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SHANGHAI — When elite golfers line up a putt, they don’t just aim for the hole, they zero in on a particular blade of grass along the rim of the hole. By aiming that precisely, they greatly improve their chances of getting the ball into the cup.
Marketers are finding they need to take a similarly pointed approach to entering the Chinese apparel market. With 1.3 billion residents, China seems to offer a vast pool of potential shoppers. But the vast majority of Chinese shoppers live in poor rural areas and lack the disposable income to pay for branded clothing and the interest to seek it out.
To find attractive consumer segments, marketers focus on shoppers in urban areas, where per-capita incomes are more than triple those in the countryside.
Experts vary on how to define apparel market segments in China. In general, any garment priced at $50 or higher is considered high-end, but many studies use more international standards.
Ivan Kwok, a fashion industry analyst with Boston Consulting Group’s Shanghai office, said many international brands jack up their retail prices or offer only their most premium products in China. Coupled with the effects of import and luxury taxes, this can make their products about 30 percent more expensive in China than in the U.S. or Europe.
“People are brand-driven in this market, so brands can’t sell at the midprice range because of the perception of poor quality,” Kwok said. “There is a big gap in the comparative middle, with no equivalent of the Gap or Old Navy, which is what it takes to be sustainable.”
Kwok added that Esprit, which is considered a high-end brand in China, is the international label with the most substantial penetration of the Chinese market.
Qin Guoliang, president and design director of Hangzhou Hallowell Garments, which sources China production for international brands such as Fubu, said he believes most foreign brands selling in China are slowing their growth because their prices are too high.
“The rich in China are too few in number and most people’s incomes are too low to afford luxury goods,” he said. “In China, the interest in brands is the highest, but the ability to buy them the lowest.”
Susana Chen, China director of Swatch Group, said the Swatch brand in China mostly appeals to white-collar, well-educated, 20- to 30-year-olds, mainly women, who are more concerned with style than status. The group’s Omega brand appeals mostly to wealthy, status-conscious men in their 30s and 40s.
Bruno Sälzer, chairman and chief executive officer of Hugo Boss, described a similar constituency of young-to-middle-aged businessmen as its “core customer” in China.
Tong Minqiang, director of Hangzhou Tower, one of China’s most profitable luxury brand malls, said the mall’s clientele is “mostly the upper management of companies, banks and the government, plus the bosses of private companies, mostly aged 30 to 40. Women shoppers outnumber the men, but the sales values are about the same.”
Ye Kangxia, an analyst at CTR Market Research, which conducts one of the country’s largest consumption and lifestyle surveys, said the biggest spenders in China are urban men aged 35 to 45.
He said they work as “senior teachers, doctors, lawyers, managers, chief executives…in all kinds of enterprises or government departments. They are not only the decision-makers in their own workplaces, but also [play] determining roles in expensive household buying activities.”
Another group growing in importance as consumers are young, educated, white-collar urban dwellers, who make up the so-called “aspirational middle class.”
Boston Consulting’s Kwok defined this group as 20- to 35-year-olds who have lower incomes than their elders, but spend more of their cash and are most interested in fashion. College graduates entering the workforce earn starting pay of roughly $200 to $400 a month, a figure that can double after a few years on the job. The overwhelming majority continue to live with their parents until they get married, which means their spending on basic needs like food and housing are minimal.
Chinese families traditionally pool their financial resources, but the current generation of pampered only children is under little pressure to contribute to the family account. They are expected to save some, but large future investments such as property and education will mostly come from parents’ income or savings.
“Chinese in general spend 8 to 10 percent of their disposable income on clothing, including footwear, hats and accessories,” Kwok said. “But young people spend 20 percent or more.”
Twentysomethings are the most brand-conscious, as they grew up during a more capitalist milieu and have had greater exposure to mass media advertising and susceptibility to peer pressure. Wang Lan, an editor at Exquisite Life, a luxury lifestyle magazine in Zhejiang Province, said fashion consumers in their 20s spend a lot of time browsing, but are cautious buyers.
In its latest study, conducted in the second half of 2004, CTR found that 49.8 percent of respondents aged 25 to 34 considered dressing fashionably as “quite important” and devoted a large proportion of their expenditures to it. A majority agreed with statements such as they “love to pursue fashion trends” and “wearing famous brands is part of my charm.” Only 38.4 percent professed indifference to current trends.
Respondents said they primarily buy middle-range casual and sportswear brands, primarily local labels. In the prior 12 months, 16.7 percent of survey participants in this age group had purchased apparel by Shi Pai, 12.3 percent by Baleno, 9.9 percent by Giordano, 8.2 percent by Crocodile and 7.9 percent by Adidas.
Young, white-collar Chinese entering the workplace spend their first few paychecks on clothing, electronics and entertainment like going to restaurants, teahouses and bars. The CTR survey found that 92.9 percent had dined out recently, and while Chinese food remains predominant, 48.8 percent had been to a Western restaurant in the previous month. Dating and socializing account for the relatively large entertainment spending among this group.
Beyond entertainment, apparel’s biggest competitor for young Chinese shoppers’ yuan are small electronics. Most middle- and upper-class Chinese have their own mobile phone by high school, if not sooner, and many will trade up for newer, trendier models with more advanced functionality. Better-off Chinese will buy a new mobile phone every year or so, and now cameras, online gaming, short messaging and e-mail functions are de rigueur.
According to the CTR survey, 99.7 percent of young white collars have mobile phones, 82.3 percent have personal computers and 91.6 percent use the Internet.
BCG’s Kwok identified a significant gender gap in how recent graduates spend their first few paychecks.
“Guys will spend more on gadgetry and maybe a good pair of athletic shoes,” he said. “Young women will use their first paycheck to buy clothing, particularly maybe a good bra for themselves,” which their more practical parents previously would not have subsidized.
Young middle- and upper-class Chinese are willing to spend the bulk of their income on nonessentials like fashion, but those incomes, while high by Chinese standards, remain comparatively low by international standards. Many young women will save several months’ income to purchase, for example, a single Louis Vuitton bag, often to accessorize a wardrobe of knockoffs of the same brand.
According to data from China’s National Bureau of Statistics, last year the average per capita income among urban residents was $1,137, while rural dwellers made about $354.
Fashion preferences among Chinese shoppers also vary greatly by city. Generally speaking, young white-collar Chinese in the so-called “first tier” cities of Beijing, Shanghai, Guangzhou and Shenzhen enjoy higher salaries and exhibit a more sophisticated approach to fashion. They are highly brand-aware and know their Givenchy from their Gucci. This sophistication, however, means that they are not easily impressed and do not exhibit as much blind enthusiasm for famous brands as many of their country cousins. Rather, they will pick and choose to establish their own personal style and image. In particular, young Shanghainese are willing to support emerging local designers, and have embraced rebellious styles like hip-hop and grunge.
China’s 40 to 50 “second tier” cities are defined as such by population size and economic conditions. They include massive municipalities such as the coastal Tianjin, with a population of 10 million, and inland Chongqing, population 30 million, as well as smaller but prosperous provincial capitals like Hangzhou, home to 1.7 million, and Nanjing, population 6 million.
Tastes are more conservative in the second-tier cities, even among young people. Twentysomethings in the secondary cities dress similarly to the thirty-somethings in the main urban centers. This is in part because of more slowly adapting social attitudes and traditional tastes, and in part because the young professionals in secondary cities are more likely to work in manufacturing and state-owned enterprises, compared with the small companies and creative and service fields predominant in the large cities.
As college-educated, professional, middle- and upper-class Chinese enter their 30s, their place in society changes, as do their consumption habits. Either promoted to management or founding their own businesses, their incomes rise substantially. As they marry and move out from their parents’ home, they enjoy the double income but also confront significantly higher expenditures, such as the purchase and furnishing of a home.
Instead of splurging on imported, brand-name Italian shoes, they will splurge on an imported, brand-name Italian toilet for their posh new condominium.
Similar to other countries, Chinese professionals in their 30s and 40s have less leisure time to spend shopping or thinking about fashion. For some, this combines with rising incomes and a growing need for status to push them toward international luxury brands and brand loyalty.
“People aged 30 to 50 do not spend much on clothing,” said BCG’s Kwok. “It depends on their occupation and stage in life, but for their clothing needs, comfort and durability matter more than brands, compared to the kids who just care about brands.”
Especially once they have children, middle-aged Chinese are more concerned about saving for and spending on their offspring. A study by Horizon Research Group found that 31 percent of Shanghainese reported school fees for their children as their biggest expenditure increase in 2004.
The children of the well-off are an important but often overlooked consumer demographic in China. Kwok asserted that the 10 to 20 age group is one of the main markets for luxury goods, including apparel, in China. Families will spend significantly more on luxuries for their children than for themselves.
Despite all the demographic variety within China’s middle and upper classes, and despite their high profile, they remain a tiny proportion of what remains a developing, largely poor nation, where 60 percent of the population still lives in rural settings. Behind the per capita gross domestic product of $1,094 lies a huge wealth gap between rural and urban residents. China’s National Bureau of Statistics estimated that the middle class represents 5 percent of the population, roughly 65 million people.
For the time being, however, 95 percent of Chinese consumers are far from able to afford foreign fashion. Even mid-range domestic and Hong Kong brands like Baleno and Giordano are beyond their usual range. The mainstream Chinese consumer will rarely spend more than $5 on an item of apparel and will splurge on something costing $15 to $30 only once or twice a year. Their preferences run toward low-end local brands and knockoffs of foreign luxury brands.
That leaves many foreign brands engaged in marketing efforts that they hope will pay off over the long term, when more of China’s population can afford their products.
“Interest in brands is high, but the ability to buy is low,” said Wang. “Here, it’s maybe 3 to 5 percent [of the population] that can afford the top products.”