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H&M Posts Sales Growth in China – Other Firms Look to Discounting

Fast fashion retailer Hennes & Mauritz (H&M) reported sales in China at its 109 stores jumped 56% to $568 million during the first nine months of the year. The fast fashion retailer has capitalized on its traditional market strategy as it has entered China. The company moves clothes from runway to retail in weeks, not months, closely watches local trends and tastes, and gets goods out the door quickly, in order to avoid the discounting trap that is overtaking many Chinese retailers.

Vishop Holdings, which sells unwanted inventory at a discount to Chinese consumers, has been having a great year. According to CFO Yan Donghao, quoted in the Wall Street Journal, more than 3000 brands have sold clothing to Vishop this year, an increase of 58% from 2011. Second quarter sales tripled.

In contrast to the last few years, when it was mostly sportswear companies seeking to unload inventory, sales this year are across many categories.

Slowing economic growth is hitting sales growth, even as apparel makers have been betting on expansion. Rosy predictions from the government, which is estimating 25% growth in the coming year, are belied by the reality of 14.2% sales growth in September, fallen from 17.7% growth in 2011.

Nike Inc. and VF Corp. have both reported slowing sales in China, and VF has been expanding discounting on its product lines.

Han Weiwen, a partner of Bain and Co. based in Shanghai, was quoted in the Wall Street Journal saying that the Chinese economy is not going to return to double-digit growth, and that “the hyper growth era for the apparel industry in China is over, period.”

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Firms and brands have bet big on China, with retailers looking to Chinese growth to staunch losses in Europe and the United States. Boston Consulting Group predicts China will account for 30% of the fashion industry’s growth in the next five years. Luxury brands have taken major stakes in the Chinese market as well, opening big new stores in coastal metropolises and pushing into e-commerce.

Foreign brands with strong presence in China have weathered the slowdown fairly well. Chinese brands, on the other hand, have seen inventory levels rise to disastrous heights. Some firms in September were reporting having over a year of inventory on hand.

Brands have overproduced, betting on big growth. Even international firms such as Nike are suffering, with that company reporting in August that earnings slipped 6% in China from a year earlier.

The broader trend toward a more promotional environment is catching many makers and sellers flat footed, as their low operating margins give them little wiggle room in a slowing market. Chinese advertising campaigns are becoming more focused, as most market participants are predicting falling sales as broader economic conditions fail to improve.

Most of the practices being implemented are nothing new for firms operating in more developed markets. Simple issues of cost and inventory control, on time product delivery, and an increased emphasis on meeting the tastes of consumers, are among the measures being implemented. Basic metrics development is also an issue, including the need to calculate sales per square foot and cost per square foot.

The boom in China largely masked the failure of many of its firms and brands to implement modern management and retail techniques. The graduated slowdown will give firms a chance to recalibrate and could improve longterm global competitiveness.

As any company operating in the Eurozone knows, reporting that the Chinese economy is in “slowdown” is somewhat relative. Sales in China are still set to grow by 15% this year – numbers not seen in Europe for many years. The growing middle class in the region will continue to propel sales upward, and demand is not expected to decline at any point in the foreseeable future.