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Into the dragon's den of Chinese retail

As Chinese economic growth slows, retailers and brands are questioning how they can still reap riches from this vast market

All levels of the market are exposed to the China slowdown, from luxury down to mass, so all brands will need to adjust and refine their approach both strategically and tactically

 


Simon Gaffey, international retail director, Karen Millen

Just days into the new year of the monkey, the giant Chinese dragon is already breathing fire with global markets shaken by ongoing tumbling growth figures and an uncertain outlook. But will these flames be enough to burn retailers already trading there, or planning to expand into the country?

China has long been lauded for its huge retail sales potential. Its rapidly expanding middle class and increasingly urbanised population are a ripe market for international and luxury brands: sales of consumer goods rose 10.6% last year, while online sales shot up by a third.

burberry shanghai

Burberry Shanghai

Checkered trading: Burberry experienced a mixed year in China with sales tailing off

But on a macro level, China has taken a turn for the worse. Growth of the wider economy slowed and global markets panicked after the government stepped in. In August, it devalued the yuan by 4% and wiped 10% off the value of two-thirds of Chinese listed companies. With consumer confidence hit, the slowdown has stung luxury retailers, such as Burberry, Louis Vuitton and Hugo Boss, which all announced falling sales in the country for 2015.

So far in 2016 there has been no respite from the bad news. In January, the National Bureau of Statistics of China reported that for the full year 2015, GDP grew 6.9%, down from 7.3% in 2014, representing the economy’s weakest growth in 25 years. Some analysts fear growth rates could be much lower than official statistics suggest. Goldman Sachs has predicted that the yuan could slide a further 6% in the next 12 months, as the government grapples with the weakening economy, adding that 2016 will be a year of “bumpy deceleration”.

“You’ve got to take the figures with a pinch of salt, as we don’t know how much the Chinese government is propping up the economy and there is a feeling it can’t go on,” says Daniel Morris, managing director of handbag brand Paul’s Boutique.

He says the retailer is taking a “measured approach to rolling out in China”, but that the territory remains a hugely important growth market. It launched its localised Chinese website and started trading in the multibrand Ave Showay store in the Qingdao Kelu Plaza at the end of last year. The company is now preparing to open standalone stores in biggest tier 1 and next-level tier 2 cities this year with Korean partner S&K Global Solutions, as well as joining online platforms, such as Tmall in July.

paul's boutique china website

Paul’s Boutique’s China website

The latest accessory: Paul’s Boutique launched a China website in 2015

“We are being very cautious and approaching it through a Korean partner, as they have more localised knowledge and employ Chinese people,” says Morris. “I wouldn’t do anything in China without local investment and involvement, you won’t get access to the right locations and into the systems.”

Despite this, he sees “some reason for confidence” thanks to the vast 1.4 billion Chinese population, the fact the economy is still growing – albeit at a muted level – and the way in which the slowdown is being felt first on higher-end product, which means shoppers may seek less luxury items, such as those sold by Paul’s Boutique.

Emma Rowlands, UK sales director for Kerry Logistics, agrees.

“There will be an impact and people may be a bit more cautious,” she predicts, as Chinese pensions and investments are squeezed, but there is still a vast population to tap into and a lot of disposable money. Rowlands believes Chinese consumers are “downsizing in spend”, moving from luxury to premium goods, and that the market for international fast fashion is also growing.

While retailers that are serious about Chinese expansion are not backing out of plans, they are “changing the way they set up their infrastructure in China”, she observes.

Rowlands cites House of Fraser and Debenhams as examples: both are seeking to enter second tier cities first, rather than core metropolises such as Beijing and Shanghai, as they are less penetrated by the big brands.

Chinese-owned House of Fraser is opening stores in Nanjing, Chongqing and Xuzhou – with Nanjing expected to open at the end of this year. Meanwhile, Debenhams opened a pop-up showroom in Chongqing in January with ecommerce partner Xigang Global Buy Centre in the Three Gorges Square scheme, where shoppers can try on product before buying online. These strategies enable retailers to take less risk with store portfolios.

Her advice for those entering the market is to focus on ecommerce, as this is a less risky investment and can be implemented alongside a few cautious flagships. It also has the potential to build the brand quickly by reaching more people.

Karen Millen operates nine franchise stores and concessions in China with distributor GRI and plans to open up to seven more this year. The business’s international director, Simon Gaffey, says the company is “confident we can ride out the slowdown”.

But he adds: “We will be looking again at the timetable, and challenging ourselves on location priorities and digital aspirations over the course of the year”. He believes “2016 will be a year of considered expansion rather than contraction in terms of physical and digital presence for many brands”, as the market is vast. “I don’t foresee aggressive divestment of property holdings from UK businesses.

“All levels of the market are exposed to the China slowdown, from luxury down to mass, so all brands will need to adjust and refine their approach both strategically and tactically. I expect many UK retailers and brands to reassess their strategies in respect of both model [direct, franchise or joint venture] and channel [standalone stores, concessions or digital] blend. A balance adjustment between offline and online is the most likely shift for some brands.”

He says retailers must have a reactive merchandise assortment that can flex to changing conditions and prioritise Chinese shoppers’ loyalty in China itself, rather than internationally, as consumers cut back on international travel. Financial services company Premier Tax Free found that, in December, UK sales to Chinese tourists fell 13%.

Karen Millen plans an exclusive Chinese Atelier Collection for the second half of 2016 to “help raise awareness and cement Karen Millen’s position” in China, and is developing a Chinese website to launch later this year or early next year.

new look in china2

new look in china2

New Look store in China

Under New Look’s rapid Chinese expansion programme, 85 stores are expected to be trading by its financial year-end in March – alongside its presence on ecommerce platform Tmall – and a further 50 are planned for the following financial year. The retailer’s group business development director, Steve Challes, says the expansion is “still on track”. He believes “China is still a compelling and huge market opportunity”, but expansion has to be done well and the retailer “will scrutinise all new investment cases carefully”.

He adds: “The slower growth makes it all the more important to always ensure a superb product range, offering great value – and to choose new retail locations with care. Mall footfall will always be the key dynamic.”

Clyde Buntock, vice-president of group sales and marketing at logistics firm Allport, says: “Retailers are discovering that it is no golden ticket and, just like in western markets, a cross-channel marketing strategy is required to gain any sort of traction in China. Online is dominated by thought leaders and bloggers far more than the West, so partnering with a digital strategist to tap into the bloggers and obtain brand advocacy must be a key focus.”

new look in china

new look in china

New Look store in China

He adds: “There has been an impact from the slowdown, and some traditional bricks and mortar-only, commodity-based retailers have been affected – but not those that have fully embraced digital, as can be seen from the statistics around Singles Day [on November 11].”

On this day Chinese ecommerce platform Alibaba, which helps UK brands enter the Chinese etail market, reaped $14bn (£9.6bn) of online sales – up 60% on the previous year.

Amee Chande, managing director UK, Ireland and Nordics for Alibaba, insists now is the right time to engage China’s growing middle class as demand for overseas brands increases: “Forward-looking, bold brands and retailers will see the current business conditions as an opportunity, and use this time to build brand loyalty with Chinese consumers.

“There is no doubt that China should still be at the top of UK brands’ and retailers’ expansion plans. Macro-economic issues shouldn’t be used as an excuse to avoid the China consumer market. We work with a wide range of British businesses across apparel and accessories that use our marketplaces as a starting point to test the China market. The resounding feedback from these brands and retailers is that they are encouraged by the positive feedback from consumers and by the demand for their products.”

So despite the negative headlines about China’s future potential, the overwhelming sense from the fashion retail sector remains one of cautious optimism. But businesses must stay alert to the potential risks and triple-check their strategy is in line with the ever-evolving environment.

Chinese tourists

The impact of the slowdown is not just being felt by those trading in China; Premier Tax Free found that in December, UK sales made to Chinese tourists fell 13%.

Simon O’Connell, head of insight at Premier Tax Free, says: “The most important factor for Chinese shoppers in Europe and the UK is currency. The problem UK retailers have is the pound is stronger than the euro, compared to the yuan, so Chinese visitors go on multiple visit trips and because they all have smartphones with price comparison sites, they can see where the Prada shoes they want are cheapest, and they have detailed lists of where to buy each item.”

He adds a lot of Chinese visitors enter the UK via Eurostar from Paris but following last November’s terrorist attacks, many cancelled their trips.

But he says only 5% of the Chinese population have travelled outside the country, so the growth potential for tourism spend is huge if the middle class continues to grow.

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