Staying in fashion is a tough sell

International fashion brands are looking to the expanding China market as the global economy slows - but turning a profit isn't easy

PUBLISHED : Monday, 27 August, 2012, 12:00am
UPDATED : Monday, 27 August, 2012, 5:04am

International fashion labels have turned China into their main battlefield this summer, opening one new store a week as they bid for the spending power of wealthy consumers in the world's No2 economy.

Prominent among the labels expanding their presence in mainland shopping malls at a time when slow economic recovery in the United States and a worsening debt crisis in the euro zone have forced Western consumers to tighten their spending, are Italy's MaxMara, and Gap, the iconic American fashion brand.

But it's not easy to make money in China, where rapid rent rises have forced some global retailers such as Nokia, once the world's No1 mobile phone maker, to close their stores.

Earlier this month, Abercrombie & Fitch launched its first store in Hong Kong's Central district, after agreeing to a monthly rent of more than US$1 million - several times more than the last tenant, Shanghai Tang, owned by Swiss luxury product giant Richemont Group, was paying for the space.

In the circumstances, some analysts wonder if the high rents leave room for profitable trading. They cite, for example, the price tag on an A&F T-shirt - one of its big selling products - of around HK$400 and point out that the company would need to sell more than 20,000 T-shirts a month to just cover the rent on its Hong Kong store.

In addition to rent, fashion firms are often big spenders on marketing and advertising.

Earlier this year, fashion label Louis Vuitton agreed to pay around HK$20 million a month to rent space for its new flagship store in Causeway Bay, one of the busiest shopping areas in Hong Kong and a must-go destination for many mainland travellers.

Small wonder Redmond Yeung, Gap's president for Greater China, identifies sky-rocketing rents and property prices as the main challenge facing international brands seeking a foothold in Hong Kong to capture the spending power of mainland visitors.

"But as long as there are still people [stores] who pay the rent, there must be a reason. It's all about supply and demand. Retailers and landlords always have a love-hate relationship," said Shanghai-born Yeung, who held senior positions at American retail giant Best Buy and fashion firm Ports before he joined Gap in early 2010.

"If a landlord asks for a rent that no one can pay and still make a living, that will be a problem and eventually no one will rent the place," he said.

But this was not happening because competition for prime locations among retailers remained intense.

Yeung didn't give sales figures for Gap's stores in Hong Kong or on the mainland and would only say he felt "comfortable" about the performance of the new stores.

Other business leaders who once thought rents in China were too high have since admitted they were wrong, and whatever the cost, Chinese consumers cannot be ignored.

In 2008, Paul Smith, the designer and founder of his namesake fashion brand, told the Financial Times in an interview that the China market was "extremely dangerous", as rents were too high and most of the 1.3 billion Chinese population only wanted "clothes to cover their bodies".

But in May this year, London-headquartered Paul Smith announced it would re-enter the mainland market by opening a new store in Tianjin near Beijing in September, after it had pulled out of the mainland in 2007 due to undisclosed losses made in the early years of its operations in China.

Luigi Maramotti, chairman of Italian fashion brand MaxMara, told the South China Morning Post recently that he believed consumers on the mainland were now better able to afford luxury products, thanks to the country's fast economic growth in the past decade.

He also believed that Chinese spenders had gained a greater understanding of fashion since more and more of them were travelling abroad for work, study or just holidays.

"Today, the [China] story … is a story of everybody's big expansion," said Maramotti, the son of the late Achille Maramotti, founder of the closely held company. "The Western world is now in trouble," he added.

Both MaxMara and Gap plan to open one new store a week in the next six months.

John Rindlaub, president for the Asia-Pacific region at Wells Fargo, the largest bank by market capitalisation in the United States, told the Post that he was concerned about the pace of expansion of many global brands in China, though he understood the reason behind those moves.

"Many US company CEOs tell us that maybe 10 years ago the story in China was all about manufacturing in China, and then exporting to the US," Rindlaub said. "Now the story in China is that they still manufacture in China but sell to local Chinese consumers."

A senior executive of a global brand that is ready to expand into China told the Post on the condition of anonymity that many brands have to prepare for "a period of losses" when they come to China because brand recognition took time, and Chinese consumers were not loyal to just one or two brands.

"But we have to be there. It's just like those foreign banks in China. How many of them can really make decent profit? What we care about is the future of China," he said.