US Retailers Aim to Win Over Chinese Consumers
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US retailers have long suffered with flat-to-slow growing domestic sales thanks to a sluggish economy. There is no easy solution for them as the developed US economy has no hope of growing at a rate like the world's emerging economies. So some forward thinking US retailers decided to move into the emerging markets.
One obvious target in the emerging world is the largest developing economy, China, where consumers spent an estimated $2.6 trillion in 2011, a growth rate in excess of 15%. China is not an easy market for foreign retailers to enter and be successful, so some US firms have cleverly decided to use a 'back door' with which to enter the Chinese market. That 'back door' is China's most international city, Hong Kong.
It is a logical move. In 2010, 23 million visitors came to Hong Kong from the mainland, a rise of 25% from the previous year. The visitors spent $13 billion in the city, much of it on shopping trips, accounting for a nice chunk of the $42 billion in total retail sales in the city in 2010. Although Hong Kong retail sales are tiny in comparison to the mainland, it is significant in another way.
Goods in Hong Kong have a special cachet for Chinese consumers. If a company sets up shop in Hong Kong and is successful there, it can then attract the leading distributors in mainland China to work with them to distribute their goods throughout all of China. Some familiar US retail brands have done just that and established a presence in Hong Kong and are worth a look by investors.
One of the first retailers to make a move into China was luxury goods brand Tiffany & Company (NYSE: TIF). It first set up shop in Hong Kong in the early 2000s (due to no taxes on luxury goods) with an eye on capturing mainland Chinese consumers. That strategy seems to have worked as the company expects that 18 percent of its global sales will come from China this year.
In a similar vein, luxury goods company Coach Inc. (NYSE: COH) also established a presence in Hong Kong and has since moved into the mainland. It will have roughly 10 percent of its sales come from China in 2012. Coach has become such a familiar name in the region that the company is even listing its stock on the Hong Kong Stock Exchange.
But luxury retailers aren't the only ones making the move to Hong Kong. Last year Abercrombie & Fitch (NYSE: ANF) ousted a long-standing luxury retailer, Shanghai Tang, out of a prime location in Hong Kong by offering to pay three times, or nearly a million dollars, the rent paid by Shanghai Tang for the location. Meanwhile, it plans to close 180 stores in the US over the next three years.
The Gap (NYSE: GPS) just opened its first Hong Kong store in November on Queen's Row, the busiest street in the city. That was an interesting move since it followed the company's move to cut 20 percent of its North American network due to an extended sales slump in its domestic market. The Gap also opened stores in Beijing and Shanghai about a year and a half ago.
Finally, just over a year ago, American Eagle Outfitters (NYSE: ANF) opened its flagship Asia-Pacific store in Hong Kong and has since opened stores in mainland China. With its recent struggles in the US, it understands the region's importance to the company's future, American Eagle Outfitters even opened a third corporate office (in addition to Pittsburgh and New York) in Hong Kong.
For investors in retailers' stocks, the key to future performance in the years ahead may lie in how well these companies are able to expand their business overseas and in the world's largest consumer market in particular. The key to future success in China starts with being successful in Hong Kong. As an executive of privately-held retailer Forever 21 said, “Hong Kong is the gateway to China, we feel it is important to establish our brand within China.”
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