiXinjiangYunnan

Gansu

Guizhou

Ningxia

Qinghai

Tibet

Developing - Dongguan

Developed - Shanghai

Emerging - Chengdu

Undeveloped – 1000 cities

Geographical landscape


China quick facts

• 1.2 or 1.4 or is it 1.6 billion people?• Second largest economy in the

world• 300 million new middle and upper

class consumers• Racing the world to the top, not the

bottom• Shifting from “factory of the world”

to “mall of the world”• Piracy and IP theft still a big issue


GDP growth will remain robust Becoming true “market economy” Moving up the value chain Vibrant group of young, new urban

consumers Strengthening technology capability Emerging new global companies Focus on domestic market

development

Uneven economic development Corruption Ability to manage a diverse, complex

and regional market Significant environmental challenges Strained infrastructure State control of communications Too few key resources (energy, water,

oil) Constant need to create jobs Responsibility to be a global citizen

+-

China today


“In China for China” is growing

• A majority of US companies:– Say they produce or source goods and services in China for the China

market as a primary strategy– Have or are designing unique products or services to sell in China – Import finished goods or parts from the U.S.

• 87% of confident companies are in China for China*• 80% of successful companies are in China for China**

*i.e. those with long-term market growth target >15%, increasing China investment and are optimistic or very optimistic about China

**i.e. those who are very profitable in China with positive cash flows


2010 was a strong year for U.S. companies in China, achieving record results…

Source: Amcham-Shanghai 2010 China Business Report; Technomic Asia

70%77%

52%

65%

47%40%

79%87%

61%

0%

20%

40%

60%

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100%

Profitable Revenue Up fromPrevious Year

Gained MarketShare

200820092010

How US companies are faring


For many luxury brands, the goal seemed a long way off…


There were confusing signals


…and some subtle messaging


…and it was not what they expected when they got there…


…leaving them tough choices!


• China is now the #1 apparel and #2 accessory market in the world.• The Chinese consumer market is exploding as tens of millions of people join the

middle class every year (300 million and counting).• The accessory market for women is booming• There is a new appetite for “affordable luxury.”• There is a growing appetite for niche brands.• New channels mean new opportunities.• Digital is key

The China apparel and accessory market


The China apparel and accessory market

• 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.


Apparel market

• 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.*


Source: Technomic Asia Research

Brand Handbag

Price Range (RMB)

ProductSegmentatio

nSnakeSkin

Ferragamo 10,000-30,000 High to Lux YesBurberry 10,000-20,000 High to Lux YesCoach 4,000-10,000 Mid to High LessLouis Vuitton 10,000-20,000 High to Lux NoGucci 10,000-20,000 High YesTod’s 5,000-25,000 High YesHermes Up to 100,000 High to Lux YesMarc Jacobs 7,000-10,000 Mid to High NoCeline 6,000-12,000 High YesPrada 2,000-20,000 Mid to High YesFendi Up to 200,000 High to Lux YesDior 15,000-25,000 High NoChloe 10,000-30,000 High to Lux YesBottega Veneta 20,000-30,000 High to Lux Yes

Chanel Above 20,000 High Yes

Handbag/Accessories Brands in China

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Tier 1 Tier 2 Tier 3

FerragamoBurberry

CoachLouis Vuitton

GucciTod’s

HermesMarc Jacobs

CelinePradaFendi

DiorChloe

Bottega VenetaChanel

Retail Geography (# Stores by City Tier)

Different brands take different approaches to selling in more vs. less developed urban areas.

Market overview: China’s handbag/ accessories industry


Affordable luxury/niche brand explosion

The following are companies that are succeeding in the affordable luxury, premium brand, SME space in China - based on our interviews and secondary research

Brand Price RMB No. of Stores Location Sales Channels Enter

Time

Kate Spade 2000-40005 Shanghai, Beijing,

Suzhou, HangzhouDirect, registered in HK 2008

Furla 2000-600025 1st and 2nd tier cities* Distributor but thinking about

establishing JV1996

Agnes B 1500-4500 14 1st and 2nd tier cities Direct 2007Folli Follie 1500-3000 102 1st and 2nd tier cities Direct 2002Marni 4000-8000 1 Shanghai Direct, registered in HK 2005

Rebecca Minkoff 1500-5000- Shanghai,

Beijing,ShenzhenKate Zhou's stores 2008

Barbara Rihl 1300-2800 - - Online multiple Brand Botique 2011DKNY 1500-2500 45 1st and 2nd tier cities Direct 2008Jil Sander 1000-5000 2 Shanghai, Beijing HK Distributor 2006Etro 3000-7000 2 Shanghai, Beijing HK Distributor 2008Anya Hindmarch 3000-9000 2 Shanghai, Beijing HK Distributor 2008Juicy Coutour 700-3000 34 1st and 2nd tier cities HK Distributor 2006Lancel 2000-7000 23 1st and 2nd tier cities HK Distributor 1996Roberta Di Camerino

2000-5600 - 1st and 2nd tier cities HK Distributor 2010


Channels

1. Department stores and shopping malls are found in commercial areas of all levels of cities, more in tier 1 and 2 cities:

– Targeting mid- to high-end customers and known for high price but reliable quality– They rent space to distributors and many brands rent space for their own shops – Still dominate apparel and accessory sales today– Fierce competition means the brand has to perform or they will be dropped

2. Standalone stores– Apparel retailers can open standalone single brand stores anywhere in China– They give more control over brands, sales and inventory but can be expensive to

open– Real estate deal is key– Demographic and consumer behavior is critical to understand

There are two key channels and three emerging channels for the apparel and accessory brand to consider selling through:


• E-commerce– Increasingly important to luxury and affordable luxury brands and

retailers

• Multibrand retailers– Beginning to gain traction as more manufacturers/distributors have

learned the business and

• Multibrand boutiques– Catering to well-heeled and fashion conscious consumer

Emerging channels


80 94 111137

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40%Millions of Broadband UsersInternet Penetration Rate

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.

Online Activity 2010 2009 Growth

Web Browsing 77.2% 80.1% 14.7%

Instant Messaging 77.1% 70.9% 29.5%

Online Games 66.5% 68.9% 15.0%

E–Mail 54.6% 56.8% 14.6%

Social Networking 51.4% 45.8% 33.7%

Online Shopping 35.1% 28.1% 48.6%

E–Banking 30.5% 24.5% 48.2%

Total # Internet Users 457m 384m 19.1%

Note: Growth represents % increase in # users, not % users.

Internet Use and Penetration (2010) Popularity of Online Activities (2010)

e-commerce in China

At the end of 2010, China had 457 million Internet users, 35.1% of whom shop online.


Cosmetics, Beauty Care + Fragrances

• 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.


Women spend an average of 10-15% of their income on cosmetics and skin care.

• 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.

Cosmetics, Beauty Care + Fragrances


Car, Watches and Luxury Travel

• 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.” Patek Phillipe, Rolex and Omega

• 100 million Chinese travelers by 2020.• Spend more per trip than any traveler in the world.


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.”

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.”

Who are these 400 million new customers?


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.”

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.”

Who are these 400 million new customers?


What works in China?

• Branding, branding and branding• Online, Online, Online• Understanding that China is not an Eastern US or Europe• The nexus of China, the Internet and the modern supply chain• Local management• Strategy before structure• Incremental roll-outs


• Structure before strategy• A “snapshot” view of the market • Unexpected competition – over supply• Lack of due diligence in partner selection • Poor relationship management• Not enough support for the local operation • Naive financial planning

What doesn’t work in China?

Lifestyle

Fashion Trends and Brand Opportunities in China