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Retailers target gold in China

With Sir Philip Green rumoured to be taking Topshop to China, what are the prospects for UK chains in Asia?

If speculation that Sir Philip Green will take Topshop and his Kate Moss for Topshop range to China is true, the pound signs must already be flashing for the retail tycoon.
Rumours suggest that Moss herself could pocket up to £25 million from the deal, which could see Green open sites in Shanghai’s Super Brand shopping mall and other locations in Beijing and Hong Kong.

But with China having a population of more than 1.3 billion people and a booming economy, the amount of money that Green himself could make from the venture is anyone’s guess.

According to Retail China, which promotes and operates international retail brands in China, the country’s rising middle class is driving unprecedented spending.

Most of China’s “new rich” are under 35 and have greater international exposure than previous generations. In 2005, China’s upper-middle class accounted for only 10% of total consumer spend. Retail China expects this to rise to 28% in 2010 and to 64% by 2025. As for fashion, it made up 5% of total consumer spend in China in 1995, but this is set to double by 2015.

“China is a market that no one can ignore,” says Gill Moore, managing director for Marks & Spencer, Hong Kong. “The population alone gives retailers huge potential and there is a big emphasis on shopping being a leisure activity, particularly in Hong Kong.”

M&S will open its first store in mainland China in Shanghai in the autumn, after taking its total to nine shops in Hong Kong – the “springboard” for mainland China according to Moore – in July. “Our retail sales in Hong Kong continue to be extremely strong,” says Moore. “It plays an important role in our total international sales.”

The opportunity for UK retailers entering the Chinese market is certainly there for the taking. According to Verdict Research, the clothing and footwear market is worth US$88.5 billion (£46bn). But to be successful, UK retailers and brands must do more than shift their home strategy to Chinese soil. “UK brands need international appeal to succeed here,” says Karim Azar, assistant general manager at Hong Kong’s Ifc mall.

“M&S’s bread and butter mainline collection has a wide appeal so it works here, but the likes of Reiss would struggle. Burberry, on the other hand, is great.”

Booming business
Sales at Ifc, whose mix of fashion retailers includes French Connection, Zara, Mango, Agn賠b and Patrizia Pepe, are up 25% year-on-year. Azar says a shopping mall location “opens doors” for retailers looking to expand into mainland China. With their complete leisure offer – including cinemas, gyms and restaurants – and with the often wet and humid conditions outside, shopping malls are a haven for Chinese shoppers.

Last year, luxury brand Burberry achieved double-digit like-for-like growth across its stores in Hong Kong, its third largest market in Asia. Its sales from Asia rose by 17% in the year to March 31, 2007 and the market now accounts for more than 20% of its turnover.

A Burberry spokesman explained: “During the year, significant progress was made in realigning the region under one strengthened management team – historically it reported as eight separate businesses. In South Korea, for example, the distribution of the brand has been refined, with luxury handbags now making up 40% of sales (up from 17% a year ago) and concessions are being relocated and refurbished – an initiative that will continue in the current year.” Azar also points to Zara as a role model for UK retailers wishing to profit from the booming Chinese retail market. “Zara’s quick time to market is appealing to the Hong Kong customer,” he explains. “Retailers also need to demonstrate clear branding and marketing.”

On the product front, M&S, which anecdotally has a more premium appeal in Hong Kong than in the UK, tweaks its ranges to satisfy the Chinese consumer. “Our stores
are substantially smaller in Hong Kong and that gives the brand a slightly different feel,” explains Moore. “Men’s formalwear, especially shirts, are very important for that market and we have to make small adjustments like taking off two inches from the sleeve length.”

Lifestyle brand Ted Baker, which has two stores in Hong Kong, also adjusts its product mix to suit Asian consumers. “We not only offer a broader size range, with an emphasis on smaller sizes, but also the type of product mix can differ from the UK,” a spokesman explains. “The Hong Kong customer prefers to dress up, which suits Ted’s current profile.”

Hong Kong customers’ preference for dressing up is tied to how much they are willing to spend – currently, there does not seem much scope for value retailers wishing to enter the Chinese market, with shoppers favouring more premium products. “Customers are not price sensitive in Hong Kong, preferring quality over fast, disposable fashion,” says Ted Baker’s spokesman. “The customers are discerning. They are educated shoppers, in tune with fashion brands and brand positioning, making way for one of the biggest luxury markets in the world. For a bridge brand such as Ted this creates a huge opportunity.”

English appeal
Unlike Azar, the spokesman believes that Ted Baker’s “Englishness” translates well in the Hong Kong market, particularly with its expat community. “It has been a challenge to try to find a means to make our English humour and quirky nature translate into all markets, and we are continually reviewing our campaigns to make sure they work in all territories. But I think English eccentricity translates well in Hong Kong,” he says.

“As we don’t advertise we need to continue to communicate the brand by word of mouth and clever marketing. We hope to make our windows and giveaways understood and implemented worldwide, as this is a key way of communicating to our local customers.”

Yet despite the success of international retailers entering the Chinese market, it is a territory that is still relatively immature, particularly for local brands.

“China is still emerging and has an aspirational culture where everyone wants a Louis Vuitton bag,” says Karen Fifer, managing partner of recruitment firm Heidrick & Struggles in Hong Kong. “Global retailers have raised the bar, to the point that Hong Kong has stolen Japan’s crown as the fashion epicentre of Asia, so local retailers are having to up their game too.

“In fact, private equity firms are sniffing around local retailers, which are historically family-owned and have become sleepy. Investors see an opportunity to inject creativity.”
A key problem facing fashion retailers that want to open in China is one of recruitment. As an immature retail market, China’s talent pool is relatively small, so Fifer’s advice to international brands is to “shop locally”.

“But it is astronomically expensive to send someone from London, who is used to a certain salary, to China,” Fifer explains. “Retailers need to consider candidates from across the globe. They should also be an employer of choice. Zara, for example, offers staff the opportunity to travel for periods of time. It also positions itself as a funky brand with opportunity for progression.”

This may be the case as it stands, but with China’s economy going from strength to strength, perhaps it won’t be long before the UK dips more deeply into the Asian talent pool.

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