Levi’s new brand Denizen a Warning to Foreign Firms

On August 18^th, jeans-maker Levi Strauss & Co. announced the launch of a new line of jeans called Denizen. The Denizen jeans range will initially be sold in China, South Korea and Singapore and is Levi’s attempt to corner the jeans market for 18-29 year-olds in Asia. Denizen jeans will be priced at US$40-60 – half the price of Levi’s jeans currently sold in China.

While this news may excite college students in Shanghai, it is also a vivid example of the income disparity in China. Levi’s latest move reflects the difficulty they faced selling their original jeans in China which were too pricy to qualify as inexpensive casual wear yet too cheap to be a luxury good. In other words, even a global jeans giant like Levi’s was unable to derive profit from the ‘middle-ground’ segment of the Chinese consumer market – the segment which is rich enough to want to wear better jeans than bargain, local-made brands yet who can’t afford top-end jeans. The reason for Levi’s failure to do so is simple – the ‘middle ground’ segment doesn’t exist.

The Chinese Gini coefficient (a commonly used measure of income inequality) reached 0.47 in May 2010 (Source: China Daily, 12/5/2010), surpassing the global warning level of 0.4 (a Gini coefficient of 0 indicates perfect equality and a value of 1 indicates perfect inequality). Li Shi, a professor on income distribution and poverty studies with the Beijing Normal University, said the top 10% of Chinese earners had incomes 23 times that of the poorest 10% in 2007. In 1998, the top 10% earned only 7.3 times what the bottom 10% did. Clearly, China is made up of those who are very rich and those who are very poor – there is no (significant) middle ground.

This glaring and worsening disparity in China doesn’t bode well for foreign firms looking to set up in the Middle Kingdom. To make it worthwhile, these firms will have to adapt their mid-price-range products so that they are either targeting the low end of the market (as Levi’s have done) or the exorbitantly expensive end. However, such modifications would entail significant investments. What’s more, many firms simply won’t be able to adapt – after all, the brand image of Diesel can’t change into something equivalent to Gucci overnight. These troubles may put off many foreign firms who aren’t large enough to afford such an adaptation. Evidently, if China wants to boost domestic consumerism, inequality is an issue they must deal with.

Note: Having said this, some people may argue that Western firms won’t actually have to adapt their product range that much. After all, America’s Gini coefficient was 0.45 in 2007, up from 0.41 in 1997 (CIA World Factbook). Even the UK’s Gini coefficient is quite high at 0.34. The key reason why China can’t be compared with the likes of the US and the UK is that the poorest people in the latter two countries are much richer than the poorest in China. According to the IMF, the US’ GDP per capita at purchasing power parity (PPP) was $46,381 (in International dollars) compared with China’s which was Intl. $6,567, about seven times less. Clearly, while countries in the West may have inequality comparable to China’s, they are still much richer. Therefore, Western firms will have a tough time adapting to the polarised Chinese market and hence, China must tackle its inequality problem by pulling millions out of poverty.