China's burgeoning middle class creates a significant opportunity for dominant retailers operating there today. The continual rise of household income in China in recent years is one of the primary driving forces behind a rapidly growing middle class that is ready to spend. Last year, Urban Chinese residents enjoyed a 9.7% spike in disposable income, according to China's statistics bureau. Moreover, wages in the Asian country are set to increase by more than 10% this year. This means big business for accessible luxury brands such as Kate Spade (NYSE:KATE), Michael Kors (NYSE:KORS), and Coach (NYSE:TPR) in the region.
As purchasing power improves, so to do retail sales
The most improved award goes to Coach. The leather goods and accessories retailer surpassed $500 million in sales in China last year, and that figure continues to grow. During the latest quarter, Coach's overall revenue in China grew 20%, complimented by double-digit growth in same-store sales in that market as well. This was far better than the retailer's performance in its U.S. segment, which suffered same-store sale declines in the period.
The company understands how important the Chinese market is to its future growth plans. Coach had 153 retail outlets in China as of June, 2014. In the year ahead, Coach plans to capitalize on its success in the region by opening an additional 30 new stores there. This should pay off tenfold for Coach down the road, as China is on pace to overtake the United States as the world's largest retail market by 2016, according to the Economist. Coach's rival, Michael Kors, also sees this as an opportunity.
With its headquarters in Hong Kong, Kors is uniquely positioned to dominate the Chinese market. Similar to Coach, Kors sells affordable luxury items that appeal to China's growing middle class. "More than 75% of China's urban consumers will earn between 60,000 and 229,000 yuan, or $9,800 to $37,000 a year, by 2022," according to Bloomberg. This makes a compelling case for retailers like Kors, Coach, and Kate Spade, who sell merchandise in the mid-luxury price range.
Kors is heavily investing in the Chinese market today. The namesake designer brand opened its flagship store in China earlier this year, with a whopping 5,800 square-foot retail space in Shanghai. The company now has more than 20 stores in China, up from just 12 a year ago. Additionally, Kors boasts 112 Michael Kors licensed retail locations in Asia, which includes Greater China, Korea, Southeast Asia and Australia. While this is significantly below Coach's store count in the region today, Kors has plans to expand its footprint to include more than 200 Asian locations in the years ahead.
Kors is taking a calculated approach to its rollout in China. The brand launched its chinese-language website last year and has enlisted some of the country's most famous models to promote its products in the region. Meanwhile, Kate Spade is another "accessible luxury brand" that's making bold moves in the Far East these days.
Kate Spade is a much smaller company compared to Coach and Kors, which gives the brand even more room for growth. With Kate Spade aggressively expanding into new markets including China, the company's retail footprint could grow from $1 billion today to $4 billion over time, according to Barclays.
Kate Spade opened the doors to its Asian headquarters earlier this year in Hong Kong. The brand now operates 22 Kate Spade retail stores in China, and has plans to open between eight and 12 additional locations there this year. With products priced between $33 and $900, Kate Spade offers a range of prices and product mix to fit the budgets of China's growing middle class. The Economist expects China to account for a quarter of all global retail sales by 2020. When that happens, Kate Spade, Michael Kors, and Coach will already be established players in one of the world's biggest retail markets.
Moreover, China's middle class is bigger than the entire population of the U.S. today, according to PBS. That is to say, there is plenty of consumer cash to go around. Therefore, all three of these retailers are well positioned to benefit from this growing market going forward.
Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.