The word “China” is frequently on the lips of fashion industry executives these days, because that nation is a growing source of supply of goods for the U.S. and European Union markets, and because a new middle class is growing up among its 1.3 billion residents, creating a potentially huge target market.
Yet, for all the talk about China, many Westerners don’t really know the country all that well.
To illustrate that point, Bonnie Brooks, president of the Hong Kong-based Lane Crawford Joyce Group, a retail conglomerate that operates 243 stores across 32 markets of Greater China — encompassing Hong Kong, Taiwan, Macau and the mainland — recounted a story.
“We were in Shanghai with the Vogue team during a photo shoot and I mentioned we were opening a six-floor megastore that included designer shops from Emporio Armani, Burberry and others in the center of Chongqing, a market with 32 million people,” she said. “The writer and the fashion editor both gasped and said they couldn’t believe there was a city — in fact, the largest in the world — that they’d never heard of.
“Welcome to the new China,” she continued. “It’s no longer a question of Shanghai or Beijing.”
China has emerged in recent years as an increasingly attractive retail market, and has attracted major fashion brands, including Louis Vuitton, Giorgio Armani, Prada, Gucci, Tiffany, Polo Ralph Lauren and many others.
Many of those brands have expandACed into China with an eye toward capturing the yuan of its growing middle class. While most observers agreed that such a middle class exists — a fact that’s borne out by rising retail spending — its exact size is a matter of contention. Citing figures from the Economist magazine, Brooks said the Chinese middle class currently numbers 250 million people — about 40 million shy of the current estimated population of the U.S. — who earn between $15,000 and $57,000 a year. That’s well above the per capita gross domestic product of $5,000.
Other speakers at the summit provided varying estimates of that population, from 17 million to 100 million. Still, all agreed that it appears to be growing rapidly, in step with the nation’s rapid industrialization.
Related Articles
You May Also Like
That industrialization is causing enormous demand for managers and other professionals, driving up wages for skilled workers even as China’s exports depend on the low wages of unskilled workers from its rural provinces who are willing to take on manufacturing jobs.
“Our people are in high demand due to the rapid market expansion and are being poached as quickly as we train them,” Brooks said. “Junior buyers today are recruited as brand managers tomorrow for double the salary. You can expect to spend in the range of $50,000 U.S. for a regional brand manager in China, but with a much lower sales base than in the U.S., even though we’re open 365 days a year.”
Those workers in turn are spending their money on everything from cell phones to Chanel fashion. Brooks said retail sales in China currently represent $558 billion a year, and are growing at an annual rate of 13 percent. By comparison, net retail sales in the U.S. are $3.78 trillion, she said.
Brooks’ company operates the Lane Crawford, Joyce Boutique and Pedder Group chains, in addition to managing a growing armada of shopping malls around China.
For U.S. brands and retailers seeking to expand into China, she said, it’s critical to understand that the organization of the nation’s retail industry is completely unlike that of the U.S.
“Department stores are very different from Western formats, largely because they are leased out, with no owned or bought merchandise,” she said.
In other words, there aren’t buyers to call on at major department store chains, or orders to fill. Rather, the vendor pays a fee for occupying a set amount of space in the store, and staffs and manages the space itself, in a model more like a shopping mall.
“The bridge brands normally found in a U.S. department store have not penetrated the [Chinese] market yet,” Brooks said. “Typically, department stores have luxury brands on the ground floor and local brands on all the floors above.”
Doing business in China also presents several challenges that are less common in the U.S. and EU, in terms of rampant counterfeiting and significant corruption, she said.
On counterfeiting, Brooks said, “We’re constantly battling it and we have a lot of legal help on that. It’s a country without many regulations, and it’ll be very interesting to see what happens over the next couple of years as more and more brands get quite serious about their distribution….There will be a lot of work for lawyers. It’s a wild country.”
Turning to the issue of corruption, she said, “The other investment that is difficult to budget and account for is relationship, or guanxi money, especially for government officials. First is the commercial bureau, next is the consumer bureau, then the fire department — who offer the final store-opening approval certificates — and of course the customs departments. Your relationships with these people can be expensive in time, also, as goods can sit in customs for weeks if you don’t know the right people or how to maneuver through the endless red tape.”
Brands trying to establish themselves in China also face more mundane difficulties, Brooks said. For instance, the Chinese tend to make their purchases with cash — rather than traceable credit cards — and are often “hesitant” to provide their names or contact information, making traditional American direct marketing techniques difficult to apply.
Setting up a shop in China is quite expensive, she noted. Store opening costs run to $200 a square foot and the combination of high rents and low sales means that rent can represent 25 to 35 percent of sales. In its first few years, a store typically generates about $350 a square foot in sales, a number that can rise to $700 for a mature store in a good location.
Choosing locations can also be a challenge, she noted, and rising costs in the major cities like Beijing and Shanghai mean that returns can be better in lesser-known cities, such as Chongqing, Harbin and Shenzhen.
“These markets can now deliver the same sales per square foot, but with much lower operating costs,” she noted.
Lane Crawford Joyce Group, she noted, thinks of China as four major population centers: central China, including Chongqing and Chengdu, the largest but not the wealthiest; the northeast, ranging from Beijing to Harbin; the east, from Shanghai to Wuhan, and the south, Shenzhen and Guangzhou. Shoppers from the southern Pearl River Delta region, in particular, are driving the retail growth of Hong Kong, where prices can be 30 percent lower than on the mainland, due to different tax systems.
She also noted that tastes — and climate — vary significantly from region to region: “Shanghai is more fashion-chic, let’s say New York, while Beijing is more Washington conservative.”
Despite the sizable hurdles, China has significant allure, Brooks said.
“One owner of a large Italian group of luxury brands told me he doesn’t care if they open in the wrong place. He said, ‘Just open and close it later if we need to,’” she said. “It’s a cavalier land with a pioneer spirit.”