China Consumer

If the shoe fits

How the fortunes of China’s biggest ladies shoemaker have dipped


The way Wang Lin puts it, the investment philosophy of CDH goes beyond just giving the companies capital. In an interview with Chinese Venture, the partner at the Chinese private equity titan says: “We did not invest only money in the enterprises, but made friends with them. When in trouble, the first one they turn to for help is you.”

So perhaps that explains why no one was surprised when CDH announced in late April that it will partner with Hillhouse Capital, another Chinese private equity firm, to lead a consortium of investors to take private Belle International, China’s largest female footwear retailer. If successful, the acquisition would value Belle at Rmb40 billion ($6.4 billion) and become the biggest ever buyout of a Hong Kong-listed consumer goods company.

Belle and CDH go way back. In 2005 when the Shenzhen-based company was looking for capital to expand its retail business and consolidate its distribution network, it approached CDH, which had a track record of investing in consumer businesses like dairy company Mengniu and Nanfu Battery.

Attracted by the shoe firm’s strong growth, CDH – together with Morgan Stanley Private Equity – invested HK$23.6 million ($3 million) in Belle’s redeemable preferred stock, according to CBN.

The investment was a hugely lucrative one for the two private equity firms. The capital influx drove rapid development at the retailer, and Belle went public in May 2007, raising about $1.1 billion. The offering came amid a bull market – Hong Kong’s benchmark Hang Seng Index hit an all-time high in October 2007 – and the IPO’s retail portion was 500 times oversubscribed. At one point, its market capitalisation even surpassed HK$150 billion.

A decade on, the shoemaker (which has over 20,000 outlets) is hardly the belle of the ball. Its market value had dwindled to HK$51 billion as of this week. Gone are the days when profit was up double-digits year after year. Instead same-store sales are consistently down. Last year, Belle reported a net profit of Rmb2.9 billion, slumping more than 40% from 2015. It was forced to close 276 stores in China between June and August.

The proposal put forth by CDH and Hillhouse offers to buy Belle’s shares at HK$6.30, which represents a 20% premium to its pre-deal closing price (the retailer’s shares have been suspended since April 18). When completed, it will render Hillhouse the controlling shareholder with a 56.1% stake while CDH will have 12.1%. The private equity firms say that taking the company private will allow them to “more effectively” revamp the business and explore other commercial models and technology investment.

One reason for Belle’s reversal of fortune is a heavy dependence on bricks-and-mortar stores. The company, which started out as a shoemaker and still sells its own self-made brands like Millie’s, Staccato and Joy & Peace, relies on department stores as its primary sales channel. But as more and more consumers go online to shop, department stores in China have seen a steady decline in foot traffic. In the first nine months of 2016, the top 50 domestic retailers saw sales fall 1.9% compared to the same period of 2015, says China National Business Information Centre. Online sales, on the other hand, went up 26.1% during the same period.

“Belle is still the top performer among fashion footwear companies, but the industry as a whole is in a tight spot, especially those reliant on physical channels,” Tang Xiaotang, founder of retail consultancy Nofashion, told the South China Morning Post.

Belle has tried to diversify into e-commerce. In 2009, the shoemaker set up its own e-commerce site before merging it with Yougou, an online shopping platform it acquired in 2011. However, it found that internet shoppers have come to expect bargains when they shop online, expecting to see cheaper prices.

That puts the shoemaker in an awkward position: Belle doesn’t want to cannibalise its offline sales, which remain the largest contributor of revenue, says China Business Journal.

Nevertheless, e-commerce is not the only challenge Belle now confronts. Sohu Finance reckons it has been slow to react to changing consumer preferences. Young buyers simply don’t find the brand trendy. In fact, millennials say they now perceive the shoemaker as “old-fashioned”.

“Belle is always a few steps late when it comes to catching up with the trend. Within weeks after the Chanel runway show hits the internet, similar designs are everywhere on Taobao [Alibaba’s consumer site]. But Belle would take a whole season before it launches the same designs,” one industry insider explained to China Business Journal.

That’s a major change from five years ago when local media was marvelling at how nimble Belle was. Reports said it could produce 2,000 designs per year – many in small batches – and was adept at cashing in on new trends (see WiC157).

Still, Belle can find comfort that it is not the only shoe retailer that is struggling. Daphne, another large retail footwear chain, also reported a net loss of HK$819 million last year after closing almost 2,000 outlets. Similarly, Topscore, a Guangzhou footwear maker, also saw its sales drop 5.1% to Rmb1.6 billion after closing 216 stores in 2016.

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