Like it or not, the future of China as a market or sourcing base for Western fashion companies remains one of the most heated debates in 2023. University of Delaware's associate professor of fashion and apparel studies, Dr Sheng Lu, uses GlobalData's apparel brand and retail filings to investigate.
China is a US$300-$350bn annual fashion retail market, but its economic growth has slowed amid various new uncertainties in recent years. Likewise, while China continued to serve as the largest source of apparel for many Western markets statistically, its prospect is shadowed by the ongoing trade and geopolitical tensions with the United States, increasing competition from other exporting countries, and fashion companies’ switch to nearshoring.
This article objectively evaluates Western fashion brands and retailers’ latest China strategy, hoping to contribute to the informed debate. By leveraging GlobalData’s corporate filing tool, around 30 leading fashion companies’ quarterly financial reports and earning call transcripts published between 1 November and 31 December 2022, were analysed.
The results suggest several themes:
First, Western fashion companies unanimously ranked the Covid pandemic as their top concern for China. Many companies reported significant sales revenue and profits loss due to China’s draconian “zero-Covid” policy and lockdown measures. For example:
· Tapestry says: “For Greater China, sales declined 11% due to lockdowns and business disruption… as a result, we have tempered our fiscal year 2023 outlook based on the expectation for a delayed recovery in China.”
· Adidas says: “With Great China… we continue to see several market-specific challenges that are affecting our entire industry. The strict zero Covid-19 policy with nationwide restrictions remains in place amid more than 2,000 daily new Covid-19 cases in November. As a consequence, offline traffic is subdued due to the imminent risk of new lockdowns.
· Under Armour says: “Ongoing impacts of the Covid-19 pandemic and related preventative and protective actions in China…have negatively impacted consumer traffic and demand and may continue to negatively impact our financial results.”
· VF Corporation says: “The performance in Greater China…continues to be impacted by widespread rolling Covid lockdowns and restrictions as well as lower consumer spending.”
· Puma says: “Covid-19-related restrictions are still impacting business in Greater China, and higher freight rates and raw material prices continue to put pressure on margins.”
Notably, despite China’s most recent Covid policy U-turn, most fashion companies expect market uncertainties to stay in China, at least in the short run, given the surging Covid cases and policy unpredictability. For example:
· PVH says: “While we remain optimistic about our business in China, it continues to be a challenging environment as restrictions have once again intensified in the fourth quarter of 2022.”
· Nike says: “So we’ve taken a very cautious approach in our guidance to China, given the short-term uncertainties that are there.”
· Abercrombie & Fitch also listed China’s Covid situation as one of their top risk factors: “Risks and uncertainty related to the ongoing Covid-19 pandemic, including lockdowns in China, and any other adverse public health developments.”
Second, NO evidence shows that fashion companies are decoupling with China. Instead, Western fashion companies, especially those with a global presence, still hold an optimistic view of China as a long-term business opportunity. For example:
· Inditex, which owns Zara, says: “We remain absolutely confident about our opportunities there (in China) in the medium to long term. Fashion demand continues to be strong in China. For sure it will remain a core market for us for Inditex.”
· Ralph Lauren says: “China provides not only the successful blueprint for our elevated ecosystem strategy globally; it also represents one of several geographic long-term opportunities for our brand…We continue to see near and long-term brand opportunities in China.”
· Lululemon says: “On China, we remain very excited…we remain very, very excited about the potential and the role that will play in quadrupling our international business with Mainland China.”
· Nike says: “We have remained committed to investing in Greater China for the long term.”
· Adidas says: “On China, clearly, we believe in as a midterm opportunity in China… And then when the market opens up (from Covid), we believe, the western brand is well-positioned in China again, and we can start growing significant in China again.”
Meanwhile, Western fashion companies plan to make more efforts to localise their product offer and cater to the specific needs of Chinese consumers, especially the young generation. The “Made in China for China” strategy could become more popular among Western fashion companies. For example:
· Nike says: “We believe the best way to capture demand in China is to serve consumers in a locally relevant way… And our team continues to drive China for China capabilities like delivering hyper local product design and localising marketing content creation… We’ve been very focused on youth in China, the young consumer, both kids and Gen Z.”
· VF Corporation says: “China is a significant opportunity…(We are) really pushing decision-making into the regions and providing more and more latitude for local-for-local decision-makings around product, around storytelling, certainly staying within the confines or the framework of the brand strategy, but really giving more freedom and more empowerment to the regions.”
· Adidas says: “Both our local creation centre and in-house marketing agency are already driving an increased degree of localisation… we are moving away from the previous activation model centred around lifestyle influencers and shift gears to its social, communities, membership and closer to the point of sale.”
Third, China stays one of the most frequently used apparel-sourcing destinations. However, often, China is no longer the largest apparel supplier in volume, overtaken by China’s competitors in Asia, such as Vietnam and Bangladesh. For example:
· According to Lululemon: “Approximately 40% of our products were manufactured in Vietnam, 17% in Cambodia, 11% in Sri Lanka, 7% in the People’s Republic of China, including 2% in Taiwan, and the remainder in other regions.”
· Children’s Palace says: “We import a vast majority of our merchandise from foreign countries, primarily Bangladesh, Ethiopia, Cambodia, Vietnam, India, and China.”
· VF Corporation’s top suppliers include Vietnam (13%), China (8%), Bangladesh (5%) and India (5%).
· According to Levi’s, only 2% of its products come from China.
On the other hand, fashion companies still heavily use China as a sourcing base for textile materials. The result suggests diversifying textile raw material sourcing would be more complicated and slower. For example:
· Guess says: “During fiscal 2022, we sourced most of our finished products with partners and suppliers outside the US and we continued to design and purchase fabrics globally, with most coming from China.”
· Lulumemon says: “Approximately 48% of the fabric used in our products originated from Taiwan, 19% from China Mainland, 11% from Sri Lanka, and the remainder from other regions.”
· Columbia Sportswear says it sources most of its finished products from Vietnam, but “a large portion of the raw materials used in our products is sourced by our contract manufacturers in China”.
Fourth, fashion companies are concerned about the growing supply chain risks associated with sourcing from China, from trade tensions and geopolitics to forced labour. Unsurprisingly, some companies plan to reduce apparel sourcing from China further to mitigate the risks. For example,
· Express lists “geopolitical risks, including impacts from the ongoing conflict between Russia and Ukraine and increased tensions between China and Taiwan” as one of their main risk factors.
· Chico’s FAS says its “reliance on sourcing from foreign suppliers and significant adverse economic, labour, political or other shifts (including adverse changes in tariffs, taxes or other import regulations, particularly with respect to China, or legislation prohibiting certain imports from China)” constitutes a risk factor.
· Guess says: “We have been reducing our dependency on China sourcing, particularly for our US business, and mitigating potential tariffs’ risks without compromising the quality of our products, while improving costs.”
· Tapestry says: “Since fiscal 2019, the US and China have both imposed tariffs on the importation of certain product categories into the respective country, with limited progress in negotiations to reduce or remove the tariffs. The company continues to take strategic actions in response to the current environment and remains committed to driving selling, general, and administrative expenses (SG&A) savings.”
says: “As it relates to China for us specifically, we had low
double-digit exposure to China this past year. We’re down to single-digit
exposure in product next year (in 2023).”
By Just Style