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Should China Still Be a Key Destination for US Retailers?

As Gap Inc. neared the opening of its 101st namesake store in China last November, the San Francisco-based company was coolly confident in its growth prospects there. And why wouldn’t it have been? The milestone—which included Gap and Gap Outlet locations—was reached less than four years after the first store debuted in 2010; sales had grown to nearly $500 million in that time and e-commerce expanded by about 60 percent year-over-year between 2013 and 2014.

Old Navy China debut
Old Navy promoting its grand opening in China.

“We continue to be excited by the response of Chinese customers to our brands,” Jeff Kirwan, president of greater China for Gap Inc., said in a statement at the time. “Both Gap and Old Navy have been warmly embraced, giving us confidence to continue our expansion in this vibrant region.”

Indeed, Old Navy was on a roll, too, racking up seven stores in five cities, as well as a shop on Tmall (Alibaba’s platform for selling foreign brands that are new to the Chinese mainland), before its freshman year was over.

But fast-forward to the company’s recent call with analysts to discuss its second-quarter earnings and Arthur Peck, chief executive officer, felt the need to defend his Chinese strategy: “Obviously, over the last couple of weeks, there’s been a lot of news coming out of China. And it’s an important area of long-term growth for us,” he said, adding, “I don’t see [the currency devaluation] really giving us any significant headwinds, as we think about the continued growth of the China business…As far as I’m concerned, no change in strategy, no change in direction, no change in intensity, as we continue to look at China as a significant long-term growth opportunity for the company.”

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For the uninitiated, the People’s Bank of China rattled global stocks in August when it let the value of the yuan slide. It was seen by many as a last-ditch effort to boost the country’s exports and bolster the economy by making domestic goods cheaper, and thus more attractive. But all it’s succeeded in doing so far is sending financial markets into a tailspin and making products from other countries more expensive for Chinese people and companies to buy.

It’s no surprise, then, that Gap’s investors were feeling anxious. With sales of its namesake brand stumbling on home turf (second-quarter net sales in the U.S. were $795 million, down from $850 million in the prior year’s period), the company was putting a lot of already-fragile eggs in China’s basket.

Bebe is another clothier banking on making big bucks off of the emerging Chinese middle- to upper-class consumer as its sales suffer stateside. Last week, the women’s retailer reported a second-quarter loss of $0.05 per share and simultaneously announced plans to open as many as 150 retail and wholesale distribution points in Greater China, Hong Kong, Macau and Taiwan over the next five years. As part of an agreement with retail management firm Longgoal LLC, it’s looking at Shanghai and Bejing as sites for potential flagship stores.

“As style and design are among the top priorities for sophisticated women in China, we are confident that Bebe’s bold design and contemporary fashion will appeal to the ever-changing lifestyle of the confident and sexy modern Chinese woman,” said Celine Chen, Longgoal’s chairwoman.

But given the recent volatility in the Chinese market, should the country still be a key destination for U.S. retailers looking to expand overseas?

“In the near-term, the devaluation of the currency on its own may have very little negative impact on brands selling into China. In fact, there is always the possibility that a weaker yuan may keep China’s tourists at home, adding some additional disposable income in the local markets which can actually help sales,” said Chen Grazutis, equity research analyst at Bloomberg Intelligence.

Melody Kong, a business analyst at Shanghai-based China Market Research Group, echoed these sentiments. “Retailers such as Gap or Old Navy have loyal consumers in China who are not highly price sensitive. They care more about the design of products,” she said, noting, “As long as these retailers provide the right products and use the right marketing strategy, they can still gain because China is one of the biggest retail destinations in the world.

“At the same time,” Grazutis noted, “The underlying reason for a weaker currency may be a little more worrisome for brands as the slowing economy and steep losses in the stock market may pressure consumer confidence and its appetite to spend.”

On a separate but related note, even if consumer confidence isn’t affected, retailers need to step up their service. According to Forrester Research’s recently published CX Index 2015, 80 percent of brands in China are delivering mediocre customer experiences.

Based on a survey of 9,000 shoppers, Forrester measured 60 brands across five industries on the quality of their customer service and its impact on customer loyalty; traditional retail and e-commerce brought up the rear in the rankings. Ryan Hart, a principal analyst at Forrester, commented, “Meeting the basic needs of customers is the first step before embarking on loyalty programs, which could lead to winning customer emotions by making them feel more valued.”

Fast fashion giant Forever 21—which raked in $3.9 billion in revenue last year—has opened 12 stores since it first entered China in 2012, in Beijing, Chongqing, Hangzhou, Shenzhen, Wuhan, Shanghai and Wuxi. “As one of the world’s largest consumer markets, China offers us endless opportunities to further expand,” Linda Chang, Forever 21’s general merchandise manager told China Daily last year. And it makes sense, given that the bulk of the brand’s clothing is made there.

Calvin Klein and Tommy Hilfiger, both owned by PVH Corp., have also lauded their booming Chinese businesses. In 2010, China was Calvin Klein’s fastest-growing market, with sales projected to increase as much as 30 percent year-over-year. Most recently, Calvin Klein International’s second-quarter revenue increased 7 percent on a constant currency basis—with a 3 percent increase in comps—that PVH said was driven by growth in China.

Tommy Hilfiger Beijing Fashion Show After Party (Photo: Business Wire)

Tommy Hilfiger, meanwhile, restaged its Fall ’15 runway show in Bejing in May to commemorate the brand’s 30th anniversary as well as the opening of its largest store on mainland China. “Since we entered the Chinese market, it has been an important region for the expansion of our global business,” Daniel Grieder, CEO of Tommy Hilfiger, said in a statement. “Today, with our solid foundation of more than 100 stores across the country, we are able to embark on a number of exciting strategies focused on unlocking the growth potential, sharing our all-American heritage and expanding our brand presence and business.”

But not all U.S. brands are feeling so buoyant about their prospects in the Chinese market. It’s been nearly a year since hipster haven Urban Outfitters opened its first Asian store in Hong Kong after a three-year wholesale distribution deal with World Co. Ltd., but the retailer has yet to announce any concrete plans to expand into China. In fact, with net sales increasing 4 percent in the quarter ended July 31, it seems most focused on growing its presence in existing markets by bettering the in-store experience and improving its omnichannel strategies.

Should over-eager retailers take a leaf from Urban’s book and, for now at least, pump the brakes on any Chinese expansion strategies they have in the works?

As Grazutis put it, “At the end of the day, China remains one of the world’s largest apparel and footwear markets, with an emerging middle-class that continues to grow. Brands that may take a more cautious approach in upcoming months, trying to see where things are headed without taking unnecessary risks, but I expect the region to remain a growth engine for many of them.”