Hello BoF Professionals, welcome to our latest members-only briefing. China’s colossal size and dynamism makes it a top priority for any global business, but it remains opaque to many in the fashion industry. Leveraging our rare access and local knowledge, the BoF China team demystifies the Chinese market with weekly industry analysis and the wider socio-cultural context you need to sharpen your focus.
SHANGHAI, China — Apprehension sits like an omnipresent blanket of smog above Chinese cities as the Year of the Pig dawns.
Chinese consumers and lawmakers are understandably troubled by an economic future less certain than it has been for a decade, while consumer brands who have banked on continued blockbuster growth from China also nervously wait to see which way the wind will blow.
The Spring Festival is a seven-day public holiday in China accompanied by the world’s largest migration of people, as hundreds of millions travel, either returning to their hometowns from working in urban centres, or increasingly, taking the opportunity to travel to further flung international destinations in search of adventure and experience (and social media bragging rights.)
During this year’s holiday — which officially runs February 4 to 11 — the spending of Chinese consumers, whether remaining at home or traveling abroad, will be seen as a barometer of what can be expected for the rest of the year to come.
“The holiday is a key indicator for projecting spending levels during the rest of the year. This is an especially important two weeks for luxury brands,” says Michael Zakkour, China and APAC vice president at Tompkins International.
Though few luxury brands have reported any significant slowdown in spending from Chinese consumers to date, the fear of belt-tightening in China has been enough to spook investors in luxury conglomerates such as LVMH and Kering, as well as brands such as Prada, Moncler, Tiffany & Co and Christian Dior. Luxury stock prices seem to plummet at the very suggestion of weakening consumer confidence in the Middle Kingdom.
It seems like people are continuing to spend on experiences, but may not be thinking about shopping quite as much.
Chinese consumers held their nerve in the fourth quarter of 2018, with data analytics company Nielsen setting China’s consumer confidence index at 113, a point higher than the quarter earlier.
But that was last year. A slow one for China’s economy, certainly, with a 28-year low in full-year GDP growth, pressure from the trade war with the US, housing oversupply impacting property prices and a stock market that lost one quarter of its total value. All these trends seem set to continue or worsen in the Year of the Pig, placing even more pressure on consumers.
Yet, the first month of 2019 has seen a smattering of earnings announcements from luxury brands that indicate little need for panic. Tiffany & Co, while reporting a slowdown in sales from traveling Chinese consumers, balanced this with a strong performance in domestic sales for Mainland China; Burberry reported “mid-single digit growth” in China, a stronger than expected performance; and Hugo Boss fourth quarter figures beat analyst expectations on the back of better-than-predicted sales across Asia, as well as Europe.
On January 29, LVMH announced strong annual results, stating that demand in China had picked up during the last quarter of 2018. According to its chief executive officer Bernard Arnault, Louis Vuitton’s sales reached “well over” 10 billion euros last year, leading better-than-expected sales growth across the conglomerate's leather goods and fashion division.
In positive early signs for Chinese New Year spending, estimates from China’s largest online travel agency, Ctrip, predict a slight increase in trips — both domestic and international — from Chinese consumers over the holiday.
Last year, more than 6.5 million Chinese travelled abroad during the holiday, with 386 million domestic trips clocked up in the same period. This year, closer to 7 million Chinese tourists are expected to travel abroad, with another 400 million travelling domestically.
According to Zakkour, these predictions are an unequivocally positive sign about the willingness of Chinese to continue spending in a challenging environment. “This is great news for retailers and brands who depend on big spending Chinese travellers. Ctrip also reported that bookings for 4 and 5 star accommodations, air travel and experiences are up this year,” he notes.
Others are more cautious, pointing out that a continuation of the traveling and spending seen in previous years may not necessarily equate to a continuation of the traditional new year shopping boom.
“I think Chinese New Year this year will be interesting to watch. While this year might not be a blockbuster year in terms of growth compared to last year, travel numbers should stay relatively strong,” says China Market Research Consulting's senior researcher, Benjamin Cavender.
“In interviews that we have conducted with consumers, it seems like people are continuing to spend on experiences, but may not be thinking about shopping quite as much.”
It has become de rigueur for luxury brands to release special campaigns and limited edition products in conjunction with the Spring Festival. In the current environment, in which young and increasingly nationalistic Chinese consumers are on the lookout for cultural insensitivities (a la Dolce and Gabbana) and consumer spend might not be as free as in years past, it’s more important than ever for brands to get these campaigns and products just right.
Looking at the well-received campaigns launched by luxury brands this year, they share in common either a playful, cutesy take on the “pig year” theme, or an elevated nod to Chinese traditional aesthetics.
In the former camp is Longchamp, who collaborated for the second year running with top KOL Mr Bags on a line of bags that features cutesy curlicue tails, snouts and pink accessories, as well as Gucci, who linked with Disney for a 35-piece, “Three Little Pigs” range.
Dior, on the other hand, has omitted the pig motif altogether, in favour of an elegant red and white botanical pattern on classic bags such as the Book Tote issued exclusively in China and in very limited numbers.
“This year I think we will see mixed results, with brands that have a designer that is currently popular with younger Chinese doing very well over the Chinese New Year period and brands that are relying on a slightly older consumer or which take a more conservative approach to design not doing particularly well because many of their buyers are taking a wait-and-see approach to luxury purchases this year,” Cavender says.
As he intimates, the key to China’s luxury market remains younger consumers. They tend to be more focused on luxury brands than their contemporaries in other markets and are more likely to remain confident in their spending than older generations, who are more exposed to financial risks through investments, real estate and mounting household debt, for example.
It is unlikely that China’s New Year spending will deliver the kind of growth that international luxury brands have become used to, but it is also unlikely that spending will slow by as much as many seem to fear, buoyed by the continued confidence of the young.
The best move for luxury brands is to take aim at these young consumers by engaging with them more through assertive domestic strategies that achieve excellence in experience, service, product and messaging, rather than waiting around for consumers to come to them or shop abroad.
FASHION & BEAUTY
Tranoi Shanghai to Debut at Shanghai Fashion Week
Major Parisian trade show player, Tranoi, has announced it will launch Tranoi Shanghai as part of Shanghai Fashion Week, in partnership with local fashion management and market development group DFO International. “In short, Tranoi is investing to exponentially expand DFO's current sales & distribution know-how to benefit brands on their China platform starting this March. Tranoi’s new China strategy will focus on bringing transparency and integration by supporting brands with local market knowledge and business know-how, and assisting with trade activities,” says Meimei Ding, the chief executive of DFO International. The event will be held in conjunction with SFW’s AW19 iteration, from March 28 to 31 as part of the Ontimeshow exhibition space. The move comes at an interesting time for Shanghai’s burgeoning fashion week, with a booming domestic market for multi-brand boutiques fuelling accompanying growth in the trade show space. As this growth normalises, however, only the strongest B2B operators are expected to remain standing. With the help of experienced local hands, along with its international expertise, Tranoi Shanghai might be well-placed to capitalise on gaps in the B2B ecosystem. (BoF China)
Valentino Names First Official Chinese Menswear Spokesman
Though Zhang Yixing, also known as Lay Zhang, has been affiliated with the Italian luxury house since 2017, and is a familiar face in the front row of Valentino shows, last week the relationship was further cemented with Zhang named Valentino’s first official Greater China menswear brand ambassador. The 27-year-old singer and actor, best known as a member of South Korean super group EXO, has a massive following online (with 45 million fans on Weibo alone), but may also be seen as a safe bet in turbulent times for his political affiliations. In 2016, Zhang was appointed by the Communist Youth League of China (CYLC) in his hometown of Changsha as a publicity ambassador, the first celebrity to hold such a title. (Valentino WeChat)
Avon Announces Double-Digit China Growth in 2018, Sells Manufacturing Operation
In a recent announcement, Avon Products touted “continued double-digit growth” in the Chinese market and outlined the next phase of its China strategy, with e-commerce and a flagship store on Alibaba’s Tmall platform a central pillar for growth in 2019. At the same time, the beauty company announced the sale of its Guangzhou-based manufacturing operations to LG-owned The Face Shop, for $44 million, with a manufacturing and supply agreement written into the deal. Avon chief executive Jan Zijderveld said the sale was part of the company’s plans for “a leaner, more agile global infrastructure.” After almost 30 years in the China market and quite a few ups and downs along the way, Avon seems to think it has cracked the China code. Time will tell. (CBO)
TECH & INNOVATION
Giants Snubbed as Douyin Is Tapped as Official Social Media Partner of Spring Festival Gala
In an effort to appeal to a younger audience, state television broadcaster CCTV has snubbed tech giants Alibaba and Tencent to partner with short video platform Douyin for this year’s Spring Festival Gala. Often called the world’s “most watched television show” (reporting 1.1 billion viewers last year) tuning into the gala is an annual tradition for Chinese families celebrating the New Year together. Douyin will create gala-related challenges, music, stickers and AR filters with the purpose of encouraging users to create their own content, sharing their favourite Spring Festival moments. The partnership is seen as a win-win, with CCTV looking to keep its major annual variety event relevant to a younger generation and Douyin sure to benefit from the massive exposure — and perhaps spike in new users — it can expect from the deal. (China Film Insider)
Pinduoduo’s Tumultuous Start to 2019
One of the hottest stories in China’s e-commerce sphere in 2018 was the emergence of Pinduoduo, the group-buying site beloved by the country’s lower-tier consumers that raised over $1.6 billion in a June IPO. News of fake and faulty products plagued the platform in the second half of the year and 2019 has started out mixed, with a “glitch” in the Pinduoduo app blamed for a proliferation of discount coupon codes, which led to the platform losing “tens of millions” of yuan within a few hours before the loophole was closed. On the upside, last week the platform announced that its pre-Chinese New Year shopping festival, running from January 4 to 24, had seen orders rise 340 percent over 2018’s sales period. (Ebrun)
Cross-Border E-Commerce up 36 Percent in 4th Quarter
A report released last week from Analysys shows China’s fourth quarter cross-border e-commerce market growing 36 percent to a total value of 114.56 billion yuan (or $17 billion) over the previous quarter. Tmall Global is top of the cross-border food chain, driven by strong Singles’ Day results in November, with a 31.7 percent market share for the quarter, beating out cross-border specialists Netease Kaola, with 24.5 percent market share. E-commerce remains a bright spot in China’s retail sector, and within this sphere, the desire of Chinese consumers to access high quality beauty and lifestyle products sourced from overseas seems particularly well-placed to buck any broader consumption slowdown. (Analysys)
CONSUMER & RETAIL
China to Surpass US in Total Retail Sales This Year
China will become the world's top retail market in 2019, according to a new eMarketer report, with 2019 total retail sales expected to reach $5.6 trillion, a growth of 7.5 percent, compared to $5.5 trillion in the US, with growth of 3.3 percent. China’s continued growth is attributed to rising disposable incomes and rapid economic growth in second and third-tier cities in China, offsetting consumer confidence concerns sparked by a slowing economy. While the retail sales growth rate for both countries is slowing, Chinese growth is expected to exceed US growth rate through 2022, according to the report. The wider retail ranking comes at an interesting time, since Greater China is also due to overtake the US as the world’s largest fashion market this year, according to The State of Fashion 2019, a report co-published by BoF and McKinsey & Company. (CNBC)
Alibaba CEO Talks up Chinese Consumer Resilience at Davos
Speaking at the World Economic Forum, Alibaba chief executive Daniel Zhang said China’s trade war with the US wouldn’t halt the appetite for foreign companies to access China’s consumer market. “The most important thing is consumption power, [of] which I believe China is a strong growing driver in the future,” he said. Zhang’s confidence in continued consumer growth partly stems from the low debt burden of Chinese households. He’s right in saying China’s household debt-to-GDP ratio is low compared with Western economies, but this is changing rapidly, with Allianz showing an increase of 20 percent in household debt over the past five years, complicating the hypothesis for a continued spending boom. (Business Insider)
Winners and Losers in China’s Footwear Arena
Domestic manufacturer and retailer, Daphne International, long in China’s top five retailers for the footwear sector, closed 941 points of sale over the course of 2018, 282 in the fourth quarter alone, and saw same store sales decreased by 7.6 percent over the year to December 31, according to a recent announcement. Meanwhile, global Skechers executives recently travelled to China to fête the opening of the country’s largest store in the city of Shenyang. Though not known internationally as a fashion capital, Shenyang portends the brand’s expansion plans in China, which Skechers president Michael Greenberg says will focus on third and fourth tier markets. These recent events are indicative of broader trends in China’s footwear sector, which is seeing long dominant domestic brands, reliant on an extensive high-street store network, lose market share to international players looking to increase their retail footprint beyond major tier one and two cities. (BoF China, Linkshop)
POLITICS, ECONOMY, SOCIETY
What Is Peppa? China’s Most Viral Ad of 2019 so Far
A rural Chinese grandfather’s quest to understand, “What is Peppa?” in order to give his grandson a special New Year’s gift is at the centre of a heart-warming ad campaign for the upcoming February 5 cinema release of the Alibaba co-production, "Peppa Pig Celebrates New Year." The ad, sponsored by China Mobile, touches on social issues, including the urban/rural divide and changing nature of consumption in the country, which struck a chord with netizens. More than 400 million posts on Weibo featured the hashtag #WhatisPeppa in the days following the ad’s release. Peppa Pig is a cultural phenomenon in China, with Peppa merchandise popular with young adults, as well as pre-schoolers. In the Year of the Pig, it seems unlikely her influence will wane any time soon. (What’s on Weibo)
Young Karl Marx Anime Debuts, Courtesy of China’s Propaganda Department
A seven-episode anime series called "The Leader," which chronicles the life of a young Karl Marx, made its long-awaited debut on China’s hottest video-streaming site, Bilibili on January 28. This, however, is not the bushy-bearded, stern-faced father of Communism, familiar to most people in China and abroad. The protagonist of ‘The Leader’ is tall, lean, charismatic and good-looking. Its production was sponsored by several Chinese government agencies, and comes at a time when President Xi Jinping regularly pushes for a renewed embrace of Marxist thought in the country. As far as China’s animated propaganda efforts go, this one shows unexpected range, both high in production values and appealing to young audiences who have enthusiastically embraced anime. (SupChina)
Fan Bingbing’s Return Is Leaked
Three months after a public mea culpa and mega-fine levied over a tax evasion scandal, which saw Chinese superstar Fan Bingbing disappear for months last year, the actress appears to be making her way out of the doghouse. The start of 2019 has seen leaked images of Fan fronting a campaign for eyewear brand PRSR, and word that production has resumed on the Hollywood spy thriller "355," with Fan still part of the all-star cast (which includes Jessica Chastain, Lupita Nyong’o, Penelope Cruz and Marion Cotillard.) The general public seems receptive to Fan’s return, with the prevailing attitude on social media portraying Fan as a high-profile fall guy for dodgy accounting practices plaguing China’s entertainment industry at large, rather than a serious villain herself. How long before the big luxury players are back knocking on Fan’s door? (Xiang Qu)
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