CHINA A REPORT FOR BFA MEMBERS

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1 CHINA A REPORT FOR BFA MEMBERS SUMMARY As a result of the fact-finding trip in March, there are the following conclusions relevant to SME footwear companies 1. There is a definitely a market for British branded product, the more premium the better. Much of the non-premium footwear on sale is very safe and there is an opportunity for edgier, more colourful styling, retailing in UK terms at There is a more obvious opening for any footwear made in Britain 2. Various routes to market are available. These include : a) A limited amount of multi-brand shops b) Concession arrangements in departmental stores c) Conventional wholesale business via shows and/or agents and distributors d) E-commerce e) An interesting launch platform we met 3. There are some genuinely interesting leads to be followed up 4. Trade Mark squatting is a major issue and no-one can ignore it. 5. Success can only come through a high level of commitment, patience and management attention. It is not for the faint hearted. By way of follow up, the BFA in collaboration with UKTI and UKFT will organise a seminar in London where delegates will not only hear some detailed proposals but will be able to meet representatives of iqubator, a Shanghai based company that helps launch SME size companies into China. The Seminar will also cover recommendations on Exhibitions, a new multibrand operation and an unusual European branded shopping mall concept. I will also be speaking directly to individual members that might be interested in following up on specific leads INTRODUCTION China as a market for UK Fashion Competitively few UK fashion brands are in the market at present. Burberry at the luxury end is clearly the most visible with its own shops throughout China in high end malls. A number of UK fashion designers are represented

2 in the high end multibrand shops (Lane Crawford, IT and Joyce) but these shops barely number 20 outlets across HK, Beijing and Shanghai. There are a few (but a growing number) of independent boutiques featuring UK designers. Other UK fashion and clothing brands seen in high end malls across China include Thomas Pink, Gieves and Hawkes, Kent and Curwen and Henry Poole (most of which have gone into China through their HK base). Clarkes has been comparatively successful as have a number of other shoe producers (Churches, John Lobb, Dr Martens, Startrite) and premium high street brands like Karen Millen, FC UK and Ted Baker are gradually featuring in more malls. Top Shop is about to open its first store in Hong Kong and Stella McCartney is opening her first store in Beijing. The internet is playing an increasingly important role in both promoting fashion and giving access to buy and sites such as Net-a-Porter and Glamour are delivering luxury and premium brands into the market. However, everywhere we received the impression that the market is on the cusp of change: A real appetite for new/international brands Young people educated overseas are coming back to China and are hungry for international brands (and are educating their parents to explore them) The customer is being influenced by magazines, celebrities and internet bloggers and becoming increasingly knowledgeable about fashion The wealthy are considering their purchasing more carefully, they are looking beyond the obvious super-brands to less obvious, high quality apparel and accessories often with a strong design USP or interesting back story However, there was a continued demand for international accessories (that demonstrate status) particularly in second and third tier cities which were less well served by retail outlets but where there were lots of people with money to spend "Made in UK " or at least "not made in China" helps command a higher price and will ensure less likelihood of being undercut on the internet from illegal factory run-on product Interest in acquiring design and other services to develop China brands Lots of talk about the opportunities/demand in second and third tier cities but this needs balancing with the apparent current paucity of decent multibrand stores within the premier price bracket The traditional routes to market including setting up own monobrand shop (often through a JV or franchise), through one of the few multi-brand shops, or through a Hong Kong trading partner are still valid options but new opportunities/routes to market include: The government is encouraging international brands into the market and the development of tier 2 and 3 cities which encourages mall

3 development and devices like bonded warehousing etc (and sometimes in a misguided way eg through the International Brand Management Centre!) There are a growing number of mall / property developers seeking interesting new brands Continued steady growth in multibrand stores (IT Group and Joyce both planning new stores) or through department stores like Central Support organisations like IQubator in Shanghai are offering a supportive service facilitating gradual entry to the market. Chic Beijing and possibly MICAM Shanghai are possible credible trade shows for international brands seeking partners in the market Hub Hong Kong - a new trade show focusing on fashion, accessories and design setting up this August to meet the appetite for new brands More niche boutiques appear to be opening in China Traditional trading/partnering operations are seeking to develop new business lines - by either expanding their coverage beyond say homewear into fashion or accessories or by developing an online presence Points raised about the internet included: The internet is offering more access to fashion (Net-a-Porter, Asos, Neiman Marcus on-line, Glamour, T Mall) and sales in this area are expanding fast UK companies manufacturing already in China have an opportunity to sell product through the various well regulated internet platforms (although manufacturing in China also run the increased risk of illegal product run offs) If you have an on-line platform in China your customer will expect to be able to talk to customer service The challenges to China remain an issue. They include: Sizing, fit, colour, design, labelling requirement etc - designers and brands need to adapt product for the market (Korean designers, often UK trained, were seen as particularly successful in the market as they understand the China market better than most). Cost of import % plus distribution and sales tax meaning a minimum of approx 60% mark up on the wholesale price (which makes most fast fashion difficult to market on price) Finding the right partner / retail position. Lots of property developers/malls or trading companies diversifying from their traditional products are interested in partnering/working with international brands but this needs to be done with caution as they do not understand luxury retail or brand development. Lack of talent supporting the fashion industry (poor buying/retailing expertise was mentioned by several groups as was poor customer service) with most experience coming from Hong Kong

4 companies. Lots of staff turnover in the sector Customer preference for monobrand stores - even department stores are laid out as a series of individual stores. Need to put significant investment into marketing support for your brand in China (probably over 2-3 years) in order to make an impact. IP - trade mark squatting was seen as a problem by most companies - some of whom actively help their brands develop strategies to deal with this (including changing the trade mark to' xxx of London' etc). Interesting to see that even quite legitimate companies are sometimes in danger of stepping very close to being seen as trading off (ie by representing a brand name above a shop but including little of that brand's product within the shop) and manufacturing brands for China which didn't exist elsewhere (by packaging goods from say Italy into a brand for China - not illegal but something a genuine brand would want to be aware of before agreeing for their own store to be situated in the same mall). This is something companies need to watch and ensure that their partners in market understand how to represent their brand properly. Need to consider China as several separate markets - not only do the north and south (and to a certain extent the east and west) have different tastes, sizing etc but they will have different distribution, mall operators etc At most meetings we tested what our hosts thought of British fashion and where there might be more we (government/industry) could do to promote our companies in China. The responses were generally very consistent : UK fashion seen as quality with a good reputation in China (but behind Italy and France) Italian and French governments were more supportive of their companies in China (this included support for trade events/promotions). Korean design was seen by many as fastest growing international influence in the country Visa issue was mentioned as influencing buying of Italian and French brands over British Menswear was seen as a really strong area we could push more - heritage angle and Savile Row reputation seriously underexploited in China Traditional craftsmanship, British Lifestyle (and Warrant Holders) all mentioned by several hosts as an asset Many companies pledged their support and interest in being involved in an initiative to promote British Heritage Menswear.

5 CHINA IMPLICATIONS FOR THE UK FOOTWEAR INDUSTRY Retail This is the key route to market. The retail scene is dominated by large shopping malls selling near identical luxury brands but often linked with department stores selling mid range goods. In the case of footwear, this is predominantly local product with some European brands often run by local concessionaires or jv partners (Clarks, Ecco, Estate). Some business opportunities here. There is a major expansion of mono brand stand-alone stores such as Zara, GAP, Mango, H & M, M & S, IKEA and now Topshop opening up the market further. This development is probably only open to premium brands already know internationally eg Churchs, John Lobb and Dr Martens. There is a very limited evidence of High Street multi brand shops and nothing like an Office, Schuh and Kurt Geiger and the better end is dominated by Hong Kong based retailers such as Joyce, IT and Lane Crawford. We identified a few realistic opportunities for BFA members to consider - see the Action section below. Retail growth is slowing as the luxury market flattens a bit and rents, wages and competition increases. 8% growth however is still being achieved. There are a number of factory operators that have become involved with retailing and who are receptive to giving exposure to European labels. Belle with its deal with Clarks is the best example but there are others emerging and we met a few. Wholesale It appears that comparatively little business is transacted in the conventional European way eg exhibitions, sales agents/distributors but the annual CHIC fair in Beijing might have potential and the Shanghai Fashion Fair and the new MICAM Shanghai shows are being analysed. These shows seem to generate limited interest from regional agents and distributors but there are trading houses that are worth developing a relationship with and whom would handle the wholesaling side. This needs further on-the-ground research by UKTI and its partner China-Britain Business Council (of which we are members). E.commerce This is huge business but mainly suits established companies trading from a reasonably substantial base in China, where they also hold stock. However,

6 the conventional wisdom is that e.commerce is a part of the launch package for any new brands to the market. European e.commerce platforms such as Net-a-Porter are becoming active and this provides another way in if companies already have listings on these sites. General Part of the joy of trading with China is the bureaucracy surrounding testing, fulfilment, import duties, the language and regional specific practice. A degree of hand holding is therefore needed and this can be supplied by China based partners, by iqubator type companies and CBBC. There are some commercial opportunities for groupings of brands/designers offering a package deal sort of arrangement with either retailers or trading houses. We have some leads on this. ACTION 1. We will help organise a Seminar in May to lay out the various options for companies to decide upon 2. We will approach several member companies with some immediate opportunities for them to consider 3. We will find out more about CHIC, MICAM Shanghai and other exhibitions with 2014 in mind. 4. We will commission UKTI/CBBC to do more research on possible trading house partners. The one we saw was not fashion orientated enough but the formula was interesting 5. We will spend more time exploring the iqubator concept and how it would work for our members prior to the May meeting 6. It may be appropriate for some of the high grade menswear companies to be involved with a Government backed Great promotion in Autumn Depending on the results of the May Seminar, it may be feasible to organise a UKTI subsidised Trade Mission to China in late 2013/early 2014 If any BFA member companies would like to discuss any elements of trading with China, please contact me. The BFA is determined to give as much assistance as possible to any of its members keen to explore this extraordinary market.

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