Clothing export: Chinese apprentices applying the Zara model

With the rise of local fast fashion brands, these brands have gradually expanded and started to do business overseas. How can they grow quickly and what do they need to pay attention to when doing business in overseas markets?

In the past few years, the wave of store closures by international fast fashion brands has spread from Zara and H&M to MANGO and Forever 21. On the other hand, local fast fashion brands are making a comeback, not only with gratifying sales, but also making an impact on the capital market.

According to Bloomberg, people familiar with the matter revealed that Urban Revivo (hereinafter referred to as UR) is considering an IPO in Hong Kong to raise at least US$100 million. The person also said that the IPO plan is still under discussion and the company may decide not to go public.

Behind UR is a story of the rapid rise of a Chinese fast fashion brand. Founded in 2006, UR is the first brand in China to adopt the fast fashion business model. At the beginning, the company had only more than 100 designers and one factory. After more than ten years of development, it has grown into a fashion brand with more than 400 stores worldwide and annual sales of over 6 billion yuan.

At the same time, UR is also one of the earliest domestic clothing brands to go overseas. In 2016, UR opened its first overseas store in Singapore. It has now achieved large-scale expansion in the Southeast Asian market. In July this year, it opened two stores in Pavilion Mall and Utama Shopping Mall in Malaysia.

But Li Mingguang, chairman and CEO of UR's parent company FMG Group, has ambitions that go beyond this. In an interview, he said that he "wants to build an international fashion industry group with a scale of hundreds of billions."

1. The model change of the king of fast fashion

The industry calls a series of brands that rose rapidly from 1990 to 2010 fast fashion brands, such as H&M, Uniqlo, Zara, GAP, Forever21, etc. However, Zhongtai Securities believes that among these brands, Zara's pursuit of "fast" to reduce transaction costs is the most extreme.

Zara's success lies in its unique corporate genes - a garment manufacturer with user-oriented thinking. The Zara brand belongs to the Spanish clothing giant Inditex. Its predecessor was the garment manufacturer GOA, which was responsible for the design and manufacture of clothing and served the channel merchants. The birth of Zara marks that GOA skipped the supplier function and went directly to the retail link to directly serve consumers.

Consumers' impression of Zara's products is that they are of poor quality and can only be worn a few times. However, it is somewhat contradictory that many consumers believe that Zara's products are cost-effective and will make frequent purchases.

There are two key factors. First, the price/performance formula that Zara follows is price/performance = fashion/price, not quality/price. Second, Zara sets the price point at half of the price of comparable brands and comparable quality products. Half price is a price that makes people feel that it is a high price/performance ratio and is a driving force for making a decision to buy immediately.

This raises the question: how does Zara achieve advantages in both fashion and price?

The answer is because of "speed" and "accuracy". Zhongtai Securities pointed out in its research report that Zara has reduced the transaction costs of fashion clothing to an unprecedented extent and passed on the benefits to customers.

On the design side, Zara has a clear and accurate process for predicting fashion trends. This includes observing the changes in the clothing of street fashionistas and target customers, running around fashion weeks to collect fashion trend elements, and observing the clothing of celebrities and KOLs in the media. These three systematic additional information sources give Zara a clearer sense of fashion trends, and combined with the original designs of internal designers, it is conducive to improving the accuracy of the prediction of the final destination of dynamic demand.

On the manufacturing side, Zara shortened the product cycle from 6-9 months to 2 months, and quickly iterated through a 3-4 week cycle, launching more than 12,000 products a year, 5 times more than its peers. The ultra-high update frequency ensures that Zara replenishes its shelves twice a week and replaces old products with new ones every three weeks.

Zara also attaches great importance to logistics speed, and even "transported clothes as fresh products." Zara gathers the goods produced worldwide in three warehouses in Spain: La Coruña, Madrid and New Zaraxa. All three warehouses are highly automated and near the airport. Stores in Spain and nearby European countries use land transportation by truck within 36 hours, while stores in Eastern Europe, the United States and Asia use air transportation within 48 hours.

In summary, Zara has established a highly streamlined fashion supply model, which satisfies the fashion needs of urban women quickly and accurately with a high-frequency fixed cycle. Zara's fast delivery, fast inventory clearance and seamless customer experience enable customers to experience the "pleasure" of online shopping offline, which has helped it win the favor of consumers for a long time. Zara ranks 41st in the "Forbes 2020 Global Top 100 Brands" list.

At the same time, it also brought considerable profits to Zara's parent company Inditex Group. According to Inditex Group's 2023 fiscal year report, the company's sales increased by 10.4% year-on-year to 35.947 billion euros, net profit increased by 30.3% year-on-year to 5.4 billion euros, and gross profit margin was as high as 57.8%.

2. From challengers to leaders, what are SHEIN and UR missing?

Standing on the shoulders of the Zara model, domestic fast fashion companies represented by SHEIN and UR have further promoted the improvement of supply chain flexibility and precise matching of demand through digital tools, thereby improving the supply efficiency of trendy clothing.

Through its online sales model, SHEIN has leveraged and empowered small supplier resources in South China. It takes only seven days from design to shelf, and can meet clothing demand with 100,000 pieces per week. This model has reduced the inventory rate to single digits.

Data shows that SHEIN's revenue in 2020-2022 was US$10 billion, US$15.7 billion, and US$22.7 billion, respectively. The company's valuation once exceeded the sum of H&M and Zara. In May 2023, SHEIN's valuation was about US$66 billion, making it the leader in domestic fast fashion cross-border e-commerce.

If SHEIN is the representative of online consumption, then UR is the representative of offline stores. Li Mingguang revealed earlier that in 2022, UR brand sales exceeded 6 billion yuan, with more than 400 stores in China, and nearly 10 stores in Singapore, Thailand, and the Philippines. The online sales network has also covered Europe, North America and other international markets.

Riding on this favorable wind, UR also gained the favor of capital.

Tianyancha data shows that from 2010 to 2019, UR's parent company "KuaiShang Fashion (Guangzhou) Co., Ltd." (hereinafter referred to as "KuaiShang Fashion") completed five rounds of financing. The list of shareholders includes well-known investment institutions such as Gobi Ventures, Jinglin Investment, and Sequoia China, as well as leading clothing listed company Heilan Home.

Image source: Tianyancha

Li Mingguang once admitted in an interview that "UR is the verifier and beneficiary of Zara in China". As Zara's "apprentice" in China, UR has learned the essence of Zara - relying on a fast-response supply chain, achieving a large number of styles and small quantities, keeping up with trends, and frequently launching new products, combining fast fashion with efficient supply chain management. UR also learns from Zara in the location selection and image creation of offline stores, which must not only be large but also high-end and luxurious enough. In 2006, UR's first store opened in Guangzhou Zhengjia Plaza, covering an area of ​​more than 1,000 square meters. At that stage, few local brands opened stores of more than 200 square meters. Today, UR has opened stores in first- and second-tier cities such as Shanghai, Chengdu, Beijing, Xiamen, Wuhan, and Tianjin, with an average store area of ​​more than 1,000 square meters and the largest store area of ​​4,400 square meters.

With its vision for overseas markets, UR has set a lofty goal. Li Mingguang said that Zara, UR's benchmark, should have a global revenue of around 200 billion yuan, and Uniqlo's global revenue should also exceed 100 billion yuan.

Image source: Tianyancha

It is worth mentioning that before the rumored listing, UR had a series of changes in its equity structure. In November 2022, several shareholders collectively withdrew from Fast Fashion, changing from the original multi-shareholder shareholding model to a single shareholder wholly-owned holding. After the adjustment was completed, Guangzhou Leo Holdings Co., Ltd. completed the holding. In June 2024, Guangzhou Leo Holdings Co., Ltd. withdrew and Guangzhou Fashion Dynamic Investment Holdings Co., Ltd. took over.

Industry insiders said that generally speaking, the collective withdrawal of some shareholders of a company may be to streamline the equity structure of the listed entity, with major shareholders buying back shares of minority shareholders; it may also be that the domestic investment entity withdraws and the IPO is carried out by the overseas investment entity. Both of these are preparatory actions before listing.

What’s more, just before UR was rumored to be listed, SHEIN was also rumored to be listed on the IPO. According to Forbes China, SHEIN secretly submitted documents for listing in London to the British market regulator in early June, actively promoting the listing on the London Stock Exchange.

Faced with a changing business competition landscape, SHEIN and UR do need more capital support while expanding rapidly.

3. Discussion on the overseas export model of clothing in the inventory era

In the era of supply shortage, consumers competed to buy goods, and the supply bottleneck determined the growth of clothing companies. In the era of abundant supply we are in, the basic needs of consumers are fully met, while more, broader, and more personalized needs are not fully met, so sub-categories such as yoga clothes, jackets, and sun protection clothes have successfully emerged in recent years.

Zhongtai Securities pointed out in its research report that there is still a large amount of demand that is not fully met under the current supply model. Enterprises can gain incremental growth through digital tools, deep exploration of user needs, segmentation and expansion of scenarios, and many new brands can also find development opportunities from it.

It can be foreseen that the exploration and satisfaction of enterprises in more segmented scenarios and demands will be the deciding factor in future competition in the existing market.

This is especially true when it comes to clothing exports. Clothing has always been one of the main categories of my country's foreign trade exports, ranking first among the "three old items for exporting overseas", and there are countless players in this field. Fast fashion brands represented by SHEIN and UR have become examples for Chinese companies and brands to go overseas.

SHEIN's business model is driven by supply chain advantages and digital operations. On the one hand, after a large number of high-cost-effective products are launched frequently and accurately accumulate user needs through continuous testing and iteration, the supply chain is organized to achieve accurate scheduling and rapid production in a small-order fast-response mode. It takes only one week for women's clothing to go from design to sale.

On the other hand, the digital system shares the fabrics, production capacity, and production information of suppliers within the system. For example, after SHEIN places an order in the system, the system automatically dispatches the order based on the algorithm or the supplier grabs the order online. The "GMP system" on the mobile terminal digitizes the order process, supplemented by online and offline operational training, to guide efficient production in the supply chain. The "MES system" can track each link of each order from the supplier in real time and visually to control production efficiency.

Image source: Screenshot from UR official website

UR also began a comprehensive digital transformation in 2019, and carried out digital reforms on store merchandise, omni-channel, and supply chain management, achieving full-link automation and intelligence. Digital technologies such as 3D pattern making, image recognition, and machine learning have been applied to UR's product design and supply chain system. It only takes 6 days for a piece of clothing to go from design to store.

At the same time, since UR's development focus is offline (about 70% of its revenue comes from offline stores), in order to quickly launch new products without being dragged down by inventory, UR has established a product portrait model for stores across the country. By analyzing the purchasing habits of different markets and different users one by one, it can achieve real-time allocation of popular products every month, week, and even day, maximizing inventory turnover and profits, and achieving a sell-out rate of 90% at the end of each season.

Overall, SHEIN and UR have similarities and differences. SHEIN's prices are lower, and its overall supply chain operation efficiency and costs are rarely matched in the industry. UR, which follows the "fast luxury" route, is not in the same niche as SHEIN, but it is fast enough to capture and respond to trends, and has a unique inventory turnover and inventory control.

More importantly, SHEIN and UR’s intelligent transformation of the clothing industry chain has provided a new idea for China’s manufacturing industry, which is in the midst of a transition period.

Because previous digital transformations were more focused on logistics and sales channels, companies are now extending their transformation tentacles further into the processing and manufacturing links, opening a new time window for the transformation of labor-intensive manufacturing industries.

References:

[1] From ZARA, Uniqlo to SHEIN: An Atlas of the Evolution of Clothing Models in the Inventory Era, Zhongtai Securities

[2] “UR Li Mingguang: Fast fashion will not die out, it is undergoing a second start-up”, China Entrepreneur Magazine

Author: Tang Fei

WeChat public account: Xiaguangshe