January 2011

From Mao to Wow: Winning in China's booming apparel market

By Todd Guild and Grace Hu

 

China is already the second-largest apparel market in the world, reaching $110 billion in 2009. The opportunities are huge, for two reasons.

 

First, the market is fragmented: The top 10 players account for only five to six percent of total sales. And second, it is growing fast – 16 percent in the last five years, and projected to continue to grow at 11 percent. Among higher income groups (those with monthly household income above 8,000 RMB, or $ 1,202) McKinsey estimates spending on apparel will grow 30 percent a year. All told, McKinsey believes that apparel spending in China could reach $200 billion by 2014. By comparison, U.S. apparel sales in 2009 were $287 billion, but growth is only about two percent.

 

To succeed in China, however, requires understanding, planning and execution.

 

The dynamics of the market

 

Potential: China weathered the global recession relatively well. In 2009, GDP grew more than eight percent and is on track to grow 10 percent this year. Incomes are rising and the middle class is expanding. These are important trends, but it is also important to remember that China remains a heterogeneous market. Consumer preferences differ from region to region – not least because of vast differences in weather conditions -- and even within a region.

 

Retailers have deployed multiple strategies to achieve national leadership. For example, Nike began in China in the 1980s with a presence in Tier 1 cities like Beijing, Guangzhou and Shanghai.  In the following decade, it conducted a measured roll-out, mainly expanding in Tier 1 and Tier 2 cities. From the early 2000s, Nike expanded aggressively, establishing  a national footprint, including Tier 3 and 4 cities;  it now has about 6,000 stores.

 

In contrast, the country’s leading casual-wear brand, Meters/bonwe, started in Zhejiang province, just south of Shanghai, in 1995. Beginning in the early 2000s Meters/bonwe expanded through franchising, and now has about 3,000 stores nationwide, mostly in street boutiques, 80 percent of them franchised. It controls quality by closely monitoring the stores and providing training for key personnel.

 

Within the sector, too, it is worth recognizing particular areas of potential. Casual wear, which comprises 60 percent of clothing purchases, is growing 19 percent a year, for example. This reflects a shift toward occasion-based dressing – that is, wearing different outfits for work, social occasions and at home. Children’s apparel is another boom category, growing at an annual rate of 15 percent; casual and sports footwear is growing almost as fast, and could reach annual revenues of $7 billion by 2013. 

 

Consumers: It was only about 30 years ago that mainland Chinese began to shed the "Mao suit" in favor of Western clothing. Today young people set the trends, driving the apparel market with their preferences for upscale sports and casual wear. Two characteristics stand out.

 

First, Chinese consumers consider research and comparative pricing essential. Traditional word of mouth, buttressed by modern innovations like blogs and chat rooms, are crucial information resources. More than 60 percent get information online.

 

Second, Chinese consumers are brand conscious, but not brand loyal. A 2010 McKinsey survey found that 45 percent of Chinese consumers think well-known brands have better quality. About 70 percent of apparel sales in China are branded, a percentage that is growing. But the Chinese focus on value for money means that there is little loyalty to a specific brand; consumers are constantly looking for the best deal. Even so, stores that feature a single brand are expected to enjoy the fastest growth in the future because they are the most important retail format. Established brands, both domestic and foreign, are expanding aggressively into specialty stores. Other foreign brands are hot on their trail. Even for latecomers, then, there is still a lot of potential in investing in a brand.

 

Channels: Department stores are still an important channel in China, accounting for more than 30 percent of volume, and even more so for premium brands; consumers consider department stores, which are concentrated in the best shopping areas, a premium shopping experience.   But department stores act more like landlords in China than merchandisers. Brands lease floor space from them and are responsible for staffing and maintaining the concession. Competition is intense, and low performers are pulled after three to six months.

 

Although online is a key research technique, it is not yet an important sales channel, accounting for only 1 percent of the market. But that could change fast. A 2010 McKinsey survey found that 37 percent of Chinese consumers who have shopped for apparel online ended up buying; information-savvy younger consumers who use computers in their daily lives are leading the online charge. Apparel purchases command 36 percent of the Chinese online digital wallet, the biggest single category. Uniqlo has enjoyed early success through partnership with the leading e-commerce player Taobao Mall. It has an official Uniqlo store in Taobao Mall, and also sells products via its own website powered by Taobao. Other players are also testing the water, and starting to extract consumer information from the online channel.

 

Weaving a winning strategy

 

Retailers who want to succeed in China must excel in six areas: 

1. Deliver quality merchandise
Quality normally accounts for 50 to 70 percent of brand success, and brands in China are no exception. Leaders consistently deliver quality clothing for each season. Given the lack of brand loyalty among Chinese consumers, a brand can easily lose its market positioning. Baleno and Giordano for instance, used to be the leading mass casual wear brand, but both failed to continually renew themselves. Meters/bonwe and Semir have taken over their top spots. 

 

2. Manage multiple format growth

There is no dominant channel in China. Consider walking on "multiple legs" including flagship stores, street boutiques, stores-in-stores, department store counters, franchising and online. Each channel addresses different consumer needs and attracts different traffic.

 

3. Excel in franchising

Given the rate of growth, companies must consider franchising. This is particularly important for boutique stores, store-in-store, and tenant strategies with department stores. In order to keep pace, companies need to wrap their minds around a growth rate of more than 30 percent a year.

 

4. Sustain the brand 

In managing a brand, companies need to be deliberate and clear -- or they risk losing its value. Companies should position themselves relatively high in the China apparel market, and consider moving away from lower-value positioning. Consider the experience of Uniqlo. It first entered China in 2002 with a low-price strategy. But because the Chinese expectation was that foreign brands have higher quality and higher price tags, the strategy was not successful, and Uniqlo then repositioned itself as a fashion and premium brand that offered value for money. Uniqlo successfully piloted the concept in Hong Kong and then rolled it out in China’s Tier 1 cities. As of 2010, Uniqlo has 55 stores in China mainly in Tier 1 and Tier 2 cities; it plans to open 1,000 stores all over China in the next 10 years.

 

In China, consumers tend to undervalue the atmosphere of a store and customer service. Merchandise quality/design, and pricing/promotion are far more important factors, and some retailers who invested significantly in store layouts and infrastructure have not reaped the rewards of their investment. However, store format innovation is rapidly developing and vastly improving the quality of the in-store experience, and winning apparel players need to deliver the brand experience in store.

 

5. Retain talent

Any operation is only as strong as its weakest link, and in China one common weakness is that frontline store employees fail to consistently deliver a quality in-store experience. Chinese staff are in general very capable, but not naturally enthusiastic about serving customers. Companies should expect a 30 to 50 percent turnover in frontline staff, as people change jobs to make more money.

 

Better retail companies seek to retain staff by designing compensation plans tailored for the local economies, and establishing career development programs.  For example, Denmark-based Bestseller has developed online training programs and leadership workshops called the "Store Manager Academy."  Esprit created a career path and mentoring program for its shop assistants, and offers them the highest compensation among their peers. South Korea’s E-Land screens to avoid job-hoppers and offers compensation linked to tenure.

 

Chinese consumers only spent about $100 each on clothing in 2009, according to McKinsey research – about one-sixth of that of consumers in developed markets. But they are poised to spend more -- much more. Companies that want to win a bigger share of this spending need to be aggressive to keep up. Doing so might take them out of their comfort zone -- but the opportunity is well worth the risk.

 

Todd Guild is a director in McKinsey’s Tokyo office and Grace Hu is an associate principal in the Shanghai office.

 

 

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