China Insight: How Can Fashion Enterprises in China Consolidate Their Moat Three Years Into Pandemic?

The lockdown of Shanghai and other Chinese cities to prevent the spread of COVID-19 has stirred growing pessimism about the performance of global luxury groups as well as the potential impact on the industry due to the closure of offline businesses and suspended logistics.

From Hong Kong to Shenzhen and Shanghai, businesses in cities that play a key role in the fashion economy have been halted or hampered by the pandemic one after the other. What exactly is the situation facing Shanghai and its entire fashion industry that is attracting the world’s attention?

As the old saying goes, the present is determined by the past. It is important to go through its past before we can understand the current situation because the experiences and strengths accumulated to a certain extent contribute to Shanghai’s resilience in the current situation.

In the 1990s, attracted by Hong Kong’s developed market economy and the huge potential of the mainland, foreign fashion and luxury companies that initiated globalization dropped their “anchor of development” in Hong Kong. The city became the pilot window for international fashion brands to test the Chinese market and communicate with local consumers.

Later, Shenzhen, a city near Hong Kong, developed into the fourth largest in China and the fifth largest financial center in the world as the first special economic zone. In the “Global Fashion City Index” released at the end of last year, Shenzhen ranked among the world’s top six fashion capitals for the fifth consecutive time.

Shenzhen — along with Beijing, Shanghai and Hong Kong — has formed the front rank of China’s fashion industry, becoming an important symbol and contributing to the improvement of the country’s fashion image on the global stage, marking its progress toward becoming the “third pole of fashion” comparable to Europe and America. Meanwhile, Shanghai, as the city with the country’s largest economic output, is the window of Chinese fashion to the world and the center of the supply chain of the Yangtze River Delta for the domestic market. It is the key connection point between the domestic Chinese and global markets.

At this critical moment, fashion companies headquartered in Shanghai or have strategic layouts in this city are contributing even more. For example:

• K-Boxing menswear has done research and development into a product called the “Angel’s Armor,” which can accommodate all kinds of nucleic acid testing sampling items in a timely manner.

• In addition to the timely distribution of rice, eggs, vegetables, meat and other daily necessities to targeted places in the city, Peacebird Group is aggressively looking for new retail methods amidst the lockdown, while continuing to provide logistical support and communicating with its staff.

• Department store group Lane Crawford provided free outdoor electronic advertising screens for charity promotion, prepared fresh vegetable gift packs for Shanghai customers who are self-quarantining at home, provided gift boxes for customers containing Protector Daily masks with professional-level filtration and elegant designs and protective spray sets from Bondi Wash, an antibacterial plant brand from Australia. It also enhanced training for staff on communication with customers remotely during the closure.

What is clear is that these fashion companies and others have reintegrated their production lines and resources to become key parts of the pandemic response. What is less visible is that their online businesses have also stabilized and improved, resulting in year-over-year growth even during the crisis.

All of these actions are similar to what occurred in the West in 2020 and 2021 during its various lockdowns as a result of COVID-19. Luxury, fashion and beauty groups from LVMH Moët Hennessy Louis Vuitton to Clarins and Christian Siriano pivoted their operations to producing sanitizer or personal protective equipment, while retailers including Walmart Inc., Target Corp., Macy’s Inc. and Costco saw their online sales boom.

Cash flow, the primary immunity of fashion companies against risks

Three years fighting against COVID-19 required China to rethink the relationship between health and wealth, during which time the fashion industry has been constantly evaluating its risk resistance. Cash flow has been the most significant challenge and the key for enterprises to survive the pandemic.

There are numerous estimates as to the economic impact of the citywide lockdowns. Public data shows that Wuhan, which was closed for 2.5 months in the first quarter of 2020, saw gross domestic product drop from 360 billion yuan, or $55.3 billion, to 200 billion yuan, or $30.7 billion, an average loss of 2.1 billion yuan, or $32.3 million, a day. Using the same calculation, as a first-tier city with almost twice the GDP and population of Wuhan, the equivalent in Shanghai would be a loss of 40 billion yuan, or $63 million, a day. But what is more important than these economic losses is the potential longer-term damage to production capacity and the industrial supply chain.

The good news is that there appears to be none so far. Despite the inevitable losses, the pandemic has, if anything, made the fashion industry in Shanghai even more resilient.

For example, take the online performance of new consumer brands in the beauty industry. On the one hand, they benefit from online sales that are free from the risk of retail closures under pandemic control measures. On the other hand, the latest outbreak is centered in Shenzhen, Shanghai and surrounding areas, putting the Pearl River Delta and Yangtze River Delta in a lasting lockdown state that has resulted in a stagnation in warehousing and logistics operations since employees can’t travel to work. Since consumers are confined at home, demand for beauty products has dropped. The decline in demand — along with the need to retain talent and production capacity, increasing costs — has pressured cash flow.

Lets Group (Shanghai), the brand management company behind Into You, following Perfect Diary and Florasis, is representative of new consumer brands in the beauty industry, and is focusing on channel development in Europe, America and Southeast Asia after completing its expansion in the Japanese and Korean markets. At the beginning of this year, Lets Group (Shanghai) received an angel round of financing of 30 million renminbi, or about $4.6 million, from GSR Ventures and Fosun RZ Capital. The company has been upgrading its cash flow management methods; developing a closed-loop ecological chain from raw material supply through to sales channels and improving logistics solutions. By taking advantage of large warehouses across the country where goods are stocked to meet customers’ needs through stable logistics and rapid delivery, Lets Group (Shanghai) also has worked to leverage its resources to provide public assistance during the pandemic.

The sales of Nature’s Envy, a natural and organic brand established in the U.S., were hit hard as a result of COVID-19. Because of the pandemic-induced pressures on logistics and transportation, process timelines were lengthened. Nature’s Envy has a market penetration rate in high-end supermarkets of more than 95 percent after 15 years of cultivating the Chinese market, which meant its sales were severely impacted when these stores were closed. As a result of the dual pressures of blocked import logistics and lower retail sales, Nature’s Envy has taken a more active approach toward using data tools to predict domestic demand and product supply quantities more accurately. The changed consumer environment has forced the company to adapt its model to cover a full range of sales channels. As a result of these and other steps, and continuous investment from relevant medical companies in Australia, Nature’s Envy was able to maintain strong cash flow despite the pandemic.

Going online: the operational norm in the post-pandemic era

With the continuous development of digital and virtual technologies, online operations have become mainstream in China as the fight against COVID-19 enters its third year.

In an interview with WWD, Blondie Tsang, president of Lane Crawford and Joyce, said that during the pandemic, Lane Crawford has made it a priority to enhance its digital capabilities, tap into digital talent and innovate online sales models. In fact, since the outbreak of COVID-19 in 2020, Lane Crawford has adopted digital tools to keep sales and “personal image consultants” in close contact with customers and strengthen the emotional connection, while integrating online and offline sales.

For customers who are unable to visit stores, Lane Crawford provides personalized services through online channels such as livestreaming and online communication with style consultants. In order to provide customers with a convenient and diverse shopping experience, it continues to improve its online services by launching initiatives such as holiday wish lists and membership of WeChat apps.

At the same time, research and development into 3D technologies saw explosive development. For example, Kashion and Kimhaie, as the two leading ODM enterprises in China, have established a large digital style library and a digital fabric library of 40,000-plus varieties, respectively, giving them a competitive advantage. With a significant increase in R&D spending and more channels and options for marketing, they have the ability to cope with offline obstacles related to human or material resources as well as the explosion of online fashion demand created by the metaverse.

Behind the improvements in the digital capabilities of retailers and manufacturers are a number of Chinese fashion technology companies. For example, Style3D continues to expand its digitalized apparel-centered ecosystem, taking the 3D digital service platform of the fashion industry chain as its cornerstone to link YKK, Alvanon, Pantone, SAB and other leading enterprises and enable them to cooperate with industry giants such as Nvidia, Tmall and Baidu Intelligent Cloud. Applying internet technology services to all ends of the fashion industry better enables them to resist the pressures brought on by the pandemic.

Dividends in the Chinese market and industry believers

The development of overseas companies in China strengthens the country’s industry while enabling international brands to grow their market share, even during COVID-19.

Shiseido, which considers China its most important overseas market, regards its operations in the country as its second global headquarters. These are located in Lujiazui of Pudong District. In addition, Shiseido has factories, logistics and warehouses in Shanghai. As a result, it has suffered significantly during the most recent pandemic-induced lockdowns. Despite this, it will continue to introduce brands to meet the increasing demands and diversified beauty needs of Chinese consumers; increase local R&D at the third Shiseido R&D center located in the Shanghai Oriental Beauty Valley; participate in local innovation, and reach a strategic cooperation with Boyu Capital, a leading alternative asset management company in China, to set up the Shiseido Beauty Fund.

Another example is the Thai Ho Group, which established a factory in Kaohsiung, Taiwan of China in 1980 and moved to the Shanghai area in 1992 to set up a production base. The beauty company has set up branches in the Taiwan as well as the Shanghai and Hangzhou regions of China and has also collaborated with its branches in Japan and North America as it continues to implement its mid- to long-term plans despite COVID-19. The full industrial chain that was expected to be completed by 2025 was actually done so ahead of schedule in March. Behind this is the belief of its founders and executives that the ongoing changes in Chinese cosmetic regulations are a favorable “talisman.”

The beauty industry has been facing more stringent regulations since mid-2021. In this context, Thai Ho Group has established a government-approved third-party cosmetic efficacy assessment center and worked with its customers to help promote the benefits of the use of beauty products in a legal manner. To capitalize on the popularity of TCM in China, Thai Ho Group has established a pharmaceutical factory to conduct cross-border R&D into the benefits of natural-based beauty products, helping it gain further competitive advantage in the market.

Senfu Zhang, the founder of the Nature’s Envy, has lived in the U.S. for many years and manages his business in China remotely. During his more than a decade of managing imported brands in the Chinese market, three of those years have been spent dealing with the fallout of the pandemic, and he has witnessed the prevention and control measures adopted by the U.S. and China. The entrepreneur, who holds a master’s degree in economics from the Chinese Academy of Social Sciences and an MBA from the University of Southern California’s Marshall School of Business, said: “We are very confident in China and are bullish on the Chinese market in the long term. According to the minimum annual economic growth target of 5.5 percent set by the government, China’s economy is likely to become the world’s largest in 2030.”

Editor’s Note: China Insight is a monthly feature by WWD’s sister publication WWD China looking at the Chinese market.