Cotton Incorporated

Reaching the Chinese Consumer

China continues to top the AT Kearney Retail Apparel Index, which shows the top 10 emerging countries viable for the retail sector. Strong growths in population and in income make it an increasingly attractive market for western brands looking to expand. Yet reaching the Chinese consumer poses unique challenges.

According to Euromonitor International, Chinese clothing expenditures are projected to nearly double within the next 10 years, from 1.2 trillion in 2012 to 2.2 trillion in 2020. Even in 2011, a year of slower than predicted growth, Chinese real GDP still amounted to 51.1 trillion RMB.

And while the Chinese population is expected to grow 2% by 2020, income growth will continue to outpace population growth — which means more consumers with more buying power. Per capita disposable income is expected to grow 75% between 2012 and 2020, according to projections made by Euromonitor International.

As the population continues to grow, though, it is also shifting towards more urban areas. This stands to benefit western retailers first expanding into larger cities, since urban consumers tend to spend more on discretionary purchases like apparel and textiles.

In 2012, about half of the Chinese population lived in urban areas. By 2020, that figure is expected to rise about 20%, to more than 800 million. “Rising incomes in a growing population, coupled with a shift to more urban areas, means Chinese consumers will become an increasingly strategic demographic for western retailers,” says Kim Kitchings, Vice President, Corporate Strategy and Program Metrics. “International brands stand to benefit as Chinese consumers continue to have more discretionary income, and trading up opportunities certainly exist as consumers may venture away from domestic brands in favor of aspirational, western ones, according to our research.”

Click to See Chart Full-Sized

Click to See Chart Full-Sized

One hurdle, though, is awareness. Today, less than half of the Chinese population (42%) has access to the Internet. But by 2020, that percentage is expected to rise to 55%, according to Euromonitor International. And while the majority of apparel shopping currently happens on a consumer to consumer (C2C) level, through e-commerce and marketplace sites, that is also expected to change rapidly. By 2016, iResearch projects that business to consumer (B2C) sites will account for nearly half of all online sales in China.

“Internet penetration and policies limit consumers today, but that is changing rapidly and with it the very nature of e-commerce in China itself,” says Kitchings.

Brand Futures

Currently, the Chinese apparel market is highly fragmented. According to the Cotton Council International and Cotton Incorporated Chinese Consumer Survey, the top 10 brands account for just 11% of total market share in women’s wear, and 19% in menswear (based on unit volume purchases), posing an opportunity for international brands. And while domestic apparel brands certainly dominate purchases today, research indicates that international brands do hold significant appeal to Chinese shoppers, a factor that may only continue to grow.

According to the Chinese Consumer Survey, the majority of Chinese consumers say international brands are not only more fashionable, but also enjoy a better reputation than domestic brands. And while most consumers do say they prefer domestic brands overall, those who prefer international brands are more likely to say they plan to trade-up in apparel purchasing next year, and are more likely to draw clothing inspiration from media sources like magazines, television shows, celebrities, and the Internet.

Click to see chart full-sized

Click to see chart full-sized

“Those Chinese consumers who prefer international brands are perhaps a minority right now, but they may prove to be a serious boon to Western retailers, given their savvy and willingness to seek inspiration from outside media sources like advertising,” says Kitchings. “And given the projections, this demographic should only continue to grow.”

To capitalize on this fragmented shopping sphere, though, retailers will need to hone in on a customized approach. Adidas, for example, has five stores in Wuhan, in central China, and each sells different merchandise to better differentiate themselves. Those brands with a varied portfolio also stand to gain in China, allowing them to appeal to diverse consumers while still keeping sales in-store.

“Larger western apparel brands with bigger portfolios can capture market share more effectively by appealing to a wider range of consumers,” says Kitchings. “But retailers will need to ‘market globally, implement locally,’ especially as we expect growth in apparel spending to come less from well-known Tier 1 cities like Shanghai and Beijing, and more from lower tier cities in the western part of the country.”

Spending Shifts

Indeed, research by McKinsey and The Boston Consulting Group indicate that growth in apparel spending will come not from Tier 1 shoppers, but from those in lower tier cities. In fact, according to the Chinese Consumer Survey, 61% of Chinese consumers in the western part of the country say their incomes will increase, compared to 37% of Chinese consumers in the eastern part.

Despite rising incomes and better access to apparel brands, Chinese consumers remain staunchly pragmatic, and are known to have one of the highest rates of savings in the world. According to the Chinese Consumer Survey, impulse buying behaviors have not risen in more than a decade. Encouraging spontaneous shopping may be a tall order for western retailers, who may be better off creating a need for new apparel purchases in order to drive sales.

“Chinese consumers are extremely quality conscious,” says Kitchings. “Almost all say quality is important to their clothing purchases, and nine out of 10 say they are willing to pay a premium for better quality clothing, according to the Chinese Consumer Survey.”

And just as is the case among US consumers, so too do Chinese consumers equate quality with fiber content. More than seven out of 10 Chinese consumers define “good quality” clothing as the feel or durability of the fabric/material, according to the Chinese Consumer Survey. To that end, they too, have noticed diminished quality in their apparel purchases, a result of fiber substitution away from cotton. Fifty three percent of consumers say there are fewer cotton items available, while 41% say clothing does not last as long as it used to and 35% say the quality of clothing offerings has declined just from last year, according to the Chinese Consumer Survey. “According to our research, 79% of consumers agree cotton clothing tends to be higher in quality than synthetic clothing,” Kitchings says. “Retailers that continue to substitute away from cotton may find Chinese consumers are unwilling to pay the price.”

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