China Insight: First-half Results Show Tough Time for Apparel Sector
Chinese apparel companies are having a tough summer due to ongoing lockdowns, and are searching for a winning formula to get through what is expected to be a hard winter.
First-half results from some of China’s leading apparel firms, as well as national economic operation data from the National Bureau of Statistics, show the roller coaster the industry has been on over the last two years. After suffering a massive loss of nearly $300 billion during the pandemic shock in 2020, the sector rebounded to achieve a good performance last year only to slide back again in the first half of 2022.
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The recurrence of COVID-19 has impacted China’s entire economy: In the first half of this year, the country’s consumer price index (CPI) rose 1.7 percent on a year-over-year basis. GDP in the first half rose 2.5 percent year-over-year thanks to the timely resumption of work and production. However, this was far below the original target set at the beginning of 2022 for growth of 5.5 percent.
As for local apparel companies’ results, the majority have not reached expectations and China, one of the world’s textile powerhouses, faced a “dismal” market in the first half. It has been difficult for firms that have not achieved a certain scale to survive the recent pandemic, which has been an unpredictable loop of lockdown and store closure, resurgence and then back in lockdown. Firms have been squeezed between declining sales and rising costs of operation, supply chain and raw materials. A sharp drop in profits in the first half appears to be the inevitable result for apparel groups focused on physical stores, either in direct-to-consumer or in traditional retail business models.
Apparel firms’ revenues drop, activewear market bucking the trend
Taking Peacebird as an example, net profit in the first half of 2022 is expected to be about 133 million yuan, or $19.7 million, a year-over-year decrease of about 68 percent. Sales of Semir Garment decreased by about 13 percent on a year-over-year basis, while net profit decreased by 80 to 86 percent compared with the same period of the previous year. Ellassay released a performance forecast: its estimated net profit is about 47 million yuan, or $6.9 million, a year-over-year decrease of about 75 percent. Meters Bonwe data shows that its warehouse at Shanghai could not deliver orders due to the lockdown; the net loss in the first half of the year was between 620 million and 680 million yuan, or $91.8 million to $100.7 million. Anzheng Fashion Group reported that its net profit for the first half of the year was 15 million yuan to 21 million yuan, or $2.2 million to $3.1 million, a year-over-year decrease of 74 percent to 81 percent. Although Dazzle Fashion, a member of the “2 billion revenue club,” has not released financial statements for the first half, its first-quarter performance already showed the pressure: the group’s first-quarter net profit was 150 million yuan, or $22.2 million, a year-over-year decrease of 23 percent; the decline of direct-to-consumer turnover led to a drop in gross margin to 77 percent.
But even in the depressing first half of 2022, when the overall industry’s net profit saw steep declines, there are still surprise winners in the activewear category.
Anta Sports reported on July 11 that its retail turnover in the first half of 2022 recorded midsingle-digit percentage growth compared with the same period in 2021, but retail turnover in the second quarter saw a year-over-year decline in the midsingle digits. Its subsidiary Fila’s retail turnover also saw a low-single-digit year-over-year percentage decline, while all other brand retail sales increased by 30 percent to 35 percent year-over-year.
Another sportswear giant, Li-Ning Group, has not reported its first-half results, but its operating figures for the first quarter showed that on a year-over-year basis, same-store sales across its platforms grew by 20 percent to 30 percent, retail direct-to-consumer channels grew at a mid 20 percent to 30 percent rate and e-commerce channels rose at a mid 30 percent to 40 percent rate. In addition, figures indicate that the group’s snowboarding series launched on the occasion of the Beijing Winter Olympic Games has been successful.
KongLei/Courtesy
Digital empowerment to be deepened with retail innovation and multiproduct line strategy
Throughout China’s apparel sector, companies with a high proportion of physical retail have inevitably been affected by factors such as lack of customer flow. Not only is shoppers’ desire to buy apparel weakened due to the pandemic, physical stores lose their preferred status as a result of the repeated lockdowns. In addition, enterprises with more direct-to-consumer channels have better cost control in a market that is seeing ongoing declines, which helps to stabilize gross profit margins. At the same time, a flexible product line for large apparel groups is one way for them to grow even during adversity: Gaining insight into the consumer demand and psychological changes of the post-COVID-19 period, categories like outdoor activewear can spark sales, boosting even the biggest companies.
It is an indisputable fact that the uncertainty created by the current pandemic has accelerated the transformation of the traditional apparel retail industry. On the one hand, digital empowerment of retail requires in-depth practice: increasing the sales ratio of e-commerce platforms can not only reduce the operational risks of physical stores but also enables brands to attract both existing and potential consumers. On the other hand, the only constant under great change is change: The change in market demand might be short-term, and domestic textile enterprises belong to a traditional industry with a relatively conventional business model. In a shorter market cycle, business shifts inside traditional apparel firms are as hard as turning a big ship in one step — only flexible risk management and timely market forecasts can allow the company to move upstream.
For the current global fashion industry, digitalization is no longer a new word. However, many traditional apparel companies only provide e-commerce options, which is a sort of adding “online” shelves instead of attracting consumers. For Chinese apparel companies, transformation cannot be solved simply by investment and acquisition, nor can the sole use of livestream e-commerce open up the incremental market. The development of online channels requires a true understanding of consumers’ needs, whether to take approaches like new platforms, community marketing, etc., or to profit from the trend of outdoor sports such as camping, surfing, hiking and cycling in the post-epidemic era. Only by adapting to the market in a timely manner can consumers be convinced of a brand’s DNA.
International brands keep confident, internal circulation market competition enters a new era
While Chinese local fashion brands are facing a challenging time, international companies remain confident in the Chinese market even if it still has not regained its previous momentum. In early July, the world’s largest flagship store of Maison Margiela celebrated its grand opening in Shanghai: with an area of more than 5,380 square feet, the “deconstruction” and “the making of unfinished” concept is integrated into the store’s design; a special coffee shop, Maison Margiela Café, has attracted fashionistas to create social media buzz. The Maison Margiela store is part of a major development by its parent company, Italian luxury giant OTB Group, which had four of its leading brands enter Shanghai’s Nanjing Road — Jil Sander’s first flagship store in China, Marni’s first concept flagship store in the country, and Amiri’s first flagship store in Asia in addition to the Margiela store.
Denni Hu/WWD
Looking forward to the second half of the year, the risk of stagflation in the global economy continues to rise and it will not be easy for the domestic apparel industry to fully recover within a few months. But the competition between international brands and local ones is creating a new market dynamic. For Chinese apparel companies, it is vital to increase competitiveness, adapt flexibly to the market, deeply implement digitalization, understand consumption trends and launch unique products in order to complete the transition to a new phase of growth.
Editor’s Note: China Insight is a column prepared by WWD’s sister publication WWD China aimed at providing insights into developments in that market.
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