China fashion retail market

International, local and regional fashion players are now filling up the space between the high-end/low-end fashion offer in China’s apparel retail sector.

H&M's newly opened Qianmen Avenue store in Beijing is rumoured to be taking CNY1m ($146,000) a day, Zara's aspirational collections are flying off the rails and Gap is gearing up for a 2010 entry. China's fledgling fashion middle market is growing fast.

The Chinese womenswear market was worth just over $31bn in 2008 and is expected to make annual growth of 10% a year for the next five years, reaching $46m in 2012 according to Howard Abe, partner at AT Kearney in Shanghai. The middle market part of this sector is doing even better.

"The mid-market has been growing at about 30% a year or more over the past five years," he says. "What's interesting about brands such as Zara and H&M is that they have a retail model that is closely tied to the market. They price competitively and they are clearly looking at the Chinese consumer and adapting."

Retail spending in China was up 15% in the first quarter of 2009 to CNY2.94trn ($430.4bn). Though there has been a slight slowdown in sales it hasn't been as bad as retailers were expecting, he says. "Retailers were very concerned in January and February, but the perceived drop hasn't been as bad and there is still double-digit growth.

"There is easily enough demand, and demand is increasing all the time. With the increasingly affluent consumer, if even 1% of 1.3 billion people can afford it, that is a massive market. The greatest challenge is not enough of the right product, the right sizing, the right location and the right managers."

Owing to the one child policy (which focuses family resources on one person), the high number of students and the new generation of white collar workers, 18-to-30-year-olds are one of the strongest consumer groups in the Chinese market.

Paul French, chief China analyst at Access Asia, says the "upper middle market" of international brands has been fuelled by the increase in young women going into white collar jobs. He says that foreign brands are still perceived as having more credibility for impressing bosses and colleagues.

A typical Chinese office worker would aspire to dressing in Zara or H&M, would carry a Louis Vuitton handbag and would wear some jewellery, he says. "They tend to go for basic colours… they don't want to stand out. Zara is popular because its cut is narrow, which suits the Chinese."
A taste for simplicity is backed up by AT Kearney's research. Monochrome colours made up 54% of the womenswear market in 2008. This trend is predicted to continue and in 2012 monochrome fashion will be worth an estimated $24.9bn, compared to colour at $21.1bn.

However, it is still a small percentage of the population who can afford to shop in the middle market. "In the urban cities, where 41% of the population live, there are many different consumer segments and only about 10% of those actually shop at these type of shops," says Abe.

"The average household in Shanghai spends about $3,000 on fashion products and of that $1,000 goes on apparel," he adds. Surveys show that consumers are most interested in value and quality.

Plenty more retail space is coming on line, according to Stead. "We look at a basket of 16 Chinese cities and at the end of 2008 there was 18.1 million sq m of retail space of a varying quality. At the end of 2010 we expect a further 7.5 million sq m in those 16 cities," he says.

May Lawrence, director at PricewaterhouseCoopers in China, says that many tier-one cities are now saturated with brands and tier-two cities are seeing the most growth. But she emphasises that retailers really need to understand the differences in consumers between provinces.

"The difference in sizing and colours between regions and cities requires a high level of awareness and sophistication to make the offer localised," she says. "Good brands will localise the design and colour and have to understand the social demographics."

Improvements in infrastructure as the Chinese government pours massive investment into road, rail and air travel mean that it is easier for retailers to transport product and for consumers to travel. For example a two-hour car journey from Beijing to Tianjin now takes just 29 minutes on the newly opened bullet train.

For Chinese brands competing in the middle market Abe says there are several challenges. "Competition is tighter and they are having to step back and say 'how do we differentiate our apparel?' Branding is still very much a foreign concept. Branding (in the Western market) means your consumer experience - there's nothing like that here."

Lawrence from PWC adds: "The biggest challenge is brand building, particularly for local brands. Getting the customer value proposition is key… all the other things filter down once you get that right."

French agrees: "Chinese companies don't know how to do branding and they don't want to pay." Instead he believes Chinese companies and entrepreneurs will buy brands. They have already bought local licences for Kappa and the whole of Tacchini and he predicts it won't be long before some major luxury labels are Chinese-owned.

Linking up with a brand ambassador who is popular with the Chinese is vital for marketing. H&M plastered the streets of Shanghai with billboards of Kylie Minogue before opening.

French says that Topshop could build a great business in China with the Kate Moss collection as the model is already a hugely popular style icon. Other Western celebrities popular with the Chinese include Victoria Beckham and Catherine Zeta Jones.

Perhaps the biggest problem facing some European and US retailers is underestimating the amount of involvement and expertise needed to understand the Chinese market and consumer.

2007 market share of top 10 branded womenswear sellers
· Etam - 8.27%
· Only - 7.77%
· Vero Moda - 6.79%
· Esprit - 4.61%
· Tangy - 1.54%
· Girdear - 1.51%
· E-Land - 1.36%
· Hua Xin - 1.04%
· Etam Weekend - 1.03%
· Zup'er mei - 0.62%
· Others - 65.46%

Ref: LIZ MILLER, WGSN 22.05.09