ASIA: QUEST FOR VALUE
FAR EAST CONSUMERS HAVE A NEW MOTTO: IT’S CHIC TO BE CHEAP.
Byline: Vicki M. Young / With contributions from Kavita Daswani, Hong Kong / Koji Hirano, Tokyo
NEW YORK — Spend, spend, spend.
That’s what many fashion executives in Asia wish consumers would do, but it’s not likely to happen anytime soon, even though the economic storm clouds hovering over Asia appear to be lifting.
That’s not to say that consumers aren’t opening their purses. They are, but the economic constraints of the last two years have revolutionized the buying habits of the Asian customer: They’re buying less and have become expert bargain hunters.
Adrienne Ma, general manager of Hong Kong-based Joyce Boutiques Ltd., a chain of upscale stores throughout Asia, observed: “As a result of the economic crisis, disposable income and buying sentiments have been greatly affected…customers are still cautious in their spending and have also developed an interest in bargain-hunting. So while there is still sufficient demand in luxury products, the desire to buy immediately is less than before, and many tend to wait for sale time.”
David Coleridge, managing director of Alfred Dunhill in Asia, agreed: “Last year, we perceived that customers only wanted to spend if they got a discount. It was not so much the absolute price of the item, but the fact that they [got] a 10 percent discount that mattered.”
Michael Hsieh, president of LF International, a venture capital fund that invests in apparel firms, was in Hong Kong last month.
“People were walking around in the shopping districts, so the traffic there wasn’t necessarily down,” he observed. Hsieh noted the excursions to the shopping sites could also have been a form of recreation for the consumers. “I saw an enormous amount of stuff on sale, but people weren’t buying, and it looked like they just weren’t in the mood,” he said.
Zachary Belil, president of Work in Progress, a U.S.-based private label sweater manufacturer with a factory in Taiwan, pointed to the high levels of unemployment that have taken a toll on consumer confidence.
“While my volume of business hasn’t changed, I’ve noticed a fallout in the industry, where many of the middlemen are gone. No one buys from wholesalers anymore when they can go directly to the source,” he explained.
Consumers have also shifted their focus in what they buy, noted Yukihiro Moroe, managing director of Goldman Sachs Japan Ltd. “Buying PCs and paying cellular phone bills [account for a greater] share than before. And along with the change [in spending disposable income], fashion market volume will shrink in the long run,” he said.
Another apparel executive in Japan agreed.
“Fashion [is no longer a] priority in the people’s consumption behavior. Only 10 years ago, people here bought whatever had famous-brand tags. But now, people don’t buy useless goods, even though they are famous brands.”
Alice Maier, senior division manager of the fashion and accessories department of HCL Ltd. in Hong Kong, which distributes the French fashion label Leonard and Japanese beauty line Shu Uemura, added, “The common thinking now is ‘Why bother spending this here and now if I can buy it elsewhere at a better price?’ They are encouraged by the fact that it seems almost fashionable to buy cheaper things.”
Of course, retailers are partly to blame too. In scrambling for ways to drum up sales, they’ve conditioned consumers to wait until prices drop.
To be sure, some Asian countries are faring better than others; for example, Korea and Taiwan are recovering, while Japan remains sluggish. But consumer confidence in the region remains shaky from persistent economic and political issues lurking in the background: threats of a possible devaluation of China’s currency, uncertainty of the outcome of the upcoming presidential election in Indonesia and mounting tensions between China and Taiwan as they spar over the issue of sovereignty.
Richard Bernstein, first vice president and chief quantitative strategist for Merrill Lynch & Co., who spoke at a recent New York Society of Security Analysts presentation, noted, “Korea is our favorite market around the world right now. It has [some of the] most leveraged companies in the world, but the stock market has been performing.” That’s a hint that the profit cycle is picking up and that the global companies are under repair, he explained.
Korea, according to a Credit Suisse First Boston Corp. research report in July, represents an attractive opportunity for multinational retailers because the Korean consumer crisis has “accelerated the development of discount chains.” The report explained that retailers have taken advantage of falling real estate prices, changing consumer patterns and a reduction of bureaucratic obstacles to opening new space.
But Mark Konyn, director at Dresdner RCM Global in Hong Kong, cautioned that Korea also tends to absorb imports, which could prove damaging to the trade balance as well as force interest rates up and depress consumption. Another problem is the lack of job security.
While China is flirting with a possible currency devaluation, the consensus among experts is that recovery will depend upon the government’s willingness to open the door to new trade, which would make it easier for international retailers and manufacturers to enter the market. China is in talks to join the World Trade Organization.
“China wants to show that it is developing, that it has money,” said Lisa Ng, chief representative of Salvatore Ferragamo in China. “But for any brand to survive in China, it needs to be competitive. It is easy for mainlanders to travel out of China to shop, so many of the major brands have reduced their prices by 10 or 15 percent,” she added.
By yearend, China will have two new international airports, in Beijing and Pudong. Hong Kong-based upscale boutique department store chain Lane Crawford is set to open a site early next year in Shanghai. And the newly built Citic Center, owned by Hong Kong’s Swire Group, will house many first-tier brands.
Angela Moh, consumer analyst at Morgan Stanley Dean Witter, warned that the growth of China’s market is “still very slow [because] people are cautious about spending. The government may try to pump up the stock market [to improve the economy], but I think that apparel retailing is going to be a tough market.”
There’s at least one bright spot ahead for China: the cosmetics market.
According to a Warburg Dillon Read research report last month on the global cosmetics industry, presently 1.2 billion Chinese spend an average of $3 a year each on beauty products, bringing the retail business to about $3.6 billion. The market comprises domestic “suppliers of inexpensive beauty products, [while the] foreign brands are priced on the high end.” Annual sales, according to the report, are estimated at more than $5 billion by the end of 2003.
“Before China opened its doors to foreign investors,” the report said, “skin care products were the most common cosmetic items sold at state-owned stores.” With the introduction of foreign brands, hair and skin care combined is the largest segment of the Chinese cosmetics market. The report noted that Procter & Gamble’s three brands of shampoo — Head & Shoulders, Pantene and Rejoice — command a 50 percent market share.
According to the investment firm, “Most cosmetics consumption occurs in the urban areas, where about 29 percent of the population lives. As China’s urban population becomes more affluent and fashion-oriented, sales of color cosmetics and perfumes should begin to gain in popularity and sales.”
Chet Hazzard, president of design house Vera Wang, agreed with Warburg’s trend analysis, but added that his company views China and the rest of Asia as potentially a huge market down the road.
“Women love fashion there. They love designer brands. The fashion business will become big,” he said, noting that there are two tiers for growth. “There’s a high-end luxury market aimed at a limited number of consumers and a second-tier luxury market for those who are more price-conscious.”
So far, Taiwan hasn’t been affected as badly as the other Asian countries, pointed out Marta Lou, general manager of Taipei Metro shopping mall, which houses brands such as Max Mara and Moschino.
“There may have been a slight decline in department store-type merchandise, but we think things still look prosperous. If people slow down their buying, it is more because they don’t have the mood, not because they don’t have the money,” Lou said.
She added that brands such as Chanel, Fendi and Gucci were still performing well, as was middle-market merchandise that is locally made. “Taiwan is still the market to watch,” she said.
Elsewhere, the outlook isn’t so good. Hong Kong remains badly affected by the slump in tourism, a major driver of the economy, according to Dresdner’s Konyn.
The Hong Kong & Shanghai Banking Corp., Hong Kong’s leading banking institution, forecasts flat sales for 1999 and 2.8 percent growth for 2000. HSBC predicts that it’ll take Hong Kong another 18 months to recover.
“It will take time before people start spending again,” Morgan Stanley’s Moh predicted, explaining that “things will probably slow down toward the end of the year and there might be some build-up of inventory.”
Tara Melwani, managing director of Jay Gee Enterprises (PTE) Ltd. in Singapore, pointed out, “The [Singaporean government’s] cost-cutting measures…helped to some extent, and the general feeling is that the market has bottomed out. But we are not out of the woods yet. We haven’t seen any real growth in [retail and apparel] and are unlikely to in the next few months.” Jay Gee includes in its stable of brands Levi’s and Escada.
Nico Moran, managing director of P.T. Sanggar Catur Utama, a Jakarta-based retailer whose brands include Levi’s, Prada and Hugo Boss, explained the problems in Indonesia, where political unrest has spawned widespread violence: “We’re trying to survive here the best we can. Most retailers are holding lots of inventory, and in order to activate the market, we are offering gifts-with-purchases and huge discounts.”
Sales of women’s apparel have plunged, according to Moran, who noted, “People are not going out, [they’re] not spending money and there is an exodus of the rich, who are leaving until things settle down and there is law and order. Most people here live in fear. There are muggings and most people try to get home early.”
He added, “In various parts of Indonesia, stores are being burned and members of Chinese society are arrested, [and] they are the main operators of the retail trade.”
More than two months after Indonesia’s parliamentary election, the official results were released last week confirming that Megawati Sukarnoputri’s Indonesian Democratic Party for Struggle won. Incumbent president B.J. Habibie of the Golkar Party came in second. The results make Sukarnoputri the favorite to be chosen president by the electoral college in November.
In spite of the current problems lingering in the region, hope runs high for its future.
Abel Halpern, The Texas Pacific Group’s European managing director, an investment firm that expects to close on its deal to buy the Bally brand in October, said, “From a macroeconomics point of view, there will still be hiccups in the future for East and Southeast Asia. Over the long term, the region will be an incredibly prosperous and dynamic place.” His immediate focus for the brand’s revitalization is Japan.
The Japanese economy, meanwhile, hasn’t been too kind to retail, but companies that are part of the upper echelon of luxury brands have fared better.
Masafumi Shoda, analyst at the Nomura Securities Financial Research Center, observed: “Two groups — the high-end brands and good quality merchandise at reasonably low prices — are doing well, while the brands in the middle face a tough time.”
The lower-tiered brands include Muji and Comme Ca De Mode, while luxury brands that remain strong in Japan are Tiffany and Prada. Shoda explained, “Tiffany has a wide price range and doesn’t have strong competitors, while Prada introduced a sport line, which also attracts consumers here.”
Retail strategies for luxury brands have shifted, with more freestanding stores instead of in-store shops in department stores, observed Masayoshi Soutome, senior staff researcher at the Mitsubishi Research Institute.
“Opening flagships is a must for a brand’s survival,” Soutome said, noting, however, that just opening a store doesn’t guarantee the success of the brand. “The gap became wider between the brands that generate enough sales and profits through their flagships and the others that open the shops only for image control and don’t make money through them.” According to Mitsuru Sakuraba, president of Charles Jourdan Asia Ltd., there are three factors for survival in the next century: brand image control; supply control, including proper balance of imported goods and licensed goods, and distribution control.” Department store operators, however, are getting shut out. Sales have declined for 14 months straight for the period ended in June. Responding to the continued sales slump, some department stores last month said that they would remain open during many of the upcoming national holidays.
Department store chain Sogo Co. also said last month it would cut 2,500 workers as part of a company restructuring. And the Saison Group, which includes the Seibu chain, is also ailing. The group, which was one of the first to introduce high-end fashion to Japan, has been divesting many of its businesses. Both Saison and Seibu are parties to a multimillion-dollar lawsuit in the U.S. The suit was filed by Lee Weissman over commissions allegedly owed in connection with Saison’s divestiture of property in the U.S.
Still, the biggest change resulting from the economic crisis might reside in the mind of the consumer.
Ryohei Onoe, executive vice president of Etro Far East, noted, “Consumers [in Japan] have money, but are very conscious of what to pay for and when. Our business goes well if we grab the mind of such customers.”