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American Apparel Expands To China
DNR
Andrew Harmon
March 17, 2008

LOS ANGELES — American Apparel Inc.'s rapid retail rollout will soon count China as among its international conquests.

Timed to coincide with the upcoming Beijing Summer Olympics that has intensified foreign retail interest in a burgeoning Chinese middle class, the vertically integrated manufacturer of slim-fit T's and other perennial basics has announced its intent to open doors in Shanghai, Beijing and Suzhou next month.

The company is currently finalizing leases for the three locations.

Fleece hoodies, Tyvek jackets and other items soon to be sold to Chinese youth will continue to be manufactured at the company's downtown L.A. headquarters—a stark contrast from the current trans-Pacific apparel trade flow, where Chinese imports account for about one-third of all apparel sold in the U.S.

American Apparel joins a growing list of foreign companies entering a Chinese market flooded with designer labels, yet still rife with retail opportunity. The country has supplanted the U.S. as the top market for retail opportunities, according to a recent report by the consulting firm TNS Retail Forward.

Last month, Louis Vuitton unveiled its first-ever television advertising campaign specifically targeted for rapid growth markets like China, while Fendi spent a reported $10 million for an October runway show atop a stretch of the Great Wall of China. Coach, Burberry and Gucci are among a growing number of labels that have significant direct retail presence in the world's most-populous country.

But American Apparel is not Gucci. With its focus on affordable fashion basics that lack conspicuous logos, the company is a marked contrast to many European designer labels popular with Chinese consumers.

"We expect to be an anomaly, and we expect it will take time, because we're not interested in chasing the market," American Apparel CEO Dov Charney told DNR in an interview last week. "The [upscale] brands have done well there, because Chinese consumers are a little into the glitz.... American Apparel doesn't provide that. There's no status associated with it, so we'll have to appeal to the early adapters who appreciate fit and simplicity."

The brand has proved viable in other Asian markets. American Apparel now operates five doors in Japan: three in Tokyo and one each in Osaka and Fukuoka. There are eight additional locations in South Korea.

"Clearly the upscale brands have an advantage in capturing the attention of shoppers [in China]," said TNS senior economist Frank Badillo. "But well-known, mid-tier brands still have an opportunity, so long as the brand can identify the niche it wants to target."

Several foreign mid-tier brands have already found success in the market, including Swedish retailer H&M and Spain's Zara, which opened a Shanghai flagship in 2006. It now boasts six doors in Hong Kong and six other locations in Mainland China.

"If you look back 10 years, there was a lot of Chinese government pressure to have foreign companies enter the market via a partnership with a state-owned enterprise," said Doug Hart, a partner in BDO Seidman's retail and consumer products group. "But if the consumer wants certain brands, the government has now realized that it needs to give these foreign companies greater freedom."

It's unknown whether American Apparel's provocative advertising campaigns will pass muster in China, however. In September, that government's State Administration of Radio, Film and Television banned TV ads for women's underwear, breast enhancement surgery and sex toys. "Sexually suggestive ads and bad ads not only mislead consumers seriously and harm public health, but are socially corrupting and morally depraving, and directly discredit the radio and TV industry," regulators said in a statement.

Charney said he may employ a campaign strategy in China similar to the U.S., with advertisements in a range of publications, from glossy fashion magazines to lowbrow metro weeklies. "So much foolish negative attention has been paid to the ad campaign. We figured out an eon ago that it's effective," he said. "It's obvious that young metropolitan adults are more sexualized than their parents, and they appreciate ads that are sexy and artistically provocative. I believe Chinese young people will understand the message of the advertising and will connect with it."

However, it's possible that the brand will opt for a soft launch in China with little advertising, he added.

Global retail expansion has accelerated since the company was acquired last year for a reported $382.5 million by Endeavor Acquisition Corp., a publicly traded investment firm created in 2005 by Eric Watson and U.S. Office Products founder Jonathan J. Ledecky. American Apparel has grown to 160 doors in 15 countries, and currently opens between two and six stores per month. "We've said before that we think we can open 800 [doors]," Charney said. The company may detail future expansion plans in its fourth-quarter earnings conference call today, he added.

Double-digit sales growth for the brand has recently rebounded, with a 23 percent rise in same-store sales during the first three quarters of 2007. Comps had slowed to a 5 percent gain in 2006, compared with a 45 percent increase in 2005.

The company's fair-wage policy—it pays its factory workers $12 per hour, more than twice the current federal minimum wage—will extend to Chinese retail employees as well. "[Wages] will not be the same as the L.A. workers, but we will make sure that every worker in China receives at least a U.S. federal minimum wage per hour worked," Charney said.

In a nod to Olympic spirit, retro obsession and hometown pride, Charney said American Apparel's planned Chinese doors will feature apparel and in-store photo essays themed to the 1984 Summer Olympics in Los Angeles. "We love making garments that people want to wear. And we look forward to bringing that to China."