China Insight: Reading the Signals of Where China’s Fashion and Beauty Markets Are Headed

Investment, consumption and export are the “three driving forces” of economic growth. In November, a crucial month for the fashion industry, the major industry events also reflect the future of the sector in China: the fifth China International Import Expo (CIIE), a global economic and trade event to promote high-quality development; the “Double Eleven Shopping Festival” that is responsible for most of the KPIs of many fashion brands throughout the year, and the investment projects completed in the industry. All of these mapped China’s attitude and initiatives in dealing with the current complex environment, one filled with uncertainties: global inflation, COVID-19 curbs and shrinking demand.

Facing a complex internal and external environment, the key question discussed at these events: Can China’s fashion and beauty industry maintain its momentum?

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In previous years in beauty, makeup has been the superstar in China’s new consumption patterns, seeing waves of upgrades, brand segmentation, new retail transformation and the rise of Chinese products. But this year, Chinese beauty companies accustomed to relying on ODM cosmetics saw a dramatic plunge in orders due to weakening demand. Many manufacturers have claimed that “survival is the priority.”

But it isn’t only the beauty sector that has experienced a downturn, the apparel industry is having a hard time as well.

In the first three quarters of 2022, China’s apparel industry was buffeted by spiraling costs, weak demand and high inventories. With an overall slowdown in production and sales growth, many companies saw reduced profitability. Nor are things expected to improve in 2023, when a continued decline in demand and intensified international competition will create even greater hurdles for clothing exports.

By reviewing the recent major industry events, is it possible to find some indication of the future of the fashion industry in the world’s second-largest economy with 1.4 billion consumers? Are there any signs of stable growth and recovery?

Imports: China and the world need each other

At the beginning of November, the fifth CIIE attracted 145 countries, regions and international organizations and 46,100 visitors. The intended turnover of this year’s CIIE was $73.52 billion, an increase of 3.9 percent over the previous one, reflecting the attractiveness of the Chinese market despite the current complex situation.

As the first event linking China and the world after the 20th National People’s Congress of the People’s Republic of China, the fifth CIIE gave clear signals from the government regarding international trade: an unwavering commitment to an opening up and opening at a higher level. For the fashion industry, especially the luxury sector, the emerging markets in Asia Pacific have been the key regions and important engines of growth. How can brands continue to satisfy consumers with a high net worth of $656,800 or even those of higher incomes with net worths of more than $1.4 million? For luxury groups seeking a breakthrough, it is a segment that can’t be ignored.

However, the Chinese market hasn’t been as strong as it was in 2020 and 2021, and has even declined to a degree not seen in recent years. For example, in the six months to June 30, LVMH Moët Hennessy Louis Vuitton saw significant gains in Europe and the U.S., but experienced “severe double-digit declines” in China. Richemont’s jewelry division grew more than expected in the first half to Sept. 30 but also witnessed double-digit sales declines in China. Kering Group, whose sales rose 23 percent year-on-year in the first half, concluded that the Chinese market was “improving but still unstable” after a strong global retail performance that offset losses in the second quarter in China.

Still, the country is too important of a market to ignore and this year, China’s official “invitation” to the world with the CIIE received positive responses from global fashion and beauty giants. LVMH, Kering, Richemont, Tapestry, Fast Retailing, Inditex, Nike, L’Oréal, Shiseido, P&G and other fashion groups were all present.

The president of LVMH Greater China, Andrew Wu, repeatedly mentioned the “openness, integration and interaction” of this year’s CIIE and interpreted the theme of LVMH’s participation as “reconnection” to echo the event’s theme of “CIIE: Openness.” The four dialogues — themed “New Connection With the World,” “New Connection With History,” “New Connection With Culture” and “New Connection With Youth” organized by CIIE — also showed the contributions of international luxury groups in sharing ideas and promoting global communication and cooperation.

As Ray Dalio, founder of the Bridgewater Fund, said, “China is going through some major changes, and most people are seriously misinterpreting them.” The collective participation of international fashion giants in the fifth CIIE reflects their interpretation of the Chinese market to some extent.

Investment: acquisition of international brands by Chinese companies

Facing shrinking demand together with rising raw material costs due to global inflation, capital is acting more and more sensible despite the gloomy market. At this point, the move by Chinese companies to acquire international brands for all cash has become a market booster.

Last month, Chinese high-end beauty group Ushopal acquired British luxury care brand Argentum, while this month Baozun acquired Gap’s Greater China business. The fashion industry, especially listed companies, has been witnessing a range of acquisitions as the end of the year approaches. The acceleration of Chinese companies’ acquisition of foreign brands’ businesses in China shows their confidence in the country’s domestic demand.

In fact, capital shifts and resource reorganization are the most direct manifestations of the changes in the fashion industry. As a tested and effective strategy to achieve market expansion, the integration of international brands via acquisitions/M&A is one of the best ways for Chinese fashion companies to increase their valuations.

Gap, which entered the Chinese market before Zara and H&M, sold its Chinese operations to Baozun, a leading Chinese e-commerce agency founded in 2007 and listed on Nasdaq since 2015. This triggers memories of two past acquisitions made by Chinese companies: Private equity firm CK TongRong acquired the China business of Dutch fast-fashion brand C&A two years ago and Anta acquired part of the trademark operating rights of Fila in China in 2009.

The acquisition of foreign brands by Chinese companies, which have explored successful models in their existing businesses, is aimed at achieving revenue growth by combining core competencies through acquisitions/M&A. This seeking of a second growth curve is considered a positive move to open up the territory in the current market.

Consumption: no more worship of GMV growth figures

Unlike in past years, this year’s Double Eleven Shopping Festival did not release the total gross merchandise value of major e-commerce giants. Taking a closer look at the official statements of the major platforms, one finds mostly phrases like “maintain a stable and good momentum, the transaction scale is the same as last year” and “surpassed the industry growth rate and set a new record.”

Trudy Dai, president of Alibaba’s business-to-business group, said, “The economy is undergoing a major transformation and everyone is seeking reassurance amidst uncertainty.” In fact, China’s online consumer market, which stopped “fetishizing” GMV reports as early as last year, is already transitioning from the blind worship of numbers to the pursuit of healthy, stable growth and quality development.

However, this year’s situation is indeed more complicated, with the COVID-19 epidemic repeatedly raging in various parts of China. Following Hong Kong, Shenzhen, Shanghai and Beijing have been hit most severely, and even Beijing’s top luxury department store — which had surpassed Harrods’ pre-pandemic performance for the first time in sales in 2020, racking up more than 17.7 billion renminbi, had to shut down recently. Although it resumed business the next day and postponed store celebrations to a week later, its business was affected.

Facing pressure in their brick-and-mortar businesses due to the ongoing lockdowns, online sales have become the “last hope” for fashion brands to hit their fourth-quarter and even full-year performance targets. In the digital battlefield, the most talked-about news in early November were the new joint venture between tech giant Tencent and state-owned telecom operator China Unicom, and state-owned China Mobile’s strategic cooperation with e-commerce platform JD.com. The presence of state-owned capital is expected to bring fundamental strategic adjustments and upgrades to the digital economy. While for the time being it involves only the technology sector and has not yet been seen in the consumer sector, this is a new shift in the market.

First metaverse space launched in Taobao livestreaming space in 2022 (Double Eleven Shopping Festival).
First metaverse space launched in Taobao livestreaming space in 2022 (Double Eleven Shopping Festival).

However, different forces have emerged in the fashion consumer sector’s leading platforms. Tmall, which leads in fashion categories such as apparel and beauty, launched “TaoLive City,” aimed at helping brands enter the metaverse and build their social currency. Meanwhile, Jingdong Luxury continues to make efforts on the brand side, becoming the first company to fully cooperate with nine LVMH firms, with the turnover of labels such as Bulgari, Celine, Fendi and Loewe increasing 12 times year-on-year, and the luxury bags, shoes and boots category growing more than 180 percent year-on-year.

Editor’s Note: China Insight is a monthly feature from WWD’s sister publication WWD China analyzing trends in the Chinese market.