Friday, July 19, 2013, 08:46
Fast fashion's survival of the fittest
By Sophie He

Mainland consumers have risen to new levels of sophistication and fashion retailers need to adapt to the ever-changing reality if they want to stay on trend and survive. Giordano boss Peter Lau outlines his company’s strategy in the face of an increasingly competitive market. Sophie He reports.

Fast fashion's survival of the fittest

By all appearances mainland shoppers have become sated in their consumer spending binge and for retailers, things may never be the same.

“(Consumers) on the Chinese mainland have entered a phase of normalized spending. The free spending we used to see two years ago, probably won’t come back... (fashion apparel) brands in China are waking up to that reality,” Peter Lau Kwok-kuen, chairman and chief executive at Giordano International Ltd, tells China Daily.

Not only has overall consumption on the mainland slowed, consumers across the border are getting more sophisticated — choosier. Gone are “good old days” when consumers from across the border threw money around — buying stuff out of sheer curiosity or maybe because they wanted to make a personal fashion statement.

Giordano, a Hong Kong-based clothing retailer, in business since 1981, has depended on making fast strategic moves, not too far unlike tap dancing, to keep its 2,600 stores and shop counters running ahead of the curve.

Giordano moved into the mainland market in a big way during the 1990’s — and soon enough, established its largest market.

Consumer habits are changing quickly — and with the dawning of international “fast fashion” companies like H&M and Zara, the mainland market is no exception.

“Zara and H&M changed the rules… we have to understand the implications,” says Lau. Some of his colleagues refuse to acknowledge H&M and Zara as competition because their product offering is different from Giordano, Lau says. He thinks people who insist on clinging to that point of view ignore the reality of how much consumer behavior has changed since Zara opened its doors. Lau compares it to the way the iPhone changed consumer expectations about mobile phones.

Lau says he read somewhere about the “zaratization” of the apparel market over the last few years. It was a reference, he points out, to how “fast fashion” has conditioned consumers to the expectation that they can buy fashion products at budget prices. Casual isn’t what it used to be and casual brands were forced to redefine what they were all about — redefine casual, actually.

“Casual is no longer just a T-shirt or a plain Polo, we have to be more in fashion,” says Lau, stressing that although Giordano is not selling the kinds of things you’d wear to a cocktail party, its products still need fashion flair — “casual — but with design”.

Living amid a community consisting of Chinese local fashion brands struggling to stay alive and aggressive international fast fashion giants, Giordano’s high times are gone, where the mainland is concerned.

The company saw it coming and had been preparing for the day but when the change came it hit fast and hard. The company’s annual retail sales on the mainland had been expanding at 17 percent a year. Then, around the middle of 2011, Giordano’s high-flying balloon hit an air pocket and landed sharply back on Earth.

Fine tuning

The company reported a 5 percent year-on-year decrease in sales on the mainland in this year’s first quarter. Sales for all of last year fell 6 percent.

“Your company (Giordano) faced considerable headwinds on the mainland where consumer demand was down and competitive pricing intensified,” Lau said in a statement to employees earlier this year.

The number of Giordano’s stores on the mainland slipped by 36 to 1,207 at the end of March. That came after the company recorded a net decrease of 129 stores on the mainland during 2012.

Lau says the stores on the mainland closure hadn’t been profitable in the first place — so were no big loss — and over all, he’s not worried.

“We have over 1,200 stores (on the mainland), there are bound to be some non-profitable ones,” says Lau.

“Besides, many brands have been closing stores on the mainland… a few years ago, the industry expanded too much, now it has normalized; and in the meantime, the rent is rising, shops that aren’t making a profit have had to be closed. This is normal,” he adds.

He says that Giordano’s expansion strategy on the mainland is still in place but it’s had to undergo some fine turning. The company is heading into department stores — stepping back from more traditional store front boutiques. The store fronts have to pay fixed rent. In department stores, company operations pay commission or turnover rent, only (a preset proportion of turnover). It’s a lot easier to manage risks that way.

“When we got into some of those store fronts two years ago, the rent was very high, so we are losing money (in those shops), but in some new shops we have just gotten into, the rent is more reasonable, because everybody knows economic growth on the mainland has slowed down and has normalized as compared with 2 years ago,” Lau says.

“We started this (expanding into department stores) during the first quarter (of this year), so far we have closed some street shops as well as some shops in the shopping malls, but we will be getting more into department stores in the third and fourth quarter, and by the end of this year we may be able to make up for some of the lost outlets,” says Lau.

Giordano’s gross profit margin on the mainland remains buoyant enough. In the first quarter, the company’s gross margin was 54.5 percent, 1.1 percent higher than the same period last year.

Signs the Chinese economy was cooling off started appearing a few years ago. Giordano started making adjustments — bringing its expenses under tighter control, especially labor costs. “We have fewer people today, but we try to simplify the process, so that fewer people can do more,” says Lau.

Last year, Giordano cut 500 workers from its payroll, from 3,900 to 3,400.

Besides, Lau says, the firm has very good relationships with some suppliers. It was also able to increase the selling price of its products.

“I am quite happy with our gross profit margin at the current level and I believe there is still room for the margin to expand,” he says.

To compete with international brands including Uniqlo and local rivals like Meters/bonwe on the mainland, Giordano also has launched different clothing lines, adopting a “multi-brand” strategy. Its “Giordano Lady” line, launched over a decade ago, is still doing well, says Lau.

Youth oriented

Fast fashion's survival of the fittest

Giordano is also moving into children’s clothing. The venture has been successful in some markets, not in others. “It is successful in Taiwan and Hong Kong, but not so much on the mainland, (I believe) the problem is localization,” says Lau, “the design of children’s clothes on the mainland varies from region to region. That is something we have to learn.”

The company is constantly changing its strategy, even redefining its brand to meet market demands which have come under strong influences from the international fast fashion brands.

“What they have done to us is force us to upgrade faster, going after younger customers. We have already been pushed out of some malls to give space to international brands” says Lau.

When Giordano’s store has to relocate to where there is lower traffic, it’s likely to meet a drop in sales.

“We used to be a fast retailer, we sold many, many pieces per day, and now we are selling less. We need to increase selling prices in order to make up for less revenue. That’s why we have to upgrade and target younger people, as older customers we used to target won’t pay a lot of money (for clothes).”

When Giordano entered the mainland market, it was known as a “casual brand”, now the company describes itself as a “modern casual” fashion brand. It’s targeting younger people between 15 and 30. “Giordano Lady” is targeting more mature customers, 25 to 45.

The company has new advertising campaigns in Hong Kong and the mainland, to promote its brand with more “local interest”. It’s also working with local designers or launching products featuring local elements, to attract younger consumers.

“I’m not saying that we need to copy (Zara and H&M), we have to see that these pioneers have opened a market for you; it’s like they open a door for you and you have to jump in,” says Lau.

He believes that currently, the situation on the mainland is improving for the apparel industry as most of the companies have already learned their lesson about “over expansion” and have disciplined themselves, learning to manage all aspects of their operations more effectively.

“Many apparel brands had such high inventory, most lowered their selling prices to clear the old stock. I believe the inventory problem has been handled. Their inventories are now at an acceptable level, like Li Ning said a few days ago, so I believe the significant price discounts are unlikely to continue.”

Wrong product, wrong city

Lau admits that Giordano made similar mistakes on inventory, too much stock of the wrong product in the wrong city, but he stressed they weren’t big mistakes. The company has always been very careful about inventory.

Lau says that in his 26 years with Giordano he has seen important changes in the Chinese apparel industry, many ups and downs along the way of the company’s development.

“I am actually excited about all the changes in the market, as the company is always ready to change with the market, although change usually means risk; at least I am always ready to change.”

He says his job gives him the opportunity to guide and influence those working under him, especially people on the management team. He tries to share a vision consistent with trends in the market. He says that’s the part of his job that gives him the greatest satisfaction.

Watching managers develop a successful operation, gives him a great sense of accomplishment that makes up for all the frustration of witnessing the failures, says Lau.

Fast fashion's survival of the fittest

Contact the writer at sophiehe@chinadailyhk.com