Retail’s Middle Market Hits the Middle Kingdom

Related entries: Consumer Market, Corporate News, General

Just the other day I posted about continued strong retail sales, and the high-end department stores that are being developed for the consumer elite in China (see “What’s in Store in the Luxury Department?”) . At the same time China Law Blog picked up an interesting Wall Street Journal article on the middle-market consumers (see here: China’s Middle Class Now Shopping For Western Brand Clothes). China Digital Times adds to the topic with a post about middle-class makeovers from an article in China Daily. As Chinese consumers are a constant fascination, more details can be found below.

The Wall Street Journal (WSJ) quotes the consulting firm Kurt Salmon Associates as saying that “the market for casual clothes in China is projected to grow by an estimated 10% annually to reach $58 billion in sales by 2010”. Combined with less restrictive regulations for foreign investors in the retail sector, this makes for an attractive market. Awareness of the opportunities is also growing, and a number of middle-market retailers have recently moved, or are about to move, into China. According to WSJ these include:

    • Hennes & Mauritz AB (planning first Asian stores in Shanghai and Hong Kong next year).

    • VF Corp. (owner of Lee jeans)

    • Kellwood Co. (maker of Phat Farm and Baby Phat lines).

    • Inditex SA (owner of Zara and Mango).

Already established with over 50 outlets by the end of this year is Jones Apparel Group Inc., which is also reported to be adding Nine West, Anne Klein and Jones New York outlets. Levis has around 200 locations. And there are many others. Challenges for these firms include such issues as:

    • Positioning – the low end is too price-competitive and, as a foreign brand they can try to position higher than at home (Levi’s sells for as much as double the home price). It is likely to be a difficult balancing act.

    • Costs – import duties and logistics costs can squeeze profits (although many are already manufacturing in China, some operate under restrictions in relation to domestic sales). Setting up operations and building brand awareness can also be significant costs, even though shop-floor salaries may be relatively low.

    • Sizing – figures in China differ from in the west, and are changing (thanks to higher-calorie diets of the sort provided with foreign fast-food chains).

    • Styling – a lot of fashion concepts are being tested out by some newly emerging consumers, and tastes (let alone climate) can also vary from place to place. Inexperienced local consumers may need more help in making the right selections.

In relation to the style challenges of the less-sophisticated consumer, help is at hand, according to China Daily in an article (or rather, PR piece) about image consultants. Ximan Colour Image Centre is reported to be one of a growing number of businesses offering image consultations – from RMB2,600 to RMB10,000 (US$325 – US$1,250). Even if only partly true, it still says a lot about the ability of consumers in the big cities to spend on consumer goods and services.

WSJ also says that: “Even more daunting, per capita gross domestic product in China averaged $6,800 in 2005, a small fraction of the $41,800 average in the U.S.” As I pointed out in my post on luxury goods, while the national per capita figures make for good reading, they do not reflect any practical reality for retailers. It is important to focus analysis on the accessible market, and to cut out the parts of the population (e.g. in the countryside and smaller cities) that are not yet realistic consumers (it is also important to note that the quoted GDP figure for China is at Purchasing Power Parity or “PPP”).

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3 Responses to “Retail’s Middle Market Hits the Middle Kingdom”

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