MARK E T ANALYSIS
Shoe Store Retailing in China (PRC)
Part 2 of 2
OVERVIEW Rapid economic growth over the
Shoe Store
Retailing in the
US and CHINA
Read Part 1 — Shoe Retailing in the US in the June 2013 issue
by Peter Mangione
12
August 2013
© FFR - Focus On Fashion Retail
last two decades has transformed China into
a leading consumer society. It now paces the
world in annual auto sales, housing starts, and
is a devotee of American fast food, especially
KFC and McDonald’s. It has the second largest
economy in the world at about $7.0 trillion, or
about half the US GDP.
Not surprisingly, China is now a huge
consumer of footwear, with annual per person
consumption in the 2.5 – 2.8 pair range – and
with 1.3 billion people – its total pair utilization
is at least 3.0 billion pair per year and likely
higher. China’s shoe consumption will likely
grow dramatically in the years ahead, perhaps
one day rivaling the annual 7 pair per person
shoe consumption in the US.
With the world’s leading annual shoe
production – in excess of 13.0 billion pair per
year – it makes sense for such a populous nation
to also be the largest single shoe consuming
nation, surpassing the European Union and the
US, both well below 3.0 billion pair yearly.
One key factor, driving this amazing
shoe consumption story is the simultaneous
revolution in shoe store retailing.
The growth of China’s leading shoe store
chains has been phenomenal.
Today the six largest shoe retail chains in
the world by store count are home grown China
companies.
Much of the rapid growth has been
accomplished by brands franchising the retail
store operation to other companies and then
selling the product to the franchisees on
wholesale basis.
This growth has been accomplished by
uniquely Chinese methods.
Multi-brand Retailers Do
Not Buy Product – They
Only Sell Floor Space
Unlike just about every shoe retailing market in
the world, China does not have retail formats
that buy brands from the brand holder and then
sell them to consumers in a multi-brand format.
As a result, China’s shoe brands have
become powerful by opening their own mono
brand retail presentations – ones with the
brand’s name over the door in malls and in
© FFR - Focus On Fashion Retail
shopping street locations, or by operating brand
specific counters in department stores.
While China’s department stores offer many
shoe brands to consumers and are huge players
in the shoe retailing business, the department
stores do not buy shoes from brand holders.
Instead, they sell floor space to the brand
holder in return for a percentage of the sales.
The brand holder mans and merchandises the
leased space itself.
China’s department stores are probably the
most powerful players in the retail marketplace.
But these firms are first and foremost real
estate companies and not merchants like their
counterparts in the US and in other locales
around the globe. As such, their business model
does not involve tying up cash in inventory
– better to let the brand holders make the
investment and take the risk of selling the
product. Moreover, the high concession fees
demanded by the department stores often reflect
the high land costs that the developer has had to
pay to the local government for use of the land
on which the department store rests.
Typically, the department store operates the
checkout stations in the store, collects payment
from the customer, and then pays, typically at
the end of a month, the brand holder its share
of the proceeds after deducting the agreed upon
concession charges.
It is not uncommon in tier one cities like
Beijing, Shanghai, etc., for the concession fee to
range from 25-30% of sales, while such charges
can be as low as 16-25% in second and lower
tier cities.
Not only are the concession fees high, but
the limited space allotted to the retailer reduces
the amount of inventory that can be kept on
the premises and ready for sale. Brands are
compelled to replenish each counter as often as
every day to avoid missing sales. This shipment
schedule requires the brand to maintain an
offsite warehouse for each city to facilitate quick
replenishment.
The model also relies on quick shipment of reorders from factories to the brand’s warehouses.
It is estimated that about 50% of sales are done
through re-orders. Since all of the shoes are made
in China, replenishment from factories is timely
and since most of the brands operate their own
production facilities for some or all of their needs,
the supply chain works smoothly.
All sales are done full service, necessitating
training of staff to promote the brand and its
selling features, and requiring a significant
number of staff to man each counter.
Given the high overhead costs of the
concession fee, the large staff needed to man the
space and the heavy logistical cost of constant
replenishment, it is not surprising that retail
prices are quite high by international standards
– certainly higher than the US, for instance, for
similar quality items.
Brands also need the high retail price
to accommodate the increasing store wide
promotions dictated by the department store
itself and which the brand must participate.
Also, given the intense competition with
so many brands in the department store, it is
likewise not surprising how tough it is to make
a good return on the retailing endeavor.
“Rapid economic
growth over the
last two decades
has transformed
China into a leading
consumer society.”
Thus, at present in China, department
stores are the principal outlets that offer the
consumer a selection of many brands. There
some athletic specialty stores like Sport City,
Sport 100, Novo, etc., that sell multi-brands
with brand counters for each brand, which
pays a concession fee, the same format as in the
department stores.
There are no other retail concepts selling
multiple brands at the moment and none of
those operating today buy wholesale from
brands. Instead, as noted, they all sell the
brands floor space in return for a concession fee.
There is nothing in China like in the
US where the athletic specialty stores, the
merchandising driven shoe-buying department
stores and the big box branded discounters
all buy shoes from the brands and offer the
customer a multi-brand buying experience.
A u g u s t 2 0 1 3 13
MARK E T ANALYSIS
Leading China Retail Companies
Mono-brand Shops – The Only Way
to Build a Shoe Brand in China
With China department stores unavailable to buy shoe
brand offerings and help the brand owner build awareness,
shoe brands in China are compelled to operate their own
shops and counters, even if the process is not very profitable
for the brand.
In light of the absence of multi-brand buyers of shoe
brands, China shoe companies have developed huge
nationwide chains of own brand stores.
There are at least nine shoe brands in China that have
2,000 or more shops and/or counters in department stores,
far surpassing the US over 2,000 store threshold total –
three (Payless ShoeSource, Footlocker and Wal-Mart) – and
the European total of one (Deichmann) that operates that
many mono-brand stores.
Indeed, each of the top six China shoe store brands are
larger by store count than any shoe store chain in the US or
Europe (Belle, ANTA, Pou Sheng, Li Ning, 361 Degrees,
and Daphne).
By far, the largest shoe store chain in the world is
Belle International Holdings Limited. It has more than
16,000 stores, about 10,000 of which operate under their
own women’s brands like Belle, Millie’s, Staccato, Joy &
Peace, Tata, etc. Belle does not franchise the retailing of
its own brands. The Shenzhen based, publicly traded group
also operates some 6,000 licensed and franchised stores
for leading international brands such as Nike, Adidas,
Mephisto, Clarks, Merrell, Bata, and many others. With
annual sales of about $5.0 billion USDs, the chain is
close in size to the world’s largest shoe store chain by sales
volume, Footlocker.
Belle also follows just about all other China shoe store
chains by also being a manufacturer of most of the shoes
sold in its stores. Belle produces some 25.0 million pair
annually in its many China shoe factories.
Indeed, the probable source of most of its profit is from
its own manufacturing and subsequent sale to the public
without any middle man. Overall, operating profit was
some 17% in 2011, an astounding level of profitability for
a shoe brand.
Belle’s vertical integration – design, production, own retailing – is the
typical business model for most leading China store brands, and can be
hugely profitable if all works well.
Other top China shoe brands also do some or all in house
manufacturing including ANTA, Li Ning, Daphne, 361 Degrees,
Kangnai, Aokang, and many others, as well as Pou Sheng, the retail arm of
the largest shoe manufacturer in the world, Pou Chen, the main sourcing
partner for Nike, Adidas, and just about all sport shoe brands in the world.
Indeed, this kind of vertical integration was the successful business
model for US shoe brands for decades, ending entirely when overseas
production undercut US manufacturing efficiencies. Today, all US shoe
brands outsource their production overseas and concentrate on design,
14
August 2013
NUMBER OF
STORES
ANNUAL SALES
IN MLN USD
BRANDS
OWN
PRODUCTION
Belle
16,127
$5,000
Belle, Millie’s, Tata,
Staccato, Joy & Peace, etc.
80% plus
ANTA
9,517
$1,400
ANTA
37%
Pou Sheng
7,422
$1,749
Converse, Reebok
Significant
Huge franchisee for Nike, Adidas, and exclusive for Converse, Reebok and Hush Puppies
Li Ning
7,303
$1,417
Li Ning
Significant
Lotto and Double Happiness are other small brands
Daphne
6,165
$1,114
Shoebox
Significant
Daphne is the top brand, store count includes licensed brands Aldo, Aerosoles, totaling
563
361 Degrees
7,865
$898
361 Degrees
Some
Kangnai
3,050
NA
Kangnai
All
Makes some 10.0 million pairs annually for its stores, including some 250 in the US,
Italy and France
Aokang
2,800
NA
Aokang
All
Men’s and women’s specialist making some 10 million pairs/year for it’s stores
Foshan Saturday
Designs, manufactures and retails own brands
NAME
Athletic shoes are a huge part of the China shoe market.
It is a major market for the leading international sports brands
including Nike, Adidas, New Balance, Converse, Vans, Lotto, etc.
Nike sells principally through its some 8,000 Nike brand shops
throughout China, all but a few are franchised stores, with key players
like Belle and Pou Sheng handling the bulk of the locations, but there are
many other franchisees as well.
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Store count includes 220 FILA stores, half sales are apparel
Most stores are in third tier cities in North and West China
1,961
$217.40
ST & SAT, FBL, etc
All
921
$200.60
Le Saunda
Mostly
Women’s specialist
Hongguo
1,014
$172.10
C. Banner
Mostly
Women’s specialist, also under E. Blan brand and JV partner with Naturalizer
Cameido
500
NA
Cameido
Mostly
Operates mostly in SW and SE China, large OEM for NWG, BSC, etc in Chengdu
600
NA
Ecco
All
600+
NA
Columbia
None
Swire group operates the stores
New Balance
450
NA
New Balance
None
Operates own stores without partner
Geox
300
NA
Geox
None
Belle operates the stores, but Geox is looking to do all itself
Skechers
250
NA
Skechers
None
Luen Thai operates the stores, half are franchise
Timberland
200
NA
Timberland
None
Some 20 dealers operate retail
Hush Puppies
180
NA
Hush Puppies
None
Belle is taking over from Pou Sheng and may acquire some 100 franchise stores
Merrell
178
NA
Cat and Merrell
None
Belle operates the stores
Nine West
165
NA
Nine West
None
Global Retail Inc (GRI) operates the stores, including 67 franchise stores
Naturalizer
97
NA
Naturalizer
None
JV with C. Banner Group
Steve Madden
50
NA
Steve Madden
None
Operated by GRI
Top Gloria
100
NA
Top Gloria
All
Stuart Weitzman
3
NA
Stuart Weitzman
None
Local partner operates the stores, mainly in Beijing
Jimmy Choo
3
NA
Jimmy Choo
None
Operates own stores. Very ambitious, nationwide expansion planned
Columbia
Athletic Shoes Drive China Shoe Business
6,000 stores are franchises of Nike, Adidas, others
Le Saunda
Ecco
marketing, and sales, but none return anything like 17% operating profit
as a percentage of sales!
OTHER
Adidas has a similar profile with thousands of franchised stores. Again,
Belle and Pou Sheng are the largest franchisees for the German brand, but
there are many others.
In fact, there are so many Nike and Adidas stores in China that it is
not uncommon in top shopping streets to see as many as 6 or even more
Nike stores on the same street and an equal number of Adidas stores.
Of course, not everyone sells the same format – some are performance
oriented, others are more apparel focused, while others are pure life style,
etc. While the two brands have strict rules about presentation, it is clear
that the franchisees fashion the offering to be different from their many
like- brand competitors.
While China consumers have a love affair with international brands,
especially those that offer products that are visible in public like shoes,
cars, etc., China is also a huge market for homegrown sports brands.
Five of the top six shoe chains in China are athletic specialists. Three
© FFR - Focus On Fashion Retail
Operates own stores without partner
Operates own stores without partner
chains promote their own brand exclusively – ANTA, Li Ning and
361Degrees, while Belle and Pou Sheng work only with international
sports brands.
The trio of ANTA, Li Ning and 361Degrees are a China
phenomenon – each operates more than 7,000 stores in China – quite
an accomplishment for brands that have no international profile. Like so
many China brands, each member of the trio is a large manufacturer of its
own products. Nearly all of the retail stores of this group are franchises.
In its own way, each is challenging Nike and Adidas – developing hot
sports shoes and matching sports apparel, recruiting famous athletes as
endorsers of their products, sponsoring China sports teams and events,
employing a distinctive logo, etc.
In the end though, the China sports brands have mainly stayed
competitive by selling at lower prices than the international leaders.
While each competes head on with the international brands in malls
A u g u s t 2 0 1 3 15
MARK E T ANALYSIS
and top shopping streets in the tier one and
tier two cities, the China trio is more heavily
represented in third and fourth tier cities than
their international counterparts.
Nowhere outside of China are there
such huge athletic brands that are not big
international brands.
While each one has made some attempt at
developing an international presence, none have
broken through to date.
Non-athletic Specialty
Retailers are also
Business Drivers
Women love shoes in China and a large group
of ladies’ shoe specialists has developed to
capture that market, especially the career and
hip customers.
Again, Belle is the leader in this group. Its
many different ladies’ brands are designed to
attract specific customers from basics to higher
fashion. They employ top designers from Italy
to complement their huge team of home- based
fashion experts. Perhaps their biggest challenge
is keeping each brand looking different enough
to make the offering distinctive and clear for
the customer. Since each women’s brand has
its own chain of stores/counters, hitting the
fashion and the distinctiveness targets each
season is a make or break challenge.
Other similar, but smaller, competitors
abound in the women’s specialty space in China.
The Daphne brand and its sister, Shoebox,
are ‘top of mind’ ladies’ brands with thousands
of stores/counters throughout China. Others
include (1) Saturday and its brands, ST&SAT
and FBL, etc., which operates nearly 2,000
stores/counters, (2) Kangnai and its 3,000
doors, (3) Le Saunda brand and its sister brands
CnE and Line Rosa, (4) Hongguo and its
C.Banner, E.Blan, Sundance and Mio brands,
(5) Stella (the huge make up factory group
doing Timberland, Rockport, Nine West, etc.)
and its Stella Luna high fashion line, as well as
its What For brand, and (6) Cameido, the 500
store Chengdu-based brand that also does make
up production for US brands like Naturalizer,
Nine West, etc.
Like Belle, each one designs its own exclusive
product and manufactures some or all of its
offering in their own factories.
Franchising is employed for the retail stores/
16
August 2013
“Women love shoes in China and a large
group of ladies’ shoe specialists has
developed to capture that market…”
counters of some of these brands while others
own their own retail operations.
Again, retail prices for these firms are high
by international standards due to the heavy
overhead costs previously noted, and several
aspire to high fashion leadership like Stella Luna,
Top Gloria, and Joy&Peace, to name but a few.
In short, the China women’s market is both
fashion driven and it is not shy at higher pricing.
Non-athletic International
Brands Proliferate
It’s not just Nike and Adidas that have found
welcoming homes in China shoe retailing, but
the full spectrum of international shoe brands.
Among the most successful have been (1)
Ecco, (2) Clarks, (3) Columbia Sportswear, (4)
Geox, (5) all the Wolverine brands – Merrell,
Hush Puppies, CAT, (6) Bata, (7) Skechers, (8)
Mephisto, (9) Timberland, (10) Naturalizer,
(11) Nine West, (12) Steve Madden, (12) Aldo,
(13) Aerosoles, and (14) Jimmy Choo, to name
just a sampling.
Most, although not all, have found that
working with a plugged in China based retailer/
franchisee as a partner is the best approach to
a complicated and not always user –friendly
business and retail environment. It also helps
if the product is entirely or almost all made
in China, given the logistics challenges of
operating stores in tight spaces in China. With
the exception of Mephisto and Choo, all are
pretty much exclusively China-made.
SUMMING UP The absence of multi-brand retail
buyers of shoes, and consequential proliferation
of mono-brand shoe stores/counters in China
make it a unique market in the global shoe
business, where just about all markets, including
the US and Europe, are dominated by multibrand retailers that buy product from brands
and re-sell it to the public.
Moreover, the absence of any meaningful
self-service shoe retailing and high costs of real
estate (both in overhead cost and in limited
storage space for inventory) make China’s
shoe retail prices higher than in the developed
countries.
The vertical integration of design, in- house
manufacturing and owned retailing give China
shoe brands a unique opportunity to make
amazing profits, despite the challenging retail
overhead environment.
Given the staggering amount of retail space
in China today, one wonders what the future will
hold – consolidation, self-service formats, multibrand formats that buy shoes and not just sell
space, or other changes.
With the intensity of competition and the
high cost environment, it seems certain that wide
-ranging changes and re-alignments are inevitable.
Peter T. Mangione
For more than 30 years, Mangione has been a leader in the global shoe sector,
having served as president of the largest shoe trade association in the US, the
Footwear Distributors and Retailers of America from 1981 to 2009, and
now as managing director of Global Footwear Partnerships LLC, an
international consulting practice with a wide range of clients in Asia,
Latin America, and Europe. A lawyer by training, he has extensive
knowledge and experience in most aspects of the shoe business including
retailing, sourcing, logistics, factory social responsibility, product safety,
customs, labeling, and government regulation of the international shoe
trade. He can be reached at ptmangione@gmail.com.
© FFR - Focus On Fashion Retail