American Apparel Hits China

After long delays, U.S. brand to open first store.

A new American Apparel unit in China.

SHANGHAI — American Apparel’s ambitions to buck the conventional wisdom of fashion retailing are now poised for export — to China.

This story first appeared in the August 21, 2008 issue of WWD.  Subscribe Today.

The retailer is this weekend expected to open its first store on the Mainland, in the World Trade Center in Beijing, after months of delays. American Apparel hopes to open four more stores in the country this year and faces the daunting task of marketing American-made garments to the world’s largest apparel producer.

“The bottom line is that China is a different game for [Western] retailers,” Harry Parnass, American Apparel’s director of retail development and operations in Asia, told WWD. “For example, Zara was here with seven people for four years before opening,” he said, adding American Apparel is working diligently to cut through China’s notorious bureaucracy, find appropriate retail space and maintain its ethical approach American Apparel has plans to open stores in Shanghai, Chengdu and Suzhou, as well as the one opening in Beijing. The hope is to have all five stores open — including a second unit in Beijing — by the end of September. But the long drawn-out process of opening the stores shows the challenges of doing business in China.

American Apparel was supposed to open its first boutique in China in May in the Shanghai creative zone project 1933. The project has been postponed as it awaits final government approval, although inventory has been shipped from the U.S. “We signed the contract with 1933 last November, and started setting up the company here,” said Wei Su, manager of the company’s retail development for China. “The building used to be a slaughterhouse, and is a project with the government, so the landlord does not have ownership. Then, as a ‘creative space,’ retail is limited to only 15 to 20 percent of the project.”

Despite the difficulties, the company remains enthusiastic about the location. “Shanghai does not yet have such a hybrid retail and creative space. It is the heart of what quality city living is all about. That is: brainpower, creativity-based. It will be the launch point for American Apparel,” Parnass said. “It is the nature of American Apparel to be controversial, to go against the grain.”

It remains to be seen how that controversial aspect of the retailer — its use of sexually provocative imagery and the wild man reputation of its founder and chief executive officer Dov Charney — translates in China, where state control of media is rampant. The retailer has generated endless controversy even in the more relaxed U.S. for its ads, and for Charney’s outlandishness. It hit the headlines earlier this week for its new Afrika collection inspired by the continent, which it promoted without using any African-American models.

As for the postponed opening, Su said recently via e-mail, “The simple answer from me is ‘That’s China.’ We are definitely going to open the store in 1933 Shanghai as our people in L.A. and on the ground are working hard for the opening. But the date is not fixed due to the bureaucratic problems.”

American Apparel’s list of difficulties in China is long. “For example, we imported our lighting fixtures, and they got stuck at the Pudong Airport in Customs because we couldn’t find the right person to sign them through, and we thus lost three days,” Parnass explained.

More significantly, the company cannot register as “American Apparel” in Chinese. “The bureaucratic regime here doesn’t allow a direct translation of our name, because their copyright laws do not allow using a country name in a brand name — so it is some unintelligible transliteration,” he said.

Although many brands claim that finding appropriate retail space in China has ceased being the challenge it was a few years ago, it remains a headache for companies that are comparatively small or lack much local name recognition. “A lot of cities we went to told us it was too late, that their leases were all taken for three years. For others, leasing to us would mean taking a risk,” Parnass said.

“We are two years away from the next wave of retail spaces opening, and there are 20 candidates for each spot. The price is never discussed. It goes beyond business: the owner wants to tell his golf buddy on the course, ‘I just signed American Apparel,’ and not be one-upped by a ‘Well, I got such-and-such,’” he said, mentioning some landlords’ demands for as much as 22 to 24 percent of a store’s sales before they will agree to a lease. “They are very hands-on, and get their noses in everything, which is very typical of China.”

Low name recognition is also a problem, Su added. “We’re new, so our development is different, and the Chinese don’t know us. We have no catalogue, no Chinese stores, and different landlords have different requirements.”

She also mentioned China’s high rents and the risk that entails. “In China, they’re mostly huge spaces, which means huge investment, and then the lease is only three years. We need a high efficiency rate. The locations we’ve picked were about the landlord, and not so much about the cities,” Su said.

Launching in the lower-profile, second-tier cities of Suzhou and Chengdu marks an unusual strategy since most Western fashion brands tend to enter China in the first-tier cities of Beijing, Shanghai and Guangzhou or in prosperous, coastal second-tier cities like Hangzhou, Dalian and Wenzhou.

Chengdu is the capital of the inland and now earthquake-stricken Sichuan Province. Suzhou, a tourist haven for its traditional gardens, canals and temples, is located in the eastern Jiangsu Province and an hour away from Shanghai.

“Chengdu is a city of 17 million people that no one in the U.S. has heard of, but with so many [Louis Vuitton] stores and such,” explained Parnass, speaking before the earthquake that has since put the city on the global map. Plans for a Chengdu store have not been called off by the quake, Su said, noting natural disasters, while a tragedy, are a part of life and business as well as of the history of China.

American Apparel considered Suzhou for its tourist appeal, Su said. The store, which for now is slated to open in September, is part of a big new outdoor, waterfront entertainment project expanding the city limits. “Suzhou is expanding, but not too fast, and trying to retain its street image, to remain streetlike,” she said.

“We’re a street company, not a mall company, so in China we go for compromises like [Beijing’s] Sanlitun Bar Street,” she said.

American Apparel was originally expected to open in the street’s new Nali Mall in June, but delays in getting bureaucratic approval have caused numerous postponements. As a result, the unit in the basement of the China World Trade Center in a location formerly held by Azona was the first to open. That store originally was expected to open last month.

“We’re afraid of the malls. We’re not mall people, but that is the way China is structured,” Parnass added. “The problem for us now is how to keep our street cred within a mall. On [Shanghai’s] Huaihai Lu, you have to rent the above four stories to get the ground space. That’s fine if you’re a Louis Vuitton or a Cartier, and can afford to use it as a billboard.”

Even after the retail hassles are behind it, American Apparel will face the dilemma of positioning the brand in China’s complex, competitive market. “A big challenge is that we have no logo,” admitted Parnass. “China is the land of logo frenzy; it is five years behind the rest of the world. We’re not going in the logo direction.”

Parnass said he expects that American Apparel’s customer base in China will prove as loosely defined as it is internationally. The company is also hoping to appeal to the growing club scene here. “Everyone asks what our target demographic is, especially landlords, but we have no answers,” he said. “We mean a lot to a lot of different people.”

Marketing in China is proving to be another challenge, and only in part because activism and public discourse on social issues remain sensitive in the country. “We cannot aggressively market and still be seen as cool. So, usually we participate with the music world and city scenes, but here that is more difficult,” Parnass said. “In the U.S., we advertise on the back pages of the free magazines, the ones that tell where the cool raves are and such. That does not exist in China.”

American Apparel isn’t just shipping its signature T-shirts and tube dresses to China; it also hopes to export its socially responsible ethos. The company has decided not to source from China and has vowed to pay its Chinese sales staff no less than the U.S. minimum wage. It also plans to sell some of the socially outspoken merchandise it sells in the U.S.; for example, earlier this summer the firm planned to ship its “Legalize L.A.” T-shirt to China, which supports a relaxation of U.S. immigration rules.

“It would be very easy to shift our production to China, but [Charney] will not manufacture in a polluting factory, and we cannot guarantee that in China,” Parnass explained. “By making it all in L.A., we can control the conditions.”

The company is also eager to attract a high-quality sales force. “We were told that paying U.S. rates means getting very high-level, multilingual, college-educated staff. And we said, ‘Great, we want that!’” Parnass laughed. Formerly a director of Montreal’s LaSalle, he has been recruiting graduates from the Raffles LaSalle fashion institute in Shanghai.

Parnass did not think the company’s all-American image will backfire in a period of extreme nationalism in China. Still, the company is treading carefully on some issues. To wit, it is carefully considering whether to recruit Chinese, Korean or white celebrities for its local advertising campaigns.

“The sense we are getting from Chinese journalists is the feeling that the xenophobia is artificially created, for political reasons,” said Parnass, adding “Made in America” still has a cachet.

“The Chinese consumer is not convinced about Made in China.”