Bestseller – facing a new competitive landscape in China In the fall of 1996, Bestseller became one of the first international fashion companies to enter the Chinese retail market1. The two good friends, Allan Warburg and Dan Friis, had earlier that year made contact with the CEO of Bestseller A/S, Troels Holch Povlsen, regarding prospects for selling the Bestseller brands in China where they saw many business opportunities2. Mr. Holch Povlsen believed in the two entrepreneurs and was convinced by their enthusiasm for the Chinese market, and at the same time he could use some help with Bestseller A/S’ two purchasing offices in Hong Kong and Beijing3. The plans of the three business partners materialized in the joint formation of Bestseller Fashion Group China Ltd. (Bestseller China) and the first outlet for the brand ONLY was quickly established in a department store in Beijing4. It did not take long for Allan Warburg and Dan Friis to prove that they had been right about China. Within the first year, Bestseller China opened 24 stores in 9 different cities and in the beginning of the new millennium they could introduce two other brands from Bestseller A/S’ portfolio, Jack & Jones and Vero Moda5. A little more than a decade after the first store was opened, Bestseller China had reached almost 2,000 stores and accounted for more than a third of the total turnover of Bestseller A/S6. The secret to Bestseller China’s extraordinary success was the ability to sell price competitive European designs with a Chinese touch, which was done by locating all production in China and modifying the designs of Bestseller A/S to suit the size and taste of Chinese middle class consumers7. With a ten year head start, Bestseller China had hence managed to establish a strong presence in China. But the high economic growth and growing middle class was now making the Chinese market highly attractive for other companies, something that Troels Holch Povlsen was very aware of: “there is a growing and reasonable market in China for many different consumer goods, but that also means that the competition increases8” he said.
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Børsen (1998) Dansk modetøj bestseller i Kina Jyllandsposten (2004) Kinesere går i dansk tøj 3 Allan Warburg interview, p. 46 4 Børsen (1997) Bestseller åbner egne butikker i Kina 5 Børsen (1998) Dansk modetøj bestseller i Kina; Jyllandsposten (2004) Kinesere går i dansk tøj 6 Børsen 2005: Nyt rekord-resultat fra Bestseller, Berlingske Tidende (2007) Kinesiske forbrugere er med fremme 7 Jyllandsposten (2004) Kinesere går i dansk tøj 8 Berlingske Tidende (2007) Kinesiske forbrugere er med fremme. 2
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But although global giants such as Zara and H&M were devoting big chunks of their budgets to enter China and capture the market shares of Bestseller China, these aggressive new entrants were not the biggest concern for Mr. Holch Povlsen and his two partners9: “the competition that we see is not coming from American or European players, but from local companies… and in the future we’ll not only see Chinese goods, but also Chinese companies on an international level, that is certain10” Troels Holch Povlsen pondered.
Introducing Bestseller In 1975, Troels Holch Povlsen founded the family-owned company Bestseller A/S and opened his first clothing shop in Ringkøbing in the western part of Denmark. The aim of the company was to sell modern clothes of good quality at competitive prices. Some 30 years later, the focus remained the same and Bestseller A/S had grown with some of its most famous brands such as Vero Moda, Jack & Jones and ONLY to become a large multinational fashion company with more than 4,100 shops in 41 countries and a turnover of approximately 10.2 billion DKK (€1,397 million) (Chinese turnover not included)11 (see Exhibit 1). The three decades of continuous growth had ensured the company a position as the industry leader in Denmark with a turnover that was nearly twice the size of the biggest Danish competitors12. According to Bestseller A/S, the company’s primary goal was “to create a company that concentrates on developing people before business”13 which was reflected in the vision of “one world – one philosophy – one family”14 and in the company’s 10 basic principles formulated already in 1975 (see Exhibit 2). Troels Holch Povlsen emphasized that it was necessary to develop the employees of Bestseller A/S in order to develop the company. “It would sadden me if our company is judged solely on financial figures” he said, “real life success is about well-being and personal development”15. The basic principles included soft values such as honesty, loyalty and cooperation, but a business mindset as well as focus on results was in addition regarded to be very important. In 2001, Anders Holch Povlsen became co-owner of Bestseller A/S and replaced his father as the CEO of the company. The founder Troels Holch Povlsen continued 9
Børsen (2006) H&M vil sælge tøj til kineserne; Børsen (2007) Bestseller rival er ren pengemaskine Berlingske Tidende (2007) Kinesiske forbrugere er med fremme 11 www.bestseller.com; Bestseller annual report 2006/2007 12 Børsen, “En simpel vej til succes”, 11/08-2004 13 www.bestseller.com 14 www.bestseller.com 15 Børsen Magasiner – En simple vej til succes, 14.04.2004 10
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nevertheless as a leading figure in Bestseller A/S, focusing specifically on business development and activities in emerging markets16.
Products and Markets Initially the company dealt only with women’s fashion, but throughout the years Bestseller A/S widened its brand portfolio considerably and expanded into children’s clothes, menswear and accessories as well.17 By choosing a multibrand approach, Bestseller A/S could build up an extensive brand portfolio and was thereby able to target different customer segments while sharing various back office functions. For instance, Vero Moda targeted teenage women and up with its ‘trendy and fresh style’, while Jack & Jones – ‘cool denim fashion with an international attitude’ – centered on males between 18 and 30 years old. The brand ONLY with its street wear style focused on younger girls ‘with an attitude’ (see Exhibit 3). This approach meant that customers were not familiar with the company name as they were presented with the different brands separately. A challenge for Bestseller A/S was therefore to avoid that the multibrand strategy resulted in brand cannibalism. 18 Bestseller A/S sold its products in a wide range of countries throughout the world. The Scandinavian market was considered the largest market, although the importance of emerging markets continued to rise19 (see Exhibit 4). “It’s difficult for us to say no to new markets. We’ve turned down countries such as the US and France, but taken on less obvious markets such as Saudi Arabia and Russia” Troels Holch Povlsen explained, “it is an unbelievable feeling that our clothes are being sold in so many places in the world today. But I’m proud of it”. 20
Global Value Chain The internationalization and immense growth of Bestseller A/S influenced the structure of the company significantly in the sense that a large number of foreign and domestic subsidiaries were set up to handle retail, wholesale and purchasing activities21 (see Exhibit 5). In addition, Troels Holch Povlsen had a personal ownership in a Hong Kong company as well as in 16
Berlingske Tidende, “Interview: Bestseller går globalt”, 13/02-2005; Anders Holch Povlsen Interview, page 14-15; Børsen (2002) Mellemøsten nyt vækstområde 17 www.bestseller.com 18 MENTEL report 19 www.bestseller.com 20 Berlingske Tidende, “Interview: Bestseller går globalt”, 13/02-2005 21 Bestseller annual report 2006/07
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Bestseller Fashion Group China, which was not an integral part of Bestseller A/S. The financial results from the Chinese operations were therefore not included in the annual accounts of Bestseller A/S. Other key figures, such as Anders Holch Povlsen and managing director Finn Poulsen, had likewise personal ownership in related companies22. In the early 1980s when Bestseller A/S, against conventional wisdom, began to move production abroad, the intention was to explore the opportunities of other countries: “we weren’t talking about outsourcing when we began to look across borders 25 years ago. We said that it was exciting to go abroad and see what we could produce there”23 Troels Holch Povlsen recollected. Bestseller A/S specialized in the design, sales and marketing of clothes and accessories, but the company’s capabilities and experience in handling an outsourced production were particularly central to its ongoing success24. The entire production was managed through own purchasing offices located in Italy, Turkey, China and India, and sourced from different suppliers in Europe, the Middle East and Asia25. A very tight control of the suppliers was central to the company’s sourcing strategy in order to ensure the quality of the production. In 2002, a Code of Conduct was introduced to clarify the minimum standards that Bestseller A/S demanded from its suppliers and subcontractors in relation to working conditions at the factories, social responsibility and environmental issues26 (see Exhibit 6) The majority of the design and marketing activities of Bestseller A/S were located at the Danish headquarters in Brande where each brand was handled separately while some back office functions were centralized27. In relation to distribution, a multichannel approach meant that Bestseller A/S distributed its products through both company-owned stores, wholesale and franchises. In fact, most of Bestseller A/S’ sales took place through franchised chain stores of the brands Vero Moda, ONLY, Jack & Jones, Selected, name it and VILA. The chain stores started up in 1988 and were based on close relationships with the franchisees with Bestseller A/S as the sole supplier28. Product lines were furthermore sold through more than 12,000 independent wholesale dealers on an international scale29 (see 22
Børsen Magasiner 2004: en simpel vej til succes Berlingske Tiderne, ”Interview: Bestseller går globalt”, 13.02.2005 24 Børsen, ”Bestseller åbner egne butikker i Kina”, 27/05-1997 25 www.bestseller.com 26 Børsen Magasiner (2004) Den simple vej til Succes; Bestseller (2007): Code of Conduct 27 Anders Holch Povlsen interview, pages 5-6 28 www.bestseller.com 29 www.bestseller.com 23
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Exhibit 7). The extensive sales network of Bestseller A/S put high demands on the logistical aspect of the value chain, and the management of the logistics to ensure fast deliveries and small stocks, while keeping costs down, was regarded as a very important competitive parameter30.
Competitors As already stated, Bestseller A/S was by far the industry leader in Denmark with a turnover of nearly twice the size of the biggest domestic competitors, IC Companys and Brandtex, who also competed in price-sensitive women’s, children’s and men’s fashion. Similar to Bestseller A/S, they followed a multibrand strategy, but they differed somewhat in terms of target segments. While IC Companys with its slightly more expensive brands such as Peak Performance, InWear, and Tiger of Sweden focused more on quality-conscious women and men, Brandtex concentrated merely on women’s wear of high quality at very competitive prices with brands such as Brandtex, b.young, and Fransa31 (see Exhibit 8). The geographical reach of Bestseller A/S was significantly greater than that of Brandtex and IC Companys. Brandtex had sales in 19 European countries32, IC Companys competed in 13 countries in Europe, Canada and Hong Kong33, while Bestseller A/S sold its clothes in 41 countries in Europe, Canada, the Middle East, and China34. Due to the company’s international presence, it was necessary for Bestseller A/S to pay very close attention to the international competitors. In fact, Troels Holch Povlsen stated that “Bestseller’s good competitors are not to be found in Denmark”35. Three large players were often mentioned in the fashion retail business: Spanish Zara, American Gap Inc. and Swedish H&M, who all operated extensively on global markets and targeted the same consumers as Bestseller A/S. In terms of turnover, results and number of employees, the three companies exceeded Bestseller A/S by far, and it was only in relation to number of stores that the Danish company could match the international competition36 (see Exhibit 9). The geographical scope of the international competitors differed considerably. The biggest player in terms of turnover, Gap Inc. operated in the US, the UK, France and 30
Detailbladet, ”Bestseller tjener mere på at sælge billigere”, 21/1-2002 www.brandtex.dk; www.iccompanys.dk 32 www.brandtex.dk 33 www.iccompanys.dk 34 www.bestseller.dk 3535 Børsen (2002) Bestseller tæt på milliard-resultat 36 Reference missing (argument taken from Lisbeth’s case) 31
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Japan, and was thus not present in any emerging markets37. Neither was H&M, who had a strong position in Europe as well as a small presence in the US38. Only Zara possessed an extensive global reach, having stores in 56 countries in Europe, the US, North Africa, Asia Pacific and the Middle East. Yet, Zara’s sales were widely generated from the European market, and the fact that 90 % of Zara’s stores were located in Europe and the US revealed that the company only had a small presence in emerging markets relative to the overall size of the firm39. However, as the importance of emerging markets was growing in terms of increasing demand, the global players started to pay more attention to the developments in these markets40.
Bestseller China When Allan Warburg and Dan Friis in 1996 decided to quit their jobs at The East Asiatic Company and McKinsey & Company, respectively, to set up Bestseller Fashion Group China Ltd. (Bestseller China) together with Troels Holch Povlsen, their ambition was to build a big company41. As Mr. Warburg explained: “Going back to Denmark was not really an option as I considered China to be my new home market. Here was the opportunity and here was the market potential”42. Eight million DKK were put into the company of which Troels Holch Povlsen provided half. The other half was to be provided by the two entrepreneurs, but as they were unable to raise sufficient capital on their own, the Danish Industrialization Fund for Developing Countries (IFU) participated with a 30 percent share. Allan Warburg and Dan Friis each entered with 10 percent43 and bought back the shares from IFU in 200144 (see Exhibit 10). Bestseller Fashion Group China Ltd was registered as an independent company, detached from Bestseller A/S’ outsourced clothes production in Chinese factories and managed by Allan Warburg and Dan Friis from an office in Beijing45. Bestseller China experienced immediately significant growth, which was particularly evident in the development of stores (see Exhibit 11). In 1996, a couple of wholly-owned ONLY shops were established in Beijing and five years later, Vero Moda and 37
www.inditex.com www.hm.com 39 www.inditex.com 40 www.business.dk “Kampen om de modebevidste kinesere”, 15.04.2007 41 Interview Allan Warburg (p. 41-42) 42 Interview Allan Warburg (p. 41) 43 Børsen, ”Bestseller åbner egne butikker i Kina”, 27/05-1997 44 IFU (2005) Bestseller, Kina + Interview Allan Warburg p. 45 45 Jyllandsposten (2004) Kinesere går i dansk tøj 38
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Jack & Jones, two other brands from the portfolio of Bestseller A/S, had been introduced to the new market while 163 stores were located in different cities around China. A little more than a decade after Bestseller China was founded, the company had almost reached an amazing 2,000 wholly-owned or franchised stores of the three brands. For the management of Bestseller A/S in Denmark the success in China came a bit as a surprise: “it was actually a long-term investment, but I’m surprised by how well it’s going. There are young people who can and want to buy – and more are coming” said Finn Poulsen, co-owner and CEO of the subsidiary Bestseller Retail Denmark46.
The Chinese Market Between 1997 and 2003 total consumer spending in China increased by 64.2% while spending on clothes and footwear increased by 22%. In the same time period, the per capita disposable income in the urban areas of China likewise increased by 64.2%47. A growing group of fashion-conscious, young consumers living in the big cities meant that Bestseller China could sell their clothes at 85 % of Danish prices. Allan Warburg considered the average Chinese Bestseller customer to be a woman in her mid-twenties, often employed in a foreign joint venture, with a monthly pay of around 3,000 DKK (€40048) of which she would spend a third on clothes and shoes. This was made possible by the fact that she would have no expenses for food and rent as she still lived with her parents. He estimated that in Beijing alone, approximately 300,000 women had the sufficient purchasing power to buy ONLY or Vero Moda clothes49. At the time of entry, the Chinese fashion retail market was highly fragmented. While foreign luxury brands catered for the higher price segment through outlets in upscale department stores or licensed shops50 and several other product markets were dominated by a few big companies, this was not the case for the middle level fashion market. Bestseller China was therefore able to build an extensive sales network in a very short period of time51. This entailed for instance that the Jack & Jones brand was met with very little competition when it was introduced in the year 2000: “Jack & Jones is by far the leader in the market because
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Børsen (1997) Bestseller åbner egne butikker i Kina Deloitte (2005) China’s Consumer Market – Opportunities and Risks, page 2 48 www.oanda.com – converted from DKK to EUR per 14.7.2008 49 Børsen (1998) Dansk modetøj bestseller i Kina 50 Deloitte (2005) China’s Consumer Market – Opportunities and Risks, page 5 51 Børsen (1998) Dansk modetøj bestseller i Kina 47
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there’s not so much competition for Jack & Jones. Men’s wear in China is rather traditional and has not developed as much as women’s wear” Mr. Warburg explained, “sportswear for men, however, has much more competition with large companies like Nike, Adidas, Puma, Li Ning and so on, but luckily we are not in the sportswear industry”52.
Production The fact that Bestseller A/S already obtained a large part of its international sourcing from Chinese suppliers helped Bestseller China to set up local production in the sense that the suppliers were more willing to cooperate despite an initial modest volume. In the beginning it was therefore vital for the new company to benefit from the established production network of Bestseller A/S53. In order for the pricing strategy to work, Bestseller China’s collections needed to be produced locally, otherwise the clothes would become too expensive for the middle class54. While the ownership structure of Bestseller China entailed that Allan Warburg and Dan Friis enjoyed a large degree of local autonomy, meeting with the Board of Directors just once or twice a year, the initial agreement between the three partners had also incorporated the purchasing offices of Bestseller A/S in Hong Kong and Beijing which were not running properly. For Troels Holch Povlsen the partnership was an opportunity to get help with the company’s sourcing in China from two committed Danes in Beijing55. In the first five years after the establishment of Bestseller China, Allan Warburg and Dan Friis were therefore helping Bestseller A/S to structure their Beijing office and set up a purchasing office in Shanghai, but a renegotiation of the shareholder agreement in 2001 meant that the two entrepreneurs from then on could devote their full attention to Bestseller China56. Although they no longer assisted with the sourcing in China directly, the new company’s continued success influenced Bestseller A/S back in Europe through increased brand awareness of the Chinese suppliers: “I think being big in China helps you on the sourcing side and that has really been the case for Bestseller” Allan Warburg argued, “all the suppliers know the brands now. They are very serious about Bestseller products”57.
52
Allan Warburg Interview, p. 50 Allan Warburg Interview, p. 44 54 Berlingske Tidende (2005) IC Companys åbner i Kina 55 Allan Warburg Interview, p. 46 56 Allan Warburg Interview, p. 42 + 45 57 Allan Warburg interview, p. 52 53
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A key aspect of Bestseller China’s strategy was the adaptation to local conditions. While the concept remained the same and the Chinese stores were identical to those in the rest of the world, the actual styles and models sold in the stores were modified to match local conditions. Commenting on this, Mr. Warburg stated that “Chinese women do have another figure than women in the Western world. They are much more slender. And they typically dress in a more feminine way than Western women. And our products should reflect that”58. Colors were also changed to fit the Chinese taste, so that, for instance, all military coloring was left out59. More specifically, the process of adaptation was carried out in a manner where the designs for each brand were sent mainly from Brande in Denmark to a Danish designer located in China who was then in charge of modifying them together with a team of Chinese designers. This process entailed that Bestseller China employed a total of three Danes in addition to Allan Warburg and Dan Friis. The key to the success of Bestseller China was the European style of the product designs, which also explained the composition of the design team: “the only thing that we haven’t wanted or been able to localize in the design process is the fact that each of the brands has one Danish designer” said Mr. Warburg, “what we are selling is a European lifestyle60.” The overall Western style of the designs from Bestseller
A/S was hence maintained while the clothes were fine-tuned to better fit the Chinese consumers61. When asked to suggest reasons for the immense success of Bestseller China, Allan Warburg pointed to the location and value chain configuration of the company: “you’ve got to localize everything here in China” he argued, “we’ve seen so many of our competitors from Europe coming in, starting up and then 2 years later pulling out again. The reason is that they’re sitting in Europe and trying to manage China. We’re sitting in China, producing 100 percent of our products in China for the Chinese market”62.
Marketing and Distribution Similar to the approach employed by Bestseller A/S, a multichannel approach was used for the Chinese market. The sales network consisted of a mixture of franchising and whollyowned stores, with the long-term aim of eventually making franchising the main approach. 58
Jyllands Posten: Kinesere går i dansk modetøj, 11.08.2004 Børsen, ”Bestseller åbner egne butikker i Kina”, 27/05-1997 60 Allan Warburg interview, page 48 61 Jyllands-Posten, ”Kinesere går i dansk modetøj”, 11/08-2004 62 Interview Allan Warburg 59
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The franchising concept had been slowly introduced as it was relatively new when Bestseller China entered the market in 199663. In 2005, approximately half of Bestseller China’s stores were franchised in towns where the two entrepreneurs did not want to enter while the other half was owned by the company. All product purchasing was done at the main office in Beijing, from where they were subsequently distributed to the different branch officers who only concentrated on the sales in their respective areas64. Bestseller China had furthermore three flagship stores in Beijing, Shanghai and Tianjin which were of great importance in building up the brands65. Although they were located in prestigious shopping malls where rents were so high that earnings were very limited, the flagship stores were central to Bestseller China’s strategy, because being located in close proximity to other international brands helped Bestseller China build its own brands66. For instance with the company’s store in Guo Mao, one of Beijing’s high-end shopping malls, the expenses were actually higher than those of a similar store in Europe. But, as Mr. Friis said: “The high rent limits out profits at this place. But it is important that we are here to build up our brands. All of the big international brands are here – and many of them are running with a huge deficit on their stores in Guo Mao. We don’t have that.” 67 Other central elements of the company’s marketing efforts comprised aggressive advertising in Chinese magazines and big posters featuring, for instance, Danish supermodel Helena Christensen, representing a Northern European culture. The German supermodel Claudia Schiffer was another important face for Bestseller China’s brands whose blonde wellknown look emphasized the European image further68. Moreover, the marketing of Bestseller China comprised fashion shows in night clubs69 as well as smaller, creative initiatives such as the featuring of ONLY and Jack & Jones logos on table cloths in Starbucks cafés and in restaurants70. Yet, even though much energy was used on branding through various marketing channels, the stores were considered most important: “we actually spend money on fashion magazines and also fashion shows, but I think the most important way we build our brand is actually through the shops” Mr. Warburg explained, “shops are where you build your image 63
Børsen, ”Dansk modetøj bestseller i Kina”, 04/02-1998 Interview Allan Warburg 65 Børsen, ”Dansk modetøj bestseller i Kina”, 04/02-1998 66 Jyllands-Posten, ”Kinesere går i dansk modetøj”, 11/08-2004 67 Jyllands Posten: Kinesere går i dansk modetøj, 11.08.2004 68 Jyllands-Posten, ”Kinesere går i dansk modetøj”, 11/08-2004 69 Børsen, ”Dansk modetøj bestseller i Kina”, 04/02-1998 70 Jyllands-Posten, ”Kinesere går i dansk modetøj”, 11/08-2004 64
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because customers are out shopping anyway and they walk by and see our shops and that’s where we build our brand, much more than in any other ways”71.
Global Competitors in China With the increased economic growth and the growing middle class in China, Bestseller China started to experience an increased competition from large global fashion companies. The Swedish giant H&M, for instance, opened its first Chinese store in 2007 aimed at obtaining market shares in the booming fashion market. “We’re growing by 10 to 15 percent annually and open 180 stores a year. We started in the US in 2000, and that has been sufficient to fulfill our own demands. But for the future it’s most important that we enter the Chinese market”72 commented CEO Rolf Eriksen in connection with the celebrations of the opening of the first Chinese H&M store. The company used about two years to prepare the market entry and concluded that there was not demand for customizing the sizes and styles of the company’s collections specifically to the Chinese consumers. Accordingly, 80 percent of the clothes in the new H&M store were similar to the collections in the European and Northern American stores. The company went forth in China convinced that good PR deriving from the relations with famous celebrities such as Madonna, Kylie Minogue and Karl Lagerfeld along with its famous collection would suffice73. Spanish Zara also showed a particular interest in the Chinese consumers. With 15 Chinese stores in 200874, Zara pursued in similarity with H&M a strategy of globally standardized collections for its Chinese stores. Furthermore, it was rumored that Gap Inc. would also enter the Chinese market at some time75. Operating with a significant smaller budget, IC Companys was once again trying to enter the Chinese market in 2005. This time the company tried to copy Bestseller China’s strategy of local adaptation, and the firm furthermore aligned itself with a Chinese marketing bureau76. IC Companys’ export director Steen Petersen said: “We have prepared ourselves for this. We have studied competitors and looked over their shoulders. Both Esprit and Bestseller have great success in China, so it is obvious that we could learn something
71
Allan Warburg interview www.business.dk, ”Kampen om de modebevidste kineserne”, 15.04.2007 73 www.business.dk, ”Kampen om de modebevidste kineserne”, 15.04.2007 74 www.inditex.com 75 www.business.dk, ”Kampen om de modebevidste kineserne”, 15.04.2007 76 Børsen, ”IC Companys åbner butikker i Kina”, 23.03.2005 72
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from them”77. For instance, IC Companys would produce all of its clothes in China and thereby be able to keep the prices low for the middle class. The company would also customize its collections to suit the Chinese consumers78. Dan Friis commented on the potentially increased competition from global companies: “we are very positive towards our new professional ‘colleagues’. Many shopping malls have until now failed as there were not enough professional brands to open large stores with the management and products to attract a larger customer base. That is going to happen now”79. However, since Bestseller China was established in 1996, the market had become increasingly difficult to penetrate. For instance, the marketing prices had increased significantly and the number of foreign operators had exploded since China fully joined the WTO in 200180. “Being early in China definitely had many advantages, as the speed was slower and you didn't have to invest that much money at that time” said Allan Warburg81.
Local Competition From their headquarters in Hong Kong, an increasing number of strong local brands were also beginning to look towards mainland China for new market opportunities. Although they were not that well known internationally, they had already established their brands on a regional scale and Hong Kong clothing was perceived by customers in mainland China to be of good design and quality82. Hong Kong’s clothing industry had developed immensely since the first companies started with manufacturing in the 1950s when labor costs were low. But as the producers became more sophisticated and prices increased, Hong Kong had lost its cost advantage to other countries, including China, and own equipment manufacturing (OEM) was no longer sufficient. In order to remain competitive, the industry began therefore to focus on own design manufacturing (ODM), which meant that buyers could either use the designs of the Hong Kong companies as they were or modify them to fit their own particular needs. While ODM prevailed in the 1990s, it became evident in the beginning of the new millennium that high profits were rather to be obtained through own brand manufacturing (OBM). In fact,
77
Berlingske Tiderne, ”IC Companys åbner i Kina”, 17.03.2005 Berlingske Tiderne, ”IC Companys åbner i Kina”, 17.03.2005 79 www.business.dk, ”Kampen om de modebevidste kineserne”, 15.04.2007 80 Berlingske Tiderne, ”IC Companys åbner i Kina”, 17.03.2005 81 Allan Warburg interview 82 HK Edition (2005) Sewing seam of gold in tough market 78
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some estimated the profit margins of OBM to be 50 % higher than ODM83. This made a growing number of Hong Kong companies, such as Bossini International Holdings Ltd. and The Giordano Group, choose to brand their own designs in the pursuit of high revenues. While the developed markets were hard to penetrate for these companies, they could see many opportunities in the mainland’s mid-market segment due to the absence of the global brands and they therefore also decided to enter China84. In 2007, Bossini had opened 551 Chinese outlets which made up more than half of the company’s global distribution network85, and 827 of Giordano’s 1,800 shops were likewise located in China86. Another important competitor was the medium sized player Esprit who originated from the U.S., but had relocated its headquarters and creative offices to Hong Kong87. In order to accommodate the growing fashion-conscious middle class in China who had a preference for European style, Esprit decided to modify only 20-30 % of the company’s products to suit the Chinese market. The remaining part would be similar to the products sold in the rest of the world88. While Esprit was already a global player, the two other companies were aspiring for a global presence and were already serving many markets across the globe. In fact, the vision of Giordano was “to be the best and the biggest world brand in apparel retailing”89. For Bestseller China who was dominating the mid-market, it meant that Allan Warburg and Dan Friis did not only have to defend their market position against the global entrants, they would also have to keep a close eye on the new competitors from Hong Kong. In the eyes of Allan Warburg, these companies did nevertheless not pose the biggest threat to the market position of Bestseller China: “a lot of the Hong Kong brands have not been able to make it here” he said, “they’re big in Hong Kong, they’ve tried to establish themselves in China, but they’ve never made it”. He explained the failure with the fact that although their production was located in China, they managed all their operations from offices in Hong Kong and could therefore not move as fast as Bestseller China90. It was different, however, with the companies from mainland China: “there are some very good local Chinese companies
83
HK Edition (2005) Sewing seam of gold in tough market, page 2 HK Edition (2005) Sewing seam of gold in tough market 85 www.bossini.com 86 www.giordano.com 87 www.esprit.com 88 Deloitte (2005) China’s Consumer Market – Opportunities and Risks, page 6 89 www.giordano.com 90 Allan Warburg interview, page 54 84
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out there at the moment, who are operating at a lower price margin” said Mr. Warburg. Throughout the years, China had built a strong position worldwide as a textile manufacturer, and as a result the ‘made in China’ label was mostly associated with cheap production91. Low unit costs meant that the industry had attracted the sourcing activities of a large number of foreign companies, but the population size and vast income disparities of China had made it difficult for local companies to build up their own brands92. But with diminishing profit margins in production93, it was unknown whether this component of the value chain would be sufficient for the future. “I think our main competitors in the future will be local Chinese companies” Allan Warburg declared, “they are already starting up their businesses and they will most likely become bigger as they expand by setting up design offices in Europe and in the US. They can keep all the costs to a minimum, as they will have most of their expenses in China”.
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*
*
Troels Holch Povlsen and his two partners, Dan Friis and Allan Warburg, had clearly enjoyed the benefits of entering China already in 1996. With high brand awareness of all three brands and almost 2,000 shops, the success of Bestseller China was unmistakable. In fact, one decade after the establishment of the company, the Chinese activities were estimated to constitute more than a third of Bestseller’s total turnover94. However, the large global players were eager to challenge Bestseller China in order to get a share of the booming Chinese retail market and Mr. Warburg and Mr. Friis were furthermore keeping an eye on the new Chinese firms which they felt could pose a significant threat to their market position. The ten year head start had evidently given way to a number of significant advantages, but it was uncertain whether the organizational setup of Bestseller China and Bestseller A/S was providing the company with the best possible foundation in the quest to fend off the new competitors and sustain the position as market leader in a booming Chinese fashion retail market.
91
Frost, R. (2007) China – dressed for success Frost, R. (2007) China – dressed for success 93 People Daily (2004) China’s fashion industry needs a rethink 94 Børsen (2005) Nyt rekord-resultat fra Bestseller 92
14
Exhibit 1: Financial highlights and key ratios 2003-2007 of Bestseller A/S (Chinese figures not included)95 Profit and loss account Turnover (mill. DKK) Turnover Europe (mill. DKK) Turnover rest of the world (mill. DKK) Profit before taxation (mill. DKK) Profit for the year (mill. DKK) Equity (mill. DKK) Balance sheet total (mill. DKK) Key ratios Profit margin, % Return on assets, % Return on equity, % Solvency ratio, % Employees
95
2003 4,924 4,881 43 997 685 1,287 2,829
2004 5,336 5,272 64 875 597 1,527 2,888
2005 6,713 6,516 197 1,316 939 1,869 3,794
2006 8,672 8,305 367 1,497 1,055 2,505 4,390
2007 10,182 9,722 460 1,869 1,372 3,091 5,452
19.4 33.8 67.5 45.5
18.7 28.9 46.3 52.9
18.7 33.0 61.5 49.3
16.0 31.7 56.5 57.1
17.2 32.2 54.8 56.7
1,285
1,819
2,372
2,950
4,108
Greens online
15
Exhibit 2: Bestseller’s vision and 10 basic principles96 One World Our world is built on fairness and opportunities. Cultural differences are an advantage, which will promote quality, extraordinary results and good values. Always trying to give more than we promise we try to meet remoteness with closeness. One Philosophy We make Bestseller's 10 Basic Principles come alive. We are humble and together we work hard. We base our co-operation on trust, partnership and honesty. We treat all people as individuals but we think and act as a team. Therefore we succeed. One Family The backbone of Bestseller is our family feeling. We help each other and have unlimited faith in our relatives. We show our identity in the good examples we set for one another. We are proud of our family. It is both our link to the past and the foundation of our future. 10 basic principles97 1. We are honest 2. We are hard-working 3. We are loyal 4. We are co-operative 5. We are business minded 6. We want to see results 7. We want simple solutions 8. We take nothing for granted 9. We always keep our promises 10. We want to be the best
96 97
www.bestseller.com www.bestseller.com
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Exhibit 3: Brand portfolio of Bestseller A/S 98 Brand
Target group Boys & girls, 2-10 years Teenage women and up
EXIT
Vero Moda
Jack & Jones
Men 18-30
Vila
Women, 25+
name (formerly known EXIT) ONLY
it
0-3 years
as
Product offer
Pricing
Style
Full wardrobe. Under- to outerwear + shoes Skirts, tops, trousers, outerwear, some accessories & footwear Jeans at core, wide range of matching items, shoes and accessories Tailored/elegant wear, some outer wear Tops, trousers, dresses seasonal items (swimwear)
Jeans: €20-30 Tops: €13-18
Cool and fun but functional and wearable
Dresses: €3550 Tops: €17-25
Trendy and fresh
Trousers: €4060 T-shirts: €1525 Dresses: €4060 Jeans: €50-60 Tops: €10 Trousers: €15
Cool denim fashion with an international attitude
Jeans at core, wide range of matching casual items Clean-cut design, leisure to formal wear Jeans & trend items
n.a.
Cool, streetwear-oriented, up to date, on trend
n.a.
Leading trends, simple and stylish
n.a. Jeans: €20-35 Sweatshirts: €15-35 Jeans: €20-45 Shirts: €25-30 n.a.
Jeans from casual to innovative/unique Fresh everyday wear. Focus on comfort/functionality Trendy with a casual/urban edge Cool styles with high design
Men 20-35
Tdk
Young men
PH industries
Boys 8-16
Jeans, t-shirts, knits, sweaters, outerwear
phink industries Object Collectors Item Pieces accessories
Girls 8-16
Jeans & matching items, outerwear An Only sub-brand, jeans & streetwear
Gosha by Vero Moda
Women
mama-licious
Expectant mothers Unisex teens
98
1986
1987
1990 Feminine and elegant, highly fashionable 1993 Functional daywear
1996 Girls with attitude
Selected
Outfitters Nation
Year
Girls with attitude
1996
1997 1999
1999 2003
2003 Women
Hosiery, bikini, belts, bags, footwear, jewellery Luxury women’s wear (at Vero Moda stores) Trousers, skirts, tops Jeans wear, sportswear, feminine dresses and outdoor clothing
n.a.
Designed for the urban fashionists
n.a.
Elegant, refined, highquality fashion
Skirts: €30-40 Jeans: €45-75 n.a.
Trendy, sexy, glamorous
2003
2005
MENTEL report
17
Trendy cool teen styles
2005 2007
Exhibit 4: Bestseller A/S’ European and non-European outlets, September 200799
Austria Belgium Croatia Cyprus Czech Republic Denmark Estonia Finland Germany Iceland Ireland Latvia Lithuania Luxembourg Netherlands Norway Poland Russia Slovakia Slovenia Spain Sweden Switzerland UK Total of above
Bahrain Egypt Jordan Lebanon* Qatar Saudi Arabia Syria Turkey UAE Total of above
99
Jack & Jones 7 9 2
46 1 22 46 2 19 1 1 57 65 10 6 3 58 45 4 13 417
Vero Moda 16 19 2 1 3
Only
Exit
4 5
3
Selected
67 2 26 80 2 19 1 6 1 75 72 23 6 1 3 10 71 24 4 534
37
27
9 23 1 1 1 2
2 2 2 11
39 26
4 21
13 10
4 5
1 20
23
14 1
93
2 93
33
Pieces
Other
Total
1
31 33 4 1 4
16
241 4 67 152 9 54 3 8 2 199 200 37 12 5 3 88 170 29 20 1,376
1 32 1 7
9
7 1 1
1 4
1
7 1 4
1 5 10 1 1 167
Jack & Jones 1 1
Vero Moda 1 1
3
4 1 5 1 3 3 19
2 1 3 3 14
Vila
Exit
16
Only 1
1 1 5 6
13
Mentel report
18
1
23
Total 3 3 1 12 1 13 2 6 6 47
Exhibit 5: Organizational structure of Bestseller A/S, 2007100 Bestseller A/S
Flying A A/S Denmark
Bestseller Norge Detalj A/S Norway
Bestseller Retail United Middle East Ltd Libanon
Bestseller United Holding S.A.L. Libanon
100% 100%
100% 100%
70% 100%
Bestseller Retail A – GmbH Austria
Bestseller Retail Belgium BVBA Belgium
Bestseller Retail Finland Oy Finland
90%
100%
90%
Bestseller AS Norway
100% 100%
Bestseller Wholesale Benelux B.V. Holland
Bestseller United India Private Ltd India
Bestseller Sverige AB Sweden
100% 100%
Bestseller Wholesale Belgium BVBA Belgium
Bestseller Tekstil Ltd Turkey
Bestseller Wholesale Oy Finland
100% 100%
Bestseller United Italy S.p.A. Italy
Bestseller Wholesale Ireland Ltd Ireland
100% 100%
Bestseller Handels GmbH Austria
100% 100%
Bestseller Wholesale Spain, S.L. Spain
Bestseller Tekstilhandels GmbH Germany
70% 100%
Bestseller Retail Deutschland Germany
51% 100%
Bestseller Retail Ireland Ltd Ireland
Bestseller Retail Europe A/S Denmark
51% 100%
Bestseller Retail Netherlands Holland
Bestseller Wholesale UK Ltd England
100% 100%
Bestseller Italy S.p.A. Italy
Best Shop Midt-Norge AS Norway
50% 100%
Bestseller Retail S.L. Spain
Bestseller Wholesale France SaS France
100% 100%
Bestseller United Middle East Ltd Libanon
Bestseller Retail AS Norway
50% 100%
Jack & Jones AB Sweden
Bestseller Rus LLC Russia
99% 100%
Bestseller Canada Inc. Canada
AHPK GmbH Germany
Belokan Oy Finland
50% 100%
100%
100%
Purchasing
Bestseller Retail AG Switzerland
Bestseller (Schweiz) AG Switzerland
Wholesalers
Bestseller Retail UK Ltd England
Retailers 100
Bestseller United China Ltd Hong Kong
Bestseller’s annual report 2007/06
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Exhibit 6: Bestseller A/S’ Code of Conduct – General Principles101 1.1.0
1.2.0
1.2.1. 1.2.2.
1.2.3
1.3.0
1.3.1 1.3.2
1.3.3
1.4.0
1.5.0
1.5.1 1.5.2 1.5.3
1.6.0
101
This Code of Conduct describes the ethics that Bestseller wishes to promote. It is based on a fundamental attitude of Bestseller: “We do what we say and we keep our promises.” * * * The Code of Conduct is directed at any supplier and his subcontractors, who manufacture products for Bestseller A/S or for any of Bestseller’s companies. Bestseller must be informed about all sub-contractors producing Bestseller’s orders. The supplier is responsible for the communication of this Code of Conduct to his sub-contractors. Suppliers including their subcontractors will hereinafter be called “the suppliers”. Any supplier shall observe the legislation in force at the time in question. This includes an obligation to observe and comply with all EU product requirements at the time in question. Even though Bestseller acknowledges that legislation and cultural patterns vary across the world and that suppliers consequently operate under different circumstances, this Code of Conduct sets out the basic requirements that any supplier must comply with in order to do business with Bestseller. In cases where the law in question is more comprehensive than this Code of Conduct, current law applies. In cases where this Code of Conduct is more comprehensive than the law in question, this Code of Conduct applies. Code of Conduct also forms the basis upon which Bestseller will make a continuous evaluation of the supplier’s compliance with Bestseller’s requirements and expectations. * * * It is a prerequisite for doing business with Bestseller that any supplier complies with the Code of Conduct. Bestseller will constantly develop its follow-up system regarding evaluation and compliance with the Code of Conduct. If a supplier is not in full compliance with this Code of Conduct, Bestseller is entitled to demand that the supplier implements a development plan to remedy the deficiencies. If Bestseller has recommended such a development plan, and it is not implemented, Bestseller is entitled to without any notice to terminate its business relation and possibly cancel any production or delivery in progress. A serious violation of Bestseller’s Code of Conduct can lead to an immediate determination of the cooperation. * * * The specific requirements in this Code of Conduct are listed under the following headings: 2.0.0 The Working Environment and Housing Conditions 3.0.0 Social Responsibility 4.0.0 Environmentally Friendly Production 5.0.0 Protection of Animals * * * Suppliers who deliver and/or manufacture products for Bestseller A/S shall operate in compliance with the laws and regulations that apply in their respective countries and in compliance with this Code of Conduct, i.e.: The supplier shall treat both people and animals with respect and dignity. The supplier shall treat the environment with respect and consideration. The supplier’s business activities must comply with all the relevant and applicable laws and regulations including those concerning the workforce, its welfare and safety and the working environment. The supplier shall allow Bestseller A/S and/or anyone who represents Bestseller free access to his facilities (incl sub-contractor’s facilities) and employees and to all the relevant data at any time, whether notification of an audit has been given in advance or not. * * * The supplier shall ensure that the content of this Code of Conduct is communicated to the employees including posting a copy of the Code of Conduct in the local language and in a place accessible to the employees.
www.bestseller.com
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Exhibit 7: Global Value Chain of Bestseller A/S
Bestseller A/S, (Brande, Denmark)
Purchasing offices (Italy, Turkey, China and India)
Vero Moda Jack & Jones
Franchised stores
Retailers Sourcing from suppliers (Europe, the Middle East, Asia)
Vila
Fully owned wholesalers
ONLY Independent wholesale dealers
Etc.
Design/marketing
Production
21
Sales
Exhibit 8: Bestseller A/S’ domestic competitors102 Key financial figures, 2003-2007:103 IC Companys Turnover (mill. DKK) Net earnings (mill. DKK) Employees Brandtex Turnover (mill. DKK) Net earnings (mill. DKK) Employees Bestseller Turnover (mill. DKK) Net earnings (mill. DKK) Employees
2003
2004
2005
2006
2007
2,706 1 2,199
2,612 -309 2,095
2,819 173 2,019
3,022 224 1,989
3,354 241 2,199
3,048 74 2,397
3,282 68 2,360
3,371 46 1,871
3,369 29 1,752
3,194 72 1,593
4,924 685 1,285
5,336 597 1,819
6,713 939 2,372
8,672 1,055 2,950
10,182 1,372 4,108
IC Companys’ brands: Peak Performance, InWear, Jackpot, Tiger of Sweden, Cottonfield, Matinique, Part Two, Saint Tropez, By Malene Birger, Soaked in Luxury and Designers Remix Collection Brandtex’s brands: Brandtex, SHARE, Ciso, Blend, BlendShe b.young, Fransa, Edamae, Psycho Cowboy, Jensen Women, Gestuz, Freeze, Ichi, Silbor, Veto, Frank Q, Dranella, Signature Sales performance by market for IC Companys: DKK million Sweden Denmark Holland Norway UK & Ireland Belgium Finland Germany Poland Canada Switzerland Spain Russia Austria France Other Total brands
102 103
2005/06 674 520 274 209 185 154 155 146 88 87 84 65 50 46 36 142 2,915
2006/07 756 635 287 276 180 177 167 154 92 90 96 71 72 48 42 179 3,322
Growth 12 % 22 % 5% 32 % -3 % 15% 8% 6% 4% 3% 14 % 9% 44 % 5% 18 % 26 % 14 %
www.iccompanys.com, www.brandtex.com Greens online
22
Exhibit 9: Bestseller A/S’ international competitors104 Key financial figures, 2003-2007: 2003 2004 2005 2006 2007 Gap Inc. Net sales (mill. $) 15,854 16,267 16,019 15,923 15,763 Net earnings (mill. $) 1,031 1,150 1,113 778 833 Employees 153,000 152,000 153,000 154,000 150,000 H&M105 Net sales (mill. $) 9,413 10,485 11,966 13,330 15,335 Net earnings (mill. $) 1,063 1,211 1,539 1,797 2,262 Employees 28,409 31,701 34,614 40,368 47,029 Zara106 Net sales (mill. $) 7,219 8,742 10,582 13,996 14,810 Net earnings (mill. $) 702 1003 1261 1573 1962 Employees 39,760 47,046 58,190 69,240 79,517 Bestseller Net sales (mill. $) 1,036 1,123 1,412 1,824 2,142 Net earnings (mill. $) 144 126 198 222 289 Employees 1,285 1,819 2,372 2,950 4,108
Geographical store location: Europe America Asia-Pacific Middle East Africa Total
Gap Inc. H&M Zara 176 1,383 1,140 2,869 192 154 132 7 78 0 12 54 0 0 5 3,177 1,594 1,431
104
www.gapinc.com, www.hm.com, www.inditex.com Financial figures converted to USD from SEK on 09.07.2008 (www.oanda.com) 106 Financial figures are collected from Inditex, Zara’s mother company. Financial figures converted to USD from EUR on 09.07.2008 (www.oanda.com) 105
23
Exhibit 10: Bestseller China’s ownership structure107
1996
2001
IFU; 30 % Dan Friis/Allan Warburg; 50 %
Troels Holch Povlsen; 50 % Dan Friis/Allan Warburg; 20 %
107
IFU 2005
24
Troels Holch Povlsen; 50 %
Exhibit 11: Bestseller China’s development in stores 1996-2007108 109 Year
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Stores Own stores Franchises
3 3 0
24 16 8
45 23 22
56 26 30
82 48 24
163 55 108
282 175 107
484 274 210
710 357 353
852 1200 1800 412 675 960 440 525 840
Own stores
Franchises
2000
2002
Number of stores, 1996-2007
2000 1800 1600 1400 1200 1000 800 600 400 200
108
2007
2006
2005
2004
2003
2001
1999
1998
1997
1996
0
Figures for 2007 are based on estimates from Jyllands Posten (2007) Bestseller spurter frem, as well as own estimates. Figures from 2006 are based on Børsen (2006) Bestseller strammer konceptet til, as well as own estimates. 109 Bachelor thesis
25