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Fashion Looks to China for a Glimpse of Its Future

Now that China has passed the peak of its coronavirus outbreak, a major push is underway to restart the economy. But to what extent will the Chinese market be a 'crystal ball' for businesses elsewhere as they enter the recovery phase of the pandemic?
Chinese couple wear protective masks as they walk in a shopping area. Source: Kevin Frayer/Getty Images
By
  • Casey Hall
BoF PROFESSIONAL

This article appeared first in The State of Fashion 2020 Coronavirus Update, an in-depth report focusing on the themes, issues and opportunities impacting the global fashion industry in the wake of the coronavirus, co-published by BoF and McKinsey & Company. To learn more and download your free copy of the report, click here.

SHANGHAI, China — As the first country to be hit by the coronavirus and the first to return to work after a months-long shutdown, all eyes are on now on China for a glimpse into the future.

The hope is that Chinese businesses — which were impacted earlier than the rest of the world — will serve as a crystal ball for executives elsewhere looking to intervene with strategies adapted or borrowed from China. But that's not the only reason industry leaders are looking east.

China's colossal consumer market and the critical role the country plays in supply chains means its own recovery will be a determining factor in the recovery of the global fashion industry. China is not only the world's largest fashion market, it is also the growth engine for the luxury sector, accounting for nearly a third of luxury purchases worldwide. With so much riding on this one market, the first question facing fashion players worldwide is: how soon will Chinese spending return to pre-pandemic levels?

Bruised but Open for Business

Official retail data for January and February 2020 painted a grim picture, with a more than 20 percent year-on-year drop in sales. Hardest hit are companies with broad brick-and-mortar footprints that have yet to transition to an omnichannel model.

Belle International, China's largest shoe retailer, has more than 20,000 stores across China, none of which have seen much foot traffic for months. H&M closed two-thirds of its China stores and lost 90 percent of its sales at the peak of the outbreak, although its store network had almost entirely reopened by the first week of April 2020. Burberry — which has dozens of stores on the mainland and is highly exposed to Chinese travel retail demand — warned of a dramatic hit to sales in March 2020.

We are seeing the other side of the crisis in China. We now have a playbook we can use elsewhere.

Retailers with strong digital and omnichannel strategies are in a better position to minimise foregone revenues. Nike, for example, saw a jump in e-commerce sales cushion losses from China's retail closures this quarter. "We are seeing the other side of the crisis in China. We now have a playbook we can use elsewhere," said Nike Chief Executive John Donahoe.

Though most shops are open for business in almost all major Chinese cities outside of Wuhan, where lockdown conditions were set to be lifted in early April, people are still feeling raw from the recent crisis and wary of its potential re-emergence.

Striking the right note in such a climate is not easy and, in China, many brands went quiet, preferring to say nothing to consumers rather than risk a mistake. The downside to this approach is of course that, during a crisis, people crave connection and brands who are completely absent will lose mindshare. One example of a positive and caring message during the worst of China’s coronavirus outbreak came from Louis Vuitton, which followed the announcement of a donation to relief efforts in Wuhan by parent company LVMH with a short message published on social media channels reading (in Chinese): “Every paused journey will eventually restart. Louis Vuitton hopes you and your loved ones stay safe and healthy.”

While stores were closed, the brand concentrated efforts on customer outreach and a Valentine’s Day pop-up store on WeChat, featuring store assistants on live chat ready to communicate in real-time with shoppers — a strategy which saw online sales double compared to the previous year’s efforts.

Companies, including Swatch Group and Salvatore Ferragamo have noted some improvements in their China sales already, but it is unclear to what extent. In any case, positive momentum is likely to be unevenly spread among brands by consumer and product segments. Jason Yu, general manager of Kantar Worldpanel for Greater China, predicts cutbacks in discretionary spending on travel and hard luxury, with "opportunities in affordable luxuries…especially beauty" remaining.

Beijing is desperate to restart China’s economy as quickly as possible, with fears growing of the first economic contraction since the Mao era in the first quarter and the World Bank downgrading China’s full year GDP growth estimate to 2.3 percent. While green shoots are an increasingly common sight across China’s fashion value chain — from manufacturing to retail — they are sporadic.

Beijing daily life amid the Covid-19 pandemic. Source: Artyom Ivanov/TASS via Getty Images

A report released in March 2020 by Fung Business Intelligence Group predicts that the lingering effects of the outbreak in China will remain throughout April and into May. “We believe the disease outbreak will linger for another two to three months in China. By then, consumption will gradually return to pre-outbreak levels,” the report reads in part. Savills China Retail, meanwhile, predicts a full recovery for the country’s retail sector in the second half of the year. However, it is important to note that there is little consensus among market observers; others weighing in on future recovery scenarios predict a significantly longer time horizon.

One thing preventing a speedier recovery is that some restrictions on people remain; they often vary by city where local municipalities are responding to local conditions. As a result, there are still some limits on the number of shoppers allowed in stores at once, for example, or mandates of self-quarantine for those travelling domestically to shop between cities, cutting off the potential for tourism spend within the country. These measures feed into consumer sentiment and are born out of a reasonable fear the virus may re-emerge but are hampering service and retail sector rebounds. The result will be a bumpier journey back to pre-pandemic spending levels than many brands would like.

Watching this outcome from afar, businesses in other markets may seek to lobby their national governments to coordinate a more united, joined-up “open for business” strategy when they eventually re-open from their respective lockdowns. This is an easier proposition in smaller nations than in large ones like the United States, where the response to the pandemic itself has been fragmented on a state-by-state level.

Investing in Digital Resilience

As a sprawling and fragmented market with few nationally dominant retailers, China’s retail landscape is constantly consolidating. According to Jason Yu, the coronavirus crisis will further increase the pace of retail consolidation, with lower valuations creating more “opportunities for those that have some cash flow to make acquisitions.”

The spread of the coronavirus pandemic overseas and the global travel restrictions it has spawned will concentrate Chinese consumer spending within China for some time. This reshoring of spending, particularly apparent at the high-end of the fashion market, has been a trend since 2016, bolstered by government edicts lowering import levies on luxury goods, and bringing prices in China more in line with those elsewhere in the world. Further lowering taxes on consumer goods is one relatively straightforward measure the central government might use to stimulate consumption if the rebound in consumer appetite seems unsuitably robust moving into the second quarter of the year.

As much as 60 percent of GDP growth in China is attributed to consumer spending, making it the most important factor in how the country’s economic recovery fares in the wake of its coronavirus outbreak. Though the export industry only accounts for 20 percent of China’s GDP, supply chain interruptions and cancelled orders from overseas are placing huge burdens on this sector. The February 2020 unemployment rate of 5.7 percent was a record high for the country and widespread manufacturing job losses are likely to further dampen consumer sentiment.

As much as 60 percent of GDP growth in China is attributed to consumer spending.

One thing that should give both brands and economic policy-makers comfort is how resilient the Chinese consumer has proven to be in recent years. Even a protracted trade war with the US and a massive protest movement on its doorstep in Hong Kong have not been enough to shake consumer confidence levels. In February 2020, as the coronavirus outbreak was still raging in China, the country's Consumer Confidence Index, though it dropped a significant 4.3 points, remained the highest in the world.

Luxury brands are currently focusing recovery efforts on full-price, current season offerings on e-commerce platforms such as Tmall's Luxury Pavilion, Secoo and JD.com, as well as their own WeChat commerce channels. The increased focus on online sales will no doubt be a global phenomenon as stores around the world remain shut for an indeterminate period, but local players are bullish about the longer-term prospects for luxury e-commerce. Secoo Chairman and Chief Executive Li Rixue predicts e-commerce sales will make up 30 percent of China's $150 billion in annual luxury sales within the next five years, up from 10 percent today.

Consumers have increasingly looked online for their shopping needs as varying degrees of lockdowns and quarantines kept as many as 780 million people in China home over Chinese New Year and the weeks beyond. Even as overall retail sales bottomed out, e-commerce was one bright spot in official economic data, with 3 percent growth for January and February 2020. Christy Tan, head of markets strategy and research for Asia at National Australia Bank, notes a fundamental shift in China towards “consumption that is more indoor-based than outdoor-based.” To date, it has been livestreaming that has emerged as the innovation to watch in this space.

The “Crystal Ball” Has its Limits

In the wake of lockdowns, some traditional brick-and-mortar retailers in China have re-trained sales assistants to be livestream hosts, helping to claw back some of the shortfall from store closures. Even luxury brands have jumped on the bandwagon, with Burberry, Prada and Bottega Veneta all signing on to Tmall’s monthly luxury livestreaming promotion. In the midst of China’s coronavirus crisis, Xiaohongshu also more aggressively rolled out its livestreaming tool, with Louis Vuitton becoming one of the first luxury brands to use the feature on the popular social commerce platform.

As stores close in other global markets and consumers increasingly turn to e-commerce for shopping and short video social media sites for entertainment, the trend to combine the two in the form of livestreaming commerce seems to be a uniquely Chinese one at this point — though there is no reason it must stay that way. Brands may not be able to reach consumers in the west using Taobao Live, Yizhibo or Xiaohongshu to capitalise on this intersection of entertainment and commerce, but a similar opportunity may exist by strategising more around globally accessible platforms like TikTok and Instagram Live.

Organisers of Shanghai Fashion Week — who called off their physical event this season — have also pivoted to livestreaming, not only for fashion presentations but also by teaming up with Alibaba to allow brands to sell current season stock through the tech giant's Tmall platform. Showrooms that hold wholesale designer brands during Shanghai Fashion Week are now largely being conducted via livestreaming, video conference appointments and online ordering in a test of just how much the fashion industry can be digitised — a B2B experiment that will be watched closely by industry peers around the world.

The verdict on showrooms’ early efforts seems mostly positive. “This season we did it as an emergency contingency, but I found it to be so exciting [that] I truly regret we haven’t experimented with this before,” DFO showroom and buying agency Chief Executive Meimei Ding said in March.

Industry leaders should remain sufficiently sceptical about the accuracy of this 'crystal ball.'

Just as brands and retailers must transform themselves to serve the customer where and when they are needed, manufacturers in China are increasingly becoming “customer first” entities in order to survive. Already suffering a long-term trend of offshoring garment manufacturing to markets with lower labour costs, more Chinese manufacturers are considering a pivot from export merchandise for international brands to local brands catering to domestic demand.

A global decline in orders from major clothing brands will see even more factories competing for this domestic business and many converting to a “consumer-to-manufacturer” (C2M) model. Alibaba-owned Taobao recently unveiled its plans to work with 1,000 manufacturers across China on its custom-manufacturing platform, aiming to turn them into “super factories” with annual output exceeding RMB 100 million ($14 million) each.

While some of the business pivots, trends and innovations that emerged during the outbreak in China will almost certainly foretell what happens elsewhere around the world — particularly the spotlight on wellness, livestreaming and patriotic consumption — there are important caveats to consider. Industry leaders should remain sufficiently sceptical about the accuracy of this “crystal ball” because it is often misguided to draw global conclusions based on the Chinese market context.

For one, China appears to have been able to contain its outbreak relatively quickly (although fears of a second wave are constant, with worrying signs of new small-scale outbreaks around the country at the time of writing). The type of strong centralised political power structure found in China, allowing the government to impose strict pandemic restrictions, doesn’t exist in many western democracies. And it is hard to imagine information gathering being as straightforward elsewhere as it is in China, where there is a lack of privacy legislation helping tech giants — and the brands that benefit from their big data operations — to trace and track people’s movements, activities and interactions.

What’s more, China’s predominantly insular tech ecosystem, unique cultural context and its rapid, comparatively recent economic development makes it a very different market proposition and one that can’t easily be compared to other global markets or used as a barometer for all scenarios.

As the first country to suffer from the coronavirus outbreak, China’s customer-first, innovation-centred recovery mentality may prove to be a model for some global fashion industry leaders to emulate during these tough times — but only up to a point. As the economic fallout unfolds, the Chinese market will continue to dance to its own rhythm and, while some of the beats will sound familiar or indeed universal, others won’t be popular beyond its borders.

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