I was in Uniqlo's huge three-floor store in Causeway Bay on Sunday, and it was packed. It has to be -- that neighborhood is the second-most expensive place in the world to rent store space, according to Cushman & Wakefield. Its eye-watering rent of $2,878 per square foot per year ranks behind only Fifth Avenue in New York, at $3,000 per year.
Sure, we're heading into the Christmas season. The vast majority of Hong Kong-ers are not Christian -- generally we're Buddhist or Taoist -- but the holiday season is still a great excuse to engage in the city's favorite sport: high-impact shopping.
I have long said that Uniqlo's parent, Fast Retailing, (FRCOY) is a great core holding for an Asian portfolio. A new report backs that up and throws out a few other stocks to watch as well. It's not just at Christmas that you'll find it hard to make your way down Uniqlo's aisles. Trade has been brisk pretty much every time I've ventured into one if its 20 stores in the city. Yes, 20 stores in a city of 7.0 million. It has 472 stores in China, and plans to open 100 more per year, including its brand GU, aimed at younger shoppers, until it hits 1,000 stores.
Foreign fast-fashion brands are outpacing their Chinese rivals, according to FT Confidential Research, an independent research house affiliated with the Financial Times. That's very interesting, since foreign brands often find it hard to penetrate the Chinese market. Whirlpool, for instance, had a disastrous time trying to sell its washing machines at a higher price than local manufacturers. Turns out Chinese people don't need a brand-name basic appliance.
But apparently they do need cheap fashion. Fast-fashion retailers such as H&M (HNNMY) from Sweden, as well as the Spanish brand Zara and therefore its parent, Inditex (IDEXY) , are gaining in popularity in China. When FT Confidential asked urban Chinese what two brands they bought regularly, 19.3% cited Uniqlo as a favorite, a gain of two percentage points in a year.
So one-fifth of Chinese people like Uniqlo. They used to say that if you could sell a button to every Chinese person, you'd make a fortune. Well, what about if you sell them cheap socks, Heattech shirts and puffer jackets as well?
The foreign fast-fashion brands are advancing their march into China from the "Tier 1" cities of Beijing, Shanghai, Guangzhou and Shenzhen into second-tier cities (normally provincial capitals) and even third-tier cities, which can still be pretty massive. There are more than 100 cities with populations of more than 1 million in China, double the rate of the United States.
Brand popularity increased 3.7 percentage points in Tier 2 cities in a year, and 2.4 percentage points in Tier 3 cities, according to this new report. H&M and Zara rank second and third in terms of popularity in the Tier 1 cities, and their popularity is also on the rise. As far as Tier 2 penetration goes, H&M rose four percentage points and Zara, 3.5 percentage points.
Given the imminent arrival of Donald Trump in the Oval Office, many China watchers are advising investors to focus on companies that benefit from increased domestic spending. China's retail-sales growth is running at 10.8%, according to Trading Economics, well ahead of the economy's overall growth of 6.7%.
There is a risk that the foreign brands will be too aggressive in their expansion plans, given that disposable income in the smaller cities is far from that in the metropolises. But they are outstripping traditional domestic brands such as Shanghai Metersbonwe Fashion & Accessories SZ:002269 and Fujian Septwolves Industry SZ:002029.
How? Zara can get a product through its supply chain and onto shelves in three weeks. The Chinese manufacturers tend to rely on an old-fashioned design and supply system that takes up to nine months to reach market.
The foreign brands are also ahead in online-to-offline sales methods, and inventory-light stores. Landlords also like having a name-brand foreign retailer as an anchor tenant in a mall to increase footfall, so they offer them sweetheart deals on rent.
Metersbonwe has countered with its own Uniqlo-style brand, Me & City. But it has yet to gain any significant traction in terms of "mind share." Other companies like Ellassay have bought foreign brands to compete -- it now owns the mainland stores of the German brand Laurel and has a 65% stake in the Chinese subsidiary of the U.S. brand Ed Hardy.
Another promising play is Shenzhou International Group Holdings SHZHY, which is an OEM company that makes clothing incorporating materials such as Lycra and thermal fabrics, with a specialty in sportswear. Behind the scenes, it supplies Uniqlo and other top brands such as Adidas (ADDYY) , Mizuno, Nike (NKE) and Puma, approaching 15% of the clothing supply of those companies and 30% of Puma's.
It has been deepening its relationship with Uniqlo, something that attracts Nomura's analysts to the stock. It is also ramping up operations in lower-cost Vietnam, alleviating some of its capacity constraints.
Increased interest in sports in China and the improved demand for functional products also lures Nomura to Anta Sports (ANPDY) , which has its own strong sports brand within China but also now owns the venerable Italian brand Fila, which Shenzhou also supplies. You briefly saw Anta shoes on the size 15 feet of Kevin Garnett just before his retirement, while The Big Ticket was playing for the Minnesota Timberwolves.