Luxury brands target China’s second tier cities for expansion

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We’ve been looking at movement into second tier cities recently and China Daily today ran an article on just that.  The piece by Jiang Jingjing looks at the movement of top luxury brands into these emerging markets.

 The rapidly growing purchasing power and appetite for high-end products in small cities have drawn the attention of top international luxury lines, which are increasingly gravitating to second-tier cities.

Louis Vuitton, which entered China 15 years ago and has 16 boutiques spread across 13 cities, has opened shops in three new cities in the last two years – Wenzhou, Kunming and Shenyang. The company’s next targets are Chongqing, Harbin, Sanya, Suzhou, Ningbo, Nanjing and Urumqi, according to the company’s CEO Yves Carcelle.

French luxury giant Hermes chose Kunming, capital of Southwest China’s Yunnan Province, to open its first watch boutique in China two years ago, selling timepieces for up to 260,000 yuan each. The following year, it expanded to Anshan, a steel manufacturing base in Northeast China’s Liaoning Province.

Writing instruments giant Montblanc last year took over all its outlets from local partners and started operating directly, both in first- and second-tier cities.

Hugo Boss’ strategy in secondary cities is simple: be the first, according to Lars Larsen, managing director of Hugo Boss Hong Kong Ltd. At the end of last month, Hugo Boss had 75 points of sale in nearly 40 cities.

The huge population base in small cities is the main attraction for the luxury segment. China’s second-tier cities are huge compared to those in Europe or the United States. Luxury brand executives point out that China has over 100 cities with populations of over 1 million, opening up immense possibilities.

Jiang goes on to point report that the demand for luxury goods has been growing so rapidly in secondary cities that it has already exceeded the level of demand first tier cities saw 10 years ago.

As we’ve pointed out in the past, there are challenges  – infrastructure that is not as developed, lower skill levels, and less sophisticated officials. It is always a trade-off. As one investor, who recently chose Shanghai over Nanjing, said in a business magazine, “the further you go into the background, the cheaper the labor gets. But the further you go, the harder it gets to find qualified staff, and the logistics gets increasingly more difficult.”

In addition, for retailers, although the consumer base is alluring, it is not homogenous – tastes and preferences vary. You can’t market in Shenyang the same way you do in Kunming or Urumqi. Any new retailer or service company needs to identify a market sub-segment to make progress – and be there first. As Accenture’s Joe Mueller put it in China Economic Review, “if they are the first they can build up brand loyalty”. Being first brings other benefits – “understanding what customers desire in different areas…that takes time.”

Equally, second-tier cities are often somewhat more demanding expat locations– there are fewer international schools and hospitals, fewer opportunities for partners, a smaller expat community, and lower English standards. The Cendant study noted that “moving from Tier I to Tier II locations” was one issue that “impacted employees’ willingness to relocate”. It is still more common to find expats deployed as single people or without families in such cities – although things are changing in some locations. Dalian, Chengdu and Dongguan are perfectly livable for foreign families. Indeed, in some second-tier cities, the lifestyle may be more relaxed than the politically-intense capital or the mania of Shanghai.

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