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July 5, 2012

Apparel Internet Retailing in China, Part Two – Competition Intensifies as International Players Want In

ShirtsIn this second of a two-part series, Euromonitor International looks at the international players entering the Chinese online apparel market and the potential challenges that both they and local players face.

International players want a piece of the action

On top of this activity from local players, most recently international apparel manufacturers have also turned their attentions to China's e-commerce market, which, given the opportunities present, is hardly surprising. Quick off the mark, Levi Strauss and Nike have both launched different product lines for online sales channels and, in so doing, reduced priced competition between online and store-based retailers. Chinese retailer Li Ning has also adopted the same approach.

Meanwhile, Inditex, which opened more than 100 new stores in China in 2011, 30 of which were Zara branded and reported annual profits of US$2.6 billion, up 11% on the previous year, has announced that it plans to expand its online business in the country. It is planned that Zara will launch online in China in time for this year's autumn/winter season.

Online but not on the high street

Most recently, department store Macy's has announced it is to invest US$15 million in the Chinese online seller VIPStore. Founded in 2009, VIPStore is one of the leading online retailers of luxury brands in China. Besides acquiring a minority stake in VIPStore, Macy's will begin selling private label merchandise in China next spring on Omei.com, a website that is operated by VIPStore and sells Western luxury and fashion goods.

Although Macy's offers international shipping on Macys.com to customers in China, the website is only available in English, which could deter Mandarin-speaking consumers. The company's Chinese site will, however, be in the local language and orders will be shipped to customers from warehouses in China, and thus will not be subject to the country's import duties and tariffs.

The move allows Macy's to enter the Chinese market without the expense of opening a bricks-and-mortar store and will give the retailer valuable insight into Chinese consumers' shopping habits and preferences, should it be planning to open stores in the country. In addition, although activity is high in online apparel retailing in China, the real rush is certainly still to come – meaning Macy's move is a timely one.

Success is not a given for new entrants

However, entering the Chinese e-commerce apparel market without having a physical presence in the country does bring its risks. Unlike Zara, with which Chinese consumers are already familiar, as yet Macy's does not have the kudos of other big Western brands in the country. Branded apparel is everything to young Chinese consumers, so without already established recognition through a bricks-and-mortar store, the Macy's website may have to work hard to convince Chinese consumers of the aspirational qualities of the brand.

Furthermore, because of the country's history with fake goods, many Chinese customers are prone to not trusting websites – although this is something that is waning as internet shopping becomes more commonplace. However, because of issues of trust, as well as for reasons of fit, many consumers prefer to try on apparel and shoes before then buying them online. These people may well be reluctant to shop at Macy's if the retailer can only be found online in the country. The website will, however, offer returns and exchanges without charging a fee – contrary to the norm in China, with most retailers not allowing goods to be returned or exchanged.

Plenty of room for growth but consolidation will come

Despite the country's position at the top of the world's internet users, only 40% of the Chinese population are online, and not all of these internet users have embraced e-commerce. In contrast, in the US, which has the second largest number of internet users globally, 80% of the population are online. In light of this relatively low percentage of internet users in China, there is clearly potential for continued growth. Throughout the forecast period internet usage is predicted to grow, reaching 56% in 2016.

While there is clearly vast continued potential for online apparel retailing in China, just as China's shopping streets are becoming increasingly crowded, eventually the same will happen in the virtual retail world. Not only will competition between brands intensify, both online and on the high street, but competition between distribution channels will also grow over the forecast period. While there is currently much to play for, with all of this online activity from local and international players alike, there can be no doubt that consolidation will come and over the longer term not everyone can survive.

Perhaps an early indicator of things to come, Chinese sportswear brand Li Ning, which holds 1% of the country's apparel market, has warned that profits in 2012 will see a 'substantial decline', primarily as a result of the brand raising its prices to compete head-to-head with adidas and Nike.

Most likely it will be the local players which will be driven out of the market – both online and on the high street. Meanwhile, those large operators with advanced logistics systems and outstanding customer service will not only survive, but also blossom in the coming years.

Differing prospects for local and international players

As major international players have the upper hand over local brands in terms of logistics and financial clout – including a greater ability to withstand squeezed margins should production costs rise – as well as benefiting from the kudos that comes with being an established international brand, this suggests the long-term future of Chinese brands both in-store and online may well not be plain sailing.

Both in-store and online, if Chinese companies are to compete with the major international players currently eyeing up their home market they must develop strong, unique, standalone brands rather than simply try to emulate what is proving a success for their international rivals. As the recent difficulties of Li Ning have proven, Chinese customers are not prepared to spend extra on a domestic brand if their budgets will stretch to a foreign one.

Looking ahead, as e-commerce further develops in China, international style-savvy brands that fluidly integrate their online and in-store platforms, adding m-commerce options into the mix, will almost certainly find the rewards far outweigh any investment. For apparel manufacturers the world over, the potential the Chinese e-commerce apparel market currently holds is a once in a lifetime opportunity.


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