SHANGHAI, China — Wanma Yangji Cuomu, 29, lives in Ganzi County, in the western Chinese hinterlands of the Sichuan Province.
The clothing stores and brands she has access to nearby are entirely domestic, mass market names, like Metersbonwe and Peacebird. Such brands boast thousands of storefronts around China, but her love of looking good has led her to search farther afield for affordable fashion options.
Western fast fashion brands, however, are not on the menu. In spite of their aggressive expansion across China over the past decade, Yang says she has never heard of Western retailers H&M and Zara. Instead, like many people living in parts of China poorly serviced by retail infrastructure, she turns to Taobao.
“There are shops in [Ganzi] county, but we still mainly buy things on Taobao,” Wanma says, referring to Alibaba’s colossal C2C e-commerce platform. “I don’t care [about the brand] so much, if I see a good look, I will buy it.”
The Bottom of the Pyramid
There are thousands of wholesale clothing factories in China, largely concentrated in textile and apparel manufacturing hubs in Zhejiang, Fujian and around Guangdong in the Pearl River Delta. Traditionally, those dealing in low-cost apparel would offload their nameless, brand-less, largely design-less goods to small vendors who would truck them around the country to sell at wholesale clothing markets.
All this changed a decade ago with the rise of Taobao: the platform that “unlocked the ability of Chinese… to become consumers,” according to Zak Dychtwald, founder of Young China Group and author of "Young China."
Low-cost clothing in China did not follow the model familiar to Western consumers, who have spent decades sourcing cheap clothes from big box stores, such as Walmart and Target, or low-cost apparel and accessory specialist chains, such as Primark. Most of the value and bargain end of the market went straight online.
“It’s a huge market, considering the size of China [and] the vast differences in terms of the disposable income and affordability, [people] need affordable apparel,” explains Jason Yu, general manager of Kantar Worldpanel China.
“The bottom of the pyramid is really big and could be attractive to a lot of players, but at the moment there’s no single brand that stands out; it’s very fragmented.”
It Takes a Village
Instead, a unique infrastructure has popped up in the small villages directly surrounding wholesale clothing manufacturers in China’s heartland, where manufacturers and wholesale vendors in their vicinity set up direct-to-consumer operations on Taobao to sell locally manufactured apparel.
These are known colloquially as "Taobao villages." Alibaba's official classification of a "Taobao village" is one where more than 10 percent of households run Taobao stores, with total annual online revenue reaching at least 10 million yuan (about $1.5 million). There are currently more than 1,000 such villages in China, according to Alibaba’s research arm, AliResearch.
People see those numbers and their eyes light up, [but] most luxury brands aren’t even in the conversation for the majority of Chinese.
Villages tend to focus on a niche category. For Hongxing, in China’s eastern Jiangxi province, it is down jackets, with 420 companies in a village that contains only 821 families devoted to the business of manufacturing and distributing puffy outerwear to Chinese consumers.
Every year, the village makes 2.5 billion yuan ($360.2 million) in revenue from jackets, more than 1 billion yuan ($144 million) of which comes from Taobao sales.
Online retail in Taobao villages isn’t just coming from directly owned and operated Taobao stores either. Zhuji in Zhejing Province has long been the world’s biggest manufacturer of socks, accounting for 70 percent of all socks produced in China and 30 percent of the world’s total. In recent years, e-tailers in the village have evolved to encompass both wholesale and direct online retail, supplying socks to Taobao sellers in other regions and offline retailers while also selling their products to consumers through their own Taobao shops.
“Moving online has helped them to reach more customers, without having to travel far from where the products are sourced,” Yu says.
On the next rung up on the apparel market pyramid, domestic fast-fashion brands dominate a large and lucrative sector.
China’s domestic luxury market grew at an impressive 20 percent in 2017, to a total market value of 142 billion yuan (a little over $22 billion), according to research from Bain.
Yet, for all the talk of China’s millennial consumers and their passion for high fashion, a great number of them — particularly those outside of major east coast cities — are either unable or unwilling to pay the premium price tags demanded from international brands.
“People see those numbers and their eyes light up, and those numbers aren’t wrong, they just aren’t representative of the majority of Chinese, who are not just years away, or jobs away, but probably generations away [from the luxury market],” says Dychtwald.
Our strategy is to take root from below. [We are] still relatively fashionable, but not the most fashionable.
“Most luxury brands aren’t even in the conversation for the majority [of consumers].”
Luxury sales pale in comparison to the wider apparel market. Overall retail sales of clothing and shoes have also seen significant growth at more than 9 percent per annum, according to China’s National Bureau of Statistics, with the market for the first nine months of this year reaching over 958 billion yuan ($138.46 billion).
The bulk of this market is being serviced by apparel wholesale manufacturers, and Chinese brands (many of them built from apparel manufacturing origins into distinct brand identities), offering low cost product with a high trend quotient.
Traditionally, low-cost, mass-market Chinese brands have won market share by blanketing the country’s shopping centres and high streets with thousands of brick and mortar stores — still a viable strategy for major players such as the aforementioned Metersbonwe (the founder of which, Zhou Chengjian, has a net worth estimated at $1.4 billion by Forbes), Bosideng (founded by Gao Dekang, who Forbes estimates is currently worth $1.7 billion), plus Ochirly and Five Plus, both owned by Guangzhou-based Trendy Group (founded by Jacky Xu, whose current net worth sits at $1.3 billion).
In 2017, Shanghai-based La Chapelle, often colloquially called “China’s Zara” and known for its focus on physical store openings (the brand boasts more than 9,625 retail outlets around the country) is listed on the Shanghai Stock Exchange. Its 2018 half-yearly results showed a total revenue of 4.38 billion yuan ($631.6 million), up 2.26 percent on the same period last year.
Perhaps the biggest of all, but also the least-known outside of China, is Heilan Home Co. Ltd, one of China’s largest apparel manufacturers and retailers, founded in 1997 by Zhou Jianping, whose current net worth of $3.4 billion by Forbes’ estimates makes him one of China’s richest apparel barons. As a manufacturer, the group was early into the brand-building trend, and now operates more than 5,000 stores around the country for in-house brands that include menswear giants HLA and Sancanal.
Heilan’s recently released third-quarter earnings reported income of 13.04 billion yuan ($1.93 billion) for the first three-quarters of 2018, up 4.53 percent on the same period a year earlier.
Cheap, Cheaper, Cheapest
Despite the hype surrounding China’s ‘consumer upgrade’ — one of the government’s favourite talking points in recent years — domestic fast fashion retailers have been bifurcating, with some moving up the value chain and some moving downwards in price and quality to keep their finger on the pulse of the "starter consumers" towards the bottom of the fashion pyramid.
The Peacebird empire, built from the eastern city of Ningbo on the back of 80 yuan ($12) T-shirts and 150 yuan ($22) skirts, is a profitable one, with half-yearly revenue results for 2018 showing total retail sales of 5.12 billion yuan ($739.63 million), a year-on-year increase of 14.55 percent for the period.
As the 10-year-old company matures its offerings and retail strategy to keep pace with existing consumers — many of whom are seeing consumption habits shift as they enter the middle class — it has a opened diffusion line Ledin, in order to sustain a foothold in tier three to tier five cities.
According to Shen Yaxin, head of Peacebird’s Ledin brand division, the pricing of this line is 20 to 30 percent cheaper than Peacebird’s main women’s line and 60 to 70 percent of sales are made in lower-tier cities.
“Our strategy is to take root from below,” Shen says. “Ledin is in line with [lower-tier consumers’] spending power. This quality and design style is still relatively fashionable, but it is not the most fashionable.”
Troubling Trends for Global Giants
International mass-market players haven’t been able to gain a foothold with some young Chinese consumers. This is partly due to the first-mover advantages of local brands manufacturing cut-price fashion with remarkable turnaround speeds, but also because China’s post-90s generation don’t necessarily care where affordable clothing comes from — unlike Chinese luxury consumers who place a premium on "made in Europe" luxury.
Dychtwald believes many international companies entering the Chinese market have fallen into the trap of taking major eastern seaport cities such as Shanghai as a microcosm of the country as a whole, when it bears little resemblance to the situation in the rest of the country.
While Shanghai paints a picture of a China that is rich and showing Westernisation as a part of the fabric of everyday life, China as a whole does not. Likewise, young people are more confident in their purchasing and style decision-making.
“I don’t think this young generation [of Chinese] likes foreign stuff for foreign stuff’s sake, and I think the older generation undoubtedly did,” Dychtwald explains.
“With the older generation, the semiotics of a purchase [and] what it would mean to people around you and your social standing [were] more important than the actual functionality of a product. You don't see that nearly as much with Chinese millennials, so national brands, if they work just as well, people are going to buy them.”
I don’t think this young generation [of Chinese] likes foreign stuff for foreign stuff’s sake, and I think the older generation undoubtedly did.
Last year H&M (which is due to report full-year results on December 1, 2018) saw sales revenues of $1.3 billion in China. This is a relatively small fraction of the roughly $23.5 billion it sold globally in 2017, even after ten years in the market with a network of more than 500 physical stores in tier one to tier three cities.
I don’t think this young generation [of Chinese] likes foreign stuff for foreign stuff’s sake, and I think the older generation undoubtedly did.
Meanwhile, Zara operates 180 stores in mainland China, and has largely focused on consolidation rather than expanding its network over the past 18 months. Its footprint is dwarfed by the thousands of doors operated by local Chinese brands. In recent months, British high-street brands like Topshop and New Look have respectively terminated their franchise partner agreements and withdrawn from China completely.
Another problem for global giants is that an initial focus on physical store rollouts meant they weren’t focused on e-commerce as China’s online apparel market boomed. They simply haven’t kept pace, with their own share of e-commerce sales lagging behind the anticipated 2018 China average online retail spend of 33.6 percent.
“Young consumers are more rational in their purchases because of their wider personalisation and access to information," says Chen Ke, partner and vice president of Roland Berger Greater China. "They value quality, fashion and price to performance ratio. The channel advantages they have also make the future advantage in the local market possible,” Chen tells BoF.
Upgrade, Downgrade, or Cease to Exist
As with domestic apparel players in the offline world, low-price clothes on Taobao are fast evolving to cater to the “upgrading” segment of the Chinese consumer market.
It’s difficult to overstate the passion of KOL followings in China. A study of post-90s consumers by The Luxury Conversation in late 2017 found that 72 percent of those surveyed had a favourite KOL, and that consumers were inclined to buy products recommended to them by their favoured influencer as a way of “helping” them.
In some cases, the manufacturers previously pumping out nameless fashion apparel on Taobao have partnered with KOLs to create new brand names harnessing their attendant marketing pull.
Take the case of Hangzhou-based Ruhan. Prior to 2014, it was a clothing manufacturer called Libeilin, making mass-market women’s clothing that generated 200 million yuan ($31.4 million) per year on Taobao.
Since partnering with KOL Zhang Dayi in 2014, Jupe Vendue — the Taobao brand fronted by Zhang and manufactured by Ruhan — has grown to sell in excess of 300 million yuan ($43.3 million) per year. With hundreds of other KOL partnerships now on Ruhan’s books and a rumours of an IPO scheduled for early next year, the appeal of KOL brand-building for affordable apparel is obvious.
Most of them will struggle to scale themselves up and will either go out of business or they will have to downgrade themselves and only supply to low-cost platforms, like [group buying deal platform] Pinduoduo.
According to Jason Yu, China’s low-cost apparel manufacturers currently face the choice of upgrading to domestic brand status, downgrading to sell their wares on the lowest-tier e-commerce platforms, or going out of business altogether.
“Most of them will struggle to scale themselves up and go out of business, or they will have to downgrade themselves and only supply to low-cost platforms, like [group buying deal platform] Pinduoduo,” Yu tells BoF.
Successful cases are few and far between, signalling an opportunity for brands in China to rethink their strategies, he says, predicting further consolidation as the strongest players in niche segments grow to dominate and force smaller players out.
“The brands [that survive will be] specialised and focused, and choose one particular sector and be really strong and dominate that sector. That’s something we have seen in other industries, but not in the apparel sector yet.”
More complex is the fate of global players, most of whom seem destined to play second fiddle to domestic giants in China’s mass-market apparel sector. That's not to say the opportunities for the Zaras and H&Ms of the world aren’t significant in China, but any thought of Middle Kingdom domination looks set to be the purview of those with deeper local roots and know-how.