ITG Sees Gold in China's Middle Class

Brent Felgner, Jane Kitchen, August 8, 2005

New York — Whatever else may be said about it, free trade is also creating new rapid-growth consumer markets that are clearly underserved by existing retail.

It's the natural result of the massive foreign investment in global manufacturing, particularly in China. A quickly emerging middle class there may offer a glimpse into the scenario likely to be repeated in developing economies around the world, offered Wilbur Ross in an interview following his recent return from a 12-day swing through China, Hong Kong and Vietnam.

Ross is the principal investor and chairman of the International Textile Group — the successor company for the combined Burlington and Cone Mills, which Ross brought out of bankruptcy and has been in the process of rehabilitating.

Serving the developing middle class is simply a natural extension of the mindset to be everywhere your customers are — in this case going beyond trade customers to consumers, said Ross. Suddenly foreign manufacturing assets may also support their domestic retail. That's why Ross licensed the Burlington House name to China Ting Group, which this year is opening 25 mostly mall-based shops — showrooms, really — including soft home fashions and some furnishings. China Ting also operates about 250 stores selling western branded apparel and is co-venturing with Ross' International Textile Group in a dyeing and finishing plant in Hangzhou.

Whatever the apparent negative implications for the United States and the rest of the developed world, Ross said, free trade in developing economies will raise their living standards, and in the process create burgeoning new consumer markets. That's particularly salient among consumers at very low income levels, where Ross believes an improved standard of living will result in increased consumption of commodities, including textiles.

The retail shops are small, seemingly not much more than 1,000 square feet or so, carrying little or no inventory. Consumers browse the showrooms and order from the displays — not unlike the catalog showroom channel that's virtually disappeared in the United States.

Ross makes no effort to hide his fascination with China's developing economy and markets, and the government supports that are pushing progress. He cites inner city slums lacking sanitation, plumbing and cooking facilities that are in the process of being torn down. To get people to move out, the government pays the residents, who then may use the money as a down payment to buy the functional equivalent of a condominium. Government banks provide further loans to finance the purchases then take a monthly payroll deduction.

“When you take a guy who's been a squatter in a slum and then make him or her an apartment owner, all of a sudden they want a carpet, they want a couch, they want a nice wall covering they want this and they want that,” says Ross.

That's helping to fuel a fast-growing middle class and a retail marketplace that has home furnishings malls growing up on the peripheries of the cities.

“They only have two price tiers,” Ross notes. “There's locally made stuff, very low end, not very good — and very high-end imported stuff. So the objective of the Burlington House project is to try to hit what they define as the middle-class marketplace.”

Ross is banking on the Chinese love for everything western and the fact that Burlington is among the best-known brand names in the world. He believes the former regime at the company inadequately promoted the name.

“The consumer well knows apparel brands, well knows home furnishings brands but doesn't know fabric brands. And it seems to us that if you can make water into Fiji or Evian and if you can make a banana into Chiquita, why can't you make worsted into Burlington?” Ross asks. “So propelling the name is something we're quite intrigued with.”

Which is why he's also intrigued by the business arrangement.

“We're now being paid a fee for them to promote our name in what will eventually be the world's biggest market — in China.”

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