Depth Analysis: Vertical Integration Of BELLE

BELLE International (1880.HK) is the largest female footwear retailer in the mainland. As of the end of June 2007, its self retailing outlets reached 4816, an increase of 988 over the end of 2006.

The company currently operates 8 footwear brands, of which four of its four brands occupy 17.7% of the mainland market share in 2006.

Not only that, BELLE international is also the largest retail agent of Nike and Adidas's two sports brands in the mainland.

Although the success of BELLE international has the macroeconomic factors such as the continuous improvement of China's economy and the rise of "her era" economy, the key to its success is to adopt the vertically integrated chain business mode, skillfully arranging the rhythm of upstream and downstream capital inflow and outflow and light asset operation strategy.

In May 23, 2007, the Belle International Holdings Ltd (01880.HK, hereinafter referred to as BELLE international or company) was officially listed in Hongkong. The first day of listing, BELLE International reported at HK $8.14, up 31% compared with HK $6.2.

According to the closing price of the day, BELLE International's market value reached HK $78 billion 900 million, which exceeded the market value of 0493.HK of HK $36 billion on the same day, becoming the largest mainland retail listed company in the market value of the Hongkong stock exchange.

In the course of the offering, BELLE International's public offering has gained nearly 500 times the amount of subscription. The frozen capital is as high as HK $438 billion, breaking the record of 415 billion 600 million Hong Kong dollars in the frozen capital of ICBC (8.12, -0.12, -1.46%) (1398.HK) in 2006. It has become the most capital sought after company in Hongkong's capital market.

From the financial indicators in the past three years, BELLE International's sales revenue and profits have shown a rapid growth trend (Table 1). In 2006, BELLE international sales revenue was 7.16 times that of 2004, and its profit was 13 times that of 2004.

What special advantages does BELLE international have to develop at such a high speed?

To bypass the policy restrictions and lay the foundation for development, BELLE International's predecessor was Lihua Shoes Co., Ltd., founded in 1981 by Deng Yao, chairman of the company, and engaged in footwear products trade in Hongkong.

In October 1991, Lihua set up a Sino foreign joint venture Shenzhen BELLE Shoes Co., Ltd. (hereinafter referred to as Shenzhen BELLE), engaged in processing and manufacturing footwear products, and then expanded its business to sell footwear products wholesale in China.

After more than ten years of experience in footwear manufacturing, StaccatoFootwearcompanyLimited established its retail product for women's footwear in Hongkong in 1998.

At the same time, the company has begun to expand its global retail network.

As of December 31, 2006, the company has opened 35 retail outlets in Hongkong, Macao and the United States.

In 1997, the company set up the retail business of footwear products in the mainland, but because the mainland was in the regulatory environment restricting foreign participation in China's retail industry, the company's development of the retail network in the mainland had been limited.

In 1997, in order to create and own its own brand and improve the share of the footwear products in the mainland market, BELLE and the mainland, about 16 individual distributors signed exclusive distribution agreements.

By distributor, as a retailer, exclusive distribution of brand footwear products in various regions has made significant progress in brand building and market penetration of BELLE international in China.

In 2001, Belle leather shoes became the first two sales and sales of similar products in China.

As of July 2002, the number of retail outlets operated by these distributors in the mainland reached 600.

In July 2002, individual distributors set up Shenzhen BELLE Investment Co., Ltd. (BELLE investment).

The company is to establish a similar exclusive distribution agreement with BELLE to replace the exclusive distribution agreement previously made with individual distributors.

Most of the shareholders of BELLE investment are individual distributors, but at the same time, the founder Deng Yao family member and general manager Sheng Bai pepper's family members altogether hold 45% of BELLE investment, deeply intervening in this company, which is mainly built by the sales network terminal.

Through this equity arrangement, Deng Yao and other founders obviously strengthened their control over downstream sales terminals.

In April 2004, China promulgated the "management of foreign investment in commercial areas", which eased the restrictions on foreign investment. At that time, BELLE investment in China actually controlled 1681 retail outlets.

At the end of 2004, BELLE invested 1681 retail stores and gradually pferred to Off Shore Company BELLE international through the way of leasing contracts. The management of stores was pferred by re hiring salesmen, while BELLE's office equipment, cars and intangible assets were sold to BELLE international for 61 million 200 thousand yuan.

In August 2005, the company terminated its exclusive distribution agreement with BELLE and reorganized it in August 24, 2005. In September 12, 2005, financial investors from Morgan Stanley's two fund companies, such as MsShoesLimited, MsShoesIILimited and CDHRetailLimited of CDK investment, subscribed part of BELLE international shares for about HK $23 million 664 thousand. On the same day, three BVI companies, BELLE, International Personal distributors and main managers, subscribed some new shares to HK $77 million 430 thousand, HK $76 million 880 thousand and HK $293 million 560 thousand respectively at the cost of HK $77 million 430 thousand, HK $76 million 880 thousand and HK $293 million 560 thousand.

After the completion of the restructuring in September 2005, BELLE international with sufficient capital began to expand rapidly.

By the end of 2006, BELLE international had more than 1400 new retail outlets in the mainland, with a total number of 3828 chain stores.

At present, BELLE international is the largest retailer of women's shoes in China and one of the largest sportswear retailers in China.

BELLE has a total of 8 brands, including 6 brands, including Belle (BELLE), Staccato (Staccato), Teemix (Teenmix), Tata (HERS), Fato (JipiJapa), JipiJapa, Joy& Peace (real beauty poem) and Bata two authorized brands.

The price ranges from 300 yuan to 2000 yuan.

In the same target group, the company provides targeted footwear products for work, leisure, formal and sports occasions.

But from the product brand positioning map, we can see that although the company's products cover a wide range, but in the more casual and fashionable footwear products, there is a lack of high-end products (Figure 1).

BELLE International said it would be ready to develop, acquire or act as a high-end leisure or fashion brand in the future to balance the product mix so as to maximize revenue.

BELLE international, which runs many brands, is also quite successful in brand building.

According to the statistics of CIIIC, BELLE has been the first brand in Chinese women's shoes for ten consecutive years (Figure 2).

As of December 31, 2006, Teenmix, Staccato and he ranked fourth, eighth and ten respectively in Chinese women's shoes ranking.

In addition, in January 30, 2007, the Ministry of Commerce awarded BELLE as one of the five most competitive footwear brands in China.

On the one hand, the multi brand strategy enables the company's products to be oriented to customers of different ages, gender and incomes, thus providing a wide range of customers for the company.

The advantages of the company in segmented market (ten sales areas) also enable it to get different consumers in different market segments through multi brand strategy, so that the company can get a steady income.

Moreover, because different brands can be used for market communication and promotion by brand names, trademarks and advertising slogans, they will not affect the brand of any group due to the poor management of any brand or other problems.

But on the other hand, BELLE does not emphasize the publicity of the overall brand of the company. For the promotion of the market, advertising costs will be more expensive and can not play a synergistic role.

However, the BELLE international listing is undoubtedly the best publicity for the overall brand of the company. Investors have a comprehensive understanding of BELLE international products and company strategy.

To reduce the risk of retail outlets layout strategy, because China is a diversified market, in order to better cater to the different needs and aesthetic tastes of consumers in different regions, the company divides China into 10 sales areas according to the factors of humanities, geography, economy and technology, and places the right of purchase and sale to various sales areas.

The flat decision-making process can better adapt to the rapid market changes and enhance the company's sales and profitability.

By the end of December 2006, BELLE owned and operated 3828 retail outlets in the mainland, distributed in 150 cities and 30 provinces, and another 35 retail outlets located in Hongkong, Macao and the United States.

The company's self retailing stores mainly include department stores, stores and independent stores.

By the end of 2006, the sales of its stores in the department stores accounted for 73.4% of the total turnover.

The company uses a concession selling fee to cooperate with department stores, and stores calculate the rent according to the percentage of the sale fee of the franchised sales, that is, the monthly sales income of the retail store.

In this way, the company does not have to pay the scheduled rent, and avoids the adverse effects of the scheduled rent on the company's profit during the off-season.

The unique vertical integration mode, the so-called vertical integration mode, is completed by the company from all aspects of product design and development, production, marketing and promotion, distribution and retailing, etc. (Fig. 3).

At present, the vertical integration mode adopted by BELLE international is unique in the shoe industry. The biggest advantage of this model is that it can make every profit in the industry chain and enhance the gross profit margin of the company.

From the financial data in 2006, BELLE international consolidated gross profit margin reached 56.1%, higher than the gross margin level of 00210.HK, Lining (02331.HK) 45.1% and 47.4%, while on the other hand, in such a business mode, the company could quickly respond to the market trend because of the direct management of the retail network.

The implementation of a vertically integrated business model provides a foundation for BELLE international to implement market-oriented supply chain management. It facilitates the timely, direct and effective control of the main links of the supply chain, shortens the time to market, and adjusts the quantity and type of inventory according to the information of distribution and retail links, thereby reducing the production of non salable products.

One of the most important advantages is that the production line can replenish goods quickly according to the market demand, thereby increasing the turnover rate of inventory, reducing the occupation of capital and enhancing the liquidity of the company.

For all retail outlets throughout the country, all of which are directly managed and controlled by BELLE international, the advantage of this is that it can directly contact with consumers, so as to get first-hand information of market dynamics, and facilitate management to make timely and accurate decisions for the market.

And through the huge sales network, BELLE international can understand the market trend and the preferences of different customers, so as to develop products that reflect the latest fashion trend. At the same time, because of the regional demand difference caused by seasonal factors, BELLE international will adjust the product supply category according to the actual needs of all parts.

Therefore, in order to ensure that production is consistent with the actual market demand, the first order quantity in each sales area usually accounts for only 50% of the total demand in the quarter, and the subsequent production will be made according to the actual situation of the new product sale and sale, and the production orders will be produced through the weekly sales orders in each sales area.

This fast response supply chain mechanism enables BELLE international to ship to retail terminals within 15 to 20 days after receiving a supplementary order.

Another advantage of BELLE International's market-oriented supply chain mechanism is that it can optimize inventory structure, quantity and storage age. Therefore, the company can minimize the production of redundant or undesirable products and maintain less discount at the end of the season. There is no need to adopt a large number of discount policies to stimulate sales of such products, thereby maximizing the company's profits.

In the retail business, the footwear products benefit from the vertical integration business mode. The added value of the products is relatively high and has considerable economies of scale. Therefore, compared with the listed companies such as Yong en international and Lining, BELLE international business has a relatively high gross profit margin, while BELLE international accounts receivable turnover days are 9.89 days, at a relatively low level, which means that the company can cash in.