China expansion not without its challenges
Gap's plans to triple its store network in China next year are hardly surprising given the country's booming consumer market, demand for western brands and, of course, the retailer's own strategic focus on global growth. But it admits the move is not without challenges.
Speaking on an earnings call earlier this month, chief executive officer Glenn Murphy told analysts that performance at its Chinese stores has been "very positive" from a sales perspective.
But he warned: "You have to invest in China. It's a busy market. There's lots of brands coming in, and you've got to put marketing money into that business in order to make sure that, long term, you have a sustainable, healthy, profitable brand."
This month marks the US specialty clothing retailer's first anniversary in China, during which time it has expanded to four stores in Shanghai and four in Beijing. Today (25 November) also saw the opening of its first flagship in Hong Kong, with new stores set to open in Shanghai, HangZhou and Tianjin over the coming weeks.
Indeed, growth is on track to triple the number of Gap stores in greater China from 15 at the end of this year to 45 by the end of fiscal 2012.
"China is definitely our longest term investment," CFO Sabrina Simmons also said on the call, adding: "When we started several growth initiatives in 2010, we knew China would take the longest to become accretive." Overheads, headcount, administration and aggressive marketing are all costlier than initially planned, she said, as the retailer tries to build its presence.
"Brand awareness is really strong. The acceptance of American style is very positive," Murphy added, but "because a lot of new brands are coming into China, [we're] really putting money behind marketing."
"And the performance of the top line right now has given us the indication, the motivation to double our store count from the 15 we're going to end with this year to opening 30 new stores in 2012."
With the recession leaving the retail landscape in developed markets with fewer stores, heavier discounting and more fickle customers, it's not surprising that western apparel retailers are now firmly fixing their sights on emerging markets.
China is top of the pile for many, according to a recent study by global management consulting firm AT Kearney, thanks to its large population and growing disposable income. With a compound annual growth rate of more than 20% in recent years, apparel retail in China has grown at a rapid pace, and this trend is expected to continue for the next five years.
The Economist Intelligence Unit (EIU) also notes that overall annual retail sales in China grew 17.2% in October and it is forecasting a five-fold increase in the number of households earning over US$50,000 between 2010 and 2015.
But, as has been asked on just-style in recent weeks, will a business formula that's running out of steam at home still have mileage overseas? And wouldn't companies be better served by considering other "low hanging fruit" - less visible and less prominent markets like Korea, Singapore, Thailand and Vietnam?
As Colin Welch, president and CEO of investment banking group Financo, told us: "It's still not clear to me that the developed brands have figured out an appropriate strategy to crack those [emerging] markets, so it's still very much exploratory testing of the waters."
Of course there are some runaway success stories. Aggressive expansion in emerging markets, particularly China has paid off handsomely for the likes of Burberry and Coach. International expansion helped Burberry lift its first-half revenues by 29% to GBP830m and a 41% profit hike to GBP117.2m. And a double-digit comparable store sales increase in China contributed to a 14% rise in first-quarter net profit to US$215m at US-based footwear and accessories business Coach.
Likewise, Adidas expects China to be its second largest market behind the US, and expects these two countries and the Russia/CIS market to contribute 50% of sales growth by 2015. And the Esprit fashion brand in September said China, the company's second largest market after Germany, would be a focus as it pulls out of North America and sells its retail businesses in Spain, Denmark, and Sweden.
However, while a report by the Boston Consulting Group in July forecast that China's fashion market is expected to triple to more than CNY1.3 trillion ($204bn) in the next decade, it also noted that to win in the future, companies need to adapt their China strategies in response to new demands from consumers.
Having a 'big' brand name, a low-cost supply chain and the ability to rapidly develop a retail footprint through franchising, are no longer enough, it said.
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