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* New Look to open 500 stores in China in three years
* Many Western fashion labels founder in China
* New Look puts focus on sourcing in China
* Local sourcing helped Denmark's Bestseller dominate
* Finding real estate, selling online pose challenges
By Emma Thomasson and Donny Kwok
BERLIN/HONG KONG, Oct 21 (Reuters) - As Europe's fashiongiants brace for what could be the toughest leg of theirexpansion in China, a South African retail tycoon has launched abold assault on the world's most populous nation.
Christo Wiese is promising to open 500 of his New Lookstores in just three years, catapulting the British brand intothe same league in China as the world's top fashion chains -Spain's Inditex and Sweden's H&M.
His plan is to make most of the clothes in China to ensurethey cater to local tastes and can get to stores quickly - astrategy similar to the one successfully pursued in Europe byZara-owner Inditex.
The arrival of New Look - and its local sourcing strategy -poses a new risk for the likes of H&M and Inditex, alreadysuffering from slower growth in China, fierce competition forreal estate and the cost of investing in ecommerce.
H&M is opening more stores in China this year than anywhereelse in the world and the country is already the second biggestmarket for Inditex outside Spain.
China is a big draw for retailers who hope to tap theaspirations of a fast-growing middle class, with mid-range namesbenefiting as consumers trade down from luxury brands sinceBeijing's clampdown on corruption and conspicuous spending.
But recent history offers plenty of examples of failure. Western brands that have struggled in China include Gap Inc, Abercrombie & Fitch and Marks and Spencer, which decided last year to close five stores in smallercities to focus on flagship stores in large cities and online.
"Most of the Western fashion labels that are mid-range failin China. A large part of it is that the styles and the fit areso completely different," said Shaun Rein, founder of marketintelligence firm China Market Research.
LOCAL TASTES, LOCAL SOURCING
New Look, a chain founded in 1969 and bought last year byWiese's investment vehicle Brait SE, does not want tomake the same mistake. It now runs 94 stores in China, out of aglobal total of 852, and hopes to have up to 150 by next March.
"I will definitely give it a try if it is a foreign brandand as long as I like it," said Chen Jie, a 32-year-oldbusinessman from Shenzhen who was carrying an H&M bag in ashopping district in Hong Kong. "Price is not an issue but thedesign and quality must be good."
While New Look is cashing in on the popularity in China ofBritish style - it is adding the "London" tag to its logo forits Chinese stores and website - it is also catering for localtastes.
Sven Gaede, managing director of New Look's internationalbusiness, says the firm has an advantage over many Europeanrivals as 85 percent of what it sells in China is sourcedlocally and more than a third is designed exclusively for China.
That has allowed New Look to tap into the current popularityin Asia of culottes - flared, three-quarter length trousers.Gaede said they account for 12 percent of the firm's sales inChina, though they are not popular in its European markets.
"South Korea and Japan drive a lot of the trends that theChinese customer seeks, so our ability to be able to identifythose trends, source them locally and get them into our storesquickly is key," said Gaede.
That helps explain the success of the Uniqlo chain ofJapan's Fast Retailing in China, which already hasalmost 500 stores in the country and is aiming for 1,000 storesin about five years - more than in Japan.
"It's pretty hard for the foreign fast brands to do thelocalisation that Uniqlo does in China as it was born with theAsian gene," said Violet Shen, a marketing executive inShanghai.
The "fast fashion" model was pioneered by Inditex, which canbring new styles from the catwalk to stores in Europe withindays from factories mostly in Spain and North Africa. However,Inditex does not have the same advantage in China.
Inditex plans to add 60 stores in the next few years to the582 it already runs in China, but it serves them from itslogistics centres in Spain.
"As their proportion of sales increases in the East, itchallenges this model. You can't hub out of Spain," said DominicJephcott, chief executive of supply chain experts Vendigital.
New Look is not the first Western retailer to try to bringthe Inditex model to China.
Denmark's Bestseller, which runs brands like Vero Moda andJack & Jones, says over 90 percent of its products sold in Chinaare also produced in China and most of the designs for theChinese market are adjusted to local tastes.
That has helped the family-owned firm to become the clearleader in China, with more than 6,800 stores in over 300 cities,to give it a 2 percent share of the fragmented market, accordingto market research firm Euromonitor.
Anders Kristiansen ran the China business of Bestsellerbefore taking over as New Look chief executive in 2013. Gaedesaid Kristiansen's experience in Asia is one of the reasonsbehind the group's aggressive expansion strategy.
H&M also buys many of its garments in China - the countryaccounts for about a quarter of its global sourcing.
But the Swedish firm does not make a big point of adjustingits ranges for China, where it has opened 47 stores in the lastnine months, taking its total to 400.
"We see that fashion becomes more and more global and thatChina doesn't differ much from the rest of the world regardingtrends and fashion," said investor relations head Nils Vinge.
"There are of course local differences but that is true forevery market. H&M has a business model that can adapt to this,"Vinge said, declining to elaborate.
Rein of China Market Research says Western brands muststrike a delicate balance.
"You have to keep your global brand image and you can't bethat creatively different in China than other markets. TheChinese travel around the world," he said. "It is good tolocalise. But it hard to localise an aspiration."
STORES VS ECOMMERCE
A bigger challenge for New Look may be to secure the rightlocations, especially as rivals also seek to add hundreds ofstores in the coming years.
"To find 500 stores of real estate and roll that out in theright way ... I think it is virtually impossible," said FranklinYao, managing partner at strategy consultants Smith Street.
But the more established New Look's brand becomes in China,Gaede said, the better the locations and terms it will beoffered, adding that the firm was now pushing into smallercities.
"We are less wedded to the number each year and we are morewedded to getting quality locations," he said.
Meeting soaring Chinese demand for buying clothes online isalso tough.
Most international brands initially launch on Chineseecommerce sites like JD.com and Alibaba's Tmalland Taobao, but are keen to build up their own online operationsto protect margins and integrate ecommerce and store services.
New Look is currently available on Tmall and JD.com, but plans its own transactional site in the next 12 to 18 months.
Partnering with Chinese sites and local payment and deliveryservice providers is essential to reach consumers across such avast country, said Vendigital's Jephcott.
"It is a hard physical push and a very hard digital push,all premised on a strong relationship with the logistics partnerlike Taobao," Jephcott said, noting that Taobao has establisheda delivery network of micro-stores even in small towns.
(Additional reporting by Anna Ringstrom in Stockholm; Editingby Gareth Jones)
