Marks & Spencer will open its first store in mainland China on Thursday (2 October), hoping to shore up flagging sales at home with new sales in one of the world's fastest growing fashion markets. But while Chinese consumers are increasingly interested in foreign brands, will rising inflation and slower income growth dampen their enthusiasm to spend? asks Dominique Patton.

British group Marks & Spencer's 45,000-square-feet store in Shanghai will be its biggest so far in Asia, demonstrating its confidence in Chinese purchasing power.

Chinese consumers are certainly spending more on clothing than ever before. In August, clothing and textile sales increased by 29.5% compared with last year's same period, according to government data.

The market for mid-priced casual wear is performing especially well. Spanish brand Zara says its growth in sales in China is double the average growth across the group's other stores.

This is partly because this segment of the market is still very fragmented and undeveloped in contrast to the "very mature" luxury and low-cost segments, says Mike Mikkelborg, chief executive of new European brand Cold Method and previously manager at SourceGo, a China-based sourcing firm. 

Danish group Bestseller has a strong presence in the country with its Vero Moda and Jack & Jones brands while the luxury designers are all present with major stores.

But relatively few foreign chains have yet set out to target China's fast-growing middle class. 

"We identified a big gap between the mass market and luxury segments," said Mikkelborg, who is overseeing a 54-store roll-out across China for Cold Method.

Li Xin, an analyst at Beijing-based Citic Securities, says that foreign casual brands like Zara and H&M are successful in China because their style and price meets consumer demand.

"If the new M&S store can make their products fashionable and highly individual then they will get a good reception from local consumers."

Creating an identity
China's middle income level is now coming close to where it is in Europe, with monthly earnings around RMB15,000-30,000 (US$2,191-4,382). "Some of this money is being used to create an identity," says Mikkelborg.

Cold Method, currently looking for sites to open its flagship stores in China, will target consumers aged between 24 and 35, typically university graduates who are already in their second or third jobs.

"They want to express themselves through brands. They want to show they're successful in what they're doing and have money to spend," says Mikkelborg.

Li agrees. "It's a good time to open shops in China because people are getting more and more interested in brands."

The right location
Marks & Spencer's location on Nanjing Road West, Shanghai's leading shopping street, will be key to its success.

Rents for prime locations in Shanghai and Beijing are comparable to capital cities in the West and these spots are "brutally hard" to get. "It's just as hard as getting a location in Manhattan in a booming economy," says Mikkelborg.

But the position of a flagship store is important in building the right brand message, he adds.

In terms of sales however, the big opportunities lie in second tier cities. Consumers earn less in these cities than in Beijing and Shanghai but incomes are growing fastest here. 

Zara has already spotted this trend and just opened new stores in Tianjin and Harbin, with plans to open in Shenzhen and Dalian by the end of the year. All cities are ports with flourishing economies. 

Marks & Spencer is likely to be slower at expanding in China. Last year chief executive Stuart Rose said the firm was taking a long term view on the market, expanding "site by site" in order to manage risk.

Economic slowdown
These risks have certainly increased recently. Despite suggestions last year that China's economy would decouple from the West during a slowdown, it now looks clear that Chinese consumers will be significantly affected.

"Income growth is slowing because of weak exports and potentially lower employment," explains Ken Peng, vice president of economic and market analysis at Citibank.

Li at Citic Securities agrees. "It's true that both foreign brands and domestic clothing brands are growing this year. This reflects last year's income situation. But we predict that it's going to be down next year."

Even those unaffected by the fall in exports are likely to be more cautious about spending, after a year in which inflation hit an 11-year high at 8.7%.

Though it has since dropped sharply, there are signs that consumers are becoming more sensitive to pricing. A McKinsey survey out this month suggested that Chinese shoppers are markedly more value-conscious than last year.

Still, if foreign retailers can ride out these short-term risks, there is plenty of opportunity for growth over the long-term.

"Private consumption is now only about a third of the economy," explained Citibank's Peng.

Increasing urbanisation is going to boost this, while rising labour costs and improved social security should also give consumers more confidence to spend rather than save, he says.

"Most growth in China will be driven by investments for the next year or so but then the development of the consumer market will kick into a new stage and become very attractive beyond 2010," predicts Peng.