Dressing China

All the world’s apparel manufacturers and retailers have joined the race to clothe China. While sportswear manufacturers such as Nike and Adidas have been around for a while, “fast fashion” retailers—such as Spain’s Zara, which has opened around 70 stores in the country in the last three years, and Denmark’s Best Seller, which retails through 3,000-plus stores in over 300 cities—are also expanding rapidly now.

It’s easy to see why. Incomes are rising quickly in the world’s most populous country: The percentage of the Chinese population earning between 10,000 and 24,000 renminbi a year (between US $1,200 and $3,500, in terms of 2010 exchange rates) rose from 11% in 2004 to 58% in 2010.

The Chinese are also becoming more aware of fashion. According to a 2007 McKinsey & Co. survey, only 12% of consumers said they keep abreast of the latest fashions. Three years later, the number had jumped to 28%. Meanwhile, the number of people agreeing with the statement “I build my wardrobe around different occasions and needs” rose from 36% in 2010 to 45% in 2011. The era of the all-purpose Zhongshan suit is over.

Unsurprisingly, apparel spending in China has been growing by a robust 16% per annum. In 2009, sales totaled $114 billion, making China the world’s second-largest apparel market behind the $287 billion U.S. market. That’s just a start, though; the Chinese spent only $96 a year on a per capita basis on apparel compared to the Americans’ $935 and the Japanese’s $891.

Casual apparel accounts for 58% of clothing sales in China today. That’s why both local and multinational players are scrambling to expand. For instance, Japan’s Uniqlo will open 1,000 new stores by 2020 while China’s Semir will set up 800 outlets over the next two years.

Apparel retailers in China face three challenges:

Geographic. Some companies, like Zara, are present only in the 30 biggest cities. They’re skimming off the cream, and, to generate economies of scale, targeting some of the smaller urban centers around the metros. By contrast, local brands like Semir and Metersbonwe—the largest player by revenues—are trying to capture consumers in hundreds of cities by opening thousands of stores.

Ownership. Franchising speeds growth and entails less capital, but the risks include inconsistent execution and inefficient inventory management. The use of company-owned stores puts recruitment and people management in the company’s hands. However, it’s tough to select store locations and adjust layouts and assortments in hundreds of cities. To overcome this hurdle, some companies have adopted a hybrid strategy. Bestseller, for instance, has set up both franchised and company-owned stores.

Online. Apparel is China’s most popular online shopping category, accounting for 36% of consumers’ wallets, according to our 2011 survey. For instance, Uniqlo started selling clothes online only in 2009, but six months later, sales on its Taobao store exceeded 10% of its China sales (excluding sales from the company website). The data suggest that 60% of Uniqlo’s online customers are based in places where the company doesn’t have a physical presence.

Regardless of the approaches they adopt, retailers have to tailor their value propositions and offerings to the variations in consumer preferences across China. That applies even to companies focusing only on building a presence in the biggest cities, where tastes in clothing differ greatly from metropolis to metropolis. Succeeding in China is never easy.