What: First-half reports show a decline in gross margins for apparel brands in China.

Why it is important: The apparel sector is struggling in China, but international brands, DTC channels, and flexible product lines can help improve agility in this difficult first half of the year.

Throughout China’s apparel sector, companies with a high proportion of physical retail have been affected by factors such as lack of customer flow and weakened desire to shop in stores after repeated lockdowns. In addition, enterprises with more direct-to-consumer channels have better cost control in a market that is seeing ongoing declines, which helps to stabilize gross profit margins. At the same time, a flexible product line for large apparel groups is one way for them to grow even during adversity.

Firms have been squeezed between declining sales and rising costs of operation, supply chain and raw materials. A sharp drop in profits in the first half appears to be the inevitable result for apparel groups focused on physical stores, either in direct-to-consumer or in traditional retail business models. Looking at many apparel brands present in China; their net profit year-over-year shows a tremendous decline with some companies reporting 60-80% drops for the first half of 2022.

Despite these reports, some categories remain resilient, particularly the activewear segment.

International brands in China appear to be doing better than local apparel brands and retailers, leading to new market dynamics and a hopeful outlook for the second half of the year.

Apparel in China continues to struggle