China’s Apparel Market, 2013

December 2013 Fung Business Intelligence Centre

Table of contents

2

Market overview

Competitive landscape

Distribution channels

Key highlights

Snapshots of sub-sector

4

14

20

30

38

Executive summary

Today, China’s apparel market is one of the fastest growing markets in the world. The rise of e-commerce and the boom in fast fashion have fuelled the fast growth of the market in recent years.

Department stores and specialty stores are the major distribution channels for apparel in China. Meanwhile, online retailing is growing fast. More online apparel retailers offer a wide variety of clothes at discounted prices. Moreover, fast delivery and easy return policy make online retailing more appealing to consumers, especially those younger and tech-savvy ones. With better online shopping environment, online sales are set to continue to fuel the development of China’s apparel market.

Leading international fast fashion players such as H&M, ZARA, and Forever 21, are all expanding fast in the country. With the rapid growth of the urban middle class, the demand for fast fashion is increasing. Fast fashion brands are often welcomed by many department stores and shopping malls as they can draw foot traffic.

Under the current sluggish domestic economic conditions, the majority of mass consumers are still price-sensitive. However, premiumisation will be the theme when consumers are becoming more sophisticated. Also, facing the challenges from international fast fashion players, domestic apparel players are finding their way out by upgrading themselves.

3

Market overview

4

Market overview China’s apparel market is fast-growing; consolidation is gathering pace

China’s apparel market is today one of the fastest growing markets in the world.

Retail sales value continued to soar in 2012, albeit slightly slower growth against 2011. − According to the National Bureau of Statistics of China (NBS), the total retail sales of clothing, shoes, hats and textiles* by

enterprises above designated size** in 2012 rose nominally by 18.0% year-on-year (yoy), slowing from 24.2% yoy growth in 2011.

Unit price continued to rise

− According to the NBS, the clothing price index has increased by 3.1% yoy in FY2012, higher than FY2011 of 2.1% yoy. − However, since September, the price increase was decelerated due to the heavy promotions of the apparel enterprises.

5

377.6 462.2

587.4

795.5

977.8 25.9%

18.8%

24.8% 24.2%

18.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

200

400

600

800

1,000

1,200

2008 2009 2010 2011 2012

Billion yuan yoy growth (%)

103.4

102.7

102.3

101.9

102.5

102.1 102.3

102.5 102.5

102.3 102.2 102.2 102.3

101.0

101.5

102.0

102.5

103.0

103.5

104.0

Exhibit 1: Total retail sales of clothing, shoes, hats and textiles by enterprises above designated size, 2008 - 2012

Exhibit 2: Monthly clothing price index, September 2012 – September 2013

Source: NBS Source: NBS

*“Clothing, shoes, hats and textiles” replaced the previous “clothing” category in the NBS announcement in 1-3Q09

** Enterprises above designated size refer to enterprises with annual sales of 5 million yuan or above and with an employment of or over 60.

Market overview China’s apparel market is fast-growing; consolidation is gathering pace (Cont’d)

Operating costs such as retail rentals climb and competition stiffens, which put more pressure on apparel players.

The inventory problem in 2011 was eased a bit in 2012 due to the better economic performance and an overall increase in consumption.

Market consolidation is now gathering pace. Apparel retailers with distinctive brand positioning, responsive supply chains, effective distribution and pricing strategies will stand out from the rest.

6

18.48%

14.37%

12.25%

9.46%

0%

5%

10%

15%

20%

1Q12 1H12 1-3Q12 FY12

Exhibit 3: Inventory level of enterprises above designated size, 1Q12 – FY12

Source: NBS

Market overview Annual expenditure on clothing increased steadily

Urban households − The annual per capita disposable income of urban households grew by 9.6% yoy to 24,565 yuan in real terms in 2012. − Urban households spent 1,823.4 yuan on clothing in 2012, accounting for 10.9% of the total annual expenditure.

Rural households

− The annual per capita net income of rural residents grew by 10.7% yoy to reached 7,917 yuan in 2012. − Rural households spent 396.1 yuan on clothing in 2012, accounting for 7.3% of the total annual expenditure.

7

10.37 10.47 10.72 11.05 10.94

6.68 6.62 6.83 7.21 7.32

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0

500

1,000

1,500

2,000

2008 2009 2010 2011 2012

%

Yu

an

Per capita urban annual expenditure on clothing

Per capita rural annual expenditure on clothing

Share of clothing in per capita urban annual expenditure

Share of clothing in per capita rural annual expenditure

Exhibit 4: Per capita annual expenditure on clothing* of urban and rural households, 2008 - 2012

Source: NBS

Exhibit 5: Retail sales volume of selected apparel categories in 100 major retailers in China, 2012 – 1H2013

8

2012 1H2013

Million pieces yoy %

growth Million pieces

yoy %

growth

Men’s suit 6.88 9.62 4.07 10.65

Men’s shirt 5.40 -8.90 2.75 -6.28

T-shirts 6.34 -12.51 2.61 -13.73

Ladies’ wear 86.24 7.54 46.61 6.44

Children’s wear 20.65 3.19 12.48 16.86

Denim wear 2.51 -11.75 1.12 -13.62

Jackets 3.11 5.33 1.66 -4.89

Thermal clothing 5.56 -5.74 2.34 -11.64

Leather wear 0.72 11.51 0.39 19.16

Trousers 5.84 -4.42 3.00 -6.54

Knitted

underwear 31.56 1.16 16.19 -2.55

Woolen wear 11.88 -8.45 6.48 2.44

Source: CNCIC

Ladies’ wear is the major contributor to total apparel sales and volume according to a report by the China National Commercial Information Centre (CNCIC)*.

Market overview Ladies’ wear is the largest sector

2012 1H2013

Retail sales

(billion yuan)

yoy %

growth

Retail sales

(billion yuan)

yoy %

growth

Overall 116.27 12.33 61.15 6.85

Menswear 23.43 11.09 11.91 1.76

Ladies' wear 34.98 13.12 18.13 7.37

Children's wear 3.06 15.34 1.66 11.49

Exhibit 6: Retail sales of selected apparel categories in 100 major retailers in China, 2012 – 1H2013

Source: CNCIC

* The China National Commercial Information Centre (CNCIC) monitors monthly sales of selected sectors in 100 major retailers.

The market for men’s formal wear and sportswear are comparatively more mature. Growth slows and the competition is getting intense.

On the other hand, children’s wear, particularly babies’ wear, and outdoor wear have a larger growth potential. In the meantime, competition is still limited.

9

Exhibit 7: Forecast for selected apparel categories

Note: Sportswear excludes footwear and accessories; outdoor wear exclude footwear and equipment. Sources: A.T. Kearney, “Winning China's Apparel Market”, May 2013

Apparel category Growth forecast

(CAGR 2012-2016)

Men's formal wear 8-10%

Sportswear 10%

Women's casual wear 15%

Men's casual wear 17%

Babies' wear 20-25%

Outdoor wear 20-30%

Market overview Children’s wear and outdoor wear have the largest growth potential

Analysis of sub-sectors Ladies’ wear: Foreign fast fashion brands are expanding fast

Purchasing power of women has been increasing significantly in the past years and consumers are trading up. Consumers aged 20-35 are especially willing to spend on apparel.

Ladies’ wear market is highly segmented - casual wear, fashion for young ladies, fashion for mature women, fast fashion, business casual, high-end fashion, etc.

Fast fashion market is growing fast. Consumers are becoming more familiar with international fast fashion brands which offer stylish clothes at affordable prices.

− Foreign fast fashion leaders H&M, ZARA, Uniqlo, and Forever 21 have been expanding rapidly in the China market, starting first in tier-1 cities and gradually penetrating into lower-tier cities.

• Around 2/3 of ZARA’s stores are located in the tier-2 and tier-3 cities as of 2012. • H&M management said China will soon replace Germany as H&M‘s largest overseas market.

10

Analysis of sub-sectors Menswear: Slowing; designs are growingly fashionable

Growth of menswear market is slowing and market share is diminishing.

However, business causal wear is increasing in popularity, and the design is more fashionable than ever before. Apparel companies that specialized in business causal wear such as Septwolves, JOEONE, and Lilang are witnessing increasing sales growth.

Similar to ladies’ wear, fast fashion for men is gathering pace.

11

Analysis of sub-sectors Children’s wear: Strong growth momentum; consumers are brand-conscious

Population of children aged 0-14 years totaled 222.87 million in 2012, accounting for around 16.5% of the total population in China. The Chinese leaders have just relaxed the national “one-child policy”, allowing couples to have two children if one spouse is an only child. China is expected to add 1-2 million extra kids over the next few years. This certainly is good news for retailers of children’s wear market.

As income levels rise, Chinese parents are now more willing to spend money to make their children look fashionable. Consumers are generally more brand-conscious and drifting towards fashion and lifestyle brands. Children’s wear made from soft and comfortable materials and casual children’s sportswear with cozy fabrics and loose-fitting designs have become the market trend.

Although consumption needs have gradually switched from practical considerations to aesthetic and fashion considerations, the majority parents in China still look for “value for money” products.

Competition in the children’s wear sector is getting fierce. Many apparel brands have tried to ride the booming children’s wear market by extending their product lines.

− Foreign examples: Baby Dior, D&G Baby, ARMANI Junior, Gucci − Domestic examples: Xtep, Anta, 361 Degree, Li Ning, Stepwolves, Baoxiniao, JNBY, GXG

12

Analysis of sub-sectors Sportswear: Highly concentrated but slowing market; competition is fierce

Sportswear market in China is a relatively concentrated and mature sub-sector.

Domestic sportswear brands are dominating the lower-tier cities while international brands are mainly concentrated in tier-1 and tier-2 cities. However, leading players such as Nike and Adidas are adjusting their market strategies and paying more attention to the lower-tier cities. Cut-throat competition in sportswear is expected to set off.

Recently, overstocks of obsolete inventory have troubled some leading domestic sportswear companies. Overstocking was largely attributable to irrational business expansion of some players in recent years. Many have rolled out aggressive expansion plans in terms of retail outlets and product portfolio expansion as well as investment in marketing campaigns and the products they offer are highly similar to each other. Hence, sportswear suffered from a big slowdown in sales growth in 2012.

− Domestic players Li Ning, Anta, 361 Degree, Xtep, and Peak all suffered from sales declines in 2012 of -17%, -18%, -15%, -12% and -29% in 2012 respectively.

13

Competitive landscape

14

Competitive landscape Domestic brands dominate the mass market

Domestic brands dominate the mass market, especially in lower-tier cities and the rural market. Generally they have more extensive sales channels than their foreign counterparts.

Exhibit 8 and 9 show the top 10 domestic apparel enterprises by sales revenue and profits in 2012. Most enterprises in the list are from Jiangsu, Shandong and Shanghai.

15

Ranking Company Headquarter/

Base 1 Youngor Group Co., Ltd 雅戈爾集團股份有

限公司 Ningbo

(Zhejiang) 2 Hongdou Group Co., Ltd 紅豆集團有限公

司 Wuxi

(Jiangsu) 3 Heilan Group 海瀾集團有限公司 Wuxi

(Jiangsu) 4 ShanShan Enterprise 杉杉投資控股有限公

司 Shanghai

5 Bosideng Co., Ltd 波司登股份有限公司 Suzhou

(Jiangsu)

6 Shandong Ruyi Science & Technology

Group 山東如意科技集團有限公司 Jining

(Shandong) 7 Qingdao Jifa Group 青島即發集團 Qingdao

(Shandong)

8 Shandong Sinoer Group Co., Ltd. 新郎希努爾集團股份有限公司

Weifang

(Shandong) 9 China Ballon Apparel Group 巴龍集團有限

公司 Qingdao (Shandong)

10 Weixing Group 偉星集團有限公司 Taizhou (Zhejiang)

Exhibit 8: Top 10 domestic apparel enterprises by sales

revenue, 2012

Source: China National Garment Association (CNGA), compiled by Fung Business Intelligence Centre

Ranking Company Headquarter/

Base

1 Bosideng Co., Ltd 波司登股份有限公司 Suzhou

(Jiangsu)

2 Youngor Group Co., Ltd 雅戈爾集團股份有限公司

Ningbo

(Zhejiang)

3 Heilan Group 海瀾集團有限公司 Wuxi (Jiangsu)

4 China Ballon Apparel Group 巴龍集團有限公司

Qingdao (Shandong)

5 Hongdou Group Co., Ltd 紅豆集團有限公司

Wuxi (Jiangsu)

6 Shandong Sinoer Group Co., Ltd. 新郎希努爾集團股份有限公司

Weifang

(Shandong)

7 Semir Group Co., Ltd. 浙江森馬集團有限公司

Shanghai

8 Dongdu Textile Group 江蘇東渡紡織集團有限公司

(Jiangsu)

9 Shandong Ruyi Science & Technology

Group 山東如意科技集團有限公司

Jining

(Shandong)

10 Taizilong(Holdings) Group Ltd. 太子龍控股集團有限公司

Zhejiang

Exhibit 9: Top 10 domestic apparel enterprises by profits,

2012

Competitive landscape Domestic brands dominate the mass market (Cont’d)

16

Exhibit 10: Most Valuable Apparel Brands in China, 2013

Source: Hurun Research Institute, compiled by Fung Business Intelligence Centre

Rank in

2013

Rank in

2012 Brand

Brand Value

(billion yuan)

% of

Market

Value

Product

catogory Headquarter

1 3 Anta 安踏 4.0 30% Sportswear Xiamen

(Fujian)

2 1 Metersbonwe 美特斯

邦威 3.8 32% Casual wear Shanghai

3 4 Bosideng 波司登 3.8 25% Down wear Suzhou

(Jiangsu)

4 2 Semir 森馬 3.7 28%

Casual

wear/Children

wear

Shanghai

5 5 Septwolves 七匹狼 2.0 25% Menswear Xiamen

(Fujian)

6 15 Aokang 奧康 1.9 27% Leather shoes Wenzhou

(Zhejiang)

6 6 Joeone 九牧王 1.9 22% Menswear Quanzhou

(Fujian)

6 9 Youngor 雅戈爾 1.9 23% Menswear Ningbo

(Zhejiang)

9 7 Heilan 海瀾之家 1.8 25% Menswear Wuxi

(Jiangsu)

10 N/A Fuanna 富安娜 1.7 30% Home textile Shenzhen

11 N/A Luolai 羅萊 1.5 27% Home textile Shanghai

12 8 Lining 李寧 1.4 35% Sportswear Beijing

12 11 Xtep 特步 1.4 25% Sportswear Quanzhou

(Fujian)

Exhibit 10 shows China’s most valuable apparel brands in the Hurun Most Valuable Chinese Brands 2013 list. The number of apparel brands decreased from 17 in 2012 to 13 in 2013.

Anta has replaced Metersbonwe to top the list of the most valuable Chinese apparel brand. Its brand value amounted to 4.0 billion yuan in 2013.

Fuanna and Luolai are new entrants in the 2013 ranking.

Most of the brands in the list are specialized in the menswear and sportswear, while the two new entrants are specialized in home textile.

Apparel companies in Fujian and Zhejiang are very strong in branding; 6 out of the top 13 most valuable apparel brands are based in these two provinces.

Competitive landscape Domestic brands expand overseas to seek new growth opportunity

The domestic apparel industry has suffered sluggish development due to the slowing global economy and rising costs. Chinese apparel retailers are increasingly active in expanding overseas to maintain growth.

A number of apparel retailers have opened stores in overseas markets in recent years. − Metersbonwe opened a flagship store in London in July 2013, and plans to open more stores in Paris, New York and

Tokyo within 3 years*.

Some retailers seek to enlarge market share by engaging in M&A activities.

− As part of its expansion into Europe beginning with the UK, Bosideng is set to acquire UK retailer Greenwoods Menswear for approximately 40 million yuan**. Bosideng widens its men’s wear operations in the UK and unveil its down jacket lines to the UK consumers with the newly acquired store fronts provided by Greenwoods.

17 * http://www.linkshop.com.cn/web/archives/2013/266539.shtml

** http://www.chinagoabroad.com/en/deal/other/bosideng-acquire-uk-mens-wear-firm-greenwoods-rmb-40-million

Competitive landscape Foreign brands are more popular in the mid- to high-end market

In general, domestic brands dominate the mass market while foreign brands are usually more popular in the mid- to high-end market. Consumers with higher apparel budgets, and those living in tier-1 and tier-2 cities are more likely to buy foreign brands. However, this may be attributed to fewer choices of foreign brands in lower-tier cities.

According to CBRE, in terms of store numbers, China has already become the most important international market for major fast fashion brands. It is the largest international market for ZARA and Uniqlo, and the largest international market in Asia for H&M and C&A. Exhibit 11 shows the store count of the four major fast fashion brands in China during from 2010 to June 2013.

18

211

125

135

52

0 50 100 150 200 250

Uniqlo

ZARA

H&M

C&A

2010

2011

2012

1H13

Exhibit 11: Store count of fast fashion brands in China, 2010-1H13

Source: CNCIC, CBRE, company websites; compiled by Fung Business Intelligence Centre

Competitive landscape Foreign brands dominate the luxury apparel market

Foreign players dominate China’s luxury apparel market. According to the Hurun’s Chinese Luxury Consumer Survey 2013, the most popular brands among Chinese millionaires were all foreign brands as shown in Exhibit 12 and 13.

19

Brand

1 Chanel

2 Burberry

3 Dior

4 Giorgio Armani

5 Ports

6 Gucci

7 LV

8 Versace

9 Givenchy

Exhibit 12: The most popular female brands among Chinese millionaires, 2013

Exhibit 13: The most popular male brands among Chinese millionaires, 2013

Brand

1 Giorgio Armani

2 Ermenegildo Zegna

3 Hugo Boss

4 Burberry

5 Versace

6 Dunhill

Source: Hurun, “Chinese Luxury Consumer Survey 2013”, January 2013 Source: Hurun, “Chinese Luxury Consumer Survey 2013”, January 2013

Domestic players only have minimal presence in the luxury market. NE·TIGER is one of the domestic luxury brands that has a nationwide awareness.

Distribution channels

20

Distribution channels Department stores and specialty stores - the main channels for apparel

distribution

Department stores and specialty stores remained the main channels for apparel distribution in 2012, accounting for 36.8% and 28.5% of market share respectively.

Other emerging new retail formats such as discount stores, outlets, and multi-brand stores are gaining increasing attention in recent years. Online retailing channel is also growing fast.

21

Exhibit 14: Sales of Apparel by Distribution Format, 2012

Department stores, 36.80%

Apparel specialist retailers, 28.50%

Grocery retailers, 15.50%

Leisure & personal goods

specialist retailers, 10.50%

Other non-grocery retailers,

1.20%

Non-store retailing, 7.50%

Source: Euromonitor, “Apparel in China”, May 2013

Department stores Main channel for mid-to high-end apparel; facing increasing challenges

from other retail formats

Department stores are still the main channel for mid- to high-end apparel. Usually around 50% of the total revenue of department stores come from apparel sales.

Many department store operators in China adopt the concessionary operating model. − Commission rates for most department stores on apparel is around 20% depending on the positioning of brands. − Pitfalls: poor differentiation of department stores − According to Guangdong Academy of Social Sciences, brand overlapping rate for apparels, shoes and cosmetics among

the surveyed department stores in Guangzhou reached 41.5%, 41.3% and 45.8% in 2012, respectively.

Offline and online integration is increasingly popular. Facing the fast growing online market, many apparel brands have launched their own online shops (e.g. Banggo.com by Metersbonwe) or have started to operate a shop on third-party online B2C platforms such as Tmall.

22

Department stores Main channel for mid-to high-end apparel; facing increasing challenges from other retail formats (Cont’d)

In recent years, department store operators are facing fierce competition from shopping malls, specialty stores, and online stores. To survive and trump the competition, many department store operators have embarked on multiple strategies to enhance core competence.

− Reviewing their merchandise mix more frequently − Launching private labels/ proprietary brands − Refining their market positioning strategies to cater to specific customer demographics

• Wanda Department Store is reportedly planning to open three luxury department stores in Wuhan, Taiyuan and Changsha.

• Beijing Wangfujing Department Store (Group) Co Ltd has introduced its sub-brand hQ (hQ 尚客) to target younger and trendy consumers.

• Dalian Dashang has opened Mykal (麥凱樂) to target higher-end consumers and Kingson Department Store (千盛百貨) to target trendy youngsters.

23

Specialty stores Increasingly preferred by brand owners

Specialty stores are increasingly preferred by apparel brand owners.

When operating specialty stores, brand owners can have more control over price, promotion activities and store design and layout, and thus can better deliver their brand message to customers and provide them a unique shopping experience. Specialty store operators are usually more profitable than concessionaires in department stores as they do not have to pay high commissions.

A majority of apparel brand owners and manufactures in China adopt a combination of both self-operated stores and franchised stores. Very often, they manage the stores in key cities or strategic/ profitable locations directly while leaving other locations to franchisees as distributors.

Direct-operated stores are more efficient when compared with franchise stores. Normally, the average sales per store of direct-operated stores is higher than that of franchise stores. Direct-operated stores are also better managed than franchise stores in terms of visual merchandizing, image control, and price control.

In general, the more high-end the brands are, the more likely the brand owners will directly control the stores. However, it is relatively more costly to run direct-operated stores because of the higher capital expenditure (CAPEX) and higher rental costs in key cities.

According to Euromonitor, outlet growth for apparel specialist retailers has been impressive, at almost 10% in 2012, the highest among all distribution channels in China. The number of outlets of apparel specialist retailers amounted to 512,800 in 2012.

24

Hypermarkets/ supermarkets Target at lower- to middle-mass

Hypermarkets and supermarkets offer comprehensive range of products covering non-food and food items, providing shoppers with a one-stop shopping environment. Most hypermarkets are located in shopping malls near residential areas and in city centres. The popularity of hypermarkets stems from its low price appeal.

Hypermarkets and supermarkets are popular retailing channels for lower-priced apparel; many of which are with poor brand recognition or unbranded. Unit price is generally lower than that in department stores.

Their target customers are those who always purchase daily necessities and look for convenience in buying apparel in a one-stop shopping environment.

25

Online retailing Fastest growing retail channel in China for apparel

Online retailing is the fastest growing retail channel for apparel in China. It is observed that many consumers are shifting their apparel spending offline to online. − According to iResearch, the total

online apparel transaction value in China grew remarkably by 56% yoy to reach 318.9 billion yuan in 2012.

“Showrooming” is becoming increasingly popular. Physical stores in shopping malls and department stores have now more or less become the “fitting rooms” for consumers to try on products before they purchase online.

26

Exhibit 15: Online apparel sales, 2008 – 2016 (estimates)

Source: iResearch, "China Online Clothing Shopping Research", January 2013

18.1 48.0

105.2

204.9

318.9

429.1

567.9

727.4

920.0

14% 18%

23% 27% 27% 27% 27% 28% 28%

126%

166%

119%

95%

56%

35% 32% 28% 27%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

0

100

200

300

400

500

600

700

800

900

1000

2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e

Online apparel sales (billion yuan) Share of the total online retail sales (%)

Growth (% yoy)

27

Exhibit 17: Online apparel sales by category, 2012

Ladies' wear, 41.1%

Menswear, 17.6%

Footwear, hats and accessories,

12.5%

Maternity, babies' and

children's wear, 5.1%

Homewear, 3.7%

Sportswear and outdoor wear,

6.3%

Others, 13.8%

Source: iResearch, "China Online Clothing Shopping Research", January 2013

Exhibit 16: The most popular categories consumer purchased online, 2012

Apparel, bags and accessories,

26.5%

Consumer electrionics,

18.4%

Cosmetics products, 5.0%

Maternity and babies' products,

4.4%

Books, music and videos, 3.0%

Others, 42.7%

Source: iResearch, "China Online Clothing Shopping Research", January 2013

Apparel was the largest contributor among all categories and accounted for 27% of the total online sales in China.

Online retailing Ladies’ wear is the most popular sub-category consumers purchased online

Among all the apparel items purchased online, ladies' wear was the most popular category, with a market share of 41.1% in 2012.

The “maternity, babies’ and children’s wear” category is expected to become the next growth driver for online retailers.

Online retailing The C2C segment represents the largest segment for China’s online apparel

retailing; but the B2C segment is becoming increasingly important

The C2C segment represents the largest segment for China’s online apparel retailing. But the B2C segment is becoming more and more important.

28

Exhibit 18: Share of online apparel retailing in terms of transaction value, 2011-2012 (estimates)

79.90% 61.20%

13.70%

16.80%

6.30%

22.00%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012

B2C self-operated retailers

B2C platforms

C2C platforms

Source: iResearch, "China Online Clothing Shopping Research", January 2013

Exhibit 19: Market share of B2C Apparel market, 2012

Tmall, 66.0% Vancl, 7.2%

JD.com, 6.6%

Tencent B2C platform, 2.8%

Suning , 2.2%

Vipshop, 1.8%

Moonbasa, 1.4%

Amazon China, 1.1%

V+, 1.0%

M18, 0.9%

Okbuy, 0.8% Dangdang, 0.7%

Mbaobao, 0.6% Others, 7.1%

Source: iResearch, "China Online Clothing Shopping Research", January 2013

With a market share of 66%, Tmall is the absolute market leader in the B2C segment for apparel retailing. Vancl and JD.com come second and third, with 7.2% and 6.6% market share respectively.

Online retailing The millennial consumers are the major online apparel shoppers

The millennial generation is the most frequent online shoppers and online shopping has increasingly become a way of life for many of them. Diversity of choice, lower prices and convenience in terms of payment flavor younger consumers to spend their extra money buying clothes online.

Deloitte’s survey results show that consumers aged 20-30 spend the most on apparel online, female consumers spend more than male consumers.

29

29

* Note: Number of respondents who are sure about their online purchasing percentage Source: Deloitte, "China's consumer markets", June 2013

Exhibit 20: What proportion of your total apparel purchasing is done online? (Survey 2012, n = 1566*)

Key highlights

30

Existing adult-focused apparel retailers are flocking to the children’s wear market

China’s consumer expenditure on children’s wear per household have been increasing significantly. Seeing the promising outlook of the children’s market, existing adult-focused apparel retailers have flocked to the lucrative segment in recent years.

− Domestic players in men’s and women’s apparel such as Septwolves, Metersbonwe and Semir have already set foot in the children’s wear market by offering children’s wear product lines.

− Sportswear retailer Li Ning also introduced a sub-brand “Li Ning Kids” in 2010; the retailer expected to reach a store expansion rate of 40% yoy in 2013.

− Multinational luxury brands D&G, Armani and Burberry all launched children’s wear series in China in 2011 following Dior’s successful rollout of its “Baby Dior” series in the country in April 2010.

31

Outdoor wear market is still in its infancy but seeing huge potential

China’s outdoor wear market is in its infancy. According to A.T. Kearney, only around 5% of the population engage in outdoor sports (compared to 50% in the United States). Having said that, it is observed that outdoor sports is gaining popularity in China; meanwhile consumers are buying outdoor apparel for everyday use, favoring their comfort and functionality.

Currently, the outdoor sports market in China is largely dominated by a few foreign brands such as The North Face, Columbia, and Jack Wolfskin. Most other new players still have very small market shares.

32

Department store operators launch their own private apparel labels or proprietary brands

Launching private labels or proprietary brands is a good way for retailers to build core competence. Private labels or proprietary brands may also increase profit margins and improve customer loyalty.

− Wangfujing Department Store unveiled a new store brand “Fashion Headquarters” in Beijing in September 2010 targeting fashion consumers aged 18-35.

− Guangzhou Grandbuy Department Store launched a new store brand “Grandbuy Fashion” (GBF) in G.T. Land Plaza in Guangzhou in December 2010 targeting the youth segment.

− New World Department Store launched its private labels “XII” and “N Only” in 2010. − Intime Department Store launched another proprietary brand “Mangano” in West Lake Intime Department Store in

September 2012 after introducing “Justin Intime” in 2009.

However, private labels in China are not that successful in terms of revenue generated and

popularity among consumers.

− Many Chinese department store operators reflected that they lack professional and experienced buyers to select appropriate products

− Retailers do not have the knowledge on manufacturing and marketing their own product lines. − The capital investment is huge. − Department stores have to hold inventories and incur more risks than operating under the current concessionaire

model. − The operating model is very different, which requires another type of management skills.

33

Shifting from aggressive store expansion to improving store productivity

Some apparel retailers have adopted aggressive expansion strategy to boost brand visibility in the past. However, they now find that many stores are unprofitable.

Facing the slowing growth of the whole apparel market, some brands owners have started to close the unprofitable stores and focus on improving their core competence

− It was reported that Mango has closed nearly 40% of the stores in China, contracting from 200 stores in end-2012 to less than 120 stores in 2013. On the other hand, it has announced a new retailing model focused on megastores, and its first megastore in China will soon be located in Shanghai.

Ways to improve core competence

− To upgrade themselves by investing more on R&D − To launch more long-term marketing campaigns for brand building − To introduce new store brands and retail concepts − To launch differentiated merchandise assortments − To accelerate format revamps and innovation

34

Lower-tier cities become the major battlefields for apparel enterprises

Competition in tier-1 and tier-2 cities has become fiercer, and the market is gradually saturated. Many apparel brands have shifted their focus to lower-tier cities to avoid toe-to-toe competition. Meanwhile, new supply in the core areas of these cities is limited.

− For instance, Adidas and H&M have announced plans to increase their presence in lower-tier cities by 2015. − Fast fashion brands continued to increase their presence in tier-2 and tier-3 cities (see Exhibit 21 and 22).

New marketing strategies may be necessary to target consumers in lower-tier cities. Brands that are trying to get in the market will also be confronted with new challenges, such as managing structural shifts in the current inventory mix and building efficient logistics infrastructure.

35

Tier-1 cities, 41.10%

Tier-2 cities, 34.80%

Tier-3 cities, 24.10% Tier-1

cities, 35.40%

Tier-2 cities,

36.70%

Tier-3 cities,

27.90%

Exhibit 21: Proportion of number of stores in tier-1, 2 and 3 cities of the 4 key fast fashion brands* in China, December 2011

Exhibit 22: Proportion of number of stores in tier-1, 2 and 3 cities of the 4 key fast fashion brands in China, June 2013

Source: CBRE, “China retail: A changing landscape”, October 2013 Source: CBRE, “China retail: A changing landscape”, October 2013

* 4 key fast fashion brands include Uniqlo, ZARA, H&M, C&A.

“Lifestyle brands” are gaining attention

The increasingly sophisticated Chinese consumers have been looking to express identity and status through fashion. Consumers are also seeking more unique and personalized shopping experiences, and also brands that can represent themselves on an emotional level.

Lifestyle brands are increasingly popular. These brands attempt to embody the values and aspirations of a group or a culture for purposes of marketing. In China, the concept of lifestyle brands is still young but it is gaining increasing attention. Consumers generally value unique store experiences offered by the lifestyle brands.

Selected examples of overseas lifestyle brands: − Abercrombie & Fitch (A US casual wear retailer for youngsters) − Anthropologie (A US brand offering women's clothing, accessories and home décor) − Muji (A Japanese brand selling home products, apparel, cosmetics, etc.)

36

Apparel retailers are putting more efforts to “go green”

“Green economy”, with new energy sources and environmental protection as its main thrusts, will be another market grabbing factor for apparel brands.

− Li Ning and its suppliers jointly developed the coffee charcoal fabric, which is a functional material with environmentally friendly features. It started to apply this fabric on its products.

− Baoxiniao has put efforts in R&D for eco-friendly laundry services. It aims to minimize pollution to the environment by adopting different eco-friendly washing techniques and reducing the use of chemical detergents in the laundry process.

37

Snapshots of sub-sector performance

38

Background

The China National Commercial Information Centre (CNCIC) conducts monthly survey to around 200 major department stores* in China to study the performance of different cosmetics sub-sectors.

In this newsletter, performance of the following product sectors is examined: − Ladies’ wear − Menswear (men’s suits and men’s shirts) − Children’s wear − Sportswear − Ladies’ underwear

39 * It is noteworthy that the CNCIC data covers sales in major department stores only. Retailers of other formats such as specialty

stores are growing in popularity. The actual overall market share of apparel brands may deviate from the CNCIC data.

Ladies’ wear

40

Brand Market share (%)

Vero Moda 5.1

Only 4.7

Girdear 3.2

Ochirly 2.0

Marisfrolg 1.8

Jiuzi 1.6

Elegant Prosper (EP) 1.5

Ports 1.3

E-land 1.2

Teenie Weenie 1.2

Others 76.4

Exhibit 23: Ladies’ wear - Brand share of the top 10 players, 2012

Source: CNCIC

Menswear

41

Exhibit 24: Men’s suit - Brand share of the top 10 players, 2012

Source: CNCIC

Brand Market share (%)

Youngor 7.8

Shanshan 2.8

Goldlion 2.8

Romon 2.4

Jonone 2.3

Pierre Cardin 2.1

Baoxiniao 2.1

Vicutu 1.9

Sheng Long 1.5

Playboy 1.4

Others 72.8

Brand Market share (%)

Youngor 7.4

Rouse 2.9

Pierre Cardin 2.9

Goldlion 2.8

Myconch 2.4

Shanshan 2.3

Kaikai 1.9

Hengyuanxiang 1.9

Hubao 1.5

Hongdou 1.5

Others 72.5

Exhibit 25: Men’s shirt - Brand share of the top 10 players, 2012

Source: CNCIC

Children’s wear

42

Brand Market share (%) Balabala 4.4 Annil 4.1 Adidas 4.0

Nike 3.6 Les Enphants 3.0

Paw in Paw 2.1 Souhait 2.1 Dadida 2.1

Paclantic 2.0

ABC 1.8 Others 70.8

Exhibit 26: Children’s wear - Brand share of the top 10 players, 2012

Source: CNCIC

Sportswear

43

Brand Market share (%)

Nike 14.6

Adidas 14.4

Li Ning 6.6

Kappa 4.6

Nike360 4.3

Jordon 3.3

Converse 3.3

Anta 3.3

Puma 2.5

361 Degree 2.3

Others 40.8

Exhibit 27: Sportswear - Brand share of the top 10 players, 2012

Source: CNCIC

Ladies’ underwear

44

Brand Market share (%)

Maniform 8.0

Aimer 8.0

Embryform 7.5

Gujin 5.5

Triumph 5.5

Ordifen 4.5

Wacoal 4.2

Sunflora 3.6

Fandecie 2.4

Enweis 2.1

Others 48.7

Exhibit 28: Ladies’ underwear - Brand share of the top 10 players, 2012

Source: CNCIC

For more information

45

Fung Business Intelligence Centre 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Kowloon, Hong Kong Tel: 2300 2470 Fax: 2635 1598 Email: lfdc@lf1937.com http://www.funggroup.com/

© Copyright 2013 Fung Business Intelligence Centre. All rights reserved.

Though Fung Business Intelligence Centre endeavours to have information presented in this document as accurate and updated as

possible, it accepts no responsibility for any error, omission or misrepresentation. Fung Business Intelligence Centre and/or its

associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained

in this document.