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 — Last week, photos of a vast yet deserted retail space surfaced on Chinese social media platform Weibo. The scene was nothing short of post-apocalyptic: one photo depicted a sporadically lit, nondescript hall of empty clothing racks; another a retired army of undressed mannequins alongside an acrylic (and again, empty) shoe rack.
The photos were taken in various Forever 21 stores, shortly after the fast fashion giant announced on April 26 that it would shutter its Chinese operations across its e-commerce and physical storefronts (11, at the time) by April 29. The company has cited “shifts in consumer demands and the long-term profitability of these operations” for its retreat.
Since then, the hashtag #Forever21撤柜 (Forever 21 withdraws) has drawn over 671,000 views on Weibo alone. The news was received with distress by fans. “At 21 years old, I’m losing my favourite summertime brand. I won’t be seeing that shade of yellow among my shopping bags anymore. Nothing lasts forever,” lamented user blackBeats_.
The Los Angeles-based retailer isn’t the only fast fashion business to give up on China. Last year, Britain’s Topshop and New Look both made their exits four years after breaking into the country’s affordable segment of the market. Two years earlier, another British player Asos’ retreat cost the business £10 million (around $13 million), less than three years after launching the local division.
Though Chinese consumers are set to contribute almost two thirds of global growth in luxury spending according to McKinsey & Co., low-cost clothing isn’t in low demand, as the continued growth of global ‘big three’ retailers (Inditex’s Zara, H&M and Fast Retailing’s Uniqlo) in China indicates.
So why the exodus of players like Forever 21 — when other fast fashion players seem to have cracked China — and what should other eastward-looking foreign brands take note of?
Make First Impressions Count
Forever 21 got off on the wrong foot in China. In 2008 and at the onset of the country’s fast fashion boom, the retailer launched its first Chinese store in tier-four city Changshu— over an hour and a half’s drive away from tier-one Shanghai, where the likes of Uniqlo, Zara and H&M chose to debut.
The store shuttered the following year, and the company re-entered China in 2011 with a focus on tier-one hot spots.
By the time Forever 21 opened its locations in Beijing, Tianjin, Shanghai, and Shenzhen, Zara, H&M and Uniqlo had also set up shop and were already moving on to expand into China’s less developed regions. The former proceeded to expand physically and digitally at a comparatively slower pace, as annual openings remained in the single digits and e-commerce operations failed to pick up.
The reality is that China is competitive across the board now.
The mistake wasn’t necessarily that Forever 21 decided to launch in a lower tier city, but that the retailer failed to form a well-thought-out strategy and follow through post-debut. “Brands can choose to target tier-one markets first and move into less developed markets, or instead try to thrive by winning in smaller markets and skipping cities like Beijing and Shanghai where things are more competitive,” says Ben Cavender, principal at China Market Research Group.
“But the reality is that China is competitive across the board now, so brands will have to be able to execute it well.” Instead of a consistent approach, Forever 21 flip-flopped between strategies, causing delays in a very fast-paced market.
Choose Allies Wisely
For Topshop and New Look, it wasn’t about where they landed, but who they linked arms with to break into the Chinese market.
In 2014, late-comer Topshop inked an exclusive deal with local franchise partner Shangpin. In 2014, the latter retailer claimed it had hit 30 million users, only to have the local Financial Times report the number to be closer to 5 million.
In 2016, Topshop made its debut on Shangpin rival and Alibaba-owned e-commerce giant Tmall. The partnership ignited rumours that Shangpin wasn’t delivering as promised, and Topshop’s Tmall presence paid off, amassing over 3.15 million fans.
Although Shangpin had aimed to launch 80 Topshop stores across mainland China, by the time the two terminated their agreement in 2018, none opened, and Topshop only operated one physical store located in Hong Kong. Since its retreat, the company has remained optimistic and perceives the country as “a hugely significant market for development. The company is currently exploring opportunities to further grow the brands in China,” according to a spokesperson. Topshop did not respond to BoF's request for comment.
“The right local partner can be critical as staging an effective retail roll out, dealing with online channels, and executing on the right local marketing is incredibly difficult,” says Cavender.
“In many cases, foreign brands just do not have the China expertise necessary to make everything work and make too many mistakes with the roll out, effectively killing the brand.”
The same can be said for retailers who choose to debut solo but lack the necessary local know-how. New Look entered China in 2014 without entering into a franchising agreement. This decision required substantial investment and the company failed to recover — prior to making its exit from China, New Look’s overseas operations lost more than £37 million (around $48.4 million) in the fiscal year ended March 2018.
Don’t Underestimate Homegrown Players
It’s no secret that Chinese players such as Peacebird, Heilan and La Chappelle are edging out their foreign competitors with strong footholds both on and offline.
“A significant share of local consumers, especially coming from minor tier-three and four cities, increasingly rely on platforms such as Taobao to dig out new pieces,” Remi Blanchard, Daxue Consulting's research project leader tells BoF, referring to Alibaba’s behemoth C2C bargain-friendly marketplace.
Just being a foreign or international brand will not do much in driving sales.
A trove of cheap and cheerful fashion (among other categories), Taobao is virtually free of any prominent international brands, giving local brands and manufacturers the upper hand. And though the likes of Alibaba and JD.com serve as gateways for luxury players entering Chinese market, the playing field is levelled for affordably priced items.
According to market intelligence firm Mintel, “the country of where the brand is from and where its items are produced do not rank high on the priority list [of factors that drive Chinese consumption] —an indication that just being a foreign or international brand will not do much in driving sales.”
New Market, New Rules
This year, Beijing’s new set of e-commerce laws came into effect, and have direct implications on foreign companies conducting cross-border operations in China. From customs and taxes to warehousing and logistics, compliance with local policies can delay or impede a foreign retailer’s success. Asos’ 2016 retreat illustrated that they can be especially disruptive for certain business models.
Rather than choosing to ship to China from its warehouses in the UK, the British retailer chose to set up local operations at a cost of £9 million (around $11.79 millon) in 2013.
However, trade regulations still demanded that the company label materials and washing instructions according to local standards for all of its products, which proved impossible for a site stocking hundred of different brands. By its last financial year in the country, the retailer was reporting £4 million ($5.2 million) in losses. Asos continues to ship products to China through its global site.
Size (and Styles) Matter
Localisation goes far beyond anointing a popular ambassador as the face of a company’s local brand (which in itself is tricky business).
Blanchard states that a reason why homegrown brands are thriving is that “[they] have a better understanding of the Chinese body type and morphology.”
When overlooked, this step can cripple retailers. “Asos and Forever 21 have struggled because they have not done enough to adjust their product mix to what Chinese consumers want,” echoes Cavender.
“In many cases they were still relying on clothing fit to foreign models with different body types, and never really did enough to justify to consumers why they should fall in love with the brands.”
What’s more is that bringing the right products to consumers is becoming just as important as the speed at which a fast fashion company does so. This means brands have to “work harder to build a reputation for excellence within a product category... just being fast to latch on to new fashion trends isn't enough,” Cavender continues.
Take Fast Retailing’s Uniqlo, who ensures shorter production cycles by training staff at appointed partner factories in strategically located Chinese cities such as Ningbo. Last month, China drove its Japanese parent company’s record high profits, despite lacklustre results at home. Fast Retailing’s sales are forecast to hit 500 billion yen (around $4.5 billion) for the first time this year.
“[Uniqlo] has bucked the trend of offering a large number of SKUs and instead has focused on being known for making excellent basics that offer both good style and good function,” says Cavender. He notes that the Japanese company’s heat tech products remain well-loved while limited edition runs featuring cartoons and other collaborations keep things interesting for Chinese shoppers, who continue to crave the new and now.
FASHION & BEAUTY
Louis Vuitton Sues Chinese Shoe Giant for Alleged Sneaker Knockoffs
The French luxury brand is taking legal action over its distinctive trainers, famously worn by the likes of Bella Hadid and Jaden Smith. Louis Vuitton has claimed that two subsidiaries of China’s Belle International — a Shenzhen-based conglomerate operating local chains Staccato and Joy & Peace — for infringing intellectual property rights attached to its Archlight shoes. Though the sum of damages requested has not been specified, Louis Vuitton is requesting that said products be removed from stores and destroyed, and for further infringements to be banned. A trial date has yet to be scheduled. (SCMP)
On its Nasdaq Debut, Plastic Surgery App Draws Investors
On May 2, China’s hottest app So-Young made a strong trading debut and saw its shares surge 31.9 percent The five-year-old Beijing-based company is a marketplace and social network for people seeking plastic surgery; while two-thirds of its revenue stems from advertising, the rest comes from bookings commissions. According to its prospectus, the Tencent-backed platform is now profitable and has connected 35 million users with over 30,000 doctors. Now boasting a market value of $1.8 billion, So-Young’s stock market success speaks volumes about China’s rapidly growing cosmetic services markets, which expected to surpass the US to become the largest market by 2021. (36Kr)
Avon’s China Revenues See 20% Boost
The London-based beauty company recent released disappointing first quarter figures recently, revealing that revenues for the period hit $1.186 billion, down 14.8 percent year-on-year with a net loss of $32.7 million. Though revenues for Europe, the Middle East and Africa numbered $457.7 billion (down 19 percent year-on-year), Asia Pacific revenues increased by 3 percent to $115 million, whilst average order volumes increased by 19 percent. The company was keen to point out that due to the expansion of online channels such as Tmall, China revenues rose by 20 percent. (BoF China)
TECH & INNOVATION
Douyin’s Overseas Success Brings $11 Million Home
China’s favourite short video app Douyin — known in the West as Tik Tok — is making bank outside China, recent figures revealed. The company’s overseas operations raked in $11 million in revenue during the first quarter of 2019 — a 135 percent year-on-year boost. However, the platform isn’t content with being a video-sharing app. Back home, Douyin has focused its attention on e-commerce, and has enabled functions allowing users to search products within its mini-program ecosystem, which provide access to services within its app. (Tech in Asia)
L’Occitane, Estée Lauder E-Commerce Operator Changes Hands
According to China Securities Network, private equity firm Citic Capital Holdings Co. has acquired Hangzhou-based UCO Cosmetics — a marketing and e-commerce service provider for beauty companies — for 1.4 billion yuan (around $206.5 million). UCO serves clients such as L’Occitane, Estée Lauder, Clinique, La Roche-Posay and LG. The acquisition highlights the growth that lies ahead for China’s beauty industry, especially where e-commerce is concerned. (Jiemian)
Sequoia Capital Refutes Reports of 20% Staff Cut
Sequoia Capital China has responded to reports of alleged plans to cut 20 percent of its investment staff amid the country’s tech slowdown, calling the claims “nonsense and malicious.” The firm said that it has hired 13 people in the last year and has threatened to take legal action against publications spreading false reports. Rumours are swirling in China’s once white-hot tech sphere, as start-ups struggle to obtain capital after Beijing’s latest campaign against debt financing and the economy loses steam. With giants such as JD.com and Tencent publicising plans for cutbacks, no tech firms are safe. (Tech in Asia)
CONSUMER & RETAIL
WeChat Reportedly Censors Support for Student Accusing JD.com Tycoon of Rape
WeChat is reportedly censoring conversations and closing accounts supporting Liu Jingyao, the twenty-one-year-old student accusing JD.com chief executive Richard Liu of rape. Jingyao has filed a fresh lawsuit (estimated to be worth $7.5 billion) after earlier charges against Liu were dropped following his arrest, and netizens are flooding Chinese social media with support — hashtags #HereForJingyao and #IAmNotAPerfectVictimEither drew over 15 million views in days. On April 29, a number of public WeChat accounts — later found to have all circulated petitions in support of Jingyao’s case — were banned from posting without notice. Netizens were quick to point out that WeChat’s parent company Tencent is also JD.com’s biggest backer. (SupChina)
With “Global Dream,” Alibaba Steps Up to Face Amazon
The Chinese retail giant is gearing up to challenge the American behemoth by overhauling the business model of its e-commerce subsidiary AliExpress. Now, vendors in Russia, Turkey, Italy and Spain can register to sell their wares on the platform, and the company is looking to add to the four countries soon through this new initiative, coined “local to global.” AliExpress forms only one part of Alibaba’s globalisation strategy alongside Lazada, south-east Asia’s biggest e-commerce player, and the giant has also bought stakes in Indonesia’s Tokopedia and India’s Snapdeal. According to experts, the move is slated to offset waning growth in China — a market that has ejected Amazon from its shores. (FT)
Six Provinces Post Double Digit Retail Growth
According to Economic View, six of China’s 31 provinces recorded double digit growth in retail sales for the first quarter, while ten saw figures exceed the national average growth rate of 8.3 percent. Anhui, Jiangxi and Yunnan provinces tied for first place with growth rates of 11.1 percent, followed by Fujian, Hubei, and Henan. While retail sales for the period between January and March rose 8.3 percent year-on-year, growth is slowing in first-tier cities Beijing, Shanghai, Shenzhen and Guangzhou, with an overall slowdown in goods consumption and a simultaneous boost for the consumption of services across the board. (China Daily)
POLITICS, ECONOMY, SOCIETY
Global Markets Hold Their Breath, Ahead of US-China Talks
Financial markets have hit a five-week low after President Trump threatened to more than double tariffs on $200bn of Chinese goods, escalating tensions in the year-long US-China trade dispute. Shares opened low in Europe today: Britain’s FTSE 100 Index dropped 0.5 percent to 7,231.77, while France's CAC 40 slipped 1.1 percent to 5,353.57. Though Beijing and Washington appeared on be nearing an agreement a few weeks ago, sentiments have shifted and Trump has since accused China of "breaking the deal." Talks are set to resume today in the US, and Trump's threats could become become a reality tomorrow. (AP News)
China Can Scale Its 2023 Population Peak
A new study suggests that China’s population will peak at 1.4 billion in 2023, five years earlier than previously forecasted. Births in the country declined 11 percent in 2018 to 15.2 million in the wake of an earlier surge, a result of the relaxation of Beijing’s one-child policy. The news is disheartening for companies catering to kids and growing families, such as Babytree, an Alibaba-backed parenting platform. However, it’s not all bad: the forecast is a symptom of economic prosperity and improvements in education, and will allow more women to stay in work. (Reuters)
Upskirt Pictures Spark Legal Battle in Hong Kong
It used to be the case that people caught taking upskirt photos in Hong Kong faced one-size-fits-all charges such as obtaining access to a computer with dishonest intent. On April 30, the city’s Law Reform Commission suggested that a new law be enacted to target voyeurism and taking upskirt photos, in order to cover both private and public offences. However, women’s rights groups and legal experts remain dubious, and argue that the proposed legislation fails to catch other sexual offences such as “downblousing” (taking photos down a woman’s top), or the sharing of photos taken without the subjects consent. (SCMP)
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