Date 06-02-2014 File No. Furnit.Deisgn.2014 Our ref. FDR Case No.
1. Keywords... 3 2. Executive summary... 3 3. Macro economic and political indicators... 3 4. Consumer indicators... 5 5. Retail trends... 7 6. Fashion and clothing trends... 8 7. Conclusions and recommondations...10 Danmarks Ambassade, Beijing Side 2 af 11
China, The Royal Danish Embassy, Beijing, Furniture, Design & Retail, apparel. The main purpose of this report is to give a short introduction to the Chinese market and analyse its current and future prospect, for interested Danish companies. The main emphasis will be on describing the economy s implication for the general consumer and to give a brief analysis of the apparel market. The report finds that the Chinese market holds enormous potential for Danish companies. The economy is developing very positive and growth is expected to continue for many years, with a growing disposable income for the Chinese consumers. The apparel industry follows the general market conditions and is also looking into a period with further growth in sales. For the last three decades, China s economic performance and development has been extraordinary. After entering the new millenium China has became both the worlds largest exporter, the largest manufactorer and also succeded in surpassing Japan to be the second largest economy in the world, only surpassed by the U.S. IMF and the World Bank have forecasted that if China continues its current growth rates it will already by 2016 be the largest economy in the world, meassured in purchasing power parity. If the growth rates slows down a bit, as projected, it will replace the U.S. as the largest economy in the world- latest by 2030. It is though worth noticing that its per capita income is still only a fraction of the more developed countries, which for consumer goods companies is very important to note. As seen in the below graph, the country s GDP has grown with an average of 10 percent per year. Noteable here is that China continued showing impressive growth rates during 2008 and onwards, where most other countries where heavily affected by the worldwide recession and most other countries only experienced small or even negative growth rates. Graph 4.1 1 1 IMF statistics Danmarks Ambassade, Beijing Side 3 af 11
The fact today is that if Chinas 31 provices were regarded as independent economies, they would be among the 32 fastest growing economies in the world. The massive growth that started back in the 1970 s has its roots in bold strategies that encouraged local governments to undertake bold innovative pilot projects, which gradually were supported by countrywide market-oriented reforms. These reforms and the massive growth has benefited China a lot and over time more than 500 million people has been lifted out of poverty (The poverty rate has fallen from 65 percent to less than 10 percent today). China addresses priorities and goals in their 5-year plans 2 and for the investor it is important to note that the scope and focus of these 5-year plans have changed with time and the rapid development. When the first reforms were initiated in 1978 there was an urgent need for economic growth, which led the country initiate the above mentioned bold strategies. As China has developed, gained economic strenght, and changed into the center of world trade, these bold strategies have been replaced with a focus on balacing growth with social and macroeconomic stability. Chinas clear objective for the future is to become a modern, harmonious, creative and high-income society, which entails a lot of possibilities for western companies, even though it might slow down the growth rates we have seen the last three decades. As an example of this, a modern society in China is one that enjoys a quality of life that is on par with the western world. A modern society will have modern values, a modern economy and social structure with access to contemporary, state-of-the-art products. In the same way a creative society is one where China can produce more value products, not only more products, so that China can compete on the global market. The harmonious society is primarily aimed at social development within China, to remove barriers, eliminating social and economic boundaries while still improving the environment. To achieve all this, and to become a high-income society, China must still prioritize growth. Simply because it needs growth to enjoy a higher per capita income that is more similar to the one in advanced economies, to afford lifting more people out of poverty, to afford the enormous urbanization that is taking place and to be able to have an economy that will not be affected and send Chinese people back to 2 5-year plans is the general framework and guidelines that Chinese politicians agree on. These plans set out key objectives and goals for the coming 5-year periods. Danmarks Ambassade, Beijing Side 4 af 11
earlier days poverty when the western economies continue their struggeling with recessions and see more crises. The focus is now though on a more stable development of the economy, which focus more on harrmony, stability and creativity instead of fast growth. Going forward in time China is still expected to have impressive GDP growth rates, but they will be slower compared to the pace of today and the last three decades. From 2013-2016 an average GDP rate of 7,6 percent is expected and from 2026-2030 an average of 5 percent is expected. In the coming years Chinese GDP growth will take a few interesting turns, as structural factors in China are changing. The wages for migrant workers is expected to rise fast, which will make the income gap between urban and rural areas smaller. At the same time China will see a quite large increase in the skilled and educated workerforce, which combined with the increased wage level for unskilled labor means that China must try to advance up in the value chain. A lot of Chinas growth has earlier been derived from labor-intensified work, but with an increasing number of skilled labor and larger migrant worker cost, China must advance their pace of innovation and make their economy more open towards new technologies, as they cannot expect the same amount of growth in GDP coming from labor intensified jobs as earlier. One of the major opportunities in China will be an accelerated domestic demand for consumer goods. The middle class will be expanded, the GNI pr. Capita will increase and the poverty rate will fall even further. This means that consumers will have more money to spend on leisure activities, household goods, better health and education services etc. 3 As mentioned in section 4, the Chinese economy will continue to grow the coming years and eventually become the largest economy in the world. This will have significant importance for the Chinese consumers, as they will have more money to spend. Fact does though show that even though the Chinese economy tripled during 2000 2008, private consumptions part of GDP fell from 46 percent of GDP to 34.9 percent. In this time period, investments were the largest driver of the GDP growth. The big driver of the Chinese GDP growth will in the future not be investments however, but private consumption. Despite that there has been a strong strategic-political focus to stimulate consumption since the 12 th 5-year plan in 2008; the consumption rate has merely contracted 0.3 percentage points in the period 2008 2012. The latest 5-year plan from the government has clear and aggressive initiatives that address this matter. To sum it up briefly, there were three major reasons that made the private consumption decline. A general concern about the lack of social security in China, which made people save money instead of spending. Further, household incomes have been relatively small and lastly investments were earlier one of the most important political structural measures, which helped the Chinese economy grow. The latest 5-year plan addresses these matters by enlarging the social security package and set a serious focus on the 3 World bank, China 2030. Side 3-15 Danmarks Ambassade, Beijing Side 5 af 11
service sector, which will create more jobs and higher income, which in turn will increase private consumption. These evidence points to the fact that the Chinese government is playing an active role in promoting private consumption, and as the Chinese economy is growing at an extreme pace, as explained in section 4, the Chinese consumers are clearly an interesting target for western companies. The question though still stands how and where will the consumption take place? The increase in private consumption will mainly be focused in the major cities in China. Understanding which exact cities and regions that are developing most positive in China is important, as some cities are significantly wealthier than others. Many of the wealthy cities and regions will before 2020 reach GDP levels that are equal to whole countries in the western world. An example is the Shandong region, which in 2010 reached a GDP size equal to the one of South Korea. By 2020 this region will have a GDP that will be equal to Belgium s. When looking at the individual urban households we will also see quite dramatic changes in the income structure, which can be seen when looking at table 5.1 below. Table. 5.1 China 2010 China 2020 U.S. 2020 India 2020 Million households Affluent (More than $ 34.000) Mainstream ($ 16.000 34.000) Value ($ 6.000 16.000) Poor (Less than $ 6.000) Average Disposable Income 4.26 20.93 82.13 13.86 13.69 166.57 33.08 52.99 189.90 116.45 8.72 124.85 23.66 24.08 2.17 71.01 4.149 8.185 39.518 3.030 This table quite clearly shows that the mainstream household, which today earns between $16.000 34.000, is the one that develops the most. It will increase from 13.69 million to 166.57 million by 2020, which makes this group consist of 50 percent of all urban households. Also the affluent segment, which is the segment with the highest income, will increase with more than 16 million by 2020. Worth noticing here is that even though it is a large increase, it total only covers 6.3 percent of the total urban population and is therefore a small but interesting group. Danmarks Ambassade, Beijing Side 6 af 11
McKinsey China has looked into which tendencies/pattern the Chinese consumers will follow when they will have more disposable income available, and there is especially one trend that stands out- namely the trading up trend. To trade up means that the consumers can basically afford to replace what in a developing country is seen as a necessity or semi-necessity (food, apparel, health care, household products etc.) with a new and more expensive version of the same product, due to the fact that they do not have to buy products to survive, but can also afford products which increase their standard of living. This means that they will spend more money on themselves. Considerations such as as what they buy, what they wear, and how they wear it, will gain considerable importance. The consumer indicators do also point out areas of possible challenges for the companies. Chinese buying behaviour and Chinese culture has always differed from western and Danish norms, which are facts that companies coming into China must adapt their strategies to. The country is so large and its regions so diverse, that the different regions and consumers herein should be treated as different countries, with locally adapted strategies 4. The prosperoues economic situation in China has been known for some time, and the retail market has therefore for quite some years experienced a solid entry from big western brands; H&M plans to double their amount of retail stores, Starbucks expects 1.000 more stores by 2016 and Burger King also expects 1.000 new stores within the next 7 years. In 2013 the general Chinese retail market grew by 13,6 percent on a year-over-year basis, which is in line with earlier years performance. The total retail sales is expected to succeed the U.S. market and by 2016 it is forecasted that the sales will be around 87 percent higher than the U.S. retail market. Looking at future growth rates, the fastest growth in sales will come from third and fourth-tier cities simply because they, as mentioned in section 5, will begin to have higher disposable incomes and thereby more money to spend on consumer goods and not solely spend it on necessities. When looking at 2012 same-store sales data, which is a more reliable indicator to measure growth, as it does not contain new store openings that can increase the numbers, the retail industry experienced a minor decline in the growth rate compared to 2011, but still with impressive growth rates. The general access to the Chinese retail market for foreign brands also seems to have been made easier than earlier. This became evident in 2012 and 2013 where a few western brands were allowed to acquire 100 % of local Chinese retail stores without interference from the Chinese government. This new development is well in line with the governments intention of creating growth from domestic demand and consumption, which it among other things seeks to do by focusing and strenghtening the service sector. Even though the retail market sees solid growth rates, coming to the brick-andmortar retail scene in China is increasingly an expensive venture. In 2013, real estate prices in first-tier cities like Beijing, Shanghai, Guangzhou and Shenzhen 4 McKinsey China Danmarks Ambassade, Beijing Side 7 af 11
increased by 22%, followed by a 9,2% increase in second-tier cities and a 5,3% increase in third tier cities. In comparison, the average housing price pr square meter in first-tier cities exceed $4.949 dollars, whereas those in third tier average $1209 pr square meter 5. Further, as more and more retailers enter China and the ones that are already present open more stores, it becomes increasingly harder to find the right managers and sales assistants. The demand is simply greater than the supply, which makes the salaries increase with as much as 20 % per year for managers and roughly 10% for sales assistants. These increasing costs are at the moment contributing to squeezed margins on the retail market 67. Even though costs are rising there is no doubt that the Chinese retail market still holds a lot of potential, especially when looking at the enormous size of the population, its growing urbanization and increasing affluence. Even though big players such as H&M, Zara and Uniqlo has been on the Chinese retailmarket for many years and yearly expands with many new retailstores, the competition is still not intense, which also underlines that China as a retail market still holds a lot of potential for new entrants 8. Given the cost of traditional retail squaremeters and the embracement of digitilization among Chinese consumers e-commerce reflects a critical sales channel for market penetration. E-commerce retail has increased 66,5% from 2010 to 2011 alone, ultimately peaking $210 billion in 2013, and only shying away from the $225 billion in the U.S. Indeed, Chinese consumers have been found to spend almost double the time on mobile devices as their American counterparts 9. This level of digital embracement, thus show that companies can benefit from balancing their entry strategy between the traditional brick-and-mortar - and e-commerce retail scenes. The retail market for fashion and clothing has been growing since 2007, and this growth is forecasted to continue. From an estimated 2012 sales of $ 159 bn, this number will increase to $ 176 bn in 2016, which equals a growth of roughly 10 percent. The demand for apparels will be driven by the rising levels of disposable income, and the major demand will take place in the big cities 1011. This is well in line with statistics from the National Bureau of Statistics whom in 2013 measured that 85% percent of the total retail sales came from the urban retail sales, reflecting a 14.6% increase on a year-over-year basis. This development is expected to continue coherently with the rise of the mass-affluent mainstream household income group that arises mainly in the third and fourth-tier cities 12. As noted above, the online market for apparel will also see a significant increase in demand. This market has been growing rapidly for many years, where especially the e-commerce portal Tabao is big for apparel shopping. In 2013 China reached 5 Exchange rate at time of reference (February 2014) 1 RMB = 0,16 US Dollar 6 China Economic Quarterly, december 2013 7 Kellyservices.com.hk, Salary Guide 2013 8 Business Monitor International, retail report Q 3. 9 Booz & Company, 2013 10 The Economists Intelligence Unit 11 AT Kearney, 2013 12 Business Monitor International, Retail report Q3. Danmarks Ambassade, Beijing Side 8 af 11
618 million internet users with a penetration rate of 46% a number that is constantly increasing 13. The online market is also a good way of offsetting the increased costs that are incurring in the retail sector in general. The general online market has though been struggling with agile brands that discount their products heavily. Pacific Department Store, which is a Taiwan based store, knocked off 50% of its womenswear, cosmetics and jewellery for 17 days during one of the big Chinese national holidays in October, which was their response to an exploding development of e-commerce. Lately more online stores have continued down the same path with prices that are cut down from the normal level, which now seems to be the norm rather than the exception on the Chinese e-commerce market 14. The apparel manufactoring industry has continued to increase its exports of textiles and clothing. 2012-2013 showed exports of $255 billion, which represents a 5% increase 15. Even though the industry did continue to increase its exports, it did also see some manufactures departure from the Chinese industry, as the manufactoring costs continued to increase. The Chinese manufactoring market for apparels seems to continue to increase its focus on producing higher value products, such as design and branded apparel. In line with the prosperous retail market, described in chapter 5, China is also seeing massive growth in its apparel outlet industry. During May 2010-May 2011, 7 outlets opened, another 12 opened during the spring of 2012 and 30-40 projects are in the pipeline and could be opening between 2014 and 2016, which at the moment marks the rapid development that the Chinese outlet industry is in. The International Outlet Journal do though comment that the Chinese outlet market, even though developing rapidly, is still on a very early stage compared to the European and North American outlet market. The outlet market in China currently sees 13 major chain developers, where the 5 biggest owners (Bailian, PCS Stores, RDM, Richly Field and Outlet China Ltd.) all plan to open an average of 8 outlet centers by 2016, which is a good indicator of the development that is taking place. The outlet market is though not only a fairytale the market has already and will also in the future see failing and distressed outlet centers. Lessons from already failed centers have been that working too fast is dangerous, as it takes time to build an outlet succes. Further lessons have already shown that cannabilization is dangerous (ie. Opening outlets too close to other outlets) just like building an outlet only containing low quality brands can be dangerous in China. These years the big global brands are seriously considering and following the outlet channels, as they do all at the moment open direct-owned flagstores in a rapid speed in all major Chinese cities. Being present in outlet centers in the same cities does not always fit their strategies, as being present in a successful outlet in China requires genuine products at good discounts. The latest indicators from the market is though pointing to the fact, that the high quality centers are attracting world-class tenants and international retailers. Low quality centers are often the ones that ends up in distress 16. 13 Fastcompany.com, march 2012 14 China Economic Quarterly, december 2012 15 WTO International Trade Statistics, 2013 16 International Outlet Journal Danmarks Ambassade, Beijing Side 9 af 11
The Trade Council sees enormous potential in the Chinese market for Danish companies. Both macroeconomic-, consumer- and the specific apparel indicators point to the fact that the country is highly interesting, as they all show a positive development and great prospects for the future. The macroeconomic indicators point to the fact that China will be the largest economy in the world within the coming years, with a growth rate that continues to be on a relatively high level for many years to come. It is very interesting that the growth in the coming years primarily will come from the Chinese consumers, which means that there will be big opportunities for Danish companies to export their products to the Chinese consumer market. The apparel industry itself is also in a very positive development. Combined with the general market indicators and the consumers preference for trading up, we will see a markets that in the coming years will be driven by growing demand and rapid growth for apparel. Based on the above analysis The Trade Council therefore recommends China as a market that holds enormous potential. Danish companies entering China must though still pay attention to the big difference between the two markets and big differences between the Danish and Chinese people in general, as doing business in China is still very different from doing business in Denmark. It is more or less impossible to copy a business setupup in Denmark and replicate it in China and expect to have a success the difference between the countries and the cultures are simply too big. The Trade Council therefore recommend to team-up with a partner whom have knowledge about the Chinese market before entering, as this could otherwise be a very expensive experience. Danmarks Ambassade, Beijing Side 10 af 11
The Trade Council is a part of the Ministry of Foreign Affairs and is the official export and investment promotion agency of Denmark. The Trade Council benefits from around ninety Danish Embassies, Consulates General and Trade Commissions abroad. The Trade Council advises and assists Danish companies in their export activities and internationalisation process according to the vision: Creating Value All the Way. The work in the Trade Council follows specific procedures and quality guidelines. In this way our customers are secured the best possible quality under the varying working and market conditions at any given point of time. Ministry of Foreign Affairs of Denmark Embassy of Denmark, Beijing San Li Tun Dong Wu Jie 1 Beijing 100600 People's Republic of China Tel: +86 10 8532 9900 Fax: +86 10 8532 9999 E-mail: bjsamb@um.dk www.kina.um.dk