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Retailers Tap China Market
To be sure, the effects of the latest recession continue to linger, as consumer spending trends have yet to show meaningful improvement. And retailers, like Charming Shoppes (CHRS), have been suffering as a result. In fact, despite the economy turning the corner, retail sales data in recent months suggest that consumers are not readily parting with their dollars. This is no surprise, given the housing market slump, high unemployment, and tight credit still facing Americans, prompting them to save more and spend less. With little relief in sight and the economy limping along, not to mention mounting fears of another downturn occurring soon, consumer spending is bound to be weak in the foreseeable future. A saturated market, with an overwhelming presence of stores nationwide, doesn’t help either. That means retailers will likely see domestic business slow further. To compensate for their stagnating or, in some cases, declining U.S.-based sales, many merchants are now seeking to expand abroad, in such emerging markets as Asia, where growth opportunities appear to be plentiful.
China is a country that is getting the attention of quite a few American companies these days. Indeed, what has been a hub for cheap manufacturing is now also becoming a destination for merchants to actually sell their products. With a flourishing economy and an enormous population, which now exceeds 1.3 billion people, the Asian country is arguably one of the fastest-growing markets of the world. (By comparison, there are only 310 million people living in the U.S.) The burgeoning Chinese middle class, estimated to be between 100 million to 200 million individuals in their mid-20s to mid-40s, is especially noteworthy, considering their rising incomes and, hence, increased buying power. And demand for goods among this group is quite high. This spells opportunity for American retailers. So, appealing to this segment is key.
No doubt, there’s quite an appetite for products epitomizing American pop-culture in China. Take McDonald’s (MCD), for example. The fast-food chain operator has established a prominent presence in that part of the globe, after opening its first restaurant there in the early 1990s. Likewise, Nike (NKE) has seen business take off in the most recent decade, thanks to the popularity of Air Jordan-sneakers and other sports gear, much of which is, coincidentally, manufactured there. The sneaker maker stepped up its expansion of retail locations ahead of the 2008 Olympic Games, moving further into inland China from the cities situated on the eastern coast. And discount retailer Wal-Mart (WMT) entered China through a joint venture in the mid-1990s before opening a couple of hundred stores there. Now, the retail heavyweight is hoping that sales in China, and in other emerging markets, will help to make up for its lackluster business on the home front.
Other companies are following suit. Teen retailer American Eagle Outfitters (AEO) plans to set up shop in Hong Kong and mainland China in early 2011, with three locations to debut in Hong Kong, Beijing, and Shanghai. Gap (GPS), too, intends to introduce its namesake stores in China, where it is betting on its casual apparel to generate sales. Department store operator Macy’s (M) is looking to get in on the game, as well.
But expanding overseas is not an automatic success, and in many cases can present challenges, particularly when targeting a market such as China, in which cultural differences are material. Companies seeking to penetrate foreign markets often must take into account several considerations to avoid potential pitfalls. From understanding local customer preferences and choosing the right place to set up shop, to adapting to local culture and developing a clear, effective marketing message, the issues facing newcomers in a foreign market are many. Extensive market research, therefore, is crucial, and usually can make the difference between success and failure.
Mattel (MAT), for instance, would probably want a do-over in Shanghai. Just last year, the mega toy maker launched a flagship Barbie store in that city, geared for women in their 20s and 30s. It unveiled a sexy-styled clothing line and cosmetics collection bearing the Barbie name. While the brand is popular, the company’s products (and the underlying message) didn’t seem to resonate all that well with its target market—young Chinese women—who tend to lean more towards dainty-looking, yet classic and conservative, fashions than highly trendy, flashy wear. Pricing was another obstacle.
In the case of Nike, however, its recent success in China can be largely credited to a carefully thought-out, but aggressive, ad campaign promoting American pop-culture by challenging the traditional Chinese way of life. After a few missteps, the athletic shoe company struck the right cord with its intended market—Chinese youth. Now business is booming there.
Understandably, given the sluggish domestic conditions and modest prospects for growth down the road, expanding to a region like China sounds like an alluring proposition. Although it is no easy feat, more and more U.S. companies are looking to the Far East to give sales a boost and remain competitive, while the economy at home recuperates slowly and unevenly.