U.S. retailers seek to captivate China's consumers
— -- HONG KONG
A heavily traversed strip of central Hong Kong could be a billboard for U.S. retailers' China ambitions. On two blocks of Queen's Road, retailers including Coach, Calvin Klein and Esprit have set up shop. The latest American export: Gap.
In December, Gap plans to open a four-story, 15,000-square-foot flagship store in Hong Kong that the struggling retailer hopes will boost its sales in greater China. The store will be Gap's ninth in greater China and will expand its international presence just as it's preparing to close 21% of its underperforming U.S. specialty stores.
Gap's expansion is part of a growing trend by American clothing retailers to put down roots in one of the fastest-growing regions in the world. Other U.S. companies including McDonald's, Yum Brands and Wal-Mart have been aggressively expanding in this region for years.
"The American brands, everyone's coming to this market," says Redmond Yeung, president of Gap Greater China. The region "is a very critical component of our global growth strategy."
The International Monetary Fund predicts that China's economic growth will slow to 9.5% next year. But that's still far better than the U.S.' projected 2.9% economic growth.
"The U.S. market is struggling, not to mention Europe," says Gabriel Chan, a retail analyst at Credit Suisse. "Where else are you going to find growth? Going to Asia is the only option."
Opening a shop in Hong Kong — a special administrative territory of China — appeals to foreign retailers because it's a "big showcase" for the mainland, says Torsten Stocker, a Hong Kong-based partner at U.S. consulting firm Monitor Group. "You have so many (mainland) tourists that come here that it helps the brand-building."
In 2010, mainland Chinese accounted for 23% of Hong Kong's retail sales, according to Credit Suisse's analysis.
It's not Gap's first venture into the region. From 1997 to 2000, Gap sold its products in duty-free shops in Hong Kong. More recently, Gap had its clothing in Hong Kong and mainland China department stores, but found that the sale prices set by the franchisees were "quite expensive," said Yeung. This time, Gap is operating its own stores in Hong Kong and China, giving it ultimate control over the product and the price, he said.
It's not uncommon for multinationals to enter a new market and then pull back after realizing they have the wrong strategy, according to Isabel Cavill, a retail analyst for Planet Retail. "China is not an easy market," says Cavill. "When retailers enter, they tend to think that one size fits all."
Foreign companies exit China for other reasons as well.
Levi Strauss stopped making jeans in China in 1993 after finding what it called at the time contractors' "pervasive violation of human rights" at factories. It resumed manufacturing in the country in 2000 after finding factories that met its standards. Since then, it has also opened 630 Levi's stores in China.
Location matters
For many retailers, the difference between success and failure in a foreign market comes down to location and presentation.
Gap's strategy to open up a store in "prestigious" central Hong Kong makes sense, considering that the retailer is trying to revitalize its brand, says Chan. Gap has blamed weak domestic sales in recent years partly on clothing lines that failed to resonate with customers.
