By  on June 27, 2008

China is poised to replace Japan as the world's second-largest retail market by 2012, even as inflation slows some momentum from the consumer giant, a new report by TNS Retail Forward said.

Fashion is set to be a cornerstone of that growth, with homegrown and international names looking to tap into the market. By 2012, apparel and footwear sales are expected to reach $214 billion, a 71.2 percent rise from $125 billion last year, according to the study "Strategic Focus — China's Retail Landscape."

U.S. apparel and footwear sales are expected to swell 20.7 percent to $431 billion in 2012 from $357 billion last year.

"China remains one of the best retail opportunities in the world, despite inflation pressures weighing on near-term growth," said the study, written by Frank Badillo, vice president and senior economist at Retail Forward.

"Much of the continued entry into China is skewed toward apparel retailers, particularly strong brands and upscale retailers," Badillo wrote.

Retailers recently setting up shop in China, or planning to do so, include Hennes & Mauritz, Topshop, Galeries Lafayette, Dockers and American Apparel.

Compared with last year, the country's retail sales, excluding automobiles, are projected to expand 68.1 percent by 2012 to $1.43 trillion. The U.S. is expected to remain the king of the consumer hill, with retail sales growth of 25.6 percent over the next five years to $4.46 trillion. Japan is projected to slide to the number-three spot with an increase of 3.5 percent to $1.2 trillion.

In addition to higher prices, which are especially prevalent in food, retailers face growing government attention to product safety and environmental regulation. Foreign companies also are operating in an period of heightened Chinese nationalism.

To tap into the market, fashion companies are learning some new tricks. Adidas, for example, is churning out polo shirts featuring the Chinese "lucky cloud" symbol.

Learning to speak the language, both literally and in the fashion sense, isn't the only problem facing transplants. There are also competitive pressures.

"Foreign retailers in China continue to plan for aggressive expansion, but more often have fallen behind plan," the report said. "In some cases, the slow expansion is a result of their struggle to acclimate to the market, but in other cases, the slow movement is a result of local red tape."Carrefour's emphasis on a small format for its 387 stores in China has given it an advantage over Wal-Mart's bigger boxes, the study said.

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