China’s Fashion Market in Transition: Winners Emerge As Competition Heats Up

An Evolving Consumer Landscape Reshapes The Formula For Success Dior Homme's recent Beijing runway show. Dior hopes to bank on Chinese consumers' evolving demands. (Women's Wear Daily) Amid the ongoing discussion on China’s luxury slowdown, many fashion brands are understandably concerned about what this means for their current and long-term potential in China. The immediate effect of the slowdown has been to make the market more competitive and create winners and losers. To emerge as winners in this rapidly changing environment, it’s important for brands to understand the underlying trends that are shaping the market and redefining the traditional formula for success. Evolving Consumers = Evolving Levers for Competition The leading factor in this shifting landscape is that Chinese consumers are becoming more sophisticated. While this is generally good news for premium and luxury brands, it’s resulting in an increasingly complex and competitive market with some key characteristics. Consumers are upgrading their tastes and requirements. China’s increasingly experienced consumers want to be more low-key in their spending and to differentiate themselves from their peers. This is creating opportunities for brands poised to capture this more sophisticated consumer, and challenges for those left behind as tastes change. At the same time, this trend is creating a growing divide between the demands of experienced and inexperienced consumers, a situation that brands need to skillfully navigate to fully capture their China opportunities. The omni-channel consumer is on the rise. E-commerce and social media play heavily into the decision-making process of today’s more sophisticated consumers. In recent focus groups of offline and online luxury consumers conducted by my firm, both groups followed essentially the same process of “Social media to e-commerce via mobile, to e-commerce via PC, to store visit” before coming to a purchasing decision. This was true regardless of which sales channel they ultimately used, creating a multitude of contact points that didn’t exist a few years ago—contact points that brands must be smart about managing. There’s less willingness to pay the “China Price.” Sophisticated, highly connected consumers are more aware of their options and more capable of accessing them. For example, internal benchmarking we have done at SmithStreet shows that women’s apparel prices average about 70 percent higher in China than in the United States, across brands and product categories. Consumers are acutely aware of this price difference and are ready to use a multitude of channels to bypass it, most importantly travel and overseas shopping agents. Chinese shoppers going abroad are welcomed by brand managers in Europe and the United States, but recapturing this lost revenue is one of the greatest challenges facing brands’ China organizations. Structural Challenges China’s crackdown on extravagance and rising operating costs have been well documented and there is no need to detail them here. Less talked about, however, is the paradox posed by the evolution of the e-commerce channel. While growing to $190 billion in 2012, for the most part, Chinese e-commerce remains the domain of discount-focused consumers and retailers competing primarily on price. The resulting price pressure has been felt most acutely by traditional mass-market retailers, many of whom are beginning to view e-commerce as a key source of competition. Luxury e-commerce sites such as The Outnet have been proliferating in China. Despite this focus on price, consumers are willing to spend more on individual items as they gain experience (and trust) in the online channel: the common perception of an ‘expensive’ online item has doubled from $80 in 2010 to around $160 today. With e-commerce becoming more premium, luxury brands and retailers are entering the space in increasing numbers. As they do so, they are encountering a similar challenge to that faced by their offline stores: how to cater to their loyal, omni-channel customer while at the same time attracting the rising spending power of price-focused, heavy e-commerce users. Only by addressing both groups can brands unlock the full potential of the e-commerce channel. Winners and Losers How brands are doing in the market today is largely a reflection of how well they have been able to deal with these consumer and structural trends. Hermès, for example, is posting strong growth from sophisticated consumers while Louis Vuitton is weighed down by its prominent logo, from both a consumer and a policy perspective. Hong Kong fashion conglomerate I.T is well poised to capture the rising aspirant consumer looking for the latest new trends, while mainland casualwear retailer Meters/bonwe struggles with declining consumer relevance, online competition, high inventories, and rising costs. At every point on the price spectrum, the days of “if we build it, they will come” are over: for the majority of brands, having as many locations as possible and entering a new city as soon as the real estate is available are no longer viable strategies. The formula for retail success in China is changing from a distribution-centric to a consumer-centric model, in which those brands that deeply understand their current and future customers are most likely to emerge as winners in this dynamic market. In upcoming columns, we will take a closer look at some of these consumer trends and what brands need to do to create effective consumer-centric strategies for growth, starting with consumers’ growing unwillingness to pay the China Price. James Button is a Senior Manager at SmithStreetSolutions , a growth consultancy based in Shanghai, where he works with a number of premium and luxury brands on their China entry, growth, and e-commerce strategies. Follow James and SmithStreetSolutions on Twitter. (Opinions expressed by columnists do not necessarily reflect the views of the Jing Daily editorial team.)

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China’s Fashion Market in Transition: Winners Emerge As Competition Heats Up