Analysts see snags in China private label clothing plans
China's multi-brand retailers are increasingly looking for ways to differentiate themselves from competitors
Late last month, Hong Kong-based sourcing giant Li & Fung formed a joint venture with Chinese retailers Bailian Group and Wangfujing Department Store to develop their own private label clothing brands and tap into its global supply chain. But China-based analysts believe there are considerable challenges to overcome.
Under the joint venture operating from the Shanghai Free-Trade Zone, Li & Fung will provide expertise to design, source and produce private labels and licensed brands meant to wean China’s rapidly growing middle class from the traditional preference for either well-established and expensive foreign brands, or cheap no-name products or even imitations.
According to an announcement from Li & Fung, the joint venture will develop one to three private labels and up to six licensed brands over this three-year period, and may involve the opening of up to 300 stores or store-in-stores and realise up to CNY1bn (US$161m) in sales.
"Through the introduction of private brands and exclusive brands, the joint venture will enable its retail partners to effectively increase its competitiveness by offering a different and cost effective product offering," said William Fung, group chairman of Li & Fung, at a signing ceremony at Shanghai Expo Centre.
"The joint venture also aims to introduce globally-sourced products that offer Chinese consumers a wider variety of foreign goods," he added.
China-based market researchers note that the time is ripe for private label clothing in the country but caution they are not certain the endeavour will become a convincing success.
Concerns are based on the fact that market shares are notoriously tiny – the number one player in China’s apparel and footwear market, worth CNY40 trillion (US$6.4 trillion), is Denmark-based Bestseller A/S. But the retailer had just a meagre 2% market share in 2014 despite its 1,200 retail shops in China, according to Euromonitor International.
"Private label, which mainly competes through low price offering to target price-sensitive consumers, is not so competitive in China, which may be attributed to the fact that branded products in China already cover a wide range of price segments, from high-end to low-end," Fangting Sun, senior analyst with Euromonitor, told just-style.
"In addition, the boom in internet retailing, which provides numerous products at competitive prices, [has] negatively affected private label and gained [a] huge share in the distribution. Moreover, Chinese consumers are inclined to purchase branded products to [ensure] product quality and fashionable designs," she added.
To give an idea of the difficulty in finding the right timing for the introduction of private label clothing in China, Sun said that in September 2013, domestic internet retailer, Dangdang.com, decided to shelve its plan to launch private label apparel and instead the products sold via its online apparel channel would all come from third party vendors. It was not until November 2014 that Dangdang.com finally launched its private label ‘Dangdang Cashmere Premium’ to obtain a share in the huge apparel and footwear market in China, Sun recalled.
"To venture into the highly fragmented apparel market in China, pricing, design, distribution channel and brand reputation are all very important while attractive prices may still be the major concern for consumers when considering the private label products," she said.
Both Daxue Consulting in Shanghai and Torsten Stocker, Hong Kong-based partner at management consulting firm AT Kearney, are somewhat more upbeat regarding the joint venture’s prospects, however.
While Stocker emphasised Li & Fung’s "top-notch credentials in terms of the creation, sourcing and delivery of competitive collections", Daxue Consulting pointed out that China’s younger generation is spending more and saving much less than their parents or grandparents.
This, together with the trend towards e-commerce, largely helps lesser-known brands – while higher-end brands lose a key asset through the e-commerce boom, namely their in-store VIP customer experience.
"One lesser-known aspect of the landscape that will be particularly beneficial, however, is the fact that many Chinese customers have experienced a growing case of ‘aesthetic fatigue’ for the top luxury brands, while newer, more personal brands, such as those that could be offered by Li & Fung, will appeal to both new and experienced shoppers alike," said Matthieu David-Experton, founder and CEO of Daxue Consulting.
That said, David-Experton cautioned that the joint venture partners will have to rapidly improve their store management capabilities.
"As department store retailers, they will need to make the shift from managing space to training in-store staff who can ensure their label is associated with the high quality products and, crucially, customer service," he elaborated.
In addition, John Fang, analyst with Shanghai-based China Market Research, pointed out that the main challenge for the joint venture "is to differentiate themselves from competitors to gain customer attention and loyalty".
Meanwhile, Wangfujing Department Store, as one of the three joint venture parties involved, played down the immediate significance of the new deal. Wangfujing’s communications officer Lily Zhang stressed that specific projects and programmes have not yet been finalised despite the relatively detailed nature of Li & Fung’s announcement.
"We are currently spending more energy on improving our sales channels, such as [brick-and-mortar] store and online presence, than on clearly developing private label clothing brands," she clarified.
Zhang elaborated that Wangfujing had actually launched its first private label brand in January – First Wert – covering mainly men’s shirts, neckties and scarves.
"With men’s shirts, I chose a relatively low-risk focus to test the waters," explained Zhang Jun, Wangfujing’s general manager for the private label research and development. "Compared to the other fashion categories – and particularly to ladies’ wear – it has small changes in style and therefore low inventory risks," he elaborated.
Illustrating just what a pioneering move the launch of private label clothing by a Chinese department store amounts to, Zhang Jun fielded the Chinese proverb of "avoiding taking the knife to fight your opponent’s gun" in explaining First Wert’s initial – and strategically very cautious – focus on men’s shirts.
Li & Fung is a leading consumer goods design, development, sourcing, and logistics company with about 26,000 people working in more than 300 locations in over 40 different markets. In 2014, the company ranked among Forbes’ list of the world’s most innovative companies.
Click on the following link for more detail on the joint venture: Li & Fung leads the charge into Chinese brands.
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