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Bestseller – facing a new competitive landscape in China

In the fall of 1996, Bestseller became one of the first international fashion companies to enter

the Chinese retail market1. The two good friends, Allan Warburg and Dan Friis, had earlier

that year made contact with the CEO of Bestseller A/S, Troels Holch Povlsen, regarding

prospects for selling the Bestseller brands in China where they saw many business

opportunities2. Mr. Holch Povlsen believed in the two entrepreneurs and was convinced by

their enthusiasm for the Chinese market, and at the same time he could use some help with

Bestseller A/S’ two purchasing offices in Hong Kong and Beijing3. The plans of the three

business partners materialized in the joint formation of Bestseller Fashion Group China Ltd.

(Bestseller China) and the first outlet for the brand ONLY was quickly established in a

department store in Beijing4.

It did not take long for Allan Warburg and Dan Friis to prove that they had been

right about China. Within the first year, Bestseller China opened 24 stores in 9 different cities

and in the beginning of the new millennium they could introduce two other brands from

Bestseller A/S’ portfolio, Jack & Jones and Vero Moda5. A little more than a decade after the

first store was opened, Bestseller China had reached almost 2,000 stores and accounted for

more than a third of the total turnover of Bestseller A/S6. The secret to Bestseller China’s

extraordinary success was the ability to sell price competitive European designs with a

Chinese touch, which was done by locating all production in China and modifying the designs

of Bestseller A/S to suit the size and taste of Chinese middle class consumers7.

With a ten year head start, Bestseller China had hence managed to establish a

strong presence in China. But the high economic growth and growing middle class was now

making the Chinese market highly attractive for other companies, something that Troels

Holch Povlsen was very aware of: “there is a growing and reasonable market in China for

many different consumer goods, but that also means that the competition increases8” he said.

1 Børsen (1998) Dansk modetøj bestseller i Kina 2 Jyllandsposten (2004) Kinesere går i dansk tøj 3 Allan Warburg interview, p. 46 4 Børsen (1997) Bestseller åbner egne butikker i Kina 5 Børsen (1998) Dansk modetøj bestseller i Kina; Jyllandsposten (2004) Kinesere går i dansk tøj 6 Børsen 2005: Nyt rekord-resultat fra Bestseller, Berlingske Tidende (2007) Kinesiske forbrugere er med fremme 7 Jyllandsposten (2004) Kinesere går i dansk tøj 8 Berlingske Tidende (2007) Kinesiske forbrugere er med fremme.

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But although global giants such as Zara and H&M were devoting big chunks of their budgets

to enter China and capture the market shares of Bestseller China, these aggressive new

entrants were not the biggest concern for Mr. Holch Povlsen and his two partners9: “the

competition that we see is not coming from American or European players, but from local

companies… and in the future we’ll not only see Chinese goods, but also Chinese companies

on an international level, that is certain10” Troels Holch Povlsen pondered.

Introducing Bestseller

In 1975, Troels Holch Povlsen founded the family-owned company Bestseller A/S and

opened his first clothing shop in Ringkøbing in the western part of Denmark. The aim of the

company was to sell modern clothes of good quality at competitive prices. Some 30 years

later, the focus remained the same and Bestseller A/S had grown with some of its most

famous brands such as Vero Moda, Jack & Jones and ONLY to become a large multinational

fashion company with more than 4,100 shops in 41 countries and a turnover of approximately

10.2 billion DKK (€1,397 million) (Chinese turnover not included)11 (see Exhibit 1). The

three decades of continuous growth had ensured the company a position as the industry leader

in Denmark with a turnover that was nearly twice the size of the biggest Danish competitors12.

According to Bestseller A/S, the company’s primary goal was “to create a

company that concentrates on developing people before business”13 which was reflected in

the vision of “one world – one philosophy – one family”14 and in the company’s 10 basic

principles formulated already in 1975 (see Exhibit 2). Troels Holch Povlsen emphasized that

it was necessary to develop the employees of Bestseller A/S in order to develop the company.

“It would sadden me if our company is judged solely on financial figures” he said, “real life

success is about well-being and personal development”15. The basic principles included soft

values such as honesty, loyalty and cooperation, but a business mindset as well as focus on

results was in addition regarded to be very important.

In 2001, Anders Holch Povlsen became co-owner of Bestseller A/S and replaced

his father as the CEO of the company. The founder Troels Holch Povlsen continued 9 Børsen (2006) H&M vil sælge tøj til kineserne; Børsen (2007) Bestseller rival er ren pengemaskine 10 Berlingske Tidende (2007) Kinesiske forbrugere er med fremme 11 www.bestseller.com; Bestseller annual report 2006/2007 12 Børsen, “En simpel vej til succes”, 11/08-2004 13 www.bestseller.com 14 www.bestseller.com 15 Børsen Magasiner – En simple vej til succes, 14.04.2004

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nevertheless as a leading figure in Bestseller A/S, focusing specifically on business

development and activities in emerging markets16.

Products and Markets

Initially the company dealt only with women’s fashion, but throughout the years Bestseller

A/S widened its brand portfolio considerably and expanded into children’s clothes, menswear

and accessories as well.17 By choosing a multibrand approach, Bestseller A/S could build up

an extensive brand portfolio and was thereby able to target different customer segments while

sharing various back office functions. For instance, Vero Moda targeted teenage women and

up with its ‘trendy and fresh style’, while Jack & Jones – ‘cool denim fashion with an

international attitude’ – centered on males between 18 and 30 years old. The brand ONLY

with its street wear style focused on younger girls ‘with an attitude’ (see Exhibit 3). This

approach meant that customers were not familiar with the company name as they were

presented with the different brands separately. A challenge for Bestseller A/S was therefore to

avoid that the multibrand strategy resulted in brand cannibalism. 18

Bestseller A/S sold its products in a wide range of countries throughout the

world. The Scandinavian market was considered the largest market, although the importance

of emerging markets continued to rise19 (see Exhibit 4). “It’s difficult for us to say no to new

markets. We’ve turned down countries such as the US and France, but taken on less obvious

markets such as Saudi Arabia and Russia” Troels Holch Povlsen explained, “it is an

unbelievable feeling that our clothes are being sold in so many places in the world today. But

I’m proud of it”. 20

Global Value Chain

The internationalization and immense growth of Bestseller A/S influenced the structure of the

company significantly in the sense that a large number of foreign and domestic subsidiaries

were set up to handle retail, wholesale and purchasing activities21 (see Exhibit 5). In addition,

Troels Holch Povlsen had a personal ownership in a Hong Kong company as well as in 16 Berlingske Tidende, “Interview: Bestseller går globalt”, 13/02-2005; Anders Holch Povlsen Interview, page 14-15; Børsen (2002) Mellemøsten nyt vækstområde 17 www.bestseller.com 18 MENTEL report 19 www.bestseller.com 20 Berlingske Tidende, “Interview: Bestseller går globalt”, 13/02-2005 21 Bestseller annual report 2006/07

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Bestseller Fashion Group China, which was not an integral part of Bestseller A/S. The

financial results from the Chinese operations were therefore not included in the annual

accounts of Bestseller A/S. Other key figures, such as Anders Holch Povlsen and managing

director Finn Poulsen, had likewise personal ownership in related companies22.

In the early 1980s when Bestseller A/S, against conventional wisdom, began to

move production abroad, the intention was to explore the opportunities of other countries:

“we weren’t talking about outsourcing when we began to look across borders 25 years ago.

We said that it was exciting to go abroad and see what we could produce there”23 Troels

Holch Povlsen recollected. Bestseller A/S specialized in the design, sales and marketing of

clothes and accessories, but the company’s capabilities and experience in handling an

outsourced production were particularly central to its ongoing success24. The entire

production was managed through own purchasing offices located in Italy, Turkey, China and

India, and sourced from different suppliers in Europe, the Middle East and Asia25. A very

tight control of the suppliers was central to the company’s sourcing strategy in order to ensure

the quality of the production. In 2002, a Code of Conduct was introduced to clarify the

minimum standards that Bestseller A/S demanded from its suppliers and subcontractors in

relation to working conditions at the factories, social responsibility and environmental issues26

(see Exhibit 6)

The majority of the design and marketing activities of Bestseller A/S were

located at the Danish headquarters in Brande where each brand was handled separately while

some back office functions were centralized27. In relation to distribution, a multichannel

approach meant that Bestseller A/S distributed its products through both company-owned

stores, wholesale and franchises. In fact, most of Bestseller A/S’ sales took place through

franchised chain stores of the brands Vero Moda, ONLY, Jack & Jones, Selected, name it and

VILA. The chain stores started up in 1988 and were based on close relationships with the

franchisees with Bestseller A/S as the sole supplier28. Product lines were furthermore sold

through more than 12,000 independent wholesale dealers on an international scale29 (see

22 Børsen Magasiner 2004: en simpel vej til succes 23 Berlingske Tiderne, ”Interview: Bestseller går globalt”, 13.02.2005 24 Børsen, ”Bestseller åbner egne butikker i Kina”, 27/05-1997 25 www.bestseller.com 26 Børsen Magasiner (2004) Den simple vej til Succes; Bestseller (2007): Code of Conduct 27 Anders Holch Povlsen interview, pages 5-6 28 www.bestseller.com 29 www.bestseller.com

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Exhibit 7). The extensive sales network of Bestseller A/S put high demands on the logistical

aspect of the value chain, and the management of the logistics to ensure fast deliveries and

small stocks, while keeping costs down, was regarded as a very important competitive

parameter30.

Competitors

As already stated, Bestseller A/S was by far the industry leader in Denmark with a turnover of

nearly twice the size of the biggest domestic competitors, IC Companys and Brandtex, who

also competed in price-sensitive women’s, children’s and men’s fashion. Similar to Bestseller

A/S, they followed a multibrand strategy, but they differed somewhat in terms of target

segments. While IC Companys with its slightly more expensive brands such as Peak

Performance, InWear, and Tiger of Sweden focused more on quality-conscious women and

men, Brandtex concentrated merely on women’s wear of high quality at very competitive

prices with brands such as Brandtex, b.young, and Fransa31 (see Exhibit 8). The geographical

reach of Bestseller A/S was significantly greater than that of Brandtex and IC Companys.

Brandtex had sales in 19 European countries32, IC Companys competed in 13 countries in

Europe, Canada and Hong Kong33, while Bestseller A/S sold its clothes in 41 countries in

Europe, Canada, the Middle East, and China34.

Due to the company’s international presence, it was necessary for Bestseller A/S

to pay very close attention to the international competitors. In fact, Troels Holch Povlsen

stated that “Bestseller’s good competitors are not to be found in Denmark”35. Three large

players were often mentioned in the fashion retail business: Spanish Zara, American Gap Inc.

and Swedish H&M, who all operated extensively on global markets and targeted the same

consumers as Bestseller A/S. In terms of turnover, results and number of employees, the three

companies exceeded Bestseller A/S by far, and it was only in relation to number of stores that

the Danish company could match the international competition36 (see Exhibit 9).

The geographical scope of the international competitors differed considerably.

The biggest player in terms of turnover, Gap Inc. operated in the US, the UK, France and 30 Detailbladet, ”Bestseller tjener mere på at sælge billigere”, 21/1-2002 31 www.brandtex.dk; www.iccompanys.dk 32 www.brandtex.dk 33 www.iccompanys.dk 34 www.bestseller.dk 3535 Børsen (2002) Bestseller tæt på milliard-resultat 36 Reference missing (argument taken from Lisbeth’s case)

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Japan, and was thus not present in any emerging markets37. Neither was H&M, who had a

strong position in Europe as well as a small presence in the US38. Only Zara possessed an

extensive global reach, having stores in 56 countries in Europe, the US, North Africa, Asia

Pacific and the Middle East. Yet, Zara’s sales were widely generated from the European

market, and the fact that 90 % of Zara’s stores were located in Europe and the US revealed

that the company only had a small presence in emerging markets relative to the overall size of

the firm39. However, as the importance of emerging markets was growing in terms of

increasing demand, the global players started to pay more attention to the developments in

these markets40.

Bestseller China

When Allan Warburg and Dan Friis in 1996 decided to quit their jobs at The East Asiatic

Company and McKinsey & Company, respectively, to set up Bestseller Fashion Group China

Ltd. (Bestseller China) together with Troels Holch Povlsen, their ambition was to build a big

company41. As Mr. Warburg explained: “Going back to Denmark was not really an option as

I considered China to be my new home market. Here was the opportunity and here was the

market potential”42. Eight million DKK were put into the company of which Troels Holch

Povlsen provided half. The other half was to be provided by the two entrepreneurs, but as they

were unable to raise sufficient capital on their own, the Danish Industrialization Fund for

Developing Countries (IFU) participated with a 30 percent share. Allan Warburg and Dan

Friis each entered with 10 percent43 and bought back the shares from IFU in 200144 (see

Exhibit 10). Bestseller Fashion Group China Ltd was registered as an independent company,

detached from Bestseller A/S’ outsourced clothes production in Chinese factories and

managed by Allan Warburg and Dan Friis from an office in Beijing45.

Bestseller China experienced immediately significant growth, which was

particularly evident in the development of stores (see Exhibit 11). In 1996, a couple of

wholly-owned ONLY shops were established in Beijing and five years later, Vero Moda and 37 www.inditex.com 38 www.hm.com 39 www.inditex.com 40 www.business.dk “Kampen om de modebevidste kinesere”, 15.04.2007 41 Interview Allan Warburg (p. 41-42) 42 Interview Allan Warburg (p. 41) 43 Børsen, ”Bestseller åbner egne butikker i Kina”, 27/05-1997 44 IFU (2005) Bestseller, Kina + Interview Allan Warburg p. 45 45 Jyllandsposten (2004) Kinesere går i dansk tøj

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Jack & Jones, two other brands from the portfolio of Bestseller A/S, had been introduced to

the new market while 163 stores were located in different cities around China. A little more

than a decade after Bestseller China was founded, the company had almost reached an

amazing 2,000 wholly-owned or franchised stores of the three brands. For the management of

Bestseller A/S in Denmark the success in China came a bit as a surprise: “it was actually a

long-term investment, but I’m surprised by how well it’s going. There are young people who

can and want to buy – and more are coming” said Finn Poulsen, co-owner and CEO of the

subsidiary Bestseller Retail Denmark46.

The Chinese Market

Between 1997 and 2003 total consumer spending in China increased by 64.2% while

spending on clothes and footwear increased by 22%. In the same time period, the per capita

disposable income in the urban areas of China likewise increased by 64.2%47. A growing

group of fashion-conscious, young consumers living in the big cities meant that Bestseller

China could sell their clothes at 85 % of Danish prices. Allan Warburg considered the average

Chinese Bestseller customer to be a woman in her mid-twenties, often employed in a foreign

joint venture, with a monthly pay of around 3,000 DKK (€40048) of which she would spend a

third on clothes and shoes. This was made possible by the fact that she would have no

expenses for food and rent as she still lived with her parents. He estimated that in Beijing

alone, approximately 300,000 women had the sufficient purchasing power to buy ONLY or

Vero Moda clothes49.

At the time of entry, the Chinese fashion retail market was highly fragmented.

While foreign luxury brands catered for the higher price segment through outlets in upscale

department stores or licensed shops50 and several other product markets were dominated by a

few big companies, this was not the case for the middle level fashion market. Bestseller China

was therefore able to build an extensive sales network in a very short period of time51. This

entailed for instance that the Jack & Jones brand was met with very little competition when it

was introduced in the year 2000: “Jack & Jones is by far the leader in the market because

46 Børsen (1997) Bestseller åbner egne butikker i Kina 47 Deloitte (2005) China’s Consumer Market – Opportunities and Risks, page 2 48 www.oanda.com – converted from DKK to EUR per 14.7.2008 49 Børsen (1998) Dansk modetøj bestseller i Kina 50 Deloitte (2005) China’s Consumer Market – Opportunities and Risks, page 5 51 Børsen (1998) Dansk modetøj bestseller i Kina

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there’s not so much competition for Jack & Jones. Men’s wear in China is rather traditional

and has not developed as much as women’s wear” Mr. Warburg explained, “sportswear for

men, however, has much more competition with large companies like Nike, Adidas, Puma, Li

Ning and so on, but luckily we are not in the sportswear industry”52.

Production

The fact that Bestseller A/S already obtained a large part of its international sourcing from

Chinese suppliers helped Bestseller China to set up local production in the sense that the

suppliers were more willing to cooperate despite an initial modest volume. In the beginning it

was therefore vital for the new company to benefit from the established production network of

Bestseller A/S53. In order for the pricing strategy to work, Bestseller China’s collections

needed to be produced locally, otherwise the clothes would become too expensive for the

middle class54. While the ownership structure of Bestseller China entailed that Allan Warburg

and Dan Friis enjoyed a large degree of local autonomy, meeting with the Board of Directors

just once or twice a year, the initial agreement between the three partners had also

incorporated the purchasing offices of Bestseller A/S in Hong Kong and Beijing which were

not running properly. For Troels Holch Povlsen the partnership was an opportunity to get help

with the company’s sourcing in China from two committed Danes in Beijing55. In the first

five years after the establishment of Bestseller China, Allan Warburg and Dan Friis were

therefore helping Bestseller A/S to structure their Beijing office and set up a purchasing office

in Shanghai, but a renegotiation of the shareholder agreement in 2001 meant that the two

entrepreneurs from then on could devote their full attention to Bestseller China56. Although

they no longer assisted with the sourcing in China directly, the new company’s continued

success influenced Bestseller A/S back in Europe through increased brand awareness of the

Chinese suppliers: “I think being big in China helps you on the sourcing side and that has really

been the case for Bestseller” Allan Warburg argued, “all the suppliers know the brands now.

They are very serious about Bestseller products”57.

52 Allan Warburg Interview, p. 50 53 Allan Warburg Interview, p. 44 54 Berlingske Tidende (2005) IC Companys åbner i Kina 55 Allan Warburg Interview, p. 46 56 Allan Warburg Interview, p. 42 + 45 57 Allan Warburg interview, p. 52

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A key aspect of Bestseller China’s strategy was the adaptation to local

conditions. While the concept remained the same and the Chinese stores were identical to

those in the rest of the world, the actual styles and models sold in the stores were modified to

match local conditions. Commenting on this, Mr. Warburg stated that “Chinese women do

have another figure than women in the Western world. They are much more slender. And they

typically dress in a more feminine way than Western women. And our products should reflect

that”58. Colors were also changed to fit the Chinese taste, so that, for instance, all military

coloring was left out59. More specifically, the process of adaptation was carried out in a

manner where the designs for each brand were sent mainly from Brande in Denmark to a

Danish designer located in China who was then in charge of modifying them together with a

team of Chinese designers. This process entailed that Bestseller China employed a total of

three Danes in addition to Allan Warburg and Dan Friis. The key to the success of Bestseller

China was the European style of the product designs, which also explained the composition of

the design team: “the only thing that we haven’t wanted or been able to localize in the design

process is the fact that each of the brands has one Danish designer” said Mr. Warburg, “what we

are selling is a European lifestyle60.” The overall Western style of the designs from Bestseller

A/S was hence maintained while the clothes were fine-tuned to better fit the Chinese

consumers61.

When asked to suggest reasons for the immense success of Bestseller China,

Allan Warburg pointed to the location and value chain configuration of the company: “you’ve

got to localize everything here in China” he argued, “we’ve seen so many of our competitors

from Europe coming in, starting up and then 2 years later pulling out again. The reason is

that they’re sitting in Europe and trying to manage China. We’re sitting in China, producing

100 percent of our products in China for the Chinese market”62.

Marketing and Distribution

Similar to the approach employed by Bestseller A/S, a multichannel approach was used for

the Chinese market. The sales network consisted of a mixture of franchising and wholly-

owned stores, with the long-term aim of eventually making franchising the main approach.

58 Jyllands Posten: Kinesere går i dansk modetøj, 11.08.2004 59 Børsen, ”Bestseller åbner egne butikker i Kina”, 27/05-1997 60 Allan Warburg interview, page 48 61 Jyllands-Posten, ”Kinesere går i dansk modetøj”, 11/08-2004 62 Interview Allan Warburg

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The franchising concept had been slowly introduced as it was relatively new when Bestseller

China entered the market in 199663. In 2005, approximately half of Bestseller China’s stores

were franchised in towns where the two entrepreneurs did not want to enter while the other

half was owned by the company. All product purchasing was done at the main office in

Beijing, from where they were subsequently distributed to the different branch officers who

only concentrated on the sales in their respective areas64. Bestseller China had furthermore

three flagship stores in Beijing, Shanghai and Tianjin which were of great importance in

building up the brands65. Although they were located in prestigious shopping malls where

rents were so high that earnings were very limited, the flagship stores were central to

Bestseller China’s strategy, because being located in close proximity to other international

brands helped Bestseller China build its own brands66. For instance with the company’s store

in Guo Mao, one of Beijing’s high-end shopping malls, the expenses were actually higher

than those of a similar store in Europe. But, as Mr. Friis said: “The high rent limits out profits

at this place. But it is important that we are here to build up our brands. All of the big

international brands are here – and many of them are running with a huge deficit on their

stores in Guo Mao. We don’t have that.” 67

Other central elements of the company’s marketing efforts comprised aggressive

advertising in Chinese magazines and big posters featuring, for instance, Danish supermodel

Helena Christensen, representing a Northern European culture. The German supermodel

Claudia Schiffer was another important face for Bestseller China’s brands whose blonde well-

known look emphasized the European image further68. Moreover, the marketing of Bestseller

China comprised fashion shows in night clubs69 as well as smaller, creative initiatives such as

the featuring of ONLY and Jack & Jones logos on table cloths in Starbucks cafés and in

restaurants70. Yet, even though much energy was used on branding through various marketing

channels, the stores were considered most important: “we actually spend money on fashion

magazines and also fashion shows, but I think the most important way we build our brand is

actually through the shops” Mr. Warburg explained, “shops are where you build your image

63 Børsen, ”Dansk modetøj bestseller i Kina”, 04/02-1998 64 Interview Allan Warburg 65 Børsen, ”Dansk modetøj bestseller i Kina”, 04/02-1998 66 Jyllands-Posten, ”Kinesere går i dansk modetøj”, 11/08-2004 67 Jyllands Posten: Kinesere går i dansk modetøj, 11.08.2004 68 Jyllands-Posten, ”Kinesere går i dansk modetøj”, 11/08-2004 69 Børsen, ”Dansk modetøj bestseller i Kina”, 04/02-1998 70 Jyllands-Posten, ”Kinesere går i dansk modetøj”, 11/08-2004

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because customers are out shopping anyway and they walk by and see our shops and that’s

where we build our brand, much more than in any other ways”71.

Global Competitors in China

With the increased economic growth and the growing middle class in China, Bestseller China

started to experience an increased competition from large global fashion companies. The

Swedish giant H&M, for instance, opened its first Chinese store in 2007 aimed at obtaining

market shares in the booming fashion market. “We’re growing by 10 to 15 percent annually

and open 180 stores a year. We started in the US in 2000, and that has been sufficient to

fulfill our own demands. But for the future it’s most important that we enter the Chinese

market”72 commented CEO Rolf Eriksen in connection with the celebrations of the opening

of the first Chinese H&M store. The company used about two years to prepare the market

entry and concluded that there was not demand for customizing the sizes and styles of the

company’s collections specifically to the Chinese consumers. Accordingly, 80 percent of the

clothes in the new H&M store were similar to the collections in the European and Northern

American stores. The company went forth in China convinced that good PR deriving from the

relations with famous celebrities such as Madonna, Kylie Minogue and Karl Lagerfeld along

with its famous collection would suffice73. Spanish Zara also showed a particular interest in

the Chinese consumers. With 15 Chinese stores in 200874, Zara pursued in similarity with

H&M a strategy of globally standardized collections for its Chinese stores. Furthermore, it

was rumored that Gap Inc. would also enter the Chinese market at some time75.

Operating with a significant smaller budget, IC Companys was once again

trying to enter the Chinese market in 2005. This time the company tried to copy Bestseller

China’s strategy of local adaptation, and the firm furthermore aligned itself with a Chinese

marketing bureau76. IC Companys’ export director Steen Petersen said: “We have prepared

ourselves for this. We have studied competitors and looked over their shoulders. Both Esprit

and Bestseller have great success in China, so it is obvious that we could learn something

71 Allan Warburg interview 72 www.business.dk, ”Kampen om de modebevidste kineserne”, 15.04.2007 73 www.business.dk, ”Kampen om de modebevidste kineserne”, 15.04.2007 74 www.inditex.com 75 www.business.dk, ”Kampen om de modebevidste kineserne”, 15.04.2007 76 Børsen, ”IC Companys åbner butikker i Kina”, 23.03.2005

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from them”77. For instance, IC Companys would produce all of its clothes in China and

thereby be able to keep the prices low for the middle class. The company would also

customize its collections to suit the Chinese consumers78.

Dan Friis commented on the potentially increased competition from global companies:

“we are very positive towards our new professional ‘colleagues’. Many shopping malls have

until now failed as there were not enough professional brands to open large stores with the

management and products to attract a larger customer base. That is going to happen now”79.

However, since Bestseller China was established in 1996, the market had become increasingly

difficult to penetrate. For instance, the marketing prices had increased significantly and the

number of foreign operators had exploded since China fully joined the WTO in 200180.

“Being early in China definitely had many advantages, as the speed was slower and you

didn't have to invest that much money at that time” said Allan Warburg81.

Local Competition

From their headquarters in Hong Kong, an increasing number of strong local brands were also

beginning to look towards mainland China for new market opportunities. Although they were

not that well known internationally, they had already established their brands on a regional

scale and Hong Kong clothing was perceived by customers in mainland China to be of good

design and quality82. Hong Kong’s clothing industry had developed immensely since the first

companies started with manufacturing in the 1950s when labor costs were low. But as the

producers became more sophisticated and prices increased, Hong Kong had lost its cost

advantage to other countries, including China, and own equipment manufacturing (OEM) was

no longer sufficient. In order to remain competitive, the industry began therefore to focus on

own design manufacturing (ODM), which meant that buyers could either use the designs of

the Hong Kong companies as they were or modify them to fit their own particular needs.

While ODM prevailed in the 1990s, it became evident in the beginning of the new millennium

that high profits were rather to be obtained through own brand manufacturing (OBM). In fact,

77 Berlingske Tiderne, ”IC Companys åbner i Kina”, 17.03.2005 78 Berlingske Tiderne, ”IC Companys åbner i Kina”, 17.03.2005 79 www.business.dk, ”Kampen om de modebevidste kineserne”, 15.04.2007 80 Berlingske Tiderne, ”IC Companys åbner i Kina”, 17.03.2005 81 Allan Warburg interview 82 HK Edition (2005) Sewing seam of gold in tough market

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some estimated the profit margins of OBM to be 50 % higher than ODM83. This made a

growing number of Hong Kong companies, such as Bossini International Holdings Ltd. and

The Giordano Group, choose to brand their own designs in the pursuit of high revenues.

While the developed markets were hard to penetrate for these companies, they could see many

opportunities in the mainland’s mid-market segment due to the absence of the global brands

and they therefore also decided to enter China84.

In 2007, Bossini had opened 551 Chinese outlets which made up more than half

of the company’s global distribution network85, and 827 of Giordano’s 1,800 shops were

likewise located in China86. Another important competitor was the medium sized player

Esprit who originated from the U.S., but had relocated its headquarters and creative offices to

Hong Kong87. In order to accommodate the growing fashion-conscious middle class in China

who had a preference for European style, Esprit decided to modify only 20-30 % of the

company’s products to suit the Chinese market. The remaining part would be similar to the

products sold in the rest of the world88. While Esprit was already a global player, the two

other companies were aspiring for a global presence and were already serving many markets

across the globe. In fact, the vision of Giordano was “to be the best and the biggest world

brand in apparel retailing”89. For Bestseller China who was dominating the mid-market, it

meant that Allan Warburg and Dan Friis did not only have to defend their market position

against the global entrants, they would also have to keep a close eye on the new competitors

from Hong Kong.

In the eyes of Allan Warburg, these companies did nevertheless not pose the

biggest threat to the market position of Bestseller China: “a lot of the Hong Kong brands have

not been able to make it here” he said, “they’re big in Hong Kong, they’ve tried to establish

themselves in China, but they’ve never made it”. He explained the failure with the fact that

although their production was located in China, they managed all their operations from offices in

Hong Kong and could therefore not move as fast as Bestseller China90. It was different, however,

with the companies from mainland China: “there are some very good local Chinese companies

83 HK Edition (2005) Sewing seam of gold in tough market, page 2 84 HK Edition (2005) Sewing seam of gold in tough market 85 www.bossini.com 86 www.giordano.com 87 www.esprit.com 88 Deloitte (2005) China’s Consumer Market – Opportunities and Risks, page 6 89 www.giordano.com 90 Allan Warburg interview, page 54

14

out there at the moment, who are operating at a lower price margin” said Mr. Warburg.

Throughout the years, China had built a strong position worldwide as a textile manufacturer, and

as a result the ‘made in China’ label was mostly associated with cheap production91. Low unit

costs meant that the industry had attracted the sourcing activities of a large number of foreign

companies, but the population size and vast income disparities of China had made it difficult for

local companies to build up their own brands92. But with diminishing profit margins in

production93, it was unknown whether this component of the value chain would be sufficient for

the future. “I think our main competitors in the future will be local Chinese companies” Allan

Warburg declared, “they are already starting up their businesses and they will most likely become

bigger as they expand by setting up design offices in Europe and in the US. They can keep all the

costs to a minimum, as they will have most of their expenses in China”.

* * *

Troels Holch Povlsen and his two partners, Dan Friis and Allan Warburg, had clearly enjoyed

the benefits of entering China already in 1996. With high brand awareness of all three brands

and almost 2,000 shops, the success of Bestseller China was unmistakable. In fact, one decade

after the establishment of the company, the Chinese activities were estimated to constitute

more than a third of Bestseller’s total turnover94. However, the large global players were

eager to challenge Bestseller China in order to get a share of the booming Chinese retail

market and Mr. Warburg and Mr. Friis were furthermore keeping an eye on the new Chinese

firms which they felt could pose a significant threat to their market position. The ten year

head start had evidently given way to a number of significant advantages, but it was uncertain

whether the organizational setup of Bestseller China and Bestseller A/S was providing the

company with the best possible foundation in the quest to fend off the new competitors and

sustain the position as market leader in a booming Chinese fashion retail market.

91 Frost, R. (2007) China – dressed for success 92 Frost, R. (2007) China – dressed for success 93 People Daily (2004) China’s fashion industry needs a rethink 94 Børsen (2005) Nyt rekord-resultat fra Bestseller

15

Exhibit 1: Financial highlights and key ratios 2003-2007 of Bestseller A/S (Chinese figures

not included)95

Profit and loss account 2003 2004 2005 2006 2007 Turnover (mill. DKK) 4,924 5,336 6,713 8,672 10,182Turnover Europe (mill. DKK) 4,881 5,272 6,516 8,305 9,722Turnover rest of the world (mill. DKK) 43 64 197 367 460Profit before taxation (mill. DKK) 997 875 1,316 1,497 1,869Profit for the year (mill. DKK) 685 597 939 1,055 1,372Equity (mill. DKK) 1,287 1,527 1,869 2,505 3,091Balance sheet total (mill. DKK) 2,829 2,888 3,794 4,390 5,452 Key ratios Profit margin, % 19.4 18.7 18.7 16.0 17.2Return on assets, % 33.8 28.9 33.0 31.7 32.2Return on equity, % 67.5 46.3 61.5 56.5 54.8Solvency ratio, % 45.5 52.9 49.3 57.1 56.7 Employees 1,285 1,819 2,372 2,950 4,108

95 Greens online

16

Exhibit 2: Bestseller’s vision and 10 basic principles96 One World Our world is built on fairness and opportunities. Cultural differences are an advantage, which will promote quality, extraordinary results and good values. Always trying to give more than we promise we try to meet remoteness with closeness. One Philosophy We make Bestseller's 10 Basic Principles come alive. We are humble and together we work hard. We base our co-operation on trust, partnership and honesty. We treat all people as individuals but we think and act as a team. Therefore we succeed. One Family The backbone of Bestseller is our family feeling. We help each other and have unlimited faith in our relatives. We show our identity in the good examples we set for one another. We are proud of our family. It is both our link to the past and the foundation of our future. 10 basic principles97 1. We are honest 2. We are hard-working 3. We are loyal 4. We are co-operative 5. We are business minded 6. We want to see results 7. We want simple solutions 8. We take nothing for granted 9. We always keep our promises 10. We want to be the best

96 www.bestseller.com 97 www.bestseller.com

17

Exhibit 3: Brand portfolio of Bestseller A/S 98

Brand Target group

Product offer Pricing Style Year

EXIT Boys & girls, 2-10 years

Full wardrobe. Under- to outerwear + shoes

Jeans: €20-30 Tops: €13-18

Cool and fun but functional and wearable

1986 Vero Moda Teenage

women and up

Skirts, tops, trousers, outerwear, some accessories & footwear

Dresses: €35-50 Tops: €17-25

Trendy and fresh

1987 Jack & Jones Men 18-30 Jeans at core, wide

range of matching items, shoes and accessories

Trousers: €40-60 T-shirts: €15-25

Cool denim fashion with an international attitude

1990 Vila Women,

25+ Tailored/elegant wear, some outer wear

Dresses: €40-60 Jeans: €50-60

Feminine and elegant, highly fashionable

1993 name it (formerly known as EXIT)

0-3 years Tops, trousers, dresses seasonal items (swimwear)

Tops: €10 Trousers: €15

Functional daywear

1996 ONLY Girls with

attitude Jeans at core, wide range of matching casual items

n.a. Cool, streetwear-oriented, up to date, on trend

1996 Selected Men 20-35 Clean-cut design,

leisure to formal wear

n.a. Leading trends, simple and stylish

1997 Tdk Young men Jeans & trend items n.a. Jeans from casual to

innovative/unique 1999 PH industries Boys 8-16 Jeans, t-shirts, knits,

sweaters, outerwear Jeans: €20-35 Sweatshirts: €15-35

Fresh everyday wear. Focus on comfort/functionality 1999

phink industries

Girls 8-16 Jeans & matching items, outerwear

Jeans: €20-45 Shirts: €25-30

Trendy with a casual/urban edge 2003

Object Collectors Item

Girls with attitude

An Only sub-brand, jeans & streetwear

n.a. Cool styles with high design

2003 Pieces accessories

Women Hosiery, bikini, belts, bags, footwear, jewellery

n.a. Designed for the urban fashionists

2003 Gosha by Vero Moda

Women Luxury women’s wear (at Vero Moda stores)

n.a. Elegant, refined, high-quality fashion

2005 mama-licious Expectant

mothers Trousers, skirts, tops Skirts: €30-40

Jeans: €45-75 Trendy, sexy, glamorous

2005 Outfitters Nation

Unisex teens

Jeans wear, sportswear, feminine dresses and outdoor clothing

n.a. Trendy cool teen styles 2007

98 MENTEL report

18

Exhibit 4: Bestseller A/S’ European and non-European outlets, September 200799 Jack &

Jones Vero Moda

Only Exit Vila Selected Pieces Other Total

Austria 7 16 4 3 1 31 Belgium 9 19 5 33 Croatia 2 2 4 Cyprus 1 1 Czech Republic

3 1 4

Denmark 46 67 37 27 32 9 7 16 241 Estonia 1 2 1 4 Finland 22 26 9 2 7 1 67 Germany 46 80 23 2 1 152 Iceland 2 2 1 2 1 1 9 Ireland 19 19 1 11 4 54 Latvia 1 1 1 3 Lithuania 6 2 8 Luxembourg 1 1 2 Netherlands 57 75 39 4 13 4 7 199 Norway 65 72 26 21 10 5 1 200 Poland 10 23 4 37 Russia 6 6 12 Slovakia 3 1 1 5 Slovenia 3 3 Spain 58 10 5 1 14 88 Sweden 45 71 10 20 23 1 170 Switzerland 4 24 1 29 UK 13 4 1 2 20 Total of above

417 534 167 93 93 33 16 23 1,376

Jack & Jones Vero Moda Exit Only Total Bahrain 1 1 1 3 Egypt 1 1 1 3 Jordan 1 1 Lebanon* 3 4 5 12 Qatar 1 1 Saudi Arabia 2 5 6 13 Syria 1 1 2 Turkey 3 3 6 UAE 3 3 6 Total of above

14 19 13 1 47

99 Mentel report

19

Exhibit 5: Organizational structure of Bestseller A/S, 2007100

100 Bestseller’s annual report 2007/06

Bestseller A/S

Flying A A/S Denmark

Purchasing

Wholesalers

Retailers

Bestseller Retail A –

GmbH Austria

Bestseller Norge Detalj

A/S Norway

Bestseller Retail Belgium

BVBA Belgium

Bestseller Retail United

Middle East Ltd Libanon

Bestseller Retail Finland

Oy Finland

Bestseller United Holding

S.A.L. Libanon

Bestseller Retail

Deutschland Germany

AHPK GmbH Germany

Bestseller Retail Ireland

Ltd Ireland

Best Shop Midt-Norge AS

Norway

Bestseller Retail S.L.

Spain

Bestseller Retail AS Norway

Jack & Jones AB

Sweden

Belokan Oy Finland

Bestseller Retail AG

Switzerland

Bestseller Retail UK Ltd

England

Bestseller AS Norway

Bestseller Wholesale

Benelux B.V. Holland

Bestseller Sverige AB

Sweden

Bestseller Wholesale

Belgium BVBA Belgium

Bestseller Wholesale Oy

Finland

Bestseller Tekstilhandels

GmbH Germany

Bestseller Wholesale Ireland Ltd

Ireland

Bestseller Handels GmbH Austria

Bestseller (Schweiz) AG Switzerland

Bestseller Wholesale Spain, S.L.

Spain

Bestseller Wholesale UK

Ltd England

Bestseller Italy S.p.A. Italy

Bestseller Wholesale

France SaS France

Bestseller United Middle

East Ltd Libanon

Bestseller United China

Ltd Hong Kong

Bestseller United India Private Ltd

India

Bestseller Tekstil Ltd

Turkey

Bestseller United Italy

S.p.A. Italy

Bestseller Rus LLC

Russia

Bestseller Canada Inc.

Canada

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

90%

90%

99%

70%

70%

50%

50%

50%

Bestseller Retail Europe

A/S Denmark

Bestseller Retail

Netherlands Holland

100% 51%

51%

20

Exhibit 6: Bestseller A/S’ Code of Conduct – General Principles101 1.1.0 This Code of Conduct describes the ethics that Bestseller wishes to promote. It is based on a

fundamental attitude of Bestseller: “We do what we say and we keep our promises.” * * *

1.2.0 The Code of Conduct is directed at any supplier and his subcontractors, who manufacture products for Bestseller A/S or for any of Bestseller’s companies. Bestseller must be informed about all sub-contractors producing Bestseller’s orders. The supplier is responsible for the communication of this Code of Conduct to his sub-contractors. Suppliers including their subcontractors will hereinafter be called “the suppliers”.

1.2.1. Any supplier shall observe the legislation in force at the time in question. This includes an obligation to observe and comply with all EU product requirements at the time in question.

1.2.2. Even though Bestseller acknowledges that legislation and cultural patterns vary across the world and that suppliers consequently operate under different circumstances, this Code of Conduct sets out the basic requirements that any supplier must comply with in order to do business with Bestseller. In cases where the law in question is more comprehensive than this Code of Conduct, current law applies. In cases where this Code of Conduct is more comprehensive than the law in question, this Code of Conduct applies.

1.2.3 Code of Conduct also forms the basis upon which Bestseller will make a continuous evaluation of the supplier’s compliance with Bestseller’s requirements and expectations.

* * * 1.3.0 It is a prerequisite for doing business with Bestseller that any supplier complies with the Code of

Conduct. Bestseller will constantly develop its follow-up system regarding evaluation and compliance with the Code of Conduct.

1.3.1 If a supplier is not in full compliance with this Code of Conduct, Bestseller is entitled to demand that the supplier implements a development plan to remedy the deficiencies.

1.3.2 If Bestseller has recommended such a development plan, and it is not implemented, Bestseller is entitled to without any notice to terminate its business relation and possibly cancel any production or delivery in progress.

1.3.3 A serious violation of Bestseller’s Code of Conduct can lead to an immediate determination of the cooperation.

* * * 1.4.0 The specific requirements in this Code of Conduct are listed under the following headings:

2.0.0 The Working Environment and Housing Conditions 3.0.0 Social Responsibility 4.0.0 Environmentally Friendly Production 5.0.0 Protection of Animals

* * * 1.5.0 Suppliers who deliver and/or manufacture products for Bestseller A/S shall operate in compliance with

the laws and regulations that apply in their respective countries and in compliance with this Code of Conduct, i.e.:

1.5.1 The supplier shall treat both people and animals with respect and dignity. The supplier shall treat the environment with respect and consideration.

1.5.2 The supplier’s business activities must comply with all the relevant and applicable laws and regulations including those concerning the workforce, its welfare and safety and the working environment.

1.5.3 The supplier shall allow Bestseller A/S and/or anyone who represents Bestseller free access to his facilities (incl sub-contractor’s facilities) and employees and to all the relevant data at any time, whether notification of an audit has been given in advance or not.

* * * 1.6.0 The supplier shall ensure that the content of this Code of Conduct is communicated to the employees

including posting a copy of the Code of Conduct in the local language and in a place accessible to the employees.

101 www.bestseller.com

21

Exhibit 7: Global Value Chain of Bestseller A/S

Bestseller A/S, (Brande, Denmark)

Franchised stores

Retailers

Independent wholesale dealers

Purchasing offices (Italy, Turkey, China and India)

Sourcing from suppliers (Europe, the Middle East, Asia) Fully owned

wholesalers

Design/marketing Production Sales

Vero Moda

Jack & Jones

Vila

ONLY

Etc.

22

Exhibit 8: Bestseller A/S’ domestic competitors102 Key financial figures, 2003-2007:103 2003 2004 2005 2006 2007IC Companys Turnover (mill. DKK) 2,706 2,612 2,819 3,022 3,354Net earnings (mill. DKK) 1 -309 173 224 241Employees 2,199 2,095 2,019 1,989 2,199Brandtex Turnover (mill. DKK) 3,048 3,282 3,371 3,369 3,194Net earnings (mill. DKK) 74 68 46 29 72Employees 2,397 2,360 1,871 1,752 1,593Bestseller Turnover (mill. DKK) 4,924 5,336 6,713 8,672 10,182Net earnings (mill. DKK) 685 597 939 1,055 1,372Employees 1,285 1,819 2,372 2,950 4,108

IC Companys’ brands: Peak Performance, InWear, Jackpot, Tiger of Sweden, Cottonfield, Matinique, Part Two, Saint Tropez, By Malene Birger, Soaked in Luxury and Designers Remix Collection Brandtex’s brands: Brandtex, SHARE, Ciso, Blend, BlendShe b.young, Fransa, Edamae, Psycho Cowboy, Jensen Women, Gestuz, Freeze, Ichi, Silbor, Veto, Frank Q, Dranella, Signature Sales performance by market for IC Companys: DKK million 2005/06 2006/07 Growth

Sweden 674 756 12 %Denmark 520 635 22 %

Holland 274 287 5 %Norway 209 276 32 %

UK & Ireland 185 180 -3 %Belgium 154 177 15%Finland 155 167 8 %

Germany 146 154 6 %Poland 88 92 4 %

Canada 87 90 3 %Switzerland 84 96 14 %

Spain 65 71 9 %Russia 50 72 44 %Austria 46 48 5 %France 36 42 18 %

Other 142 179 26 %Total brands 2,915 3,322 14 %

102 www.iccompanys.com, www.brandtex.com 103 Greens online

23

Exhibit 9: Bestseller A/S’ international competitors104 Key financial figures, 2003-2007: 2003 2004 2005 2006 2007Gap Inc. Net sales (mill. $) 15,854 16,267 16,019 15,923 15,763Net earnings (mill. $) 1,031 1,150 1,113 778 833Employees 153,000 152,000 153,000 154,000 150,000H&M105 Net sales (mill. $) 9,413 10,485 11,966 13,330 15,335Net earnings (mill. $) 1,063 1,211 1,539 1,797 2,262Employees 28,409 31,701 34,614 40,368 47,029Zara106 Net sales (mill. $) 7,219 8,742 10,582 13,996 14,810Net earnings (mill. $) 702 1003 1261 1573 1962Employees 39,760 47,046 58,190 69,240 79,517Bestseller Net sales (mill. $) 1,036 1,123 1,412 1,824 2,142Net earnings (mill. $) 144 126 198 222 289Employees 1,285 1,819 2,372 2,950 4,108

Geographical store location: Gap Inc. H&M Zara Europe 176 1,383 1,140America 2,869 192 154Asia-Pacific 132 7 78Middle East 0 12 54Africa 0 0 5Total 3,177 1,594 1,431

104 www.gapinc.com, www.hm.com, www.inditex.com 105 Financial figures converted to USD from SEK on 09.07.2008 (www.oanda.com) 106 Financial figures are collected from Inditex, Zara’s mother company. Financial figures converted to USD from EUR on 09.07.2008 (www.oanda.com)

24

Exhibit 10: Bestseller China’s ownership structure107

107 IFU 2005

1996

Dan Friis/Allan Warburg; 20 %

Troels Holch Povlsen; 50 %

IFU; 30 %

2001

Dan Friis/Allan Warburg; 50 %

Troels Holch Povlsen; 50 %

25

Exhibit 11: Bestseller China’s development in stores 1996-2007108 109 Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Stores 3 24 45 56 82 163 282 484 710 852 1200 1800 Own stores 3 16 23 26 48 55 175 274 357 412 675 960 Franchises 0 8 22 30 24 108 107 210 353 440 525 840

Number of stores, 1996-2007

0200400600800

100012001400160018002000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Own stores Franchises

108 Figures for 2007 are based on estimates from Jyllands Posten (2007) Bestseller spurter frem, as well as own estimates. Figures from 2006 are based on Børsen (2006) Bestseller strammer konceptet til, as well as own estimates. 109 Bachelor thesis