Guest Post from John Solomon, Director of enoVate

The fixed gear bike movement has hit the streets of China. Just three years ago, you could count the number of fixed gear bikes here on your fingers (and maybe toes). But spend an afternoon strolling Shanghai’s French Concession, and your sure to see various youth — Chinese and Foreign — riding fixies. What’s more, this movement is not limited to the Big Two (Shanghai and Beijing). Tyler Bowa, founder of People’s Bike, states China’s biggest fixed gear scenes are actually in Shenzhen and Dalian, where 7 months ago there were no such bikes. This movement is spreading to cities nationwide: Suzhou, Nanjing, Chengdu, Wuhan, the list goes on. But why? The fixed gear industry has done little-to-nothing to popularize this product in China. Besides a handful of local companies, like airwalk (link), fixed gear brands have mostly neglected their relationship with the Chinese consumer. This, of course, will change very soon.

Crucial to the rise of fixies in China has been the internet. For one, the fixed gear scene has become increasingly well-documented. Videos and photos litter the online world. These bikes are popping up on popular websites, blogs, and video sharing websites. Chinese youth can watch popular fixie movies, such as MashSF, on youku. Secondly, the internet has provided a place for riders to organize communities. Threemin, China’s first fixed gear website has an active forum, with roughly 4,000 members for its Southern China forum alone.

Also worth mentioning is the sometimes subliminal cultural magnetism of China’s neighbors — Japan, Korea, and Taiwan — where fixed gears have an already long-established tradition. But Karl Ke, co-founder ofPeople’s Bike, notes that beyond just fixed gears, bicycle culture is experiencing a resurgence in China.

“Basically, I think people more and more fancy riding a bike, based on four key areas: 1) the government began extensive promotion of environmental protection concepts. 2) More and more Western media are promoting the concept of bike riding and healthy living. 3) More people want to escape from depression and immerse themselves in city life. Cycling is one of the most effective and easy ways to escape and control things in one’s daily life. 4) Fixed gear is simple and close to the concept of extreme sports, but has its own unparalleled noble temperament.”

For many young Chinese today, the bicycle stands for much more than just a means of transportation. It is now a fast-growing culture, that consists of a large community dispersed throughout China. This is especially the case for fixed gears. Websites like People’s Bike and Threemin keep riders all over connected, while events like Alleycat (video here) have united riders from all over for races in Beijing, Shanghai, and this weekend Guangzhou. This community will continue to grow. The second half of 2009 saw a real explosion in China’s fixed gear scene, but that was just a taste of things to come as we enter a new decade.

We expect to see brands hoping on the bandwagon in the immediate future. Brands like Puma and Thule have already associated themselves with local bike culture by sponsoring the Shanghai Alleycat. Expect more of this, but also expect the fixed gear industry to open its eyes to the China market. It’s an open playing field. Giant will be entering the fixed gear market soon with a new brand called Momentum. This is smart. Fixed gear aficionados tend to stay away from mega-brands when building their cycle. This demographic seeks a personal relationship with their bike. A Giant branded bike would ultimately fail. As Tyler Bowa states, “we don’t want to walk into a big store and pick something off the wall, that’s why small bike companies thrive throughout the world.”

For some great Shanghai fixie photos, check out Tyler Bowa’s portraits on flickr: http://www.flickr.com/photos/peoplesbike. All photos are from Tyler Bowa and People’s Bike.

john solomon is founder and managing director of enoVate. enoVate is an insights and design firm based in shanghai. we publish daily insights and develop creative solutions for China’s youth market. visit enoVate’s website for more information.

Later that week, while walking from Xintiandi to Huai Hai plaza (roughly 1km) to an event, I took out my iPhone camera to capture one of those moments where I realized that all the good economic recovery news was not translating to the street.

In short, over the course of my 1km journey, I captured roughly 15-20 open retail spaces (recently vacated and going through fit out) that highlighted a simple point… that things are not what they seem.  That, even as some still look to China to be the consumers of last resort and as a source of potential economic catalyst, the fact that there are 15-20 open retail spaces available along one of Shanghai’s busiest retail zones is not only discouraging, but shows that consumers are not going along with the plan unless there is a deal.

There was a time when the only coffee outfit was Starbucks, and its knock off SPR.

Along Nanjing Road, the highest concentration existed with 5 stores between the Portman hotel and People’s park, and in total there were roughly 80 by the end of last year (as you can see from the map above).

Over the last 18 months though Starbucks’s hold on the market changed. Dramatically.

Leaving aside the recession for a moment, and the fact that a tall latte goes for 28RMB, the growth of Starbucks has been eclipsed by the by new entrants: Costa Coffee, 85c, Dunkin Donuts, and others. It is a market that in many ways was made by Starbucks, that others have learned from, and in the case of the Taiwanese 85c brand, looked to take away.

At first, 85c was a single store on the less than traveled corner of Maoming Road and Weihai Road (.5 km south of Nanjing road). A store that perhaps drew few glances at first from the folks at Starbucks, but within a week, it was probably clear to executives on Yishan road that they were witnessing the birth of a strong competitor.

The cakes themselves were measurably better than the local alternatives one would find at some of the other cake shops, and the bread variety was quite good (the Parmesan bread is fantastic!), but it was the 7RMB bubble teas and coffees that were growing in popularity. Everyone was talking about it, and myself and a few others quickly looked at the website and talked about taking up some of the licenses that were being offered up for the new stores.

It was the birth of what will shortly be the largest cafe in Shanghai, and the recent CHAINA article Watch out Starbucks, 85c is the new kid in town in China has a very interesting interview with one of its executives detailing its recent growth,

Q: When did you start the business in China?
PZ: We opened our first store in Shanghai 2 years ago. We now have 42 stores, 31 are in Shanghai and the rest are in Hangzhou and Suzhou. We are planning to open another 91 stores in Shanghai by the end of the year. We built our factory in Song Jiang in June last year.

What it is going to take to support that growth.

Q: Why did you choose Song Jiang as the location of the factory?
PZ: We needed a place big enough to accommodate us. We have around 6,500 square meters, which has the capability to supply 60 stores. Since we are growing so fast, a key issue that we face is how to supply the growing number of stores. We have already found a venue in Hangzhou which is 10,000 square meters in size and we’ll soon build an-other factory there.

.. and the logistics that goes into supporting the stores

Q: How do you manage logistics to each store?
PZ: Currently our 42 stores make their orders every day before 10 a.m. based on their previous day’s sales. Then our factory works 24 hours a day to make the delivery be-fore the following morning since our products have a short shelf-life. We need to pre-set product specifics on each item into our ERP system. So if I need to produce 1,500 pieces of cake today, then the system will tell me how much butter and dough we need and so on. Before 4:00 pm the same day, the products will be ready and around 7:00pm, we’ll make the delivery of the frozen cakes from factory to each store. At 2:00 am, we’ll make the second delivery of the day of normal-temperature cakes.

An interview that is interesting from many angles (Successful China business case, Retail Logistics, Branding, and real estate), I found the dialogue very interesting, telling, and was amazed to see just how profitable one of these stores could be:

What’s the average sales revenue of a store?
PZ: The best shop can have revenue of RMB1.9 million per month in Shanghai, while our store in the US, can do in excess of USD 400,000 per month.

Read the rest of the article here

When the doors opened, its marketing managers proved themselves as throngs of people made their way through the store. Both the domestic and international press cores were there to cover the action, and as you can see in the CBS piece below, it is a model that a number of people are studying with interest.

Having just come off a retail project, I must admit that when I walked into the store I immediately was impressed by the quality of the work that went into the design and build out. It was impressive, and you could really feel a buzz among the crowd as they were making their way up the escalator and into the main room.

Once in the main room, I was again impressed from the perspective of layout, design, and just how many people were in the room. It was … impressive.

It reminded me a lot of when I was in H&M for the first time. People everywhere. Activity. Sounds. the atmosphere was a buzz with people, and it was easy to understand where the writers before me were dazzled. It all seemed to “work”.

Where I was really interested was the fact that this was not some Barbie doll shop, but that there were full product lines devoted to adults. Purses, 5000 USD diamond necklaces, and Barbie dolls dressed to the 9s in Vera Wong. It was simply put, a whole new concept store that put into perspective the comments that had been made about Barbie going into new markets.

Again. It seemed to “work”
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While there are still some reports lately that forge some level of hope that the consumers in China have not been affected by the crisis, and that their spending will help to support the Chinese economy, I have held a very different opinion.

It is a feeling/ opinion that has been difficult to prove given my supporting evidence is largely anecdotal, based on
conversations with friends, based on my unscientific measures of shopping bags in-hand, and noticing that the streets of Shanghai are actually cleaner due to reduced traffic.

Until now.

Now, falling in line with the rest of the bad news, comes a SCMP article showing that consumer confidence has dropped off the chart as well.

About 45% of consumers in Beijing, Shanghai, Guangzhou, Chengdu and Shenyang said that they had already cut back on spending, according to a survey by market research consultancy DDMA. A further 15% had not yet reduced spending, but had plans to do so.

Like the recent import figures that came in, I believe it is important for there to be some better analysis of the real situation. When speaking to friend, the concerns I am hearing are that (1) they are not secure in their jobs because their firms are frozen/ laying off (2) that they fear China has yet to feel the full impact, and that with every piece of news abroad, they recognize it will come back to China (3) that until they are comfortable knowing what the wider global economy is going to do, they are going to stay put.

Update: Read Educated, urban and suddenly unemployed by Carolynne Wheeler.  It is an excellent piece that humanizes the above circumstances

What does that mean for retailers? In short…. difficult times

When I walk down the streets of Shanghai (Huai Hai and Nanjing West rd to be specific), it is clear that there are fewer people on the streets and that “shoppers” are now walking empty handed. Where my office is, an area where large populations of migrants/ middle class Shanghai residents are located, the streets were deserted for 2 weeks after the new year… and stores close early now.

Where all this becomes important is that this comes back to the wider picture of what will keep this economy in positive growth territory. the banks are absolutely unleashing a torrent of easy money into the market, and NO ONE IS SPENDING.

So, if you take the GDP projects from this year and adjust for the 30% reduction in export manufacturing output, and 30% for reduced domestic consumption… where does that leave China?

Wen jiabao still says 8%… UBS says 6.5%….

Me. an unadulterated 4%… and praying it does not go further

An interesting clip for the times.

Wong, a young professional who used to feel comfortable spending his monthly earnings on taxis and date nights, has set up a club of 100,000 followers who are looking for ways to save money as well.

Some may think that luxury sales are the story, but given China has always been about the markets and the middle and bottom, I would say that this story is one that you should follow. If nothing else, remember that while 20 million migrants are out of work, and 3 million graduates are expected to join the ranks of the unemployed, it is people like Wang that many analysts were banking on.

Following the rather quickly written post Why Layoffs in the US are a Bad Thing for China where I mentioned highlighted that these closures were likely to impact China’s real economy I thought it would be a good idea to spend a little more time looking at the real impacts to China’s economy. There have been a lot of “what if” and anecdotal evidence, but I thought rather than just leave my last post in the anecdotal, I would try and show how a single US firm closing its doors would reverberate through the supply chain.

So, beginning with the story Home Depot Layoffs: 7,000 Jobs Lost; Home Depot Expo to Close, I took a quick browse of the Expo Design Center site and found that the primary business model of Expo was to sell kitchen, bath, and flooring materials.to buyers who were looking to fit out their newly owned (or soon to be flipped) McMansions. It was a business model that 3 years ago provided Home Depot and others with strong earnings reports, high foot traffic, but as the recent economic crisis began to take hold of the mortgage and credit markets, these business began to see significant drops in business.

Where this business model, and more specifically its product line, strikes me as the most appropriate foundation for this series of posts is that it was an industry (wood products – furniture, home decor, etc) where Chinese products have penetrated the world markets very quickly, it is an industry that has several large geographic clusters that allows for a more focused geographic analysis, it is an industry that uses basic materials with minimal technology to create the finished products, it is an industry requiring high labor input.

Additionally, as you can see in the graphs, this was an industry whose products were seeing very high growth rates (thanks to lower cost of production) and while the indsutry istelf was highly fragmented, the primary economic centers were all located on the east coast by product clusters.

Quite typical of Chinese export model.

From the macro perspective, what the closure of the Expo Design Center (and others) could mean for the Chinese economy could be significant.

While the map above highlights the export manufacturing points, there are in fact long chains of activity supporting these groups. timber importers, ports, shipping companies, mills, equipment providers, and so on are all operating behind the exporters to provide goods that will become the finished product. There are an estimated 50,000 furniture manufactures who are operating in this space. and few if any of these firms have yet to achieve any real sense of scale or power within the industry.

Entire towns have developed as importers, others as processors, and others as assemblers… as can be seen the slides below.

That the economic shocks were going to happen at a much higher frequency, and severity, due to the fact that you had a large number of manufacturers who had little product differentiation packed together to supply firms whose business model proved unsustainable.. and with many of the firms who were buyers of finished products closing the stores (not simply slowing orders), the reality for policy makers and factory owners alike is that there is now a significant overcapacity will take hold, and that will mean a wider.. measurable.. impact on China’s economy as suppliers to these furniture/ cabinet/flooring manufacturers are forced to slow down their production…

Which of course will of course result in a further slow down at the ports, and in other countries – As you can see in the slides below.

Taking a different angle for the moment, a couple of examples of how this recently impacted several of our suppliers.

While visiting a kitchen cabinet maker with a client in the first half of 2008, we were already hearing that orders were off. A factory that was once adding capacity and enjoying the fruits of their product lines expansion, were now looking at finding alternative uses for idle space and staff. It was a scary turnaround for management, and as a sign of just how desperate they were for business, they were willing to work with our client on a basis that provided little upside for them other than some quick orders.

In perhaps a more ominous sign, when another supplier came to Shanghai to discuss the plans for the year, the mayor of his town came along with him to oversee things. It was clear that orders were being lost, and that even though we have been maintaining a good relationship with him for the last few years, the economic conditions on the ground meant that our relationship needed to adjust as well. Gone were the days where we could order materials 60 days ahead of time without deposit. Gone were the days of sending the container on credit. It was now a cash business for he and his fellow producers who had seen some of the large banks in the world fail, had seen their largest customers walk away, and who were managing the expectations of the staff -and mayor.

In the end, the 7000 layoffs announced by Home Depot are in reality just the tip of the iceberg. We have already seen layoffs at trucking companies and ports in the US, distribution ports and mills in Jiangsu, factories in Jiangxi, packaging companies in Zhejiang, and surly loggers in New Zealand. It is an industry whose chain stretches globally, and while administrations view these retail closures of failed business models of an unsustainable real estate bubble, the fact is that their policies are likely to fail to fully correct the core issues as they fail to understand just how long and how deep the problem goes.

Perhaps with this post, some of the void was filled, but sadly it still will not do much for those firms who have already closed.

The Xinhua news release Chinese festive spending remains robust, retail sales up 13.8% would seem to provide a beacon of hope for those looking for some light, but not so fast.

Initially alerted to the article on twitter (h/t @niubi – see recent Danwei interview of Bill Bishop here), the following chat between myself and Niubi occurred:

@niubi: Chinese festive spending remains robust, retail sales up 13.8% wasn’t 1/2 country paralyzed in ice last year?
“he robust spending was helped by sales promotions in major cities as well as government subsidies for farmers to purchase home appliances.”

@allroads: 17 provinces without power is the baseline for this year’s retail success I guess

niubi: 13% doesn’t seem so gr8 an increase does it?

allroads: hmm… an interesting/ relevant comparison would be to view growth of provinces under power last year vs this

For those who were not in China, or do not remember the havoc that was the 2008 snow storm (you can see my posts here), and it is important to consider this as literally hundreds of millions of people who were out spending this year were either stuck at the train station, living on rations, or were otherwise impeded from accessing the market.

If there was one statistics that impressed me tough:

China’s three major telecom operators estimated that a record 18 billion text messages were sent from Jan. 25 to 31.

But from the retail perspective, we are not an accurate comparison, and were the full information is released  I am sure that a few province by province comparison will show that there will be huge gains in the storm affected areas of 2008.. and losses in the unaffected provinces.

Overall – Not as bad as Christmas in the US, but certainly not a statistic we should be celebrating – and we can only hope that the numbers are good enough to avoid any major retailer bankruptcies.  Something US firms were unable to avoid.

With firms spending 80-100 M USD to be sponsors of the Olympic Games, there are going to be questions.

What I have found interesting through my discussions around this topic, and through reading the perspective of others, is that it is all in the matter of context.  Whether firms were trying to use this as an opportunity to reach consumers in China (Adidas), trying sell industrial lighting products (GE), or were looking to launch their brand on a global basis (Lenovo).

It will of course take time for the final numbers to be realized, but through this report you can see that Adidas clearly is finding ways to leverage their sponsor status.. and that with 60% increase in sales, they already have some big ammunition to be used when defending their sponsorship.

One thing I noticed, and sparked some thinking, was that they have spent a lot of money on their workers through the dormitories, and the conditions (as far as I can see) are pretty good.  firms like these were already at a higher level, so I am wondering why the new labor law hit them as hard as we are lead to believe… need some time with this one

Over the life of All Roads, I have written a few posts about the development of Nanjing Road, and it is time for another edition.

to be honest, this is a post I have struggled with as I have been on a retail project for 6 months.. have lots to say about Shanghai’s development, but I can never get it started. So, I am going to change up the format a bit

1) Following the lines of my posts Nanjing Road… Will the Construction Ever End? and Part 2, I am happy to report that the majority of major new building construction along Nanjing Road is over. Wujiang Road has been completed, Jia is open, and the apartment complex has turned over keys (buy in above 50,000 RMB/ meter).

However, the are just in front of this (where Pizza Hut, Valley Gourmet, Starbucks, and that great Cantonese place on the corner of Maoming USED TO BE) is under massive reworks. the landlord of the building literally threw out some of his tenants (KTV on the 2-4 floor showed up one day to a missing escalator)… and Marks & Spencer have just put up their advert that they will be in the space later this summer (no way possible… look at picture).

2) Wujiang Road has fully opened (see my post ), but there is a problem. A BIG PROBLEM.

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