Europe's largest clothing retailer looks to expand in China

Spain's Inditex, Europe's largest clothing retailer by sales, is looking to expand in China, attracted by the rising spending power of consumers in the fast-growing Asian country.

The firm, whose chains include Zara and Bershka, will focus its growth in Beijing, Hong Kong and the coastal city of Shanghai, Inditex chief executive officer Pablo Isla told an annual shareholders' meeting last month.

The announcement of the firm's Chinese expansion plans follows the opening in April of Swedish clothing retailer H & M's first store on the mainland and it underscores the growing appeal of China to international fashion retailers.

The Spanish fashion house has not set a specific goal as to the number of new stores it intends to set up in China, where it currently has nine Zara outlets, a spokesman told AFP.

But later this month Inditex will open its first Massimo Dutti store, which stocks smart casual items, in China in Macau, a former Portuguese enclave, with another outlet set to open in Hong Kong next year, he said.

"I think that China is the next frontier," said Marian Salzman, chief marketing officer with US-based advertising agency JWT which has studied the Chinese market.

"With everyday analysts becoming savvy about the sheer demographic reality of China, there is no retailer of scope without a plan for expansion," he told AFP.

There will be 220 million upper middle class households in China's cities, defined as those making between 5,000 and 12,500 US dollars (3,704 and 9,260 euros) a year, by 2025 compared to 23 million in 2005, international consulting firm McKinsey estimates.

Inditex already faces competition in China for a share of this growing market from Spain's Mango, Germany's C & A as well as a raft of local brands such as Hong Kong-based Esprit in addition to H & M.

The firm faces a cost disadvantage in China since competitors like H & M and Mango source a greater proportion of their merchandise from the region, said Matthew Stych, the global director for retailing research at London-based market research firm Euromonitor.

"Inditex may have to consider ramping up local production in order to maintain its ability to deliver fast fashion at prices that are competitive with its peers," he told AFP.

H & M, Europe's second-largest retailer, sources more than 60 percent of its products in Asia, more than half of that from China, compared to 34 percent for Inditex, which has said it has no plans to increase production in the region.

Inditex opened its first outlet in China in Hong Kong in 2004 and set up shop in mainland China two years later, selecting store locations in luxurious shopping areas.

To succeed in China, where the nation's rising middle class tries to emulate the West's fashion style, Inditex needs to continue positioning itself as a source of affordable but still pricey fashion, analysts said.

"Young Chinese consumers are very aspirational when it comes to fashion, so the more Inditex differentiates its brands from local cheap clothing the better," said Stych.

Amancio Ortega, Inditex's 71-year-old owner and chairman as well as Spain's richest man, is aware of the challenges that China presents.

"The Chinese market requires constant innovation," daily business newspaper Cinco Dias quoted him as saying in June.

Inditex, which was listed in 2001, has more than 3,200 outlets in 65 countries around the world. It aims to have 4,000 stores by 2009.

The firm's 59 stores in Asia -- including the nine Zara outlets in China -- accounted for nine percent of its total turnover of 8.2 billion euros (11.1 billion US dollars) last year.

Spain accounted for just under 37 percent of the company's sales while the rest of Europe was responsible for about 40 percent.

The company posted a net profit of just over one billion euros last year, up from 803 million euros in 2005.