China is beckoning mainstream U.S. retailers as never before.
With the country’s middle class growing fast — projected by Euromonitor to total 700 million people in 2020 — companies such as Gap Inc., American Eagle Outfitters Inc. and Bebe Stores Inc. are making their first forays into China. Others, including Guess Inc., Iconix Brand Group Inc. and Levi Strauss & Co., are enlarging their footprints.
The activity comes as China has decided to let its currency appreciate gradually against a basket of currencies, including the dollar, which could — along with rising wages for Chinese workers — boost the purchasing power of its consumers and make the world’s most populous nation an even more enticing market.
The push by retail and apparel firms in China, preceded by the expansion of luxury brands, has accelerated as they seek to diversify geographically because the international economic crisis exposed the vulnerability of developed markets while China’s economy grew 8.7 percent last year.
China has “progressed from an economy of only the very, very wealthy that can afford a lot of the American brands to an economy that is starting to support a middle class,” said Kelly Tackett, senior analyst, apparel, at the Kantar Retail consultancy, which forecasts China will trail only the U.S. with retail sales, excluding autos, of almost $1.6 trillion in 2013.
“That middle class is showing an increased appetite for American goods,” Tackett said. “There is an opportunity for some of the more middle-market brands like Gap, like American Apparel or even more aspirational luxury brands like Coach, to really get a foothold.”
China ranked first among global markets with the highest potential for retail development in A.T. Kearney’s ninth annual study of areas ripe for expansion.
Luxury firms from Tiffany & Co. to LVMH Moët Hennessy Louis Vuitton have banked on a prosperous sliver of the Chinese population that travels extensively, covets specialized products and has cash to spare. Mainstream American brands may have a tougher road to reach broader swaths of the Chinese public, identify suitable retail real estate and fine-tune advertising, staffing and product.
“You haven’t seen really a lot of American retailers open a lot of stores there,” said Jeff Van Sinderen, a senior analyst with B. Riley and Co. “U.S. retailers and brands have to be careful…not all of China is going to work. There are select areas that are going to work. There are certain brands that have an American sensibility that will work better than others.”
Nike Inc. is often singled out as an American success story in China, where it has fortified its brand over about three decades. The Beaverton, Ore.-based company has captured the largest share of the athletic footwear market in China and registered a 12 percent increase in sales there to $464 million in the fourth quarter ended May 31.
Over the next several years, Nike maintains there’s room for more growth and has promised significant investment in developing markets, which include China, and Central and Eastern Europe, to generate low double-digit annual sales increases and an additional $3 billion to $3.5 billion in revenues by the 2015 fiscal year.
“All evidence [is] that our premium distribution strategy and investment in China over the last three years to five years is paying off,” Charles Denson, president of Nike brand, said during a third-quarter earnings conference call.
Nike’s example indicates that persistence is rewarded in the Chinese market, a lesson that Guess vice chairman and chief executive officer Paul Marciano takes to heart. Over the past three years, the Los Angeles-based company has opened about 40 stores in China, and Marciano anticipates that number will increase to 200 in three to five years. This year, Marciano forecast Guess’ Chinese operations would break even or move into the black.
“We have a big plan for China, but it’s a country where it requires us to be very cautious, to go not as fast as you can but as carefully as you can,” he said. Speaking about retailers heading to China, he added, “It takes a strong office. It takes a big investment and it takes time to be patient to see some results coming. You cannot expect results in the first year or two years in China.”
Branded apparel giant VF Corp. has made China a priority, selling the Lee and Wrangler labels through about 400 brand stores and shops-in-shops, as well as having acquired the rights to sell The North Face brand products there. Chairman and ceo Eric Wiseman said this year that the Greensboro, N.C.-based company is targeting a 40 percent increase in distribution in China.
Iconix plans to open 50 Candie’s stores in China by the end of 2010 and 500 over the next five years, ceo Neil Cole said this week at a Reuters Consumer and Retail Summit in New York. The first unit is set for Shanghai in August. “We think the big growth comes from China,” he said.
Calvin Klein Inc. president and ceo Tom Murry and American Apparel Inc. ceo Dov Charney, both speaking at the Financial Times Business of Luxury Summit 2010 this month, tempered the China fervor. Murry said China — about a $200 million business for Calvin Klein — is a small slice of the company’s $6 billion in sales.
“There will be a gradual shift to that market over time,” Murry said. “China isn’t the only opportunity for growth….Our appeal there is driven by our cachet in other countries.” Over the next five to 10 years, he said Calvin Klein’s business will “skew to Asia.”
American Apparel’s short history in China — it opened the first of its three stores there in 2008 — bolsters the view that U.S. retailers outside the luxury sector should take the long view. Without a recognizable logo signaling status, American Apparel has had “challenges in China,” Charney said.
“They [Chinese consumers] are looking for the Rolls Royce right now,” he said. “They are not looking to buy the Volvo.” American Apparel has opted to test the waters because Charney said in a few years, “The most important thing will be that you are an international brand.”
The middle class is swelling, but it is still small and living costs are rising along with wages. In 2009, the average annual per capita income in urban households was 18,858 yuan or less than $3,000. China’s National Bureau of Statistics estimated that 17,175 yuan, or around $2,500, was disposable income, an almost 10 percent jump from 2008. About 36.5 percent of urban household income was spent on food.
“The market is split in two halves — the rich and the poor,” said Christopher Tang, a professor at UCLA Anderson School of Management. “For those who have disposable income, they go for the high-end brands. For those who are more price-sensitive, they go for the local brands….The middle range price for the U.S. market is still expensive in China.”
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