The last time he was in China, VF Corp.’s Terry Lay saw something that provided a new perspective on the concept of markdown.
The chairman of VF’s global jeanswear coalition stopped into a Carrefour, where “all women’s jeans were on sale for $3.50, all local competitors, none of which you or I would probably know or recognize.”
Through its Wrangler brand and other labels, VF is a dominant supplier in the mass market in the U.S. today. But in the U.S., that means selling jeans for more than five times that $3.50 price.
In China, he continued, “You’ll be hard-pressed to find denim above $9 in the mass market today — $5 drives the market. And local brands drive the market, and in some cases you have a button with no buttonhole cut. So it isn’t at all what you’d expect to find here [in the U.S.]. Frankly, when we run through the equation, we’re not sure we could buy the denim and meet that $5 price equation.”
Nonetheless, the Greensboro, N.C.-based apparel giant’s eight-year-old operations in China are profitable. Getting to that point has required climbing a steep learning curve, running the business on an entirely different model and carving out a new price niche.
In China, VF’s jeans — primarily the Lee and Wrangler brands — sell for $60 to $160, about three times their typical selling price in the U.S. This is in a country where the per-capita gross domestic product of $5,000 is just 13.2 percent of that of the U.S.
Lay estimated that in China’s 10 largest cities — the home of most of the country’s wealthy and middle-class residents and the source of most of its consumer spending — shoppers buy about 10 million pairs of jeans a year. That compares with more than 400 million pairs in the U.S. The numbers reflect a vast cultural difference.
“A bolt of denim — no one even saw that before the 1980s. And frankly, culturally, denim has not been where the Chinese have come from,” he said. “It’s so unlike when the Russian market opened and people couldn’t wait to get their hands on Levi’s, or hopefully Lee and Wrangler. It’s different here.”
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Just as the industry is different in its size and pricing, the way of selling in China would be completely foreign to the typical American apparel executive.
“Retail is quite fragmented, and it’s a quite complex animal to get your arms around,” Lay said. “The top 50 retailers in China represent less than 5 percent of total retailing there today. That is quite different from what you find in the U.S. or Europe, where those top 50 retailers are approaching a third of the market.”
Another major structural difference is that in China, the leading retailers are in the real estate business, not in the business of buying and selling merchandise. Whereas in the U.S. the first step to introducing a line is typically meeting buyers and persuading them to allocate some of their budget to one’s new brand, in China, one needs to find available space in a store and negotiate lease terms.
Lay sketched three models of entering the Chinese market:
- A Western brand can go on its own.
- It can find a distributor.
- It can license its brand out.
He led the Lee brand into China in 1996, and the company opted to go in on its own, trying to use what it learned about Chinese business practices through sourcing to drive a retail rollout. It was slow going, but today the Lee and Wrangler brands operate 82 of their own stores and sell to 125 wholesale accounts, for presence in a total of 207 stores. The division expects to reach the 310-store mark by 2006, Lay said.
“For eight years’ work, to be in 207 doors, frankly the people looking over my shoulder wonder why we couldn’t have gotten there quicker,” Lay admitted.
Going solo in China is expensive, but can be rewarding, he said. “I would say it’s ideal, but you’ve got to be prepared to invest,” he said, a hurdle that’s easier for the $5.21 billion corporate behemoth than it might be for smaller firms “Obviously, your investment is going to be much higher here, but you have the benefit of totally controlling your destiny and all the top-line and bottom-line rewards….It’s a four-to- five-year road to profitability [in China].”
Two of VF’s backpack brands, Jansport and Kipling, have opted to use distributors to enter China rather than operating their own retail locations.
Those brands are now sold at 60 points of sale, by distributors who handle a number of brands.
“Probably the best distributor partners…get their critical mass by leveraging multiple brands,” he said. Besides wholesaling the brand to retailers who do operate on the Western buying model, the distributor also takes responsibility for opening branded stores, Lay said.
“We prefer a distributor who is running retail. That is the primary and fundamental piece,” he said. Rapid retail expansion is one of the advantages of working with a distributor, Lay noted, saying, “You’re really looking for the expertise to help you crack that retail infrastructure.”
The North Face and Nautica operate in China through licensees, Lay said, with The North Face present in 45 retail locations and Nautica — which has been operating in China for five years — in 120.
Nautica’s Chinese licensee, he said, has “brought the retail competency and knowledge and we’ve built out freestanding stores right through going into the department store space and [leasing] that space….We think it’s important to stamp retail first and then move on to wholesale partners.”
One of the advantages of working with a distributor or a licensee is that those businesses likely have detailed knowledge of the local market, which can help a brand to expand quickly. But Lay emphasized that it’s critical for companies that are using such partners to study the market closely or they’ll find that their business is beyond their control.
“Your partner has the local market knowledge, and frankly, they’re going to know a lot about the consumer and the retailer,” he said. “If you don’t work hard to know something about that, they’re in fact going to continue to retain that.”
That said, he added, “You can scale faster if you have the right partner, for sure, and you’ll do it with a lot less investment.”