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SHANGHAI (Reuters) - When Gap Inc (GPS.N) began an online campaign ahead of the launch its Old Navy label in China, the iconic U.S. clothes retailer posed an important question to its potential Chinese consumers: have you heard of Old Navy? Only a few had.
Brand awareness is one of the uphill battles Gap faces in China as the U.S. firm looks to increase its stake in the world's second largest clothing market, where it lags rivals H&M (HMb.ST), Japan's Uniqlo, owned by Fast Retailing Co Ltd (9983.T) and Inditex SA's (ITX.MC) Zara.
Gap, which launched its first Old Navy store in Shanghai on Saturday, plans to open five stores of the value-end chain this year as well as adding 30 Gap stores to its current 81, Gap's Greater China president Jeff Kirwan told Reuters on Saturday.
"Outside North America this is the largest opportunity for us, acknowledged by all the senior leadership in the company. This is the number one growth vehicle for the company," Kirwan said in an interview at Gap's Shanghai office.
A bastion of the clothing sector in the United States, where it has around four percent of the apparel market, Gap entered China behind its rivals, setting up its first own-brand shop in 2010. It now has around 80 stores, around half the number of rivals H&M, Inditex-owned Zara and Uniqlo.
"I hadn't heard of Old Navy before. I was just passing by and saw something going on. It was my sister who told me it was part of Gap," said Ji Yin, 30, queuing for the flagship store's launch in Shanghai's up-market Jing'an district.
Gap's China team plans to invest in promoting brand awareness with local shoppers, especially online, to play into the rapid growth of China's e-commerce sector, a segment of the retail market that is unusually large.
"We're putting a lot of attention into e-commerce for both brands," Kirwan said.
They might need it. Gap's account on popular Sina Weibo, China's equivalent of Twitter, has just 86,000 followers, a figure dwarfed by Uniqlo's 3.6 million Weibo fans. Old Navy, which joined Weibo in January, has just 3,700 followers so far.
"If you can get a social media buzz in China it goes fast and wide, because Chinese people are very well connected. Without one, it's difficult for a consumer brand in China. It's almost a must I would say," said Nick Debnam, Asia Pacific chairman for consumer markets at KPMG.
One hurdle facing Gap is that some consumers say it lacks the trendy image of Zara but prices itself above affordable rivals such as Uniqlo, a specialist in basic clothing items. Gap says with its Old Navy brand it will try to leverage an energetic and enthusiastic "American voice".
"Gap's position in China is not very clear. It's outpaced by Zara on a fashion level and out-competed by Uniqlo on the concept of high-value basics," said Cherry Dai, Shanghai-based project manager at consulting firm SmithStreetSolutions.
Price is also an factor for China's cost-conscious consumers. A pair of Gap women's jeans costs up to 599 yuan ($97.48), higher than around 299 yuan ($48.79) in Uniqlo and 399 yuan ($65.11) in H&M, according to a Reuters' analysis.
Kirwan said the key rivals for Old Navy - where a similar item cost up to 299 yuan - would be Uniqlo and H&M.
Uniqlo has 260 mainland China stores, and has Uniqlo plans to add up to 100 stores each year. Tiger Pan Ning, Uniqlo's Greater China CEO, told a press conference in Hong Kong on Friday that Uniqlo's wide store footprint, speed of openings, and its range of simple, everyday basics gave it a "competitive edge".
In a market where low cost can be equated with low quality, however, price is not the only factor determining success.
"The most important criteria is of course the clothes being good-looking. The price should also not be too low," said Wang Manxue, 21, a female student in Shanghai, who shops at France's Etam Developpement SCA (TAM.PA) and boutique Chinese brands.
A shift towards mass market retail could work in Gap and Old Navy's favor. Lower-priced fast-fashion brands such as H&M and Zara beat store expansion goals last year, while two-thirds of high-end retailers missed their target.
Other mid-range brands have also struggled in China. Esprit Holdings Ltd (0330.HK) shut 38 directly managed stores last year as it grappled with high rents, stalling sales and wholesalers with too much inventory.
"I think Old Navy has a better shot (than Gap) of pushing deeper into China," said Kirwan, referring to its potential in lower tier cities, increasingly the engines for China growth.
"We'll read the customer and if the customer is happy with the brand then we'll get very aggressive and move quickly."
Though launching a new brand from a standing start will require substantial capital spending, there is significant potential for growth in China despite fierce competition from both international and domestic rivals.
"The China market is just huge at that price level," said Vincent Liu, Hong Kong-based consumer sector partner at consultancy firm Boston Consulting Group. "Just getting one or two percent could mean a couple of thousand stores."
($1 = 6.1284 Chinese yuan)
Editing by Miral Fahmy and Simon Cameron Moore