K & K Fashion Ltd - Chinese Fashion and Apparel Industry Perspectives in the Chinese Market - Report Example

Title: Your name: Institution name: Executive Summary Multinational retail and consumer-products companies have increasingly looked to emerging market in China to drive the next wave of growth as a result of the country’s recent economic performance. Currently, textile and apparel industry in Chinese economy is performing very well despite market conditions. Due to globalization in the textile and apparel industry, competition between firms in the sector has intensified as each firm want to have a competitive advantage in the Chinese market. In China, new wealth has been developed, and it is for this reason why K & K Fashion Ltd has sought to get on the ground floor of the rapid development of the Chinese textile and apparel market by establishing a presence in the country. This report is about K & K Fashion Ltd expansion into Chinese market. Content 1. Introduction K & K Fashions Ltd is a family own company that was founded in 1981. K & K Fashion Ltd is a vertically integrated clothing company that sells clothing for women. One of the highlights of K &K Fashion Ltd is that its operations are based here in Australia. A SWOT analysis for the company showed that K & K Fashion Ltd strengths lie within the company’s unique style of classic fashion pieces. The company’s mission statement is to provide the latest fashions to women of all sizes at a price they can afford. The company tailors the latest fashion trends that suit women; whether the customer is size 9 or size 26 she will be able to find the latest fashion at the company stores. The major opportunity for K & K Fashion Ltd is the possibility to broaden its customer base through expansion into the Chinese fashion and apparel industry. The intentions for the company is to obtain 10 per cent market share of the Chinese fashion and apparel market and become a central hub of shopping activity for the local Chinese population. K & K Fashion Ltd has 17 store chains in Australia, and also operates few store chains in New Zealand. In the Chinese market, K & K Fashion Ltd will target a large, diverse market of both young women and old women in the main-stream Chinese fashion culture. 2. Foreign Exchange Rate Risk China has its own rules and regulations for doing business; every company doing business in China is required to trade in Yuan (Guay 2003). It will be frustrating and difficult for K & K Fashion Ltd to do business in China because of foreign exchange volatility because Chinese Yuan is not stable- fluctuates constantly, resulting in either profit or losses. For example, K & K Fashion Ltd should start selling its products in Chinese Yuan, then the Chinese importers doing businesses with the firm will be faced with transaction exposure that may be brought about by foreign exchange fluctuation. There are many ways in which K & K Fashion Ltd can reduce exchange rate risk. Two popular approach is hedging and netting (Guay 2003), a) Hedging “Hedging can be defines as protection against uncertainty in price trends by taking up a position that offsets the company’s risk” (Guay 2003). Hedging is a financial strategy that will help K & K Fashion Ltd to reduce the risk of its investment in the Chinese fashion and apparel industry. Similar to insurance, hedging will help K & K Fashion Ltd avoid making losses. There are 3 type of hedging: Hedging with Forwards, Hedging with Futures and Interest Rate Swap (Guay 2003). i. Hedging with Forwards Foreign exchange plays an important role in international business and dealings. Foreign exchange rates fluctuations will have an impact on the K & K Fashion Ltd business outcomes and decisions (Guay 2003). Many firms that deal with import their business have become unworthy or shelved due to the effect of exchange rate risk rooted in them. Many international firms have been found to use forward contract as an instrument to manage exchange rate risk (Guay 2003). By definition, forward contracts are agreements that will help a firm to fix the exchange rate for future dealing or transaction. When K & K Fashion Ltd enters into a forward rate agreement with a financial institution, the firm will simply transfer the foreign exchange risk to the financial institution, which will now have to absorb this risk (Guay 2003). ii. Hedging with Futures Hedging with futures will help K & K Fashion Ltd to solve the problems of forward market. Therefore, K & K Fashion Ltd can enter into a currency future contract with its business partners in China. In this type of arrangement (Guay 2003), if the risk in the firm is appreciation of value, K & K Fashion Ltd will have to buy future contracts, and if the risks in the firm depreciate then the firm needs to sell its future contract. For example, K & K Fashion Ltd which has an account receivable for Chinese Yuan would hedge its dealing by selling short the Chinese Yuan future contract (Guay 2003). b) Interest Rate Swap Interest Rate Swap is also another form of hedging that can be used by the firm. This arrangement involves two firms that are in different countries agreeing to swap or exchange debt-servicing obligations. This exchange will help K & K Fashion Ltd to avoid the risks in fluctuation in the currency. 3. Chinese Consumers Chinese consumers have started shedding “Mao cloth” in favor of modern clothing. Currently, young consumers in China are setting the trend and driving the fashion market with their preferences for western clothing’s. Consumers in China consider comparative pricing and research essential (McEwen et al 2006). The Chinese fashion and apparel market is growing at a fast pace. In many instances, “new products have been accepted by the Chinese consumers before their predecessor have succeeded in penetrating the Chinese market” (McEwen et al 2006).When, K & K Fashion Ltd wishes to enter into the Chinese market, advertisement on television and billboards is an important medium in reaching out to the potential customers. Additionally, “word-of-mouth is also an important means of reaching out to customers through recommendations from people close to the customers” (Cui & Liu 2000). Television is an important medium to target consumers that are found in midsized cities since it is omnipresent, characteristics of these consumers is that they are growing quickly in terms of income to spend. i. Brands and decision making K & K Fashion Ltd should realize consumers in Chinese market are brand conscious, but not brand loyal. “The findings of 2010 McKinsey survey found that only 45 per cent of consumers in China believe well-known brands have better quality” (St-Maurice et al 2010). Although, 70 per cent of clothing sales in China were branded, most Chinese consumers mind about value for money. In order words, Chinese consumers they have little loyalty to branded names, most consumers are looking for good deal for their money. Therefore, K & K Fashion Ltd should know that even those stores that have few brands will enjoy the fastest growth in the future as long as they have quality products. Additionally, 37 per cent of consumers in China are susceptible for promotion, while 22 per cent of Chinese consumers have been found to stick to their idea before entering clothing stores. Therefore, K & K Fashion Ltd should engage customers in in-store marketing with promotions and should hire sales persons that are able to influence the Chinese consumers. ii. Ambition and work motivation The Gallup Organization which conducted a nationwide survey found that occupation can influence the buying decision (Li & Su 2007). The survey also found interesting findings in this survey. In the period between 1994 to 2004, the number of Chinese citizens that wanted to “work hard and get rich” has dropped from 68 per cent to 53 per cent. “At same time the number of Chinese citizens who have indicated that they “don’t think of fame/money, live a life that suits my own tastes” has increased from 10 per cent to 26 per cent” (Li & Su 2007). Partly, these changes have been brought about by continuously rise in Chinese salaries or wages in the past few years. The changes in the Chinese consumer’s behavior can be linked to Maslow’s hierarchy of needs. Currently, many Chinese are increasingly able to meet their primary needs, now their focus towards the upper layers of Maslow’s pyramid (Li & Su 2007). Therefore, K & K Fashion Ltd should rethink on its strategy and start targeting consumers in the midsize cities. iii. Ethnocentrism There is a misconception that Chinese consumers prefer brands that have been created in China. This is not true according to research conducted by Gallup which shows that brand preference among Chinese consumers in the period 2000 to 2004 has dropped from 78 per cent to 67 per cent. Additionally, preference for foreign brands among the Chinese consumers was found to have increased from 19 per cent to 30 per cent. This findings are supported by McKinsey survey which was conducted in 2008 indicated that only 30 per cent of the participants “only trusted Chinese brands”. In the same survey, it has been found that many of Chinese consumers are not always clear what brands are domestic and what brands are foreign; they cannot clearly define the two. iv. Face “Chinese consumers are mindful about their looks” (Cui & Liu 2000), Li and Su (2007) states that Chinese consumers are more likely to buy an expensive products to keep or improve their faces, even if they have not enough money to pay buy sufficient clothes and food and to pay for housing. Many of the Chinese consumers will buy a product to fulfill their social needs. Therefore, K & K Fashion Ltd should realize price and brand are important in such situation. v. Consumer knowledge Guo and Meng (2008) argue that Chinese consumers are more inclined to make stereotype judgment in a particular brand. Additionally, “Chinese consumers remember more on the product attributes than any other consumers in other European countries; particularly the french” (Guo and Meng 2008). “Particularities of the Chinese language much more categorization leads to more stereotype judgments and they claim the use of Mandarin asks more of the human brain and therefore Chinese are better in remembering product attributes” (Kotler, et al 1999). vi. Generation Y “This sub-group of consists of people in their early twenties and late teens” (Kotler et al 1999). In Chinese market, this sub-group is believed to be far better educated than their parents or their predecessors. According to Gallup, Generation Y is much more open to western products and ideas, yet they are still attached and found to be supportive of the Chinese culture. Generation Y wear more modern-brand apparel, use the internet and computer games more than their predecessors. “This is a generation that pay’s more attention to from the viewpoint of a marketer” (Kotler et al 1999). Therefore, K & K Fashion Ltd should make sure they target the sub-group since they are the biggest spender in fashion and apparel industry in China. 4. The myth of a stereotypic Chinese consumer Many domestic and foreign firms have not been successful in conquering the Chinese market. This is as a result of misconception that consumers in the Chinese market are not the same, in other words, most firms believed Chinese consumers are more different than only a poor west and rich East. i. Different consumer types Li and Jing (1999) argue that a survey that was carried out in Beijing to try and find out if they could categorize several consumers types. The survey was based on the following components or elements: Purchasing style, information acquisition, attitudes in life, and social and economic factors. According to the findings of that survey, it was discovered that Chinese consumers can be grouped into four different identities, “3. 6 per cent of consumers belong to conservative type, 11.7 per cent belong to the sociable type, 33.9 per cent belong to the commercialized type and 50.8 per cent belong to the pragmatic type” (Li and Jing 1999). The pragmatic consumers have been found to be only interested to the functional aspect a given product that he/she buys, and this sub-group of consumers doesn’t use commercial information. Additionally, this sub-group is sensitive to value for money and they adhere to traditional Chinese customs and value (Li and Jing 1999). The commercialized type of sub-group has increases brand awareness and actively compares products on the basis of different brand information (McEwen et al 2006). “This sub-group is projected to increase along with the economic development of the country. It is evident that people who are young and better educated are more likely to fall into this category” (McEwen et al 2006). The sociable sub-group is believed to obtain information about a particular brand from friends and family and is happy about current life (Li and Jing 1999). The conservative sub-group is not willing to change their life and wants society to be static. Consumer in this sub-group wants society to be static; this sub-group usually consists of older part of the Chinese population (Li and Jing 1999). Therefore, K & K Fashion Ltd should make sure they target the right sub-group in the Chinese market. ii. Regional division Another misconception many companies make of Chinese market is that it’s a homogeneous one because of a common culture, language and political system. Cui & Liu (2000) states that China market is not a homogenous one but there are different regional markets with their own particular consumer behavior. This derivative of the fact that the country have different nationalities, have vast land area, regionalects, customs and culture, infrastructure and income disparities, and so forth (Cui & Liu 2000). According to Li & Jing (1999), Chinese consumers that are found in coastal cities have been found to be better off than those consumers found in rural areas. “These differences is found in the national statistics, therefore it is not good to focus only on the overall rising incomes and the total size of the population” (Li & Jing 1999). The seven regional markets that are found in China are South, North, East, Central, Northwest, Southwest and Northeast China (Kotler et al 2003). The growth markets consist of East and South China. South China (Hainan, Fujian and Guangdong) is an export oriented region that attracts a lot of FDI (Foreign Direct Investment). The consumers found in this region are among the most affluent in China and they easily adapt to new brand (Kotler et al 2003). The region found in East China ( Jiangsu, Zhejiang and Shangai) is a highly urbanized region that drives the country’s economy. “The consumers living in this region are the most cosmopolitan and innovative setting new trends in lifestyle and fashion” (Kotler et al 2003). Additionally, the growth markets in this region outperform the rest of the region in terms of its inhabitants and education. “The emerging regions (markets) are in Central, North and Southwest China. North China comprises Tianjin, Beijing, Shandong and Hebei. The economy in these regions is geopolitical and has been growing rapidly” (Kotler et al 2003). Consumers found in the Northern region are relatively conservative and emphasize on intrinsic satisfaction, but are open to new brands (Kotler et al 2003). Consumers found Central region (Hubei, Henan, Jiangxi, Henan and Anhui) are agricultural focused and this region is less developed. Consumer in this region has less purchasing power (McEwen et al. 2006). In Southwest region ( Shichuan, Guangxi, Guizhou and Yunnan) is isolated from other part of China. In these regions, consumers are less exposed to foreign brands and the pace of life is slow (McEwen et al. 2006). The untapped regions in China are the Northwest and the Northeast. Northeast region (Liaoning, Jilin and Heilongjiang) it a heavy with industries, but has not been successful in turning the region into a dynamic enterprises (McEwen et al. 2006). In northeastern region, the culture found in that region is influenced by Korean and Manchu minorities. In Northwest region (Gansu, Shaanxi, Shanxi, Neimenggu, Hizang and Xinjiang) is least developed and its population is poor and dispersed (McEwen et al. 2006). 5. Conclusion This report has analyzed the K & K Fashion Ltd case into the Chinese market. This report can conclude that Chinese fashion and apparel industry is highly dominated by foreign firms. The Chinese fashion and apparel market is an emerging one but it is also competitive, that can provide new firms coming into the market with potential to increase its revenue. K & K Fashion Ltd have its key strengths in developing new market, and it right time for the company to think about it future expansion plans. Additionally, the firm will succeed in entering the Chinese market if it follows the right the right channel. Foreign firms wishing to set up shops in the Chinese market have to be aware of the reality. To have a good strategy of building brand image, it is important to understand the symbolic values of prestige required by the Chinese 6. References Cui, G. & Q. Liu, “Regional Market Segments of China: Opportunities and Barriers in a Big Emerging Market”, Journal of Consumer Marketing 17:1 (2000), pp.55-72. Guay, W., S.P. Kothari,“How much do firms hedge with derivatives?,” Journal of Financial Economics, 2003, 70, 423-461. Guo, L. & X. Meng, “Consumer Knowledge and its Consequences: an International Comparison”, International Journal of Consumer Studies 32:3 (2008), pp.260-268. Kotler, P., et al., Principes van marketing: Derde editie (The Principles of Marketing: Third European edition), s.l.: Pearson Education Benelux, 20032. Li, H. & J. Jing, “Chinese consumer types”, Journal of Consumer Studies & Home Economics 23:3 (1999), pp.171-180. Li, J. & C. Su, “How face influences consumption: A comparative study of American and Chinese consumers”, International Journal of Market Research 49:2 (2007), pp.237-256. McEwen, W., et al., “Inside the Mind of the Chinese Consumer”, Harvard Business Review 84:3 (2006), pp.68-76. St-Maurice, I., et al., “What’s New with the Chinese Consumer”, The McKinsey Quarterly (2008), pp.1-8. Zhang, X., N. Grigoriou & L. Li, “The Myth of China as a Single Market”, International Journal of Market Research 50:3 (2008), pp. Read More