U.S. apparel maker Cherokee made a strategic gamble last week when it largely circumvented China’s traditional retail store network and opened a shop on the Internet, highlighting an emerging new path for mid-sized foreign brands into the lucrative sector. Unlike real-world shops, online stores are much cheaper to set up and also target an e-commerce market set to become the world’s largest over the next decade.
While the e-commerce route holds great promise for these smaller Western brands and retailers, such companies could still easily suffer similar setbacks to much bigger names like electronics giant Best Buy, which pulled out of China in 2011 due to lack of name recognition in the crowded market. The lower barriers to entry also mean online competition is likely to intensify, forcing both Chinese and Western brands and retailers to spend big money on advertising and other promotion just to get noticed.
Cherokee’s newly announced move will see it pair with local retailer RT Mart to open its online store on the popular TMall platform operated by e-commerce giant Alibaba. While Cherokee actually entered the China market two years ago in a more traditional partnership with RT Mart, sales through that channel have been limited due to the Chinese retailer’s relatively limited scope of about 200 stores nationwide.
The new TMall presence will instantly make Cherokee’s brands available to the millions of people who use the online platform, which generated $9 billion in apparel sales last year. Cherokee’s TMall store will put it online alongside other major Western names like Nike, Levi’s, and Gap, which also operate traditional store networks that have cost millions of dollars and years to set up.
The potential of e-commerce is huge in China, where traditional retail store networks are less developed and many young consumers like comparing products online and having goods shipped directly to their homes. E-commerce sales in China rose 30 percent in 2011, as 200 million Chinese purchased 588 billion yuan, or nearly $100 billion, worth of products online, according to government figures. New data showed growth continued to rise 33.5 percent in Shanghai, China’s commercial capital, over the just-concluded Chinese New Year holiday.
But the rapid growth and relatively low barriers to entry have also led to intense competition among e-commerce site operators, forcing many into the red, with every indication the competition is spreading to brands that sell online. The inevitable spread of competition to those brands will mean that mid-tier names like Cherokee will have to spend heavily on advertising and other promotions to attract attention in a market where brand awareness is key to winning sales.
That will force them to go head-to-head with the much bigger global names with more resources, and also with the other mid-tier names, to get noticed. The result could be that many smaller Western retailers may flock to China’s e-commerce market in the next few years, but also many may quickly be forced to close up their Chinese shops when they discover how crowded and competitive the market has become.
Doug Young lives in Shanghai and writes opinion pieces about tech investment in China for Techonomy and at www.youngchinabiz.com. He is the author of a new book about the media in China, The Party Line: How the Media Dictates Public Opinion in Modern China.