Fashion, Beauty, and Status: One Year on the Frontlines of China’s Apparel and Luxury

by | Dec 1, 2011

This article originally appeared in the December 2011 edition of FFR (Focus On Fashion Retail) Magazine.


Picture Americans seeking to acquire the latest jeans by Juicy Couture and finding out that Chinese teens are just as eager to be wearing them. Envision China with millions of bargain hunters and high-end shoppers in many of its cities clamoring for ways to fashionably express themselves. While this is not yet a typical image of the Chinese consumer, the rapid interdependence of industries and markets around the world fostered by innovative developments in transportation and communication is helping to catalyze this transformation.

China expert Michael Zakkour, principal of Technomic Asia, commented at a lecture at the Fashion Institute of Technology (FIT) on October 3 that China is “shifting from the ‘factory of the world’ to the ‘mall of the world.'” Participants at this lecture also included Mark Greiz, faculty member, FIT International Trade and Marketing Program and chief consultant, Mark Greiz Consulting; Byron Lee, director, Hong Kong Trade Development Council; and Lawrence Delson, faculty member, FIT International Trade and Marketing Program and president, Delson International, Inc.

The event was co-sponsored by FIT’s Departments of International Trade and Marketing; Global Fashion Management; Entrepreneurship; Cosmetics and Fragrance Marketing; the International Trade Students Association; the Asian Student Network; New York University’s Department of Finance in its School of Continuing and Professional Studies, the Manhattan Chamber of Commerce, and the Organization of Women in International Trade.

With its economy growing by an average of 10.5% over ten years and its trade increasing by twice that in the same period, much fanfare has been made over China’s prowess as a production powerhouse, prompting zealous politicians to propose measures to limit its dominance as an exporter and promote its highly debated reputation as a currency manipulator. With rising labor and material costs, American retailers and companies are seeking to produce goods in countries such as Vietnam, Bangladesh, the Philippines, and Central America.

Momentous Leap into an Era of Unprecedented Local Consumption

China’s middle class is now 300 million people, resembling the United States’ own total population. Seventy-two individuals have been identified as billionaires, which, according to the Huffington Post (April 12, 2011), ranks second only to the United States. With a still rapidly growing economy despite measures being taken to curb inflation, and an increasing role in technology development, China is poised for a momentous leap into an era of unprecedented local consumption.

This view is supported by the following facts:

  • China alone is expected to account for about20% of global luxury sales by 2015 (According to McKinsey & Co.)
  • China is expected to be the fastest growing luxury market this year, expanding by some 25%, and is expected to be ranked third behind the United States and Japan in five years. (According to the research group Bain & Company, in an article written by Dr. Isaac Mostovicz published in Janus Thinking (May 18, 2011))
  • Study by Bain & Company has indicated that the Chinese spent over RMB 68 billion or US$10.7 billion on luxury purchases in 2010 with over 50% of that spent overseas including Hong Kong.
  • According to the Hurun Luxury Consumer Price Index, the price of luxury products sold in mainland China rose by 7.7% in 2009 and by 11.3% in 2010 and according to the World Luxury Association, the age of China’s youngest luxury consumer has fallen from 35 to 25. Also, according to the Hong Kong Trade Development Council, retail prices of international cosmetics brands in China have risen by 5% to 8% since July 2011.
  • China is now the number one apparel and number two accessory market in the world (According to Technomic Asia).

Challenges

China continues to face issues relating to piracy, intellectual property rights, uneven economic development, job creation, corruption, human rights, financial transparency, significant environmental challenges, scarcity of key resources relative to its needs, and state control of communications.

Driving Forces

However, as this centrally planned system shifts into a market economy, as it rises in its value chain to make products requiring higher skill levels, as it nurtures its own global class companies, as its vibrant group of young and urban consumers multiply, and as its domestic market development intensifies, China is increasingly becoming the market to which the world could look for the sale of its luxury merchandise.

Brands:

Recognizing China as a late adolescent in its market growth evolution, Zakkour emphasized how China is different from the United States. For example, multi-brand buyers are still a rarity in China. Consumers in the country are deemed to be brand conscious, and although affordable niche brands like Kate Spade, Furla, and Lancel are growing, shoppers are not necessarily brand-loyal. And, while domestic brands have a strong presence in the mass market, foreign brands have dominated the luxury market, which is now open to middle- and high-end segments.

Role of Women:

According to “Luxury Brands in China Revise Marketing Tactics in Response to Growing Number of Female Entrepreneurs” which appeared in The Next Women magazine (June 16, 2011), a study by McKinsey & Company revealed that female purchases accounted for more than half of China’s luxury sales in 2010, up from 45% in 2008. Female luxury goods consumers also increased their spending by 22% in 2010, compared with 2008, and in contrast to 10% by men. In addition, the article indicated that China is expected to become the world’s largest luxury market by 2020.

Growth Sectors:

Cars, watches, and luxury travel are expected to drive growth in sales over the next five to 10 years. For example, China’s luxury car sales are forecasted to reach 600,000 units in 2011 and to more than double to 1.4 million by 2015. If one asked a middle-income Chinese person what his or her first luxury purchase would be, the answer would most likely be a Swiss watch, Patek Phillipe, Rolex, or Omega. Technomic Asia also estimates some 100 million Chinese travelers by 2020.

In the cosmetics, beauty care, and fragrance sector, skin care, which made up 45% of China’s overall cosmetics and toiletry sales in 2010, is triggering growth. For instance, Wal-Mart is said to be selling moisturizers to reduce wrinkles, and spas are offering seaweed wraps. Sales of moisturizers, whitening agents, and advanced therapy treatments are expected to grow by at least 12% per year for the next five years. The new middle and higher income consumers are demanding foreign color cosmetics and skin care products and are willing to pay a premium for them as shown by strong sales at Estee Lauder, L’Oreal, and Sephora. It is estimated that women spend between 10 to 15% of their income on cosmetics and skin care and, while there is no traditional market for fragrance, it is growing by more than 10% each year.

Distribution Channels:

China’s current distribution channels are department stores and shopping malls, as well as single brand stand-alone stores. Uniqlo opened its largest flagship store in Shanghai’s Nanjing Lu shopping district in April 2010. Hermes introduced its Chinese Shang Xia brand and opened its first China flagship store in Shanghai in September 2010. Hennes & Mauritz (H&M), the Swedish fast fashion company, opened a fourth store at the LiXing Mall in Hangzhou in April 2011. Within the past 18 months, jewelers De Beers, Wellendorf, and Lan, created by Chines television host Yang Lan and Canadian diva Celine Dion, opened their first China boutiques in Beijing and Shanghai.

E-commerce, multi-brand retailers, and multi-brand boutiques are emerging as key channels of expansion.

Upscale department stores like Austen Brands City from China and Takashimaya from Japan, as well as L’Avenue, a new first-class retail and office complex being developed by Shanghai Luxchina Property Development Company Limited, have arisen or are being developed.

Chinese expert Michael Zakkour recommends that companies look to invest at tier two and three cities in China using multiple channels, including stand-alone stores and e-commerce. In 2010, China had 457 million internet users, with 35.1% of those shopping online through mobile devices rather than computers. Byron Lee, director of the Hong Kong Trade Development Council, said that Emporio Armani opened its online store in China this year and added that Shangpin.com obtained exclusive rights to the luxury brands Van Cleef & Arpels and Montblanc from the Richemont Group.

Case Studies on Marketing Strategy

In providing a case study of successful entry and marketing strategies in China, Mark Greiz explained that there is a pyramid of brands, with mass market at the bottom, middle market speciality in the middle, and premium prestige names at the top. He pointed out that L’Oreal is pursuing a multi-brand strategy, with brands in each of these tiers, and he believes that, depending on their marketing objectives, companies are best positioned either at the bottom or the top tiers, because of the lucrative potential of China’s mass and luxury markets.

In order to succeed in the Chinese market, Greiz recommended that companies localize marketing strategy either through acquisition of local brands or localization of the firm’s product offerings. Product localization is evident in brands like Hermes and Johnson & Johnson, which bought Beijing Dabaou Cosmetics Co. Ltd. In 2008, Shiseido and Levi’s are creating offerings suited to Chinese consumer buying behavior and taste preferences. Companies that do not localize run the risk of alienating the Chinese consumer by not offering brands that suit their preferences. For example, American Apparel could do a better job of localizing the Chinese language pages it created on its global web portal. A person entering its Chinese website at http://americanapparel.net/intl/china.html in October 2011 would find that clicking on a link such as “Legalize LA” on the homepage would redirect them to a page written in English. According to Greiz, rather than simply crafting several Chinese language pages on a corporate site, foreign brands can create more meaningful marketing communications in China by using advertisements which identify more closely with their target Chinese market; establishing Chinese language blogs to engage and interact with them; and focusing efforts on Chinese social media sites. Utilizing effective creative treatment and designing appropriate media mix strategies are needed to meet the linguistic, cultural, consumption, and behavioral patterns of the market.

The other key element stressed by Greiz is to strive to connect emotionally with the Chinese consumer. For example, Adidas’ advertisement during the 2008 Olympics invoked nationalism when it depicted Chinese athletes hoisted above the crowd, making it a favorite of Chinese locals. Adidas demonstrated in this campaign that, by understanding the dreams and aspirations of the Chinese consumers, identifying with their needs and wants, as well as empathizing with them, brands can develop en emotional connection with them. It is through such localized marketing that brands will become meaningful to Chinese consumers.

Lee also described Levi’s launch of its successful “Modern Original” campaign that specifically targeted the young Chinese-Asian markets, encouraging them to express their own originality.

Hong Kong’s Role as an Entry Point to Mainland China

As a business center long recognized for its resilient economy, ideal location, and dynamic people, Lee pointed out that Hong Kong attracted L-Occitane, Prada, and Samsonite to launch their initial public offerings there. Swiss watchmaker Les Montres DeWitt, and German jeweler Wellendorff debuted their first flagship boutiques in premier area shopping malls as both their testing ground and launch base for future expansion into the mainland market. Gap, Forever 21, American Eagle Outfitters, and Apple Inc., are the latest retailers to plan or open outlets in Hong Kong.

Lee continued that Hong Kong is a lifestyle trendsetter for China as well as a shop window to the world of brands for the Chinese, noting that 23 million Chinese mainland tourists visited Hong Kong in 2010, that 87% of the mainland’s middle class follows Hong Kong’s latest trends, and that more than 70% learn about the latest products, fashion, and fads through this metropolitan city.

Through trade shows, online marketplaces, product magazines, world-class facilities, Asian trend makers, and partnerships with international companies, Hong Kong has the platforms to foster the development of the fashion and creative industries and prepare these industries to enter mainland China.

In view of China’s emergence as the world’s engine of growth, the ascendancy of its middle and upper classes, increasing discernment of luxury goods, efforts to develop and mature its local economy, budding modern infrastructure, asset in Hong Kong as a gateway to mainland China’s market, embrace of new distribution channels, and eager response to effective promotions, China is well-positioned to nurture its blooming consumer market.

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