The purchasing power of Chinese consumers is soaring, and many want to spend that money on fashion. If Western retailers do their homework, they could cash in on China’s burgeoning market.
H&M has done it. Burberry’s doing it. And now Marks & Spencer wants to give it another shot. For international retailers and brands, expanding into China is a no-brainer. After all, this is a country with a population of more than 1.3 billion, and a rapidly growing middle class. The pickings are rich.
But it is also a tough feat to pull off. The Chinese high street is already highly competitive. Alongside the established indigenous brands and retailers, there are a few global names such as Adidas that got in there early, as well as an array of unlabelled or counterfeit goods whose relative cheapness is a compelling proposition to many shoppers.
Moreover, China is a vast country. Achieving a credible national footprint requires a lot of bricks-and-mortar investment, and it is also difficult to make an impression on a national scale. This may sound obvious but international retailers that get it wrong often fail because they have used a one-size-fits-all strategy. Instead, they would do well to consider different regions with the same level of nuance as retailers would different
A major key to understanding the Chinese retail scene is understanding how it developed. Whereas most of the Western world saw a slow and steady evolution from independents to a mix of branded or own-brand chains and department stores, Chinese retail was dominated by the latter category of retailer until the 1990s.
Department stores were the place most Chinese shoppers would have gone for daily goods, ranging from food and beauty products to clothes, and are still a major feature of the retail scene.
However, they traditionally operate in a different way to their UK equivalents. Instead of brands and retailers striking deals with the department store operators who essentially curate them, space in Chinese department stores tends to be auctioned off to the highest bidder, as long as they sell the right category of product and are broadly aimed at the department store’s target market.
Some retailers are trying to change this. For example, department store operator Beijing Yansha has deliberately introduced more international brands and is supplementing its retail operation with services such as hairdressing.
However, Chinese department stores are still dominated by homegrown names. According to research company IBISWorld, 60% to 80% of clothing sold in mid-market Chinese department stores is made in the country, and department stores continue to account for 14% of sales of Chinese-made clothes in China.
Nonetheless, department stores are a speedy way for international retailers to grow their networks fast and have been a key plank of Mango’s strategy, for example. As with all the more successful chains, Mango is partnering with different companies in each province to take advantage of their local knowledge, both in terms of the best sites but also the relationships they will have built up with local real estate operators.
However, the commercial clout of department stores is dwarfed by another, altogether more unwieldy route to the end consumer. Nearly a third (29.4%) of garments manufactured in China are sold at markets dubbed ‘wholesale markets’, but which actually cater to both wholesale and retail. They mix factory seconds with knock-off and made-to-order goods, with relatively competitive prices that are especially important to China’s rural or less
well-paid shoppers. This is where the merchandisers at the Marconi factory in Shenzhen (see p24) tended to buy their clothes, for example.
It is a model that is gaining rather than losing traction too, thanks to the rise of online shopping in China, where sites such as Taobao have phenomenal reach and are used as a major conduit by wholesale businesses. Prices are cheaper and easier to compare, and the infrastructure for handling goods is actually astonishingly good, prompting many young Chinese shoppers with slightly less money at their disposal to shop exclusively online.
Not that online is exclusively the domain of discount goods: while Taobao is often referred to as China’s equivalent of auction site eBay, it is actually much more complex. In March, Gap took a shortcut route to establishing itself online in China by opening a store on Taobao. You can hardly imagine it doing the same with eBay in the UK.
The third major plank of Chinese garment retail is ‘speciality stores’, a term which encompasses own-brand high street giants such as H&M or the new generation of multi-brand indies that has sprung up in Shanghai in the past two or three years. Together they account for 14.5% of sales of Chinese-manufactured goods, although they would probably chart much higher if international goods were taken into account.
As might be expected, the indies tend to sell to China’s well-heeled fashion cognoscenti who are seeking something more exclusive than the branded goods that fly off the shelves of the fake goods warehouses as fast as they do out of luxury stores, and often the product they sell is astonishingly expensive.
High price tags
But even the multiples are relatively pricey. There is little or no discrepancy between the price of an H&M top in Shanghai and the same top in London, despite the fact that average incomes and the prices of comparable goods from local brands are considerably lower.
But maybe H&M is doing the smart thing, given Chinese incomes - and production costs - are growing and it wants to be there for the long haul. The average Chinese person spends relatively little on clothing at the moment but there is a steep upwards trend.
According to IBISWorld, per capita spending on clothing for urban residents in China rose 45% from $60.40 (£36.80) in 2000 to $87.80 (£53.80) in 2005, while the same figure for rural residents grew 56% from $11.60 (£7.07)in 2000 to $18.10 (£11.03) in 2005. Figures for 2010 are not yet available but Drapers was struck by the number of people in both Shanghai and the factory districts around Suzhou and Shenzhen that claimed to spend around half of their income on clothes.
Orient excess What fashionable Chinese shoppers are spending their money on
Ken Yu, owner of designer retailer Ripple Fit, Shanghai
A lot of our customers come from Chongqing and Beijing on business. They are aged between 28 and 45, and spend an average of 10,000 yuan (£937) a month on clothes. A lot of Chinese are getting richer and richer. They pay a lot for Hermès and Louis Vuitton etc, but they are starting to look elsewhere and prioritise what is right for them in terms of style.
Peter Shi, store manager at New Balance, Shanghai
I spend 1,000 yuan to 2,000 yuan a month on clothes for my girlfriend and buy clothes for myself every one or two months. I shop by brand more than style. I like Gap and Nike. Girls are more focused on price than brand.
Yoyo Ko, manager of luxury indie Le Lutin, Shanghai
Foreigners don’t want to pay our prices so we target young, fashionable locals. A lot of them are housewives or very rich students. Our prices start at 700 yuan for a T-shirt and rise to 5,000 yuan for a cocktail dress. Shanghai people spend more and more of their money on clothing, with handbags especially important, but my customers care more about style [than the brand]. They don’t even know where the brands are from all the time, they just want to look cool.
Monica Dai, manager of premium womenswear indie Les Lucioles, Shanghai
Most Chinese like European brands more than Chinese ones because they are looking for something different. Shanghai women spend a lot of time and money on looking nice, more than on other aspects of their lifestyle. Not many people in Shanghai like [directional] looks but that will grow.