When the shoe fits

There was a time that passengers couldn’t walk through a major airport without passing a Tie Rack. At its peak the British retailer had 450 branches in 31 countries. When it went public in London in 1987, it floated on a price-earnings ratio that was a record for a company of its type. Its IPO was 85 times oversubscribed and investors queued in their thousands at the underwriter’s office, snaking around the Bank of England in a bid to get hold of the shares.

The excitement around this purveyor of male sartorial items didn’t last. Some blamed its eventual demise on politicians like Tony Blair and Barack Obama, who began to be seen more on television governing with an open collar. Others put it down to the work cultures of the new internet majors, which shunned the suited-and-booted look. Tie Rack was bought out by its main Italian supplier in 1999 and eventually closed all its shops in 2013.

China’s biggest manufacturer of ladies’ shoes was facing similar challenges when it was taken private in 2017. Some wondered if Belle’s design range of high heels had any future; there were questions too over the sustainability of its retail network, including its sales efforts in department stores. Yet Belle managed to find a new investor – Hillhouse, a leading private equity firm – which led a buyout four years ago. And now the shoemaker is back in the spotlight, keen  to demonstrate that it’s a fashionable choice once more – for shoppers  and investors alike.

What is Belle’s latest offer to investors?

A footwear retailer known as Belle Fashion filed a preliminary prospectus with Hong Kong’s main bourse last week. The French-sounding name might sound unfamiliar to younger investors, but the company first went public in Hong Kong as ‘Belle International’ in May 2007.

That $1.1 billion IPO was completed amid a heady bull market, with Hong Kong’s benchmark Hang Seng Index (HSI) hitting all-time highs a few months later (a record that was later surpassed in 2018).

Similar to Tie Rack’s IPO three decades earlier, Belle’s original share sale stirred massive investor interest. Its retail tranche was 500 times oversubscribed and a then record amount of more than HK$430 billion ($55 billion) of cash was ‘frozen’ in the local financial system thanks to the share subscription process. In recognition of the huge market demand, Belle was later included in the HSI’s blue-chip family, as its market value surpassed HK$150 billion. Its founder Tang Yiu was feted as “the king of shoes” (see WiC188).

At the time Belle was a smash hit with investors because it was viewed as one of China’s biggest consumer plays. But the rapid rise of e-commerce and the seismic changes in shopping behaviour it occasioned jolted its prospects. After 13 dismal quarters of negative same-store sales growth, it was taken private in 2017 by a Hillhouse-led consortium (see WiC364). The deal valued the franchise at just HK$53 billion (although that still ranks it as the biggest buyout of a Hong Kong blue-chip).

Analysts await details as to the timing of Belle Fashion’s IPO. Yet the stock market return of the “king of shoes” is an intriguing prospect, according to financial portal Yema Finance. Unsurprisingly there is much speculation as to how Hillhouse is going to value the listing less than five years after taking the group private.

What has changed for Belle Fashion’s prospects?

Prior to accepting the Hillhouse-led buyout, the group was operating two main business lines. Alongside its position as China’s leading manufacturer, distributor and retailer of footwear, it was also a major retail partner in China for international sportswear brands, most notably Nike and Adidas. 

Manned by nearly 112,000 employees, Belle was operating 20,716 directly managed outlets before it was bought out. Many of them were counters in department stores as well as thousands of footwear shops and sportswear and apparel outlets. In the financial year ended February 2017, the retailer reported a net profit of Rmb2.4 billion ($350 million) from revenues of Rmb41.7 billion.

In its new stock exchange filing, Belle Fashion still describes itself as the largest fashion footwear and apparel group in China, based on its 2020 retail sales. Yet it has obviously downsized. By last November it operated 9,153 outlets of its own (less than half of the footprint it reported five years ago). Sales for the financial year ending in February amounted to Rmb21.7 billion, but net profit was Rmb2.6 billion. This suggests that after five years under Hillhouse’s stewardship Belle is making a much higher profit margin but on far lower sales than it made five years ago. 

The transformation stems partly from the group’s aggressive investment in e-commerce and social media platforms. For instance, it now runs an in-house livestreaming team, where 150 executives have incubated more than 120 influencers who drive sales online. Footwear sales made online have increased to 25% of total sales from less than 7% five years ago.

Belle has also reconfigured its bricks-and-mortar store network by switching its focus back to shopping malls. As a result, revenue contribution from counters in department stores dropped to below 45% from more than 70% prior to its delisting.

Also importantly, Belle Fashion now no longer owns a sportswear and apparel business. Instead this was spun off as an independent company called Topsports. Hillhouse is now the biggest shareholder of both firms, which are being run independently although there are still connected transactions between them in areas such as e-commerce services, property leasing and logistics.  

Topsports went public in Hong Kong in October 2019 in a sale that valued the sportswear retailer at about HK$52 billion, or roughly the same as Hillhouse’s buyout price for the entire group two years earlier. Reuters’ Breakingviews noted at the time that private equity investors in the earlier buyout had likely more than doubled their investment, on paper at least.

But how much profit the likes of Hillhouse would end up with, Breakingviews added,  was going to depend on the valuation of “the other half of Belle” – i.e. the ladies’ footwear division owned by Belle Fashion.

Testing times for Topsports and its sister firm…

In many ways, Topsports is one of the most important partners for Nike and Adidas in the China market. With their partnership with Belle and Topsports, the duo don’t need to run huge retail networks of their own or shoulder the same levels of inventory risk (Nike and Adidas don’t commit the same capital to making their own products either, as their manufacturing has largely been outsourced to firms such as Yue Yuen, sometimes nicknamed the ‘Foxconn of sneakers’).

Topsports was worth nearly HK$83 billion in March last year (ahead of the so-called ‘Xinjiang cotton incident’; more on this later), although its value has dropped dramatically to less than HK$40 billion as of late. The decline was accelerated by a 25% fall in the wider Hong Kong share market, but also because of new challenges posed by local rivals to its partners Nike and Adidas in China.

The international duo have been bestsellers in China for decades – helped by brisk sportswear  turnover via a retail network provided by Topsports and Belle.

In other words, Belle’s earlier commercial success (prior to its first Hong Kong IPO) were also a factor in why local sportswear brands such as Anta and Li Ning had struggled to topple Nike and Adidas, their global peers, in their local market.

For Li Ning, things reached such a nadir in 2012 that China’s best-known domestic sportswear brand needed to bring in funds from American private equity firm TPG to survive a liquidity crisis.

Its share price has jumped more than 10 times since then (and by as much as 20 times when its market value soared to a record HK$275 billion in September last year). Partly the turnaround has been driven by savvier use of internet sales channels – a distribution avenue that Belle had struggled to match before Hillhouse took over. Brands like Li Ning have also remedied their former failings in areas like inventory management, drawing on new skills in a digitalised and more flexible supply chain.

Even more importantly, Li Ning’s resurgence is a direct consequence of guochao, a concept which can be translated as ‘national fashion’ or ‘national hip’, says Jiemian, an online news platform. The trend refers to a growing preference from consumers for goods said to be infused with elements from their own culture. Domestic firms have also honed their marketing skills to redefine local brands – successfully positioning many of them as just as desirable as their foreign counterparts. It means that younger Chinese shoppers now often consider a pair of Li Ning trainers as just as fashionable as a similar offering from Nike or Adidas.

The same change in mindset has seen Chinese consumers punish foreign firms thought to be critical of their government or national culture. Formerly dominant in their categories, international brands face huge and growing risks of being called out for ‘transgressions’ against China and being targeted for boycotts (see WiC434 on Dolce & Gabbana’s costly marketing blunder, for instance). 

That’s why Jiemian believes that the ‘Xinjiang cotton incident’ last year, which saw many global brands speak out against alleged use of forced labour in Xinjiang, was another watershed moment for China’s sportswear industry. As Chinese consumers vented their anger by refusing to buy the likes of Nike and Adidas, local brands – primarily Anta and Li Ning – tapped into the outrage by publishing statements in loud support of using cotton from Xinjiang.

According to Euromonitor, Nike was still the leading sportswear retailer in China last year with a 25.2% market share. But Anta (16.2%) had overtaken Adidas (14.8%) and moved into second place while Li Ning was closing the gap on the German giant in fourth place with an 8.2% share.

Last month Anta reported Rmb49.3 billion in revenues in 2021, second again to Nike’s China division (Rmb51 billion) but way ahead of Adidas China’s Rmb34.3 billion. Sales of Anta-branded products had surged by more than half. If Anta – which sponsors various Chinese national teams and athletes, including winter sports superstar Gu Ailing – can pull off similar growth this year, it will dethrone Nike as China’s leading sportswear brand, says Jiemian.

With its long-term partnership with Nike and Adidas, Topsports’ share price has notably moved in the opposite direction to that of the ‘patriotic’ Anta, plunging, for instance,  nearly 15% in a single session in March last year as tensions flared over the issue of Xinjiang cotton.

Its sister firm could also be affected if similar controversies erupt after its return to the Hong Kong bourse. Indeed, Belle Fashion warned in its listing document that its business was at risk of a worsening relationship between the United States and China, given that Chinese consumers “might have hostile sentiment against or even boycott US-branded products in general”.

High-heels and high risks as Belle battles on?

Belle’s leading labels include BELLE, STACCATO and Joy & Peace. None of them sound much like ‘national brands’. Yet in terms of China’s total retail sales of women’s fashion footwear Belle says it still commanded an 11.9% market share in 2020 (by value). Each of its next four rivals had market shares of less than 5%, the prospectus said.

For Belle’s relisting to be successful, it needs to prove that it can tap into the changing tastes of Chinese women and cement its position as the market leader.

This is no easy feat. Plenty of other female footwear firms have struggled to stay ahead in recent years. ST&SAT, a rival on the Shenzhen exchange, warned in January that its net loss for last year could top Rmb645 million. Hong Kong-listed Daphne, which also focuses on sales of high-heeled shoes, has scaled down its retail network dramatically from a peak of 7,000 stores to about 400.

China News Weekly went so far as to suggest in January that Chinese women are “giving up on high heels” as changes in society reduce the need to focus on this type of footwear as a means to get ahead. Such shoes may be associated with the catwalks of Paris and Milan but for many women stilettos are exceptionally uncomfortable.

According to China News Weekly newer priorities among female consumers favour brands that promote other values such as independence and health. Another factor, the state-run magazine claimed, was that Chinese women aged between 18 and 44 have gained an average 0.8mm in height over the last five years, perhaps also favouring easier to wear shoes known in fashion parlance as ‘flats’.

Height aside, there’s another trend that’s hard to ignore: Covid. Similar to Tie Rack and the cultural changes that gradually strangulated its core offering, the lasting legacy of the pandemic is likely to be greater numbers of Chinese working from home, partially or even full time. As you may have noticed: nobody sees what kind of shoes you are wearing on a Zoom call, diminishing the allure of wearing pricier stilettos…

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