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Overview of China Fashion Industry
The Chinese economy continues its dynamic performance, averaging
around 10% growth for the last 5 years. As barriers to entry are
reduced, more and more businesses are considering their entry into
China. This is in an effort to capture some percentage of the
returns generated by China’s 1.3 billion consumers.
This series of reports is intended to provide fashion retailers, who
are planning to enter China for the first time, with an overview of
the Chinese fashion industry. In addition, the reports act as a
quick update for companies who have already entered China as it
touches on the industry, trends, brands available, wholesale and
retail pricing, type of clothing cutting preferred, consumer
behavior and updated regulations. A key challenge when entering
China is the different regions in China. Consumer behaviour and
preferences for food, fashion and lifestyle vary dramatically in
these regions. For example, retailers should not assume that
products or Fashion styles that sell in Shanghai will also be
popular in Xiamen which is in southern China.
The series of reports includes:
Report 1 Overview of China Fashion Industry
Report 2 Regulations: an overview of the regulatory environment in
China
Report 3 Regional Analysis: Analysis of the key regions in China
from a retail perspective
Report 4 Women’s Fashion and Consumer Behaviour
Report 5 Teen’s Fashion and Consumer Behaviour
Report 6 Children’s Fashion and Consumer Behaviour
Report 7 Men’s Fashion and Consumer Behaviour
Report 8 Recommendations
Economic Conditions in China
China’s economy grew by 10.2% in 2005 and 10.7% in 2006 making it
the fastest growing major economy in the world. It is forecasted by
the banks (Quarterly Bank reports) that GDP would drop to 8% in
China in 2007. (Goldman Sachs), though in our opinion GDP rate may
be higher due to increased production and consumption. In 2006
China’s urban living expenditure increased at a higher rate than
GDP, both on a national as well as provincial basis. Despite strong
growth, inflation remains moderate with monthly inflation averaging
1.3% year on year from January to September 2006. It is forecasted
that annual growth in consumer prices will reach 1.8% in the early
2007. This is because higher land prices would impact production
costs. Increased investment would in turn feed inflationary
pressures.
The government’s tolerance of greater Yuan volatility and the higher
GDP has caused expectations of further exchange rate reform, which
would result in faster currency appreciation. The potential impact
would be that foreign clothing brands would find that their prices
could be more readily accepted in the Chinese market.
Retail Industry in China
Increasing income in China and Government efforts in encouraging
consumer expenditure have resulted in rising domestic consumption.
Statistics show that total retails sales of consumer goods increased
by 12.5% to RMB 6,718 billion in 2005. However, it drops slightly to
approximately RMB 6,400 billion (US$770b) in 2006. One of the
factors is the import quota imposed by US and European Union in 2006
(O&L). However, with the increase in income and domestic
consumption, it is expected that the growth rate of retail sales can
be maintained at about 10% in the next 5 years (O&L projection &
Goldman Sachs Global Investment Report)
China’s clothing market has been growing at 7% and is now a USD40
billion industry. Department stores account for approximately 40% of
the market. This includes stores like Parkson, Shanghai Bailian and
foreign brands like Wal-Mart. Clothing brands sold in these
department stores include both international brands like Hugo Boss
and local brands like Li Ning, Borne, Joe One. Franchise chains and
local individual clothing outlets in China account for the other 60%
share.
Profit Margins for retail chains in China are high. Due to the lower
costs of manufacturing in China, profit margins by these Clothing
brands can be as high as 50.5% for brands like Giordano (2005) and
Ports(70.4% in 2005) . The cities of influence for fashion in China
are Shanghai, Beijing and Guangzhou. In addition locals and tourists
travel to Guangzhou, Shanghai, Shenzhen for major fashion brands at
cheaper prices. For manufacturing, there are different specialty
regions. For example, Ningbo is more famous for manufacturing of
bags while Guangdong especially Guangzhou is more famous for
apparels.
The Different Regions in China
Due to the geographical enormity of China and the huge variation of
economic development between cities, market potential differs from
city to city. The table below shows the disparity in GDP per capita,
where the wealth is located in the coastal cities. Cities are
classified into tiers based on population and per capita GDP,
Shanghai, Beijing and Guangzhou are tier 1 cities. Report 3 explores
in detail regional differences in the Chinese fashion industry.
Fashion Industry in China
Market Segments
Initially there were two markets for apparel in China: 1. low priced
basic apparel sold under local brand names and offered in Chinese
department stores, foreign hypermarkets or small family owned
specialty chains
2. luxury brands sold either in franchised boutiques or upscale
department stores. Due to the rapid growth of China’s middle class a
new category has emerged, involving quality brands, both Chinese and
foreign, being sold in department stores and specialty stores.
Consumers in China’s middle class are increasingly sophisticated,
demanding higher quality, variety and innovation from their
retailers. The new category is highly fragmented and is dominated by
specialty casual brands from Hong Kong, such as Esprit (514
outlets), Giordano (644) outlets, Baleno (980 outlets) and Glorious
Sun (1,076 outlets). The new segment has significant growth
potential as it is affordable to the middle class but positioned at
a price point slightly higher than local brands. Prices in Clothing
have dropped slightly in 2006. This is due to the increased
competition in the fashion industry in China (O&L, 2006).
In recent years there are not only an increase of Hong Kong, local
Chinese clothing brands and international brands but also an
increase of foreign brands. These brands may be mid sized chains
that are well established in their home countries but not out of
their countries. Example Singaporean chains like Samuel and Kevin.
In addition, there are brands that are created due to the popularity
of other brands. Example the clothing brand, Fish, in China has
spawned other similar brands like 3 Fishes, Fishes and so on.
Expansion into Second Tier Cities
The retail market is beginning to reach maturity in Tier 1 cities
like Shanghai. Thus the need to accurately target specific consumer
groups is much more significant in these areas. As a result
retailers are increasingly expanding into second and third tier
cities like Chengdu, Nanping, Tianjin. Major Brands like Jean West
has now gone to secondary and third tiered cities as well. The
attractiveness of these secondary regions is enhanced by the
migration from the countryside to the regional cities, increasing
the size of the second and third tier urban retail market. This
would be elaborated in subsequent reports.
Consumer Attitudes towards Brands
Consumers are highly brand conscious and the fact that one can
afford these products is seen as a status symbol. Luxury brands like
LV, Christian Dior, are therefore often sought after when purchasing
apparel and cosmetics. For many segments, particularly younger
consumers, foreign brands that are well known are still regarded as
superior and are seen as a status symbol. Brands that are made in US
and Europe are more highly valued than those from Australia, or
other Asian countries like Singapore, Taiwan. Due to the high
prices, there are also a lot of high end counterfeit clothing and
shoe brands in China.
Attitudes to domestic brands have changed as stated owned companies
have been privatized and produce better quality products. Brands
like Borne, Li Ning, Hong guo are very popular locally. Hong Kong
brands like Giordano are also popular though the market share has
decreased recently. Pride in the nation’s accomplishments has
resulted in many consumers preferring local brands, all other things
being equal. These would be further elaborated in subsequent reports
Consumer Attitudes towards Price
Although Chinese consumers are price sensitive, a recent survey
shows that consumers are increasingly concerned about product
quality and customer service, particularly with respect to apparel.
Accordingly these elements should be emphasized in advertising and
promotional material.
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