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Fashion-Hungry Chinese Market Expected to Triple by 2020

This may come as a surprise: Chinese consumers are often more willing to drop a huge chunk of money on fashion—especially Western brands—than consumers in the US and Europe.

China Photos | Getty Images

With their wallets swelling over the past decade, China's fashion market is growing and it will continue to grow at a fast speed in the coming years, providing a good opportunity to foreign fashion companies entering this market, according the findings of a Boston Consulting Group report released last week.

China's fashion industry is set to become the world’s second fashion market by 2020, and will account for about 30 percent of the global fashion market’s growth over the next five years, the report said.

In 2020, total fashion sales in China are expected to be triple their current level, rising to more than RMB 1.3 trillion ($200 billion) from RMB 398 billion ($60 billion) in 2010.

However, there is a caveat for the retailers contemplating entering the burgeoning market—average spending by urban Chinese consumers aged 14 to 45 years old at this point is less than a quarter of the same group in the US and UK, mostly due to overall lower incomes in China.

“China's consumers' spend on fashion as percentage of income is on par with that of developed market,” said Vincent Lui, a partner at Boston Consulting in Hong Kong, who wrote the report. This suggests there is tremendous room for growth as incomes rise and the government encourages more consumption, he said.

The number of middle-class consumer households, those with an annual income of more than RMB74,000 ($11,400), is estimated to increase almost threefold to 140 million by 2020, from 50 million in 2010.

The report also expects the number of online shoppers to rise to 329 million in 2015 from 145 million last year. Apparel retailers may have the most to gain from this growth, as clothing already is the No. 1 purchase made by Chinese shoppers online.

"We have observed young consumers (below 25 years old) spending more than 40 percent of their disposable income on fashion."" -Partner, Boston Consulting Group, Vincent Lui

Chinese consumers have a strong willingness to spendon apparel, according to Lui.

“We have observed young consumers (below 25 years old) spending more than 40 percent of their disposable income on fashion,” he said.

Despite promising future sales, foreign retailers venture into the emerging market with great caution, a point that is highlighted by the relatively small footprint retailers have in the country.

Many American and European retail brands have very few stores in China. Spainish retailer Zara has about 70 stores that it is using to test the waters in China, according to the report. Others have even fewer. For example, Italian fashion house Benetton operates 25 stores, and Gap operates five.

However, even with only a few stores, foreign brands have shown they can be successful and also highly profitable.

In the case of Swedish clothing retailer H&M, China ranked seventh out of 15 countries where it operates in per-store sales—ahead of the UK, US and some other European countries.

H&M has 50 stores in China and it expects the country to be one of its largest expansion markets this year. The retailer entered China in 2009, but its brand was already well-recognized by Chinese fashionistas long before that. They learned about foreign fashion brands on international trips or from movies and television shows such as "Sex And The City" and "Gossip Girl" and fashion icons such as Victoria Beckham and Kate Moss.

“About 40 million international trips are made by Chinese now and that number expected to reach 100 million by 2020,” said Lui. “Combined with Internet exposure, Chinese fashion consumers have pretty high awareness of brands.”

In fact, many Chinese consumers prefer Western brands, which are usually known for their quality and designs, and are willing to pay a premium for the same product than the brands' homemarket price.

As a result, when H&M'smuch-anticipated store opened in Beijing in 2009, it attracted more than 600 fans who lined up outside the store in rain. The limited edition Matthew Williamson’s collection sold out within 10 minutes.

Like H&M, many other brands are more familiar to Chinese shoppers than the companies would previously assume, especially among consumers in high-tier cities such as Beijing and Shanghai and among the younger generation.

That may be one reason why Chinese shoppers buy so much apparel online. Fashionistas are often willing to pay an extra fee to a broker who buys Western brands overseas and mails them to them because the brands they are seeking do not sell in China.

Questions? Comments? Email us at consumernation@cnbc.com.

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