Baleno: Expanding Retail Operations in China

ASIAN CASE RESEARCH JOURNAL, VOL. 13, ISSUE 1, 127 (2009) Key words: casual wear Baleno china

THE COMPANY
Baleno was established in 1981 by young fashion experts. This group had left senior management positions in Giordano to set up their own company to promote a full range of casual wear to Chinese teenagers and youths. Many Hong Kong retailers were also preoccupied with the growing Hong Kong market and did not have the resources to explore the China market. Baleno saw this as an opportunity. The company entered China in 1992. Initially, the management used a similar business model as Giordano did. A key success factor of Giordano was its ability to pick good locations for its stores. Using the me-too approach, Baleno quickly opened stores right next to Giordanos. This follower strategy enabled the firm to enjoy the benefits of low risks, cost efficiency and high traffic. By 1998, Baleno overtook Giordano in terms of sales revenue and brand awareness, making it the leader in Chinas fashion market. Thus, the follower strategy was no longer appropriate. To consolidate its position, Baleno decided to build a strong brand image which customers would associate with high quality, value, style and status. It launched a series of marketing communication programs to teach Chinese youths how to mix-and-match casual wear to achieve that individual look. These educational programs would reinforce the positive image of Baleno. Andy Lau, a popular actor and singer in Greater China, was engaged as its spokesperson. A survey conducted by Baleno had shown that Andy Lau had a healthy image and was rated the most popular movie star in the Mainland. More franchised outlets were opened in China. Production capacity of dyeing and knitting lines were also expanded to achieve greater synergies. Baleno decided on a new image A simple living attitude. A new collection, clean and simple design with fashionable details for both sexes, was launched in Hong Kong, China, Taiwan and Macau. Baleno positioned itself as value for money, offering mass apparel design, quality clothing at competitive prices, superior customer service and a comfortable shopping environment. Simple, clean and natural lines were popular then. Consumers increasingly desired their own personal style, preferring to mix-and-match clothing themselves. They also demanded quality service from frontline staff, garment alteration service and goods returns and exchange. Attractive window displays, interior design, lighting, merchandising layout, and background music also contributed towards a comfortable shopping environment for consumers. CHINAS FASHION MARKET Chinas economy grew by 11.4% in 2007, making it the fastest growing major economy in the world. Increasing income and the governments efforts in encouraging consumer spending have resulted in increased domestic consumption. Table 2 shows that household consumption in China rose from 238 yuan in 1980 to 6,111 yuan in 2006. Rural and urban household consumption in 2006 was 2,848 yuan and 10,359 yuan respectively. Total expenditure on clothing for rural

households in 2006 amounted to 118.36 billion yuan and for urban households, this was 509.29 billion yuan.3 On average, urban households spent five times more on clothing than rural households.4 Income levels were the highest in the eastern coastal regions. Residents here had greater exposure to the outside world. Department stores like Parkson, Shanghai Bailian and Wal-Mart accounted for 40% of the market. These department stores sold clothing brands like Hugo Boss and local brands like Li Ning, Borne and Joe One. Table 2. Household Consumption in China Value (yuan) Year All Households Rural Households Urban Households 1980 238 178 489 1985 446 349 765 1990 833 560 1,596 1995 2,355 1,313 4,931 2000 3,632 1,860 6,850 2001 3,869 1,969 7,113 2002 4,160 2,062 7,387 2003 4,411 2,103 7,901 2004 4,925 2,301 8,679 2005 5,46 2,560 9,410 2006 6,111 2,848 10,359 Source: China Statistical Yearbook 2007 (Ref. 3). Franchised and local individual clothing outlets accounted for the other 60%. Profit margins in retail chains were high due to low manufacturing costs. Profit margins of brands like Giordano and Ports were reportedly as high as 50.5% and 70.4% respectively in 2005. Guangzhou, Shanghai and Beijing were the cities of influence for fashion.5 MARKET SEGMENTS There were initially two market segments: (1) low priced basic apparel under local brand names and sold in Chinese department stores, foreign hypermarkets or small family-owned specialty chains and (2) luxury brands sold in either franchised boutiques or upscale department stores. An emerging middle-class later gave rise to a new category involving quality brands, both Chinese and foreign, being sold in department stores and specialty stores the latter mostly foreign operated or franchised. This segment included Hong Kong companies such as Giordano, Baleno, Jeanswest, Bossini and Esprit. Priced slightly higher than local brands, this segment was expected to grow considerably in the next few years. Their target middle-class consumers were increasingly sophisticated, demanding higher quality, variety and innovation from retailers. These consumers were relatively young, well-educated, had discretionary purchasing power and aspired to a better life. Their sense of fashion was highly influenced by European luxury brands and by

Japanese style and pop culture . Consumers were price sensitive, highly brand conscious and were increasingly concerned about product quality and customer service. The main buyers of clothing were those between the ages of 20 and 40 years. This group formed 50% of the market. Those older than 40 formed 19% of the market.7 Younger consumers seemed to prefer foreign-made or foreign brand apparel since they were more influenced by fashion and liked to try new products. They considered symbolism to be important and were less sensitive to high prices.8 Well-known foreign brands were regarded as superior and were seen as status symbols. Older consumers who had lower purchasing power were more conservative in their tastes and preferred products of reasonable quality. Consumer attitudes towards local brands changed with improvement in quality. Brands like Borne, Li Ning, Anta, Hong Guo, and 3610 were very popular as were Hong Kong brands like Giordano. Improvement in quality management of local manufacturers and pride in Chinas accomplishments had also resulted in many consumers preferring local brands. In the apparel retail industry, consumer preferences and fashion trends were crucial factors affecting sales. These factors, which varied from region to region in China, are described below: a) Southern China: Design or color was important and consumers preferred popular fashion in Hong Kong and Taiwan. Comparatively, consumers in this region had better product and brand knowledge. b) Eastern China: Consumers considered brand, shop environment, product and fabric quality the most important choice criteria for clothing purchases. c) Central China: Brand image was the most important. Consumers here considered Shanghai as the trendsetter. d) Northern China: Brand image and quality were equally important. In addition, consumers preferences were influenced by trends in Korea. e) Southwestern and northwestern regions: Consumers liked what was popular in Shanghai/Beijing but were 12 years behind these cities. Consumers were relatively sensitive to price and preferred to buy low- to medium-priced clothing. A study by Cotton USA showed that white-collar workers in Guangdong and Shanghai were the most trend conscious. Consumers in Dalian and Wuhan were more conservative with 45% preferring more long-lasting and classic styles. Income and consumption expenditure on clothing also varied in various parts of China. Table 3 shows that the national average disposable income per capita of urban households and expenditure on garments for 2006 was 11,759 yuan and 646 yuan respectively. Average income was highest

Table 3. Per Capita Annual Income & Expenditure of Urban Households by Region (2006)

Region Disposable Income Consumption Expenditure Expenditure on Garments (yuan) (yuan) (yuan) National Average 11759.45 8696.55 646.69 Beijing 19977.52 14825.41 990.96 Tianjin 14283.09 10548.05 606.70 Hebei 10304.56 7343.49 591.39 Shanxi 10027.70 7170.94 748.96 Inner Mongolia 10357.99 7666.61 825.40 Liaoning 10369.61 7987.49 582.36 Jilin 9775.07 7352.64 640.20 Heilongjiang 9182.31 6655.43 657.73 Shanghai 20667.91 14761.75 752.88 Jiangsu 14084.26 9628.59 640.90 Zhejiang 18265.10 13348.51 1057.49 Anhui 9771.05 7294.73 626.22 Fujian 13753.28 9807.71 605.33 Jiangxi 9551.12 6645.54 531.59 Shandong 12192.24 8468.40 777.25 Henan 9810.26 6685.18 671.27 Hubei 9802.65 7397.32 622.43 Hunan 10504.67 8269.3 624.89 Guangdong 16015.58 12432.22 525.16 Guangxi 9898.75 6791.95 354.45 Hainan 9395.13 7126.78 288.52 Chongqing 11569.74 9398.69 764.33 Sichuan 9350.11 7524.81 533.57 Guizhou 9116.61 6848.39 592.69 Yunnan 10069.89 7379.81 564.91 Tibet 8941.08 6192.57 493.56 Shaanxi 9267.70 7553.28 543.21 Gansu 8920.59 6974.21 591.69 Qinghai 9000.35 6530.11 510.09 Ningxia 9177.26 7205.57 631.94 Xinjiang 8871.27 6730.01 665.28 Source: China Statistical Yearbook 2007 (Ref. 3).

in Shanghai (20,667 yuan) and lowest in Xinjiang (8,871 yuan). Zhejiang residents spent the most on garments (1,057 yuan) and Hainan residents spent the least (288 yuan). Besides income,climate was another factor accounting for differences in consumption across the country. In regions where

seasonal differences were distinct, consumers tended to buy more clothes to cater to different weather. In the northern region such as Xinjiang, Jilin, Heilongjiang, Liaoning and Inner Mongolia where the winter was long and cold, consumers wore coats, cashmere and cotton padded wear. Annual sales of casual wear accounted for 18%20% of the market. As more Chinese consumers embraced a leisure lifestyle, the casual wear market was expected to grow. Chinese consumers were also getting more health-conscious. Increasingly interested in participating in sports, they looked for clothes that were comfortable and suitable for these activities. The trend towards casual dressing also extended to Chinas workplace. An increasing number of enterprises in China have relaxed the dress code to allow smart casual wear. Consumers criteria on choice of garments included fit, comfort, style, colour, workmanship and either fabric, fiber content or fabric comfort, brand and price.8 A survey in 2001 investigating casual wear product attributes conducted on consumers aged 15 to 45 in six cities in different regions of China Beijing (North), Shanghai (East), Guangzhou (South), Chengdu (South-west), Harbin (North-east)and Xian (North-west) revealed that Shanghai residents valued style and workmanship. They paid attention to colour and brand name when purchasing casual wear. Consumers in northern cities like Beijing, Harbin and Xian were less concerned about colour. Those in Guangzhou were less concerned with brand and workmanship relative to their Shanghai peers. Differences in consumer behaviour may be due to differences in tradition and culture. Shanghai residents were known for their attention to appearance whereas Guangzhou residents were known for their love for food rather than clothing. Older consumers, being more practical, tended to placed greater importance on fit, comfort, style, colour, price, permeability and fibre content while younger consumers tended to pay more attention to symbolic factors like trendiness and brand name. Younger consumers may be further segmented based on age and lifestyle. A recent study on the lifestyle and perceptions of teenagers and young working adults in Beijing, Shanghai, Guangzhou, Chengdu, Xian, Shenzhen and Shenyang conducted by the Asian Centre for Brand Management in 2008 showed the following: a) Age less than 18 This group comprised mostly of students. They tended to be fun loving and led active lives. They were also optimistic about the future. Purchasing power of this group was low. b) Aged 18 to 25 This group comprised mostly of university students and young working adults. Their focus was on their future, i.e. careers or family. They were trendy and they spent more time surfing the internet, seeking information on news, entertainment and travel. They described themselves as friendly, gentle, moderate in their ways, stable and mature. Purchasing power of this group ranged from low to medium. c) Age 25 and above This group was more mature. They worked very hard and would occasionally reward themselves with some luxuries. Women tended to focus on their appearance and were willing to spend on clothes, jewelry and cosmetics to make themselves look more beautiful. Purchasing power of this group ranged from medium to high.

FASHION TRENDS AND CONSUMER BEHAVIOUR A Hong Kong Trade Development Council survey in 2003 showed that consumers in China were less influenced by the fashion trends in the United States, Europe and Japan. Hong Kongs fashion trends tended to exert a greater influence on Chinese consumers, with one third of the respondents considering Hong Kong trends as influential in their choices for clothing. Of the Mainland cities, Shanghai exerted the greatest influence. Shanghai was regarded as a trendsetter in China in everything from fashion to lifestyle. As Chinese consumers knowledge and purchasing power increased, they became more sophisticated, fashion conscious and value-oriented. Their focus shifted from low price to that of design and quality. They increasingly desired to express their individuality. More now pursued self-satisfaction and self-expression. Affluent consumers now considered whether the style, cutting and brands of the clothes could best express their tastes, social status, lifestyles and individualities. Once perceived as conservative, Chinese consumers now preferred richer and sharper colours. Rapid development of the media and the internet, increased opportunities for travel and study abroad had greatly increased their awareness of fashion trends. With greater access to information, consumers could now compare prices, quality, workmanship and design when they shop for clothing. They also sought more fashion forward merchandise. Mainland consumers now enjoyed shopping for clothes, buying a wide variety for different occasions and for mix and match. Urban consumers also tended to buy more accessories to go with their clothes. The rising number of young women in white-collar jobs was also one of the key drivers of Chinas apparel market. Financially independent and increasingly concerned about their appearance and image, this group could afford to spend more on higher-priced clothes. To respond to consumers growing demands for quality and functional casual wear, firms began to offer a wider choice of T-shirts in terms of fabric, design and pattern. T-shirts made of flax or silk and deodorant, wrinkle free, dry-fit T-shirts were on the rise. Consumers now focused more on design details such as the collars, zip and sleeves of T-shirts. Colour mix and patterns were also richer than in the past. COMPETITION IN THE CASUAL WEAR MARKET The casual wear market was highly competitive and highly fragmented. Since the removal of restrictions on foreign retailers at end 2004, the industry saw a dramatic increase in apparel supply for the mass market and the fast penetration of domestic players which led to intense competition in the mass casual wear sector. Not only had the number of foreign investors increased, strong local competitors with Western quality management and marketing skills had also emerged. Popular domestic apparel brands included Septwolves, Kipone, Weiping, Anta, Feel 100%, Free Bird, Jianlong and Tahan. Foreign brands led the market in T-shirts (Table 4). Domestic players had less experience and generally lagged behind the foreign brands in design and product development. In the market for denim wear, the top five players were local brands (Table 5). Their success was mainly attributable to their competitive pricing, extensive sales channels, especially in the second-and third-tier cities. Foreign brands were frequently active in only a few cities.

Baleno, however, still regarded Hong Kong-based fashion chains as its major competitors. These included Bossini, Jeanswest, Giordano, Esprit, Theme, Crocodile, and Goldlion. Esprit, Theme, Crocodile and Goldlion competed with Baleno only in certain segments of the fashion market. Figure 2 shows the positioning of some of these competitors. Table 4. Share of Top Players in T-shirts in 2007 Brand Share of Total Sales (%)

Baleno 10.90 Jeanswest 4.02 Yishion 3.85 Semir 3.84 Giordano 3.36 Metersbonwe 3.20 Septwolves 2.09 Playboy 2.04 Montagut 1.83 Goldlion 1.16 Others 63.71 Total 100.00 Source: Li & Fung Research Centre (2008) (Ref. 11). Table 5. Share of Top Players in Denim Wear in 2007 Brand Share of Total Sales (%) Boton 13.86 Kipone 12.84 Weiping 7.49 Brazton 6.11 Langying 5.92 LEE 4.09 Baleno 2.62 Texwood 2.45 Pierre Cardin 1.69 Yishion 1.41 Others 41.52 Total 100.00 Source: Li & Fung Research Centre (2008) (Ref. 11).

High Price Fashion Clothing Sports Clothing Giordano Jeanswest Bossini Baleno Apple U-Right Fun Low Price

BALENOS GROWTH STRATEGY About 60% of Balenos stores were franchised. Through franchising, Baleno hoped to: 1) Consolidate its market leadership in the youth segment of casual wear market; 2) Strengthen its competitive position by increasing the number of stores; 3) Promote the brand image of good quality, reasonable price, and excellent service in the most efficient way and 4) Deliver more value to customers i.e. value for money, innovation, simplicity, trust, respect, and service.

REVIEW OF BALENO RETAIL OPERATIONS

Franchising provided additional income in the form of fees and royalty payments ranging from 250,000 yuan to 1,000,000 yuan for a three-year agreement for each store, subject to the size of the franchising operation. Details of the retail operations are shown in Tables 10 and 11. Balenos sales from its retail and distribution business in China amounted to HK$2,431 in 2007 (Table 10). The company has 3,347 stores in 350 cities in China. Franchise income from all markets including China amounted to HK$13.6 million (Table 11). Some difficulties were encountered in managing its franchising chain. First, communicating with and controlling the behavior of franchisees to ensure the continued value of the brand and effective transfer of management know-how, skills and technology was difficult. Although training was provided, some franchisees were still unable to operate the business according to requirement. For instance, when sales were below expectation, many franchisees tended to rely on price reductions to boost sales and this could damage Balenos image. Maintaining a consistent corporate image could be difficult in such circumstances.

Secondly, with rapid expansion, the Franchising Department soon lacked experienced management staff to oversee the franchised outlets in China. This problem became Table 10. Retail Operations of Baleno in Mainland China from 2003 to 2007 2003 2004 2005 2006 2007

Net sales (HK$ million) 1,432 1,598 1,963 2,219 2,431 Retail floor area of directly managed stores (sq. ft) 411,454 621,294 1,322,547 1,601,473 1,672,807 No. of sales associates 4,770 6,395 10,534 10,119 11,089 No. of outlets (directly managed & 1,060 1,750 2,837 3,143 3,347 franchised) Source: Texwinca Annual Report 2007 (Ref. 1). Table 11. Franchise Income of Baleno from All Markets (incl. China) 20032007 2003 2004 2005 2006 2007

Franchise income (HK$ million) 28.689 18.714 21.047 20.881 13.616 Source: Texwinca Annual Reports, 2003 to 2007 (Ref. 1). more critical after 10% of the staff left to become Balenos franchisees and another 15% left to join competitors to assist the latter in their franchising operations. Third, trademark infringement was also a problem. The image that Baleno had carefully created could be seriously affected by fake products from local factories. In most cases, these products were of poor quality and could damage Balenos business in China. Occasionally, some franchisees were found to have purchased fake products for sale in their stores. Fourthly, franchisees may later become Balenos competitors. Once they have acquired the management skills, technology, and the management information system, they could open stores under other names using the same model. This happened in Hunan, Hubei, Shaanxi, Henan, and Liaoning. Most failed to grow their businesses and some went bankrupt. Balenos major competitors also faced the same problems. For instance, some Jeanswest franchisees have even opened their own stores right next to Jeanswests franchised stores. Finally, supply chain management could be a critical issue in expanding business. Poor infrastructure development and inefficient management of public transportation systems

in most parts of China have created serious delivery problems for garment manufacturers. The situation could be challenging for Baleno as it had only one production base in Dongguan supplying all outlets in China. Samuel Chan, Marketing Director, would discuss at the meeting, the role of franchising in Balenos expansion plans. Some of Balenos competitors were more prudent, preferring to open their own stores while others ensured that only a small proportion of their stores were franchised outlets. Yet others like Giordano were very aggressive in franchising. Close to 90% of Giordanos stores were franchised outlets. Mr B. C. Poon, Chairman of Texwinca, had earlier indicated that Baleno would continue to open new stores in China but development in Hong Kong and Taiwan will be slowed down. The company would continue to expand in such a way that risks were minimized and resources utilized in an efficient way.

REFERENCES
1. Texwinca International Holdings Limited. Annual Reports 2003 to 2007. 2. Chinas GDP grows 11.4 percent in 2007. January 24, 2008. http://english.people.com.cn/90001/90776/90884/6344376.html. Accessed on 25 July 2008. 3. National Bureau of Statistics of China 2007. China Statistical Yearbook 2007, Beijing: China Statistics Press. 4. Li & Fung Research Centre 2005. The development trends of the apparel market in China, September, Issue 2. http://www. lifunggroup.com/research/china_industry01.htm. Accessed on 8 December 2008. 5. G. Ong 2007. Overview of the China fashion industry. http:// thealexanderreport.com/overviewof-china-fashion-industry/ Accessed on 4 May 2007. 6. I. Kalish 2005. Chinas Consumer Market: Opportunities and Risks. Deloitte Research. 7. Z. Zhang, Y. Li, C. Gong and H. Wu 2002. Casual wear product attributes A Chinese consumers perspective. Journal of Fashion Marketing and Management, 6(1): 5362. 8. M. A. Dickson, S. F. Lennon, C. P. Montalto, D. Shen, and L. Zhang 2004. Chinese consumer market segments for foreign apparel products, The Journal of Consumer Marketing, 21(5): 301 317. 9. Li & Fung Research Centre 2006. Chinas apparel market, 2006, Issue 6. http://www.lifunggroup.com/research/china_ industry01.htm. Accessed on 8 December 2008. 10. Li & Fung Research Centre 2006. Performance of Chinas apparel product sectors, 2006, Issue 7. http://www.lifunggroup.com/ research/china_industry01.htm. Accessed on 8 December 2008. 11. Li & Fung Research Centre 2008. Latest developments of Chinas apparel market, November, Issue 13. http://www.lifunggroup. com/research/china_industry01.htm. Accessed on 8 December 2008. 12. Bossini International Holdings Limited. Annual Reports 2003 2007. 13. Glorious Sun Enterprises Limited. Annual Report 2007. 14. Giordano International Limited. Annual Report 2007. 15. Esprit Holdings Limited. Annual Report 2007. 16. L. S. C. Yip and I. S. N. Chen 2005. Selling to Chinese consumers: The challenges facing retailers in China. In T. W. T. Tan (ed.), Asian Retailing: Trends, Challenges and Opportunities,

Singapore: Pearson Prentice Hall: 5379. 17. R. Letovsky, D. M. Murphy and R. P. Kenny 1997. Entry opportunities and environmental constraints for foreign retailers in Chinas secondary cities, Multinational Business Review, Fall: 2840.

1981 1992 1998 -

2007 11.4 2 1980 238 2006 6111 2006 2848 10359 2006 1183.600 5092.9 5 40 Hugo BossBorne Joe One 2 1980 238 178 489 1985 446 349 765

1990 833 560 1596 1995 2,355 1,313 4,931 2000 3,632 1,860 6,850 2001 3,869 1,969 7,113 2002 4,160 2,062 7,387 2003 4411 2103 7901 2004 4925 2301 8679 2005 5,46 2,560 9,410 2006 6,111 2,848 10359 2007 3 60 2005 50.5 70.4

1 2 Esprit 20 40 5040 19. Borne 361 / 1-2

 Cotton USA 45 3 2006 11759 646

32006 11759.45 8696.55 646.69 19977.52 14825.41 990.96 14283.09 10548.05 606.70 10304.56 7343.49 591.39 10027.70 7170.94 748.96 10357.99 7666.61 825.40 10369.61 7987.49 582.36 9775.07 7352.64 640.20 9182.31 6655.43 657.73 20667.91 14761.75 752.88 14084.26 9628.59 640.90 18265.10 13348.51 1057.49 9771.05 7294.73 626.22 13753.28 9807.71 605.33 9551.12 6645.54 531.59 12192.24 8468.40 777.25 9810.26 6685.18 671.27 9802.65 7397.32 622.43 10504.67 8269.3 624.89 16015.58 12432.22 525.16 9898.75 6791.95 354.45 9395.13 7126.78 288.52 11569.74 9398.69 764.33 9350.11 7524.81 533.57 9116.61 6848.39 592.69 10069.89 7379.81 564.91 8941.08 6192.57 493.56 9267.70 7553.28 543.21 8920.59 6974.21 591.69 9000.35 6530.11 510.09 9177.26 7205.57 631.94 8871.27 6730.01 665.28 2007 3 20667 8871

1057 288 18-20 ' 2001 6 15-45 2008 a 18 - b 18 25 - 25

2003

 T T T

2004 100 T - 4 5 Esprit Theme EspritTheme 2 4 T 2007 10.90 4.02 3.85 3.84 3.36 3.20 2.09 2.04 1.83 1.16 63.71 100.00 2008 11 13 5 2007 Boton 13.86 12.84 7.49 Brazton 6.11 Langying 5.92 4.09 2.62 2.45 1.69

 1.41 41.52 100.00 2008 11

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250,000 1,000,000 10 11 2007 10 350 3,347 1360 11 10 15

 90% 10 2003 2007 2003 2004 2005 2006 2007 1,432 1,598 1,963 2,219 2,431 411454 621294 1322547 1601473 1672807 10534 10119 11089 4770 6395 1,060 1,750 2,837 3,143 3,347 2007 1 112003-2007 2003 2004 2005 2006 2007 28.689 18.714 21.047 20.881 13.616 2003 2007 1