Attempting to offset dwindling growth in America, Gap executed a grand opening in China last year. However, a year on it has failed to grab much of the 16 percent retail sales growth in the country.
It only has four stores, compared to Japanese chain Uniqlo’s 76. Uniqlo plans to have 1,000 stores in China over the next decade while Gap has not announced expansion plans. If Gap is going to gain any traction, which is even remotely near Uniqlo’s, then it will have to address serious challenges facing its image and business model.
Gap’s first problem in China is its brand image. It is not positioned as a luxury brand, hence could not demand its share of the $13.6 billion worth of luxury goods sold in 2010. Nor is it seen as a value for money brand by the majority of China’s price sensitive shoppers.
In other words, Gap has fallen into the middle class image trap like many foreign retailers including Marks and Spencer. These retailers tried to target China’s 350 million strong and rising middle class but have surprisingly attempted to evoke the same images and aspirations of America’s middle class. China’s definition of middle class is very different from America’s.
Unlike in America, no one in China views themselves as truly middle class, where they and their offsprings will work in their blue-collar jobs and watch their salaries only marginally beat inflation rates and visit Disneyworld every few years. Instead, everyone believes they or their children are destined to go from rags to riches. After all, just about everyone knows someone or even has a relative who was a farmer 10 years ago and now owns multiple villas and drives a Mercedes. There is a “can do” attitude that is electrifying the country, similar to conditions that gave rise to the baby boomers in post World War II America.
Many analysts have argued that Gap would have performed better had it introduced its premium Banana Republic line to appeal to the type of consumers that are buying Gucci or Coach . I disagree – it is very hard for new premium brands to penetrate the market. The market still demands luxury brands that are iconic like Zegna or Louis Vuitton, as displaying one’s success remains one of the main drivers of the luxury market and these established names are sure markers of prestige. Because luxury as a sector did not really exist in China 15 years ago, everyone is still scared about buying the wrong brand or wearing it incorrectly.
Even true luxury brands like Italian clothier Brioni and high-end Spanish shoemaker Manalo Blahnik that have less brand recognition are having problems building sales momentum as most Chinese consumers don’t know what to make of them. Banana Republic would not only fall short of the high bar for luxury in Chinese consumers’ minds, it would also face competition from scores of local casual wear brands like Septwolves that are similar to it in style and quality but sell for cheaper prices than you can find at Gap.
Gap should have introduced the cheaper Old Navy line into the country. Right now, it is fast fashion chains like Uniqlo, H+M, and Zara that are taking the market by storm. These brands introduce new products every week or two and are seen as good value rather than simply cheap. In this category, most potential competitors are local firms like Metersbonwe that simply don’t have the style and branding yet.
Gap has also made the mistake of opening up too many standalone stores. My firm recently interviewed 1000 women between the ages of 24 and 35 in 6 cities to see what kind of shopping environment these women preferred. The vast majority told us they prefer shopping in department stores and malls. These shopping channels serve as destinations – women can spend a whole day in these areas, shopping, watching movies, and eating. Very importantly, they simply don’t like walking outdoors because of the heat and chaos of China’s streets and are unlikely to make a special trip to a store. For this age group, many purchases are made on impulse and with groups of friends. Unless you are a luxury retailer like Gucci or selling must-have products like Apple, it is very difficult to draw crowds independently. For this reason, retailers like Gap should stay away from flagship, standalone stores to build market presence. More, smaller locations rather than fewer, bigger ones is the better strategy.
Gap is by no means facing the trouble that Mattel’s Barbie store did (it eventually shut) or American Apparel, which is having serious problems for creating fashion lines that were far too sexy for the local market in China. Younger Chinese women like cutesy: think Hello Kitty or Snoopy. But in order for Gap to capture what is becoming the must-win market for retailers, it is going to have to consider changing its sales channel strategy and either crafting a new image or introducing brand lines to the marketplace.
Shaun Rein is the founder and managing director of the China Market Research Group (www.cmrconsulting.com.cn) a strategic market intelligence firm, and is based in Shanghai. Follow him on Twitter at @shaunrein.