Clothing and Footwear in China

Euromonitor International

August 2005
Clothing and footwear China

List of Contents and Tables

1. EXECUTIVE SUMMARY ................................................................................................................................. 1
2. CLOTHING AND FOOTWEAR....................................................................................................................... 1
2.1 Market Performance.............................................................................................................................. 1
Table 1 Retail Sales of Clothing and Footwear: Value 1999-2004 ............................................. 2
Table 2 Retail Sales of Clothing and Footwear: % Value Growth 1999-2004............................ 2
3. CLOTHING......................................................................................................................................................... 3
3.1 Sector Performance ............................................................................................................................... 3
Table 3 Retail Sales of Clothing: Value 1999-2004.................................................................... 4
Table 4 Retail Sales of Clothing: % Value Growth 1999-2004 .................................................. 4
3.2 Leading Company Profiles .................................................................................................................... 4
3.3 Retail Distribution ................................................................................................................................. 6
Table 5 Retail Sales of Clothing by Distribution Format: % Analysis 1998/2003...................... 7
4. FOOTWEAR ....................................................................................................................................................... 7
4.1 Sector Performance ............................................................................................................................... 7
Table 6 Retail Sales of Footwear: Value 1999-2004................................................................... 8
Table 7 Retail Sales of Footwear: % Value Growth 1999-2004 ................................................. 8
4.2 Leading Company Profiles .................................................................................................................... 8
4.3 Retail Distribution ................................................................................................................................. 9
Table 8 Retail Sales of Footwear by Distribution Format: % Analysis 1998/2003................... 10
5. FORECAST MARKET PERFORMANCE .................................................................................................... 10
Table 9 Forecast Retail Sales of Clothing and Footwear: Value 2004-2009............................. 11
Table 10 Forecast Retail Sales of Clothing and Footwear: % Value Growth 2004-2009 ........... 12
6. DEFINITIONS .................................................................................................................................................. 12

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CLOTHING AND FOOTWEAR IN CHINA

1. EXECUTIVE SUMMARY
Structural change in China’s textiles and clothing

Textile and clothing manufacturing is a major industry for China, accounting for 19% of the country’s total
exports and around 10% of its overall industrial output in 2003. The industry was totally freed from government
control and planned production schemes in 1983. After 20 years of development, industry forces rather than
government policy now shape growth.

Italian footwear holds key position

Clothing and footwear sales in urban China are largely influenced by the lure of foreign brands, as many
affluent urban Chinese consumers look to emulate the latest Western fashions. According to Business Daily, in
2003, over 30% of all footwear sold in China is manufactured in Italy, with close to 24% of all leather shoes
also made in Italy. Italy exported 166,000 pairs of leather shoes to China in 2003, most of which were high-
quality shoes.

Designers shun domestic fabrics

Despite being ranked number one in the world in terms of production and exports for several years, more than
50% of exported clothes are made using imported materials, while a huge amount of domestic clothing materials
lies stockpiled in warehouses. China's production of clothing materials reaches 16 billion metres each year, far
exceeding demand. However, China last year spent over US$1 billion on importing materials.

Changes in general pricing for clothing

In urban China, the unit price of clothing increased in the review period due to the increasing share of branded
goods. In big cities such as Shanghai and Beijing, consumers can find many famous clothing brands with higher
unit prices from Europe, the US, Japan and Korea. However, in rural China, clothing is still chiefly purchased
for functional usage. There are fewer concerns with fashion in rural areas and consumers tend to be price-
sensitive.

Future trends of clothing and footwear

Over the forecast period, export-oriented manufacturers are expected to leverage on their foothold in clothing
and footwear by introducing more private label products and locally designed clothing and footwear in China.
With the potential to capture profits due to the 300-500% price difference between ex-factory prices and retail
prices, many of these manufacturers are likely to develop their own line of merchandise. Further, with the
government deregulating retailing, companies that act now will have a first-mover advantage.

2. CLOTHING AND FOOTWEAR

2.1 Market Performance
Slow share increase for high-end products

By the end of 2004, total retail sales of clothing and footwear were almost RMB700 billion, reflecting a 53%
current value growth over the review period. With the growing disposable incomes for Chinese consumers in
general, demand of higher-quality clothing and footwear also increased.

The retail sales of high-price clothing and footwear increased in share in the review period. The retail sales of
low- and mid-priced products still dominate, however, due to a large population and low average income of

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Chinese consumer. Branded clothing and footwear is becoming popular in the major cities of China, while in
rural regions consumers' still favour low- and mid-price products.

More name brand clothing and footwear sold through supermarkets and hypermarkets

During the review period, famous name brands increasingly entered retailing outlets such as supermarkets and
hypermarkets. Though still more expensive than domestically produced mid- and low-end clothing, the prices of
these famous name brands in supermarkets/hypermarkets are lower than prices in department stores or speciality
stores. In addition to lower prices, supermarkets benefited from rapidly changing consumer behaviour during the
review period. Chinese consumers increasingly prefer one-stop shopping in retailing outlets such as
supermarkets. Thus, they like the ability to purchase name-brand fashions alongside shopping for other goods.

General increase in retail prices as brand consciousness grows

In urban area, the unit price of clothing increased in the review period due to the growing importance of branded
goods. In big cities such as Shanghai and Beijing, consumer can find many famous clothing and footwear brands
with a higher unit price imported from Europe, the US, Japan and Korea. In 2003, the volume share of famous
brands in clothing was 8% but the value share was 12%. Although mid- and low-price clothing dominates, the
shares of higher-priced brands are increasing.

In the case of footwear, with improvements in consumers’ disposable income at the start of the review period,
consumers initially focused on finding quality footwear and then on finding quality branded footwear. However,
with more and more access to imported Western footwear, Chinese consumers have become increasingly brand
conscious when it comes to their footwear. This was particularly evident post-2000, as the launch of global
brands of fashion shoes in China from the US and Western Europe – particularly Italy – became more prevalent.
In general, after 2000, the emphasis on quality fell, as consumers developed more brand awareness.

In rural areas, however, clothing and footwear is still chiefly purchased for functional purposes and there is less
concern with fashion. The unit price of clothing reduced in rural areas to meet consumers’ requirements in the
review period.

Purchases influenced by consumers’ expenditure habits

Like most developed nations, in urban China clothing and footwear purchases are largely dependent on current
and prevailing fashion trends. That said, other influences also play a major part in purchasing behaviour.
Sources revealed that discounts and promotions are popular, with the average Chinese consumer constantly in
search of a good bargain. Owing to the price-sensitive nature of the average consumer, these consumers are
generally swayed by favourable pricing strategies.

Price aside, clothing in urban China is also largely influenced by the lure of foreign brands. Affluent and urban
Chinese consumers tend to prefer foreign brands because they want to emulate the latest Western fashion trends
and styles. These foreign brands are generally sold through specialty chain stores, which led to an increase in the
number of such Western-style stores as Jeanwest and U2 in urban China. That said, increases for such Western-
style specialists were not able to offset share declines for specialty stores on the whole. In general, specialty
stores suffered at the hands of supermarkets, which appealed to the bulk of Chinese consumers for their
typically lower prices and one-stop shopping convenience.

Table 1 Retail Sales of Clothing and Footwear: Value 1999-2004

RMB million
1999 2000 2001 2002 2003 2004

Clothing 360,065.4 393,464.9 439,224.8 478,755.0 521,843.0 562,222.7

Footwear 95,713.6 103,334.2 109,806.2 119,688.8 128,977.0 136,844.6
Clothing and footwear 455,779.0 496,799.1 549,031.0 598,443.8 650,820.0 699,067.3
Source: National Bureau of Statistics of China, China Garment Association, China Textile Industry Association,
Company research, Store checks, Trade interviews, Euromonitor estimates

Table 2 Retail Sales of Clothing and Footwear: % Value Growth 1999-2004

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% current value growth

2003/04 1999-04 CAGR 1999/04 TOTAL

Clothing 7.7 9.3 56.1

Footwear 6.1 7.4 43.0
Clothing and footwear 7.4 8.9 53.4
Source: National Bureau of Statistics of China, China Garment Association, China Textile Industry Association,
Company research, Store checks, Trade interviews, Euromonitor estimates

3. CLOTHING
3.1 Sector Performance
Clothing accessories dynamic with fashion

Clothing accessories account for the smallest share of clothing and footwear sales, at just 7% in 2004. The share
of clothing accessories increased slightly in the review period, however, as Chinese consumers began to accept
clothing accessories as a fashion trend. Although clothing accessories such as belts, scarves, ties, hats and
gloves are well established, most consumers only chose them for functional purposes prior to the review period.
By 2004, urban consumers and eventually consumers in general began to pay more attention to clothing
accessories in fashion terms. According to China’s national statistic bureau, based on data representative of over
100 retailers and 2,000 consumers in Beijing and Shanghai, by the end of 2003 per capita consumption of
scarves reached four, up from three in 1998.

Knitwear suffers from old fashioned image

Knitwear accounted for around 16% of total retail value of clothing in 2004. Despite a moderate CAGR of 7%,
reflecting its maturity, knitwear captures the third highest value in clothing of RMB90 billion in 2004, behind
only women’s and men’s outerwear. However, with increased competition from other clothing, the share of
knitwear reduced slightly in the review period. The growth of knitwear was not as high as for outerwear due to
increasingly prevalent Western fashion trends focusing on cotton and even synthetic textiles. More and more
Chinese consumers, particularly affluent urban-dwellers with larger amounts of disposable income – do not
view knitwear as hip or trendy.

Men’s outerwear significant with suits

Men’s outerwear kept a high and stable growth over the review period at 11% current value CAGR. As clothing
sales grew during the review period, the structure of clothing also changed. In China, men’s outerwear has
grown very dynamically, in line with China’s economic surge in the past 15 to 20 years. With more and more
wealth at their disposal, Chinese men living in urban centres have become increasingly fashion conscious and
are willing to pay money to look good. In turn, this increasingly lucrative market has led to a rather fierce
competitive environment among men’s outerwear brands, be they imported or domestic.

There were many local manufacturers whose clothing lines became famous during the review period, such as the
Youngor Group and Texwinca Holdings Ltd. Within men’s outerwear, competition within business suits is the
strongest due to the high profit margin involved in such clothing. The Youngor Group is the leading
manufacturer of business suits in China according to industry sources.

Maturity for socks, stockings and tights

Socks, stockings and tights is also small in its value share of clothing. However, more famous brands and
specialty stores were launched in socks, stockings and tights in China during the review period. The growth of
socks, stockings and tights was therefore high with a CAGR of 6%, although growth was constrained due to low
unit prices and mature demand. Like many other countries, socks, stockings, and tights represent a somewhat
commodified product type.

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Underwear and nightwear develops fashion status

With growing disposable incomes and improvements in living quality, the sales growth of underwear and
nightwear was high in the review period with a CAGR of 11%. Prior to the review period, consumers viewed
underwear and nightwear as items that would not be seen by others and opted for low-priced low-quality items
due to the poor economic condition of the country. However, as urban Chinese consumers have become more
fashion and body-image conscious alongside improvements in their economic situation, they have moved
towards better quality underwear and nightwear. Currently underwear and nightwear are becoming newly
fashionable and are popularly used to improve body shape in cities. In particular, more and more urban Chinese
women prefer high-end lingerie and night-gowns over more drab, commodified varieties.

Women’s outerwear

Women’s outerwear accounted for the largest share in clothing at 35% in 2004. As the urbanised modern
Chinese woman assumes a role beyond the kitchen and moves into the workforce, women’s outerwear sales
showed strong growth. Women’s outerwear maintained a stable growth in the review period with a CAGR of
9%.

Table 3 Retail Sales of Clothing: Value 1999-2004

RMB million
1999 2000 2001 2002 2003 2004

Clothing accessories 25,564.6 27,936.0 31,624.2 33,991.6 38,094.5 41,446.9

Knitwear 63,371.5 67,676.0 73,789.8 78,994.6 84,538.6 90,456.3
Men's outerwear 73,813.4 82,627.6 93,994.1 104,368.6 114,805.5 123,875.1
Socks, stockings and 28,805.2 29,903.3 32,063.4 34,470.4 37,050.9 39,459.2
tights
Underwear and nightwear 44,288.0 49,183.1 55,781.5 61,280.6 68,361.4 72,599.8
Women's outerwear 124,222.6 136,138.9 151,971.8 165,649.2 178,992.1 194,385.5
Clothing 360,065.4 393,464.9 439,224.8 478,755.0 521,843.0 562,222.7
Source: National Bureau of Statistics of China, China Garment Association, China Textile Industry Association,
Company research, Store checks, Trade interviews, Euromonitor estimates

Table 4 Retail Sales of Clothing: % Value Growth 1999-2004

% current value growth

2003/04 1999-04 CAGR 1999/04 TOTAL

Clothing accessories 8.8 10.1 62.1

Knitwear 7.0 7.4 42.7
Men's outerwear 7.9 10.9 67.8
Socks, stockings and tights 6.5 6.5 37.0
Underwear and nightwear 6.2 10.4 63.9
Women's outerwear 8.6 9.4 56.5
Clothing 7.7 9.3 56.1
Source: National Bureau of Statistics of China, China Garment Association, China Textile Industry Association,
Company research, Store checks, Trade interviews, Euromonitor estimates

3.2 Leading Company Profiles

The Youngor Group

Company background

The Youngor Group was set up in 1979. The company focuses on clothing and footwear manufacturing but also
has interests in real estate, international trading, stock investment and transportation. The net assets of the group
amount to more than RMB3 billion in 2003. There are more than 20,000 employees in the group and it is
regarded as the leading clothing manufacturer in China. The Youngor Group is a publicly held company.

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In October 2001, Youngor International Garment Complex was completed, which covers 233,000 square
meters. The complex is a comprehensive clothing manufacturing base, integrating designing, manufacturing
marketing, exhibition and business affairs with advanced facilities and technology. The complex also contains a
leading office and exhibition base and the group is cooperating with the Chinese Academy of Science to create
out Youngor Information System in order to push the company’s administration networks and improve
manufacturing and supply chain management..

General strategy

In 1999, the company introduced into ironing-free fabric using cutting-edge technology and equipment and
developed the no-iron shirt, an impressive innovation. Meantime, it also imported a lot of world first-class
production equipments and made full use of CAD system. In 2000, the Youngor Group was named Good
Enterprise in Chinese Garment Industry by the China Garment Association. Youngor shirts have led shirt sales
in China for numerous years, including those of the review period. Its business suits have also leaped been the
best selling in China since October, 1999. Youngor brand is the only clothing brand that is popular across
China. It’s popularity remains despite the growing penetration of imported brands.

Competitive positioning

The Youngor Group has increasingly become a vertically integrated company, working hard to not only
manufacture garments but also to control how and where they are sold. Operating their own retail outlets allows
Youngor to control which product ranges are sold, their price, and customer service issues. The implementation
of the Youngor Information System network should further improve the company’s supply chain management.

By 2004, the Youngor group set up more than 160 subsidiaries in the main provinces and cities of China. The
subsidiaries manage over 400 wholly-owned shops with an area from 500-3,000 square meters. The shift
towards retailing has proven quite successful for Youngor, particularly in the case of its men’s outerwear
offerings.

Texwinca Holdings Ltd

Company background

Texwinca Holdings Ltd is a manufacturer and retailer, with OEM manufacturing accounting for as much as 60%
of 2003 sales. Its main brand Baleno and two newer brands, Samuel & Kevin (S&K) and IP Zone, are mid-price
casual wear for urban Chinese consumers. The company entered clothing and footwear in China rather late in
1996 and is still young and fast growing.

Texwinca Holdings Ltd is one of the world’s largest knitted fabric manufacturers. Baleno, the company’s 54%-
owned retail subsidiary, is the largest casual wear chain in China with over 800 stores. The group is also
engaged in clothing manufacturing through its 50%-owned associate company Megawell Industrial Ltd.

The company has an immense sales network covering the US, Europe and Asia. Key customers include GAP,
Limited, Uniqlo, Muji, Wal-Mart and JC Penney.

General strategy

Texwinca’s key strategy relies on its efficient production capabilities. Over the review period, it doubled its
production capacity. Running on full capacity, the manufacturer maximised returns and had to turn away orders.
Production runs at nearly 7 million kilograms per month. Texwinca aims for 15-20% expansion in capacity per
year.

Competitive positioning

To keep its brands up to date with current trends, Texwinca utilises celebrity endorsement. It signed up F4, a
popular Taiwanese group, as the new celebrity sponsor for S&K. S&K is the second largest brand in Texwinca’s
retail portfolio with around 200 shops in China and aims for 20-40% growth for the retail operation for the
2003/2004 fiscal year. With accelerated momentum at S&K, the forecast for growth shifted to the upper end.

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Fountain Set

Company background

Founded in 1969, Fountain Set is one of the world’s largest knitted fabric manufacturers with highly vertically
integrated operations, including spinning, knitting, dyeing and printing. The company is a major fabric supplier
to manufacturers in over 20 countries who in turn supply to international retail brands. Wal-Mart is currently the
company’s largest end customer, accounting for 15% of sales. Other large customers include Gap, Uniqlo,
Marks & Spencer and Ralph Lauren. The company is also engaged in yarn trading and clothing manufacturing.
It has factories in Guangdong and Sri Lanka employing over 12,000 people.

The Fountain Set factory Located in Changan Town of Dongguan City was the first factory the company
established in Guangdong in 1990 and remains the group’s main knitting and dyeing base. The other factory is
also located in Dongguan City, in a town called Shatin and is mainly engaged in fabric dyeing and printing.
Fountain Set owns one spinning factory in Guangdong and manages an additional four. It produces about 20%
of its yarn needs itself. Having its own yarn production affords better quality control and incremental savings in
production time. In addition to production facilities in Guangdong, FS also has a knitting factory in Sri Lanka
that targets European sales, thanks to the country’s quota-free status for exports to Europe.

General strategy

Fountain Set will continue to expand its capacity for fabric exports. Because China will allow up to 100%
foreign ownership in retail businesses by 2004, many US and European retail brands are gearing up to enter
China in 2005. To curb competition, a new factory dedicated to domestic sales is being built in Zhejiang
province and came into operation in 2004.

Competitive positioning

To maintain its competitive positioning, the company has upgraded its equipment to boost productivity and
improve efficiency. The company expects the new equipment to cut fuel costs by as much as two-thirds. Fuel is
a major cost component of production at 7-8% of sales in 2001. Such cost savings would allow Fountain Set to
retain higher earnings to be channelled back to marketing or product development.

3.3 Retail Distribution

Department stores lead with convenience

Department stores holds the largest value share across clothing except in children’s wear. For clothing and
footwear sales, displays are very important for consumers in order that they can get to know the product quickly.
Good displays require space, with large department stores benefiting from this. Department stores are the major
channel for Chinese consumers to buy clothing and footwear in, with a large shop floor space and a wide range
of products offered in a comfortable environment. Especially strong in women’s outerwear and clothing
accessories, department stores registered about 55% share of overall clothing and footwear value sales in 2003.

For children’s wear, many parents tend to buy some cheap clothes to save on cost, since children tend to grow
fast and require frequent updates of clothing. Specialty stores account for the largest shares in children’s wear
with about 45% of value in 2003.

Grocery stores a driving engine

Grocery stores – which include supermarkets and hypermarkets – increased its share by five percentage points
between 1998 and 2003, with these years seeing the strongest development of grocery stores in China to date.
Offering the advantages of convenience, freedom and low prices, grocery stores attracted many consumer
groups away from traditional retailing channels such as department stores and independent stores.

Within specialty stores, most stores are chain stores or franchised brands. This channel accounted for 16% share
in 1998 and reduced in value share slightly by a percentage point by 2003. The channel is fragmented, split
between purveyors of mid- and low-end domestic brands and the latest imported fashions. The leading retailers
include Esprit, Giordano, Texwinca and Glorious Sun. Increases for Western-style specialists were not able to

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offset share declines for specialty stores on the whole. In general, specialty stores suffered at the hands of
supermarkets, which appealed to the bulk of Chinese consumers for their typically lower prices and one-stop
shopping convenience.

Most independent stores are personally owned and offer independently produced clothing. There are over a
million registered independent stores in China but most have a very small turnover, at around RMB1,000 per
month. The share of independent stores remained fairly stable during the review period, declining by two
percentage points due to increasing competition from grocery stores.

Table 5 Retail Sales of Clothing by Distribution Format: % Analysis 1998/2003

% value
1998 2003

Grocery stores 8.5 13.0

Specialty stores 16.0 15.0
Independent stores 10.0 8.0
Discounters 4.0 6.0
Department stores 59.0 55.0
Others 2.5 3.0
TOTAL 100.0 100.0
Source: National Bureau of Statistics of China, China Chainstore & Franchising Association, China Garment Association,
China Textile Industry Association, Company research, Store checks, Trade interviews, Euromonitor estimates

4. FOOTWEAR
4.1 Sector Performance
Production base mainly located in South China

Quanzhou City, located in Fujian province, has very a high production share of footwear in China and is well-
known globally. The sports footwear produced in Quanzhou captures a production shared of 80% in China. 60%
of footwear produced in this city was exported. In 2003, collectively, Quanzhou produced approximately 900
million units of shoes with a production value of over RMB25 billion. There are over 4,000 footwear businesses
employing over 500,000 workers in Quanzhou City.

Dwindling sales for domestic brands

While footwear was mainly selected for functionality in the early- to mid-1990s, major players subsequently
attempted to grow distribution for their footwear by setting up chain stores in major cities to establish their own
sales network. Chain stores established more trust in products in consumers’ minds at a time when consumers
were more quality conscious than brand conscious.

Famous domestic brand Aokang opened the first chain stores in 1998 while footwear was still generally a price-
sensitive product. Since 1998, the company opened over 3,000 outlets and developed a sense of brand equity.

However, a large number of outlets is not necessarily a formula for success. Over recent years, other small or
medium-sized domestic enterprises tried to mimic the successes of Aokang’s business model. Most were
unsuccessful owing to the fact that this model is capital intensive and does not gel with the currently brand-
conscious trends, which particularly benefit small local brands.

With improvements in consumers’ disposable income at the start of the review period, consumers initially
focused on finding quality footwear and then on finding quality branded footwear. This was particularly evident
post-2000, as the launch of global brands of fashion shoes in China from the US and Western Europe –
particularly Italy – became more prevalent. After 2000, the emphasis on quality fell, as consumers developed
brand awareness.

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As chained footwear specialty stores generally offer locally designed small brands, the large-scale entry of
foreign brands threatened their survival. Consumers also become more mature and selective when choosing
footwear. Chained specialty stores offering one small local brand no longer satisfy consumers’ requirements.

Consumer preferences across the regions

In North China, consumers tend to shop in shopping centres and department stores, while in South China there
are often full streets of specialty stores. In Beijing, meanwhile, footwear typically thrives through store-in-store
concepts, with up to 10 brands in one shopping area. It is estimated that over, 80% of footwear consumers
purchase on impulse in China overall particularly while browsing in department stores and shopping centres,
with these thus being strong channels for footwear sales.

Table 6 Retail Sales of Footwear: Value 1999-2004

RMB million
1999 2000 2001 2002 2003 2004

Footwear 95,713.6 103,334.2 109,806.2 119,688.8 128,977.0 136,844.6

Source: National Bureau of Statistics of China, China Garment Association, China Textile Industry Association,
Company research, Store checks, Trade interviews, Euromonitor estimates

Table 7 Retail Sales of Footwear: % Value Growth 1999-2004

% current value growth

2003/04 1999-04 CAGR 1999/04 TOTAL

Footwear 6.1 7.4 43.0

Source: National Bureau of Statistics of China, China Garment Association, China Textile Industry Association,
Company research, Store checks, Trade interviews, Euromonitor estimates

4.2 Leading Company Profiles

Yue Yuen

Company background

Yue Yuen is the world’s largest athletic/casual footwear manufacturer with approximately 16% share of global
footwear sales. The company makes products for many well-known global brands such as Nike, Adidas and
Reebok. Its plants are in Guangdong, China, Vietnam and Indonesia.

Yue Yuen has three key production sites in China, in Dongguan, Zhongshan and Zhuhai. China accounts for
around 65% of the company’s production. Other production sites are located in Vietnam and Indonesia. The
total number of production lines in China is around 170 lines.

The Zhongshan factory manufactures shoes for leading global brands such as Reebok, Timberland, Converse,
Rockport, Clarks and Dr Martens. The plant was built in 1991 and is located in a 184 acre site in Sanxiang
Town in Zhongshan. Production involves three key parts: outsole, midsole and upper, with the production of the
upper being the most labour-intensive. Yue Yuen makes all three parts in-house.

General strategy

The key strategy adopted by Yue Yuen is to consistently maintain a strong order flow from its key customers
such as Nike, Reebok, Adidas and New Balance. By consistently leveraging on high-profile events such as the
World Cup and the 2008 Beijing Olympics, Yue Yuen channels its marketing efforts in line with current trends.
On the local front, it also targets schoolchildren as part of its effort to maintain continuous demand for its
products

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Pou Chen Corporation is one of the world's largest shoe manufacturers and owns approximately 42% of Yue
Yuen. Pou Chen aims to restructure in the future, as it owns a number of footwear raw-material businesses as
well. A consolidation of these supply chain businesses is likely to develop greater efficacy in production.
Nevertheless, Pou Chen is not about to place all its eggs in one basket. In recent years, it shifted its focus to
investing in other non-footwear businesses. In the long-term, Pou Chen Corp is expected to consolidate all its
footwear business under Yue Yuen.

Competitive positioning

Although average income levels are still low in China, the rapid rate of growth in disposable incomes in urban
areas offers a sizable target group for quality footwear. Yue Yuen is putting together a network of outlets to tap
into the growth in domestic consumption. In Beijing, it holds a majority stake in a 15-store footwear retail
network. It is planning to expand in North China by opening another 8-10 stores.

In Guangdong, it has four multi-brand stores named Pou Yuen Sports Square in Guangzhou, Shenzhen and
Zhuhai. Yue Yuen also owns the distribution rights to Converse in China. The products are sold through 160
distributors and 40 retail counters.

Kingmaker

Company background

Kingmaker is a leading manufacturer of casual and athletic footwear. The top five branded customers of the
company are Skechers, Timberland, Stride Rite, Clarks and Caterpillar. Other major customers include Bates,
Merrell, Paul Smith, Sperry and Tommy Hilfiger. Production facilities are located in Guangdong, China,
Vietnam and Macau.

Kingmaker has a total workforce of 15,000 on 25 production lines, 17 of which are in Guangdong, China, three
in Macau and five in Vietnam. The Macau plant benefits from a quota-free status for exports to Europe. The
Vietnam plant commenced operation in February 2001. With the country’s Most Favoured Nation (MFN) status,
tariffs on exports to the US were significantly reduced. Kingmaker plans to expand the Vietnam plant capacity
to 12 lines in 3-4 years.

The company also has a well-established Original Design Manufacturing (ODM) team in Taiwan. Eventually
the bulk of the team will be moved to Guangdong to strengthen the cooperation of different group functions.

General strategy

Kingmaker launched a new wholesale and retail business in China with the opening of a flagship shore in
Guangzhou in March 2001, featuring brands such as Lotto and Head. The number of sales outlets topped 200 by
2004. While this business is still in its start-up stage, it is expected to further exploit the long-term potential of
retail opportunities in China on an on-going initiative.

Competitive positioning

To maintain its competitive positioning, Kingmaker specialises in casual shoes and athletic/leisure footwear.
According to trade sources, Kingmaker maintains an in-house research and development and sourcing team for
casual shoes. It is also strong in baby shoes, sales of which are expected to see dynamic growth over the forecast
period as the company continues to expand its retail presence, particularly in Southern China.

4.3 Retail Distribution

The distribution of footwear is shared by traditional and new retail channels. Grocery stores such as
supermarkets, hypermarkets and convenience stores, which were launched China in the past decade, increased
its share of footwear from 5% to 8% from 1998-2003. Most of the increased share was taken from the sales of
department stores.

Specialty stores is an important sales channel for footwear in China. Many specialty stores are chained in order
to increase penetration and carry one local brand. However, the channel faces a strong threat from foreign

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players due to its limitation to single brands and a small range of designs. Consequently, the retail value share of
specialty stores reduced by four percentage points from 1998-2003.

Most independent stores sell low-quality and low-priced minor brands. This channel is fragmented with many
independents present. The share of independent stores was also eroded between 1998-2003 by the growth of
grocery stores and discounters, dropping by two percentage points.

Discounters is a new sales channel in China, gaining significance only in 2000. In 1998, discounters accounted
for less than 1% of value. By 2003, however, some famous international footwear discounters entered China,
such as Heat Wind from Taiwan. By the end of 2003, discounters occupied around 7% of overall footwear
value.

Department stores continue to lead sales in footwear. By 2003, the value share of department stores was around
41% of the total. As the traditional sales channel in China, department stores still take the biggest piece of cake
because of their generally wide product selection – particularly for foreign name brands – and for their generally
upscale image. However, department stores have faced increased competition from many others sales channels,
namely discounters and grocery stores with their typically lower prices, which resulted in a lost of 2 share points
between 1998 and 2003.

Table 8 Retail Sales of Footwear by Distribution Format: % Analysis 1998/2003

% value
1998 2003

Grocery stores 5.0 8.0

Specialty stores 23.0 19.0
Independent stores 20.0 18.0
Discounters 1.0 6.5
Department stores 43.0 41.0
Others 8.0 7.5
TOTAL 100.0 100.0
Source: National Bureau of Statistics of China, China Chainstore & Franchising Association, China Garment Association,
China Textile Industry Association, Company research, Store checks, Trade interviews, Euromonitor estimates

5. FORECAST MARKET PERFORMANCE

Prospect of future economic growth should drive clothing and footwear retail sales

The future success of China’s consumer goods market will depend on continued economic growth for the
country, ensuring that more consumers have more disposable income to purchase such items. This is particularly
true of clothing and footwear, which relies on consumers having enough income to be able to purchase higher-
price name brands.

A good sign of this continued economic success is the fact that China will soon become the world’s largest
manufacturing base if it is not already the largest. This resulted in a substantial re-rating of some of its leading
manufacturers and consumption plays between 2002 and 2003, which is the post-WTO period for China. It
shows clearly the re-rating of textile machinery and fabric producers in China, such as Fong’s Industries and
Fountain Set, in light of their respective future share valuation. The revaluation of these stocks points to the
potential for the industry to grow as it is fuelled by the sentiments of both industrial players and corporate
investors.

According to the World Bank, China’s world share of textile and clothing volume sales will rise from 16% in
2001 to more than 47% in 2005. The strong growth will be due to continued economic growth in China, a
further focus on mass production and the benefits of world trade liberalisation.

The surge in world export share translates into a 19% CAGR for China’s clothing and footwear exports during
that period. The World Bank’s forecast is in line with evidence from the US, which shows similar rates of
growth for imports of some apparel on which quotas were removed in 2003. Using current growth rates for

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decontrolled products, China’s share of US imports of textiles and clothing and footwear is likely to rise to 65%
of volume by end of 2004 and 75-80% in 2005. This compares with China’s volume share of US imports of
only 31% for decontrolled clothing and 13% for quota-restricted clothing in the first quarter of 2003. The
expected rise in China’s share will bring textiles and clothing in line with China’s share of imports of other
products such as toys and rubber footwear.

Assuming that total US demand for clothing imports remains unchanged at the 2001 level of US$66 billion, a
30% share of US clothing would effectively mean a 300% jump in clothing sales by volume for China’s
clothing and footwear exporters as soon as quotas are scrapped in 2005. China’s total clothing exports were
estimated at US$6 billion in 2002. This is in line with the performance of clothing and footwear that had quotas
removed in 2002. When quotas are totally eliminated in 2005, China’s clothing exports to the US could well
surge by 600%, assuming 80% share of US clothing imports.

After strong growth throughout the 1990s and new millennium, China has become the biggest export/import
country of footwear. After its entry to the WTO, China’s footwear strongly developed further. By the end of
2003, the total annual production capacity of footwear in China was seven billion pairs, which means that the
share in the world of China footwear was over 60% by volume. At that time, leather footwear production
capacity was three billion. There are almost 40,000 registered footwear businesses in China. There are four
major production bases in China: Guangdong province and Jinjiang, Shishi and Futian in Fujian province. There
are also many new footwear production bases such as Heshan City under construction. In the forecast period,
footwear production should have an even bigger development as a result of the increased trade liberalisation
described above.

Manufacturers today, retailers tomorrow?

Over the forecast period export-oriented manufacturers are expected to leverage on their production foothold by
introducing more private label and locally designed clothing and footwear items into China, in order to benefit
from dynamic clothing and footwear growth. With the potential of capturing some of the 300-500% price
difference between ex-factory prices and retail prices, many manufacturers are likely to develop their own line
of merchandise. Furthermore, with the government deregulating retail, companies that act now will have some
first-mover advantage.

China on the world stage for textile and clothing

Trade restrictions on textile and clothing among WTO members were eliminated in stages starting from 1995.
China began to benefit from freer trade in 2002 when it joined the WTO. Quotas imposed on upstream
merchandise such as yarn and fabric and the trading of simple textile products were mostly eliminated in the
third stage of trade integration in 2002 but trade liberalisation for clothing was largely postponed until the last
stage of integration which starts in January 2005.

Owing to this liberalisation in 2005 and the wealth it should bring, growth in clothing is expected to undertake a
gradual upward growth trend over the forecast period with a constant value CAGR of 10%. Not only will
exports increase but imports of foreign brands are likely to proliferate, thus stimulating urban sales of higher-
value clothing and footwear in China during the forecast period.

Over the forecast period, clothing is expected to continue to dominate clothing and footwear with a high CAGR
of 10%. By 2009, sales of clothing are expected to reach RMB891 billion. The share of clothing in overall
clothing and footwear is expected to increase slightly in the forecast period. This is because consumer demand
for footwear is still driven more by functionality than fashion compared to clothing. This is not to say that
Chinese consumers are not expected to be fashion conscious when it comes to purchasing footwear, but clothing
fashions, trends, and fads do change more quickly than those of footwear, thereby giving consumers more
reasons to purchase clothing more frequently, and thus spend more money on clothing relative to footwear.

Table 9 Forecast Retail Sales of Clothing and Footwear: Value 2004-2009

RMB million
2004 2005 2006 2007 2008 2009

Clothing 562,222.7 613,573.7 672,210.0 738,800.5 813,024.8 891,088.8

Footwear 136,844.6 148,065.9 160,651.5 174,949.4 191,394.7 212,256.7

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Clothing and footwear China

Clothing and footwear 699,067.3 761,639.6 832,861.5 913,750.0 1,004,41 1,103,34

9.4 5.5
Source: National Bureau of Statistics of China, China Garment Association, China Textile Industry Association,
Company research, Store checks, Trade interviews, Euromonitor estimates

Table 10 Forecast Retail Sales of Clothing and Footwear: % Value Growth 2004-2009

% constant value growth

2004-09 CAGR 2004/09 TOTAL

Clothing 9.6 58.5

Footwear 9.2 55.1
Clothing and footwear 9.6 57.8
Source: National Bureau of Statistics of China, China Garment Association, China Textile Industry Association,
Company research, Store checks, Trade interviews, Euromonitor estimates

6. DEFINITIONS
This report analyses the market for Clothing and Footwear in China. For the purposes of the study, the market
was divided into 2 sectors:
• Clothing
• Footwear

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