Strategic Intelligence for CFOs, Finance Directors, Controllers and Treasurers in Asia |

Inside China's Emerging Consumer Revolution

by Cesar Bacani, 14 September 2010

topics:
Management

tags:
advertising consumer spending customer service distribution franchising marketing Xtep International

There is a lot of talk about the rise of the Chinese consumer and local sportswear maker Xtep International Holdings is in the thick of the revolution. The Hong Kong-listed company reported a 22% surge in revenues to US$300 million for the six months to June 2010, with net profit up 22% as well to US$55 million. We’re now No. 3 or No. 4 in China, says Terry Ho, the company’s CFO and company secretary. “One day we will be No. 1.”

Ho spoke to CFO Innovation’s Cesar Bacani on emerging consumption patterns in the world’s largest market, how Xtep is riding the boom and other issues.

Your business is right in the middle of the consumption revolution in China. What have you learned about emerging consumer spending habits?

In the past 10 years China has accumulated capital from the outside world and now it is building a strong, powerful country. The infrastructure is there already. Most of the people can afford a basic standard of living. The lower and middle class is coming up. But of China’s 1.3 billion people, right now only a third are consumers. There is still a vast majority, two-thirds, that are not consuming.

We see [growth in consumption] happening mainly inland. It’s very mature in Beijing and Shanghai; what has been done has been done already. So we [at Xtep] focus on Tier 2, Tier 3, Tier 4 cities, where people are getting pay rises and are willing to spend more. These are the [emerging] major consumption centres in China.

Then you have the majority that are still poor, who are not earning enough to consume. They are farmers, very low income. But this is going change. Everybody is going to have a pay rise, especially the farmer nowadays. You see some farmers paying RMB2,000-3,000 to get a cell phone to hang around their neck, but they don’t know how to use it and they don’t have the network [coverage].

Consumption is really coming up and very fast and very strong in China. We see the overall GDP growth rate to be in double digits. If we narrow it down to the sportswear sector, we see that it’s very healthy still, 15% to 20% industry growth [annually].

In the hierarchy of consumer spending, though, where would sportswear be? Is it one of the first things people buy after food and other basics?

If you don’t have a mobile phone, then you buy one. But you don’t buy a mobile phone every three months. You use it for two years and when it’s outdated, you change to another one. Sportswear, apparel, people need to wear clothes to go out. In the past, a white t-shirt was good enough; if you had a piece of cloth over the body, then it’s fine. But now you care about how people look at you, you look at your peer group and then you don’t want to look bad. So you try to improve your appearance.

But they are not millionaires, rich kids. Only very few can afford to wear Armani. The middle class is spending more than in the past, but they are not spending as much as in developed countries. The usual price tag for daily wear is between RMB100 to RMB300 [US$14 to US$44]. Anything above RMB300, consumers may think a bit longer. Is it really what they need? Is it really value for money?

If you look at the consumption patterns in a city like Shanghai or Beijing, the spending is a bit higher than RMB300. But inland, [apparel with] price tags of RMB200 to 300 are the usual things that people there can afford to buy.

Typically we price a T-shirt at RMB138 to RMB168. Shoes are a bit more complicated [to make], so we sell lifestyle footwear at RMB200 to RMB250. Functional footwear like running shoes are at RMB250 to RMB300, slightly more expensive so [buyers] can show people that they can afford to pay more, but not really over the top.

ADVERTISING AND PROMOTION

How do you maintain your pricing given rising labour and other costs in China?

You need to pass on [increased costs] to the customer. The increase in our ASP (average selling price) has outpaced the increase in costs. The ASP for footwear [in the six months to June 30, 2010] is up 7% while ASP for apparel products is up 14%. We’re moving up slowly. Not in a big jump, but in a way that people can afford.

Your name: *

E-mail: *

The content of this field is kept private and will not be shown publicly.

Homepage:

Comment: *

Web page addresses and e-mail addresses turn into links automatically.
Allowed HTML tags: <a> <em> <strong> <cite> <code> <ul> <ol> <li> <dl> <dt> <dd> <a> <p> <span> <div> <h1> <h2> <h3> <h4> <h5> <h6> <img> <img /> <map> <area> <hr> <br> <br /> <ul> <ol> <li> <dl> <dt> <dd> <table> <tr> <td> <em> <b> <u> <i> <strong> <font> <del> <ins> <sub> <sup> <quote> <blockquote> <pre> <address> <code> <cite> <embed> <object> <strike> <caption>
Lines and paragraphs break automatically.
Use  to create page breaks.

More information about formatting options

Verification Code

This question is for testing whether you are a human visitor and to prevent automated spam submissions.

What is the fifth word in the phrase "ilaj ivusigo uqeno kuvog len"?: *

Accounting and Regulations

CFO innovation Asia Accounting and Regulation the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Accounting Regulation, IFRS, US GAAP, Tax, investor relations, corporate governance, Corporate Law, Financial Regulators, Internal Audit, Audit, Corporate Law.

Auditing, Investor Relations, Law and Compliance, Tax

Finance and Banking

CFO innovation Asia, Finance and Banking the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Corporate Finance, trade finance, treasury and risk management, capital expenditure, Banking, mergers and acquisitions

Cash and Liquidity Management, Corporate Finance, Insurance, Treasury Management

Management

CFO innovation Asia the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Finance Management, Corporate Governance, Human Resource Management, Compensation and Benefits, Mergers and Acquisitions, Professional Development, Corporate Real Estate, Risk Management, Budgeting and Forecasting, Business Process Management, Business Process Reengineering, Outsourcing.

Budgeting and Planning, Business Expense Management, Human Capital Management, Outsourcing and Shared Services, Risk Management

Metrics

Corporates, Financial Services

Technology

CFO innovation Asia Technology the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Finance Systems, Business Intelligence, EPR, Accounting software, CRM, Cloud Computing, Telecommunications, Business Process Outsourcing, Business Process Management Software.

Business Intelligence, Enterprise Software and Systems, Financial Systems, Security