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China's Rag Trade Looks Ragged Wall Street Journal
Nike, Timberland and Other Global Brands Feel Effects as Slowdown Reaches Consumers.
Vipshop Holdings Ltd. unloads unwanted inventory from domestic and global clothing brands at a discount to Chinese consumers. Unfortunately for the global apparel industry, the company's business has never been better.
More than 3,000 brands have turned to Vipshop this year to peddle clothing they couldn't sell, up 58% from a year earlier, says Yang Donghao, Vipshop's chief financial officer. Second-quarter sales more than tripled to $135.3 million from a year earlier, edging the four-year-old company closer to posting a profit.
"Last year it was just the sportswear companies that had too much," Mr. Yang says, citing lingering inventory from the 2008 Olympics in Beijing. "This year it is much broader."
China's slowing economic growth is making its way to the consumer, hitting sales growth in a market where apparel makers have been investing in expansion. Overall retail sales rose 14.2% in September from a year earlier, slower than the 17.7% climb in September 2011, according to China's National Bureau of Statistics.
Nike Inc. last month said China sales were weakening, and VF Corp., which makes such brands as Lee jeans, The North Face outdoorwear and Timberland boots, said it has increased discounts on some products.
"The hypergrowth era for the apparel industry in China is over, period," says Han Weiwen, a Shanghai-based partner at Bain & Co. "The Chinese economy is not going to go back to double-digit growth."
Many of the world's retailers have looked for growth in China, which Boston Consulting Group projects will account for 30% of the global fashion industry's growth in the next five years. U.S. handbag and apparel maker Coach Inc. last year said it was pushing for China to become the company's No. 1 market in the following three years, opening bigger stores to showcase its knitwear and coats in addition to its purses. U.S. department-store chain Macy's Inc. in May invested $15 million in a Chinese website.
Chinese brands have borne the brunt of the slowdown. Inventory for Shanghai Metersbonwe Fashion & Accessories Co. rose to as much as 50% of its total net assets last year, and the company's shares have dropped about 25% this year. A spokesman didn't respond to requests for comment.
Casual-wear company Giordano International Ltd., which is based in Hong Kong and has roughly 1,350 outlets in China, reported that first-half sales from its China operations fell 4% from a year earlier.
But multinational apparel makers aren't immune, as Nike showed when the U.S.-based sportswear maker said orders for the fiscal quarter through August slipped 6% in China from a year earlier.
"The reality is that many brands will have to deal with too much inventory, having overproduced and now risking their brands," says Ben Cavender, a senior analyst at China Market Research Group.
Sales of clothing and apparel in China jumped 15% last year to 460 billion yuan, or roughly $73 billion, according to Boston Consulting Group.
VF said it offered deeper discounts in China this year to clear out inventory. "The broader environment is promotional, so you have to join in or you lose [market] share," says Aidan O'Meara, president of the company's Asian-Pacific division.
The U.S.-based company told investors at a recent meeting that it expected mainland and Hong Kong sales including the Timberland brand it acquired last year to rise 23% this year to $460 million. Last year its China sales rose 73%, adjusting for the Timberland purchase.
Giordano is overhauling its marketing strategy, creating more Chinese advertising campaigns to focus on regions and cities, and has been controlling its inventory, says Chief Financial Officer Dominic Irwin. The company for more than six months delayed buying new clothing for its stores, he says.
"We're not looking at major upturn, due to economic conditions in China," Mr. Irwin says. "Everyone's sales are down."
The slowdown is relative, however, because a ballooning middle class in the region will boost apparel sales over the long term, Mr. O'Meara says. About 247 million people in China, or 18% of the population, qualify as middle class, meaning their households spend between $10 and $100 a day on average, says Brookings Institution economist Homi Kharas. If current patterns continue, the number would soar to 607 million by 2020.
Some apparel makers are reporting upbeat results in China. Sweden-based retail chain Hennes & Mauritz AB said sales in China, where it operates 109 stores, jumped to 3.8 billion Swedish kronor ($568.6 million) for the first nine months of the year, up 56% from a year earlier. Generally, such fast-fashion retailers—which order clothing weeks ahead, rather than months—are doing better than rivals because they can respond quickly to changing markets and don't have to unload as much inventory through sales, says Vincent Lui, a Hong Kong partner for Boston Consulting Group.
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