China’s potential as a land of shoppers was spotted long before Chanel, Louis Vuitton and Tiffany began erecting megastores in its biggest cities. An Englishman, writing in 1840, noted: “If we could only persuade every person in China to lengthen his shirttail by a foot, we could keep the mills of Lancashire working round the clock.”
While Lancashire’s mills may be long gone, the willingness of the Chinese consumer to buy shirts, bling and everything in between is propping up the world’s retailers.
“For the moment, China is extremely into very high-end, pricey goods – and the complete opposite,” says Claus-Dietrich Lahrs, chief executive and chairman of Hugo Boss, the luxury menswear group.
The group, part-owned by Permira, a private equity firm, lifted sales 73 per cent in the first nine months of 2011 in China and claims to be in “more or less all” the big cities with a population above 5m.
The story is repeated at a host of luxury brands: Burberry owes the run-up in its share price (and subsequent fall-off) to China, even though the country makes up just a 10th of sales.
Louis Vuitton, which once had a significant proportion of its sales in Japan, now has its sights trained on the Chinese, both in the domestic market and, as with the Japanese before them, when shopping abroad.
Analysts reckon the strong growth rates are resilient. HSBC estimates sales of global luxury brands in China have risen more than 30 per cent a year over the past four years, far outpacing income growth and suggesting it may keep growing in a slowdown.
In March, McKinsey, the consultancy, released a report that forecast spending on luxury goods by Chinese consumers would grow 18 per cent a year to about $27bn by 2015, when the market will surpass Japan, currently the biggest.
Nor is it just a question of fancy clothes and handbags. Analysts at IGD say the Chinese grocery market will be worth more than €1,000bn in 2015, up from €597bn in 2010, outstripping the US’s projected €843bn. Spurred by these dynamics, international supermarkets, led by Walmart of the US and France’s Carrefour, have charged in.
“Every multinational in the world is rushing into China to try to offset falling sales, but the reality is there are probably more losers than winners,” says Shaun Rein, head of China Market Research in Shanghai and author of the forthcoming book The End of Cheap China.
Walmart’s global revenue of $420bn makes its Chinese income of $7.5bn seem small, but the retailer is expanding there at a pace of 17 per cent a year. Moreover, China’s retail sector is ripe for consolidation and both Walmart and Carrefour stand to benefit when it happens. Tesco, a relative latecomer, has just under 100 hypermarkets and “lifestyle” malls and has set up a joint venture to develop retail spaces.
Yet the going is far from smooth. In the third quarter, Carrefour reported a slight dip in same-store sales in China, while Walmart has fallen foul of authorities in Chongqing over allegations that ordinary pork was mislabelled as organic. The fallout saw 13 Walmart stores in the south-west city closed for a fortnight and two store managers arrested.
Walmart subsequently announced that its chief executive for China and its top executive for human resources in the country were resigning “for personal reasons”.
The Chinese market also remains fragmented. Its top five chains have a combined market share of less than 10 per cent, compared with 76 per cent in neighbouring Hong Kong (where antitrust authorities bellyache over the concentration). But even in south-east Asian nations, the proportions are about a quarter to a third.
Foreigners are also tripping up in the way they approach China. Dale Preston, managing director for retail in greater China at Nielsen, says there is still a focus on “if I open another store tomorrow, I will get fantastic sales” rather than thinking about what consumers want.
Mr Rein concurs: “Companies are not catering to local consumers.” He cites a range of misdemeanours, from Marks and Spencer selling large-sized clothes in styles “too matronly and dowdy”, to B&Q, the DIY store, gaining a perception of being more expensive than its local peers.
These all stem from a misunderstanding of the Chinese shopper, he says. M&S, for example, he sees as targeting older women, when it is younger females who have money to spend.
Those, such as Gap, in the middle, between luxury and cheap brands miss out.
“Everybody is talking about the great middle class growth story,” he says. “But, here, there is no static middle class. People would be embarrassed to be viewed as middle class. They see themselves more as on the way to riches.”
Other difficulties include expansion. Having almost saturated top-tier cities such as Shanghai, retailers and manufacturers are launching into lower-tier cities, with big populations but lower wealth levels.
“That’s where western brands are starting to struggle, because there are not enough customers willing to buy these brands in those cities,” says Melvin Glapion, head of business intelligence at Kroll, the risk consultancy.
Another is that for all China’s buoyant growth, shakiness – from lower manufacturing growth to shuttered factories – is emerging. Consumers are cutting back and hunting for bargains.
Nielsen’s Mr Preston says high inflation, albeit now easing, has changed the way the Chinese shop. In addition to cutting back on luxury goods, meals out and travel, consumers are increasing the shopping they do at cheap online sites, he says.
Nor are the rich averse to a bargain, though their shopping is more likely to be done overseas. Buying designer goods abroad brings cachet, particularly if the item is only available in Paris, New York or Tokyo at a lower price, given high taxes at home.
This is one factor behind the metamorphosis of Hong Kong from eclectic shoppers’ playground to glitzy array of big brand names.
But none of these niggles is enough to deter hopeful retailers, particularly as their traditional stamping grounds of Europe slide into a deeper funk and the jury is out on US recovery.
