BEIJING — On a recent Saturday afternoon in this city’s high-end China World Shopping Center, the center-city mall was not exactly a madhouse.
There were the typical small groups of potential customers strolling the gleaming walkways between elite shops such as Fendi, Dior and Furla. But few made it inside the stores.
At Gucci, the saleswomen were chatting with each other in a corner of the empty store. At Marc Jacobs, three salespeople were hot on the heels of one lone customer. At Prada, another group of saleswomen stood around, waiting to pounce on the first person who walked through the door.
China is nearly universally considered to be the next big place for luxury sales. But if that’s the case, where are all the customers? They’re not here, yet.
Of China’s 1.3 billion residents, only about 30 million people — about 2.3 percent of the population — can afford luxury merchandise, according to a Merrill Lynch report issued last year. That’s a large number of people — it almost matches the population of Canada, which has 32.8 million residents — but it’s not nearly enough to fill the hundreds of high-end stores that are cropping up around the country, particularly since most of those 30 million shoppers can afford to make only a few high-end purchases a year.
But the foreign luxury labels now setting up shops in China are looking ahead, betting that today’s empty stores will be filled in just a few years, as China’s middle and upper classes grow in size. More important, they’re figuring that Chinese shoppers who see a Western brand in their major cities today are more likely to desire its products as their incomes rise.
The same Merrill Lynch report projected that by 2009, Chinese consumers could represent 20 percent of the world’s luxury spending, up from 11 percent of the $82 billion luxury market at present.
Robert Triefus, an executive vice president at the Armani Group, said the Chinese market “could be as important as Europe or America in 10 to 20 years’ time…We’re here for the long term, and this is a very important investment phase.”Armani is one of the brands leading the rampant retail development in China. The company, which currently has 13 stores in China, plans to open 20 by the end of this year and 30 by 2008. The firm’s aggressive expansion plan, which includes outlets under the Giorgio Armani, Armani Exchange and Emporio Armani banners, will include shops in quickly developing second-tier cities such as Dalian, Hangzhou, Shenyang and Chongqing, in addition to its existing units in Beijing, Chongqing, Dalian, Shenzhen and Wenzhou.
Dozens of high-end brands, including Dolce & Gabbana, Christian Dior, Salvatore Ferragamo, Chanel and Cartier, are expanding all over China. Prada plans to have at least 20 stores in China by the end of this year. Tod’s aims to open 20 stores in China in the next five years. Cartier has opened seven stores around China in the past six months, bringing its mainland total to 10.
While many of those stores are not teeming with shoppers, experts said that’s a small concern at the moment.
“The fact is, when you have a luxury store, you don’t need that many people to come in and buy to be profitable,” says Chris Torrens, editorial director at Access Asia, a consulting firm in Shanghai. “The main advantage to expanding in China right now is that costs here are very cheap. Developers are keen to get the big names into their malls, so they offer competitive deals to get well-known brands to open there. A company can lease a large retail outlet for not too much money, and the labor costs for salespeople are also very low. So it really doesn’t take a lot of sales to stay in business and all the while you’re increasing your exposure to the Chinese consumer.”
While few Western companies disclose their Chinese revenues, those that have been operating in the country for a long time assert their mainland China operations — excluding the already well developed Hong Kong and Macau markets — are profitable. Officials at Louis Vuitton, which has been operating in China for 12 years, said their Chinese ventures are profitable, as say those at Ermenegildo Zegna, which has been in the country for 14 years.“We’re not losing money in China,” said Maxime Elgue, managing director of Cartier’s Far East operations, at the recent opening of the firm’s Bund 18 flagship in Shanghai. “But every dollar we make is being reinvested here right away, in boutiques, in advertising, in looking for talent and creating a culture here.”
But with a flood of Western brands pouring into the country, a major challenge for marketers is making sure their image stands out in the crowded field.
“The main question is, how do brands differentiate themselves,” said Torrens of Access Asia. “How does a consumer with no previous knowledge of luxury brands learn the difference between Tommy Hilfiger and Prada? Clearly, there is a big distinction, but when they’re both opening stores — along with so many other brands — it can be difficult to stand apart and make themselves known.”
Some top luxury brands — including Burberry, Louis Vuitton and Chanel — have found that Chinese consumers already recognize their names and trademarks — in part because counterfeiters have been hawking their styles on the streets for years. But smaller luxury labels, such as Tod’s, Celine and Lanvin, have more work to do to make their products known to the typical Chinese consumer who’s just learning about foreign fashion brands. By opening stores now, many companies hope to begin building recognition so that they’re familiar names by the time China’s consumerism starts to boom.
“What’s most important for us now is to develop the right message about who we are,” said Diego Della Valle, chairman and managing director of Tod’s SpA, who came to China in December for the opening of a new Beijing Tod’s boutique. “Right now, fewer people know us here, so our primary goal is to find ways to reach out to more customers.”
The other main issue for foreign retailers in China is convincing Chinese consumers to shop in their home country. A tariff on luxury goods has kept prices in China as much as 30 percent more than in Europe, the U.S. and even the neighboring special administrative region of Hong Kong, which has different tariffs and duties than the mainland. The extra expense has sent many Chinese who are looking for luxury products out of the country to make their purchases.“Many Chinese come to Hong Kong to do their shopping because the price difference is generally at least 20 percent cheaper,” said Balbina Wong, president of the Hong Kong-based company ImagineX, which helps manage the China expansion and distribution of more than 20 major foreign brands, including Marc Jacobs and Versace. “When you’re buying luxury goods, that 20 percent can pretty much pay for your ticket and hotel, so why not take the trip?”
To combat the Hong Kong exodus, some companies have begun lowering the prices of their mainland merchandise to make shopping in China more attractive. Louis Vuitton adjusts the price of its merchandise to be within 10 percent of its Hong Kong pricing, said Christopher Zanardi-Landi, the company’s general manager for China.
While the influx of brands in China may mean constant competition, it’s also getting consumers to think of the mainland as a place to start shopping.
“The more luxury companies that come here, the more it helps the industry,” said Cartier’s Elgue. “People will start to see they don’t have to go to Paris or Hong Kong for fashion. They can find the same things here.”
If companies can lure customers back to China, the bigger question may soon be what will happen to Hong Kong retail as more Chinese stay home to shop, said Torrens.
“You’ve got brands in Hong Kong that say up to 70 percent of their sales are from mainland customers,” he said. “With luxury goods, it’s generally around 30 to 40 percent. As sales increase in China, are those people going to keep coming down to Hong Kong to buy? Are Hong Kong sales going to erode significantly and is that something luxury companies will want? This could be a significant issue in the future.”
A major part of what is helping make the mainland more attractive to shoppers is the increase in high-end malls and other consumer-friendly retail locations around the country.
“Twelve years ago, stores tended to be environments that were very protected, like hotel lobbies,” said Louis Vuitton’s Zanardi-Landi. “It’s really quite a recent phenomenon that we’ve felt a call to come out of hotel lobbies and started to build facades on the street like you would find in other markets.”Zanardi-Landi was interviewed at Vuitton’s Shanghai flagship, a two-story, 14,200-square-foot megastore that opened last September in the Plaza 66 shopping mall. The shop is the brand’s first “global store” in China, selling popular products like handbags and shoes, as well as its ready-to-wear line. The company plans to open a second global store in Beijing’s China World Shopping Center this fall.
The Louis Vuitton Shanghai store is an example — along with the city’s Three on the Bund Armani flagship and Bund 18 Cartier boutique — of the massive effort companies are making to attract and impress Chinese consumers. Shanghai is generally considered the top tier of Chinese consumerism and has emerged as the entry point for most foreign brands making their way into the country.
“Shanghai is the mecca for fashion in China,” said ImagineX’s Wong. “It’s the most fashion-forward place in the country and also attracts a lot of shoppers from other cities around China who might not have the same selection at home.”
Beijing is the country’s second-biggest market and has been bolstering its retail position with massive development plans, including more luxury malls. Last fall saw the opening of the Golden Resources Shopping Mall in the city’s university district — a 5.9 million-square-foot monolith of more than 500 stores, restaurants and attractions that the developers say is the biggest mall in Asia and one of the largest in the world. By comparison, the Mall of America in Bloomington, Minn., measures 4.2 million square feet.
Now nearly full, the Golden Resources mall has developed a mix of prices and brands in hopes of luring customers in the heavily populated and less developed area of the city. In a department store that anchors one end of the mall, big foreign names like The North Face and Balenciaga mix with local labels like Frogme Zila, Paluopo and Nice, an apparel brand whose slogan is “Fashion Assuredly Fascination.” The mall’s designers planned the shopping center as an all-in-one retail destination, where shoppers could browse a range of price points and then take in a movie and dinner or go ice-skating.
The convenience of megamall shopping is a relatively new concept in China, but one that other cities have been quick to adopt. Outside of Beijing and Shanghai, dozens of cities with populations of more than 1 million are now developing as retail hotbeds for foreign brands. Luxury brands are opening stores in provincial capitals and second-tier cities such as Harbin, in the far north of China, and Shenzhen, in the south just outside Hong Kong.One of the major secondary markets to emerge is Hangzhou, a lakeside city about 110 miles west of Shanghai in the country’s wealthy Yangtze River delta region. A longtime vacation destination for many Chinese, the city has welcomed dozens of foreign luxury stores looking to capitalize on the region’s growing wealth and the city’s proven tourism appeal. Last fall, Louis Vuitton joined the likes of Cartier and Ferragamo in the city’s luxurious Hangzhou Tower mall, which is down the street from a Lane Crawford department store that sells labels such as Prada and Burberry. This spring, Armani and Dolce & Gabbana will both open high-profile stores in prime locations right on the bustling lakefront pedestrian walkway.
The development in Hangzhou is just the start of where brands are looking to expand. Last December, China lifted restrictions on where foreign retail outlets could open and how many shops they could have, a change that could dramatically affect expansion plans.
“Companies now have more options than ever,” said Torrens. “Before, they were chafing under the restrictions, but when there’s a lack of choice, it’s also easier to decide where to go. Now that there are so many options, it will take much longer to work out where they want to be. But they will. After all, China is the focus for many companies right now and there are pockets of wealth to tap into all over the country.
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