Finding a niche

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.

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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 stores in the Chinese mainland, and has Uniqlo plans to add up to 100 stores each year. Tiger Pan Ning, Uniqlo's Greater China CEO, told a press conference 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 and boutique Chinese brands.

Growth prospects

A shift towards mass market retail could work in Gap and Old Navy's favour. 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 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.