China Fashion Industry Overview
The Chinese economy continues its dynamic performance, with an average growth of around 10% during the last 5 years. As barriers to entry are lowered, more and more companies are considering entering 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 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 that have already entered China, addressing the industry, trends, available brands, wholesale and retail prices, preferred clothing cut type, consumer behavior and updated regulations. A key challenge when entering China is the different regions of China. Consumer behavior and preferences for food, fashion and lifestyle vary dramatically in these regions. For example, retailers should not assume that fashion products or styles sold in Shanghai will also be popular in Xiamen, which is in southern China.
The series of reports includes:
Report 1 China Fashion Industry Overview
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 Behavior
Report 5 Teen Fashion and Consumer Behavior
Report 6 Children’s Fashion and Consumer Behavior
Report 7 Men’s Fashion and Consumer Behavior
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. Banks forecast (Quarterly Bank reports) that GDP will fall to 8% in China in 2007 (Goldman Sachs), although in our opinion the GDP rate may be higher due to increased production and consumption. In 2006, China’s urban living expenditure increased at a faster rate than GDP, both nationally and provincially. Despite strong growth, inflation remains subdued with average monthly inflation averaging 1.3% year-on-year from January to September 2006. Annual growth in consumer prices is forecast to reach 1.8% in early 2007 This is because higher land prices would affect production costs. . The increase in investment would in turn fuel inflationary pressures.
The government’s tolerance for higher yuan volatility and higher GDP has raised expectations of further exchange rate reform, which would result in a faster appreciation of the currency. The potential impact would be that foreign clothing brands would find that their prices could be more easily accepted in the Chinese market.
Retail industry in China
Rising incomes in China and government efforts to encourage consumer spending have resulted in increased domestic consumption. Statistics show that total retail sales of consumer goods increased by 12.5% to RMB 6,718 trillion in 2005. However, they decreased slightly to about RMB 6,400 trillion (US$770 trillion) in 2006. One of factors is the import quota imposed by the United States and the European Union in 2006 (O&L). However, with rising revenues and domestic consumption, it is expected that the growth rate of retail sales could remain around 10% in the next 5 years (O&L projection and Goldman Sachs global investment report)
China’s clothing market has been growing by 7% and is now a USD40 billion industry. Department stores account for about 40% of the market. This includes stores like Parkson, Shanghai Bailian, and foreign brands like Wal-Mart. The clothing brands sold in these department stores include international brands such as Hugo Boss and local brands such as Li Ning, Borne, Joe One. Franchise chains and local individual clothing outlets in China account for the remaining 60%.
The profit margins of retail chains in China are high. Due to lower manufacturing costs in China, the profit margins of these clothing brands can reach 50.5% for brands such as Giordano (2005) and Ports (70.4% in 2005). The cities of influence of fashion in China are Shanghai, Beijing and Guangzhou. More locals and tourists travel to Guangzhou, Shanghai, Shenzhen to shop for top fashion brands at cheaper prices. For manufacturing, there are different specialty regions. For example, Ningbo is more famous for bag manufacturing, while Guangdong, especially Guangzhou, is more famous for clothing.
The different regions of China
Due to the geographical vastness of China and the huge variation in economic development between cities, the market potential differs from city to city. The following table shows the disparity in GDP per capita, where the wealth is found in the coastal cities. Cities are tiered based on population and GDP per capita, with Shanghai, Beijing, and Guangzhou being Tier 1 cities. Report 3 explores regional differences in the Chinese fashion industry in detail.
Chinese fashion industry
Initially there were two markets for clothing in China:
1. Low-priced basic clothing sold under local brand names and offered in Chinese department stores, foreign hypermarkets, or small family-owned specialty chains.
2. luxury brands that are sold in franchise boutiques or luxury department stores.
Due to the rapid growth of the Chinese middle class, a new category has emerged that includes quality brands, both Chinese and foreign, that are sold in department stores and specialty stores. China’s middle-class consumers are increasingly sophisticated, demanding greater quality, variety and innovation from their retailers. The new category is highly fragmented and is dominated by specialized Hong Kong casual brands such as Esprit (514 outlets), Giordano (644 outlets), Baleno (980 outlets) and Glorious Sun (1076 outlets). . The new segment has significant growth potential as it is affordable for the middle class, but is positioned at a slightly higher price than local brands. Clothing prices have decreased slightly in 2006. This is due to increased competition in the fashion industry in China (O&L, 2006).
In recent years, there is not only an increase in Hong Kong, local Chinese clothing brands and international brands, but also an increase in foreign brands. These brands may be medium-sized chains that are well established in their home countries but not outside of them. Example Singapore chains like Samuel and Kevin. Also, there are brands that are created due to the popularity of other brands. For example, the clothing brand, Fish, in China has spawned other similar brands like 3 Fishes, Fishes, etc.
Expansion to second-tier cities
The retail market is starting to reach maturity in Tier 1 cities like Shanghai. Therefore, the need to precisely target specific consumer groups is much more important in these areas. As a result, retailers are expanding more and more to second and third tier cities like Chengdu, Nanping, Tianjin. Major brands like Jean West have now also gone to secondary and third-tier cities. The attractiveness of these secondary regions is reinforced by migration from the countryside to regional cities, increasing the size of the second- and third-tier urban retail market. This will be developed in subsequent reports.
Consumer attitudes towards brands
Consumers are very brand conscious and the fact that one can afford these products is considered a status symbol. Therefore, luxury brands such as LV, Christian Dior, are often sought after when buying clothes and cosmetics. For many segments, particularly younger consumers, well-known foreign brands are still considered superior and seen as a status symbol. Brands made in the US and Europe are valued higher than those from Australia or other Asian countries like Singapore or Taiwan. Due to high prices, there are also many high-end counterfeit clothing and shoe brands in China.
Attitudes towards national brands have changed as state-owned companies have been privatized and produce better quality products. Brands like Borne, Li Ning, Hong guo are very popular locally. Hong Kong brands such as Giordano are also popular, although market share has declined recently. Pride in the nation’s achievements has resulted in many consumers preferring local brands, all things being equal. These will be elaborated in more detail 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 regarding clothing. Consequently, these elements should be emphasized in advertising and promotional material.