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SHANGHAI — It was once the case that cities like Shanghai, Beijing and Guangzhou represented the biggest opportunities for luxury brands in China.
This story first appeared in the December 29, 2010 issue of WWD. Subscribe Today.
Now China’s increasingly wealthy second- and third-tier cities are the new battlegrounds for luxury retailers trying to capture a share of the country’s nouveau riche, who have buying power combined with a voracious appetite for high-priced products that show off their fortunes. Sixty percent of new growth opportunities for luxury companies are in such cities, according to research from Bain & Co.
“In Shanghai and Beijing, it is all done,” said Eugene Tang, Jones Lang LaSalle head of retail for China. “They [luxury retailers] are having very good sales in the second-tier cities and also the demand is tremendous. These people have been used to going to Hong Kong or tier-one cities to shop, and now they can actually do it at home.”
Figuring out when and where to expand to can often be a challenge. Beyond Shanghai and Beijing, cities like Hangzhou, Tianjin, Nanjing, Dalian, Suzhou and Shenzhen have long ranked at the top of the list for opening new locations among luxury brands. But beyond those locales, nearly everyone has a different take on where the next hot spots for luxury retailers will be.
WWD compiled a short list of six cities that were mentioned frequently by industry insiders due to their high proportion of wealthy residents, existing presence of luxury retailers or future potential for growth. The cities, profiled below, are Wenzhou, Zhuhai, Chongqing, Hangzhou, Urumqi and Fuzhou.
Still, analysts warned that luxury brands should proceed with caution. There are considerable hurdles when it comes to expanding in China, and experts said retailers need to be cautious about the purchasing power of consumers, the availability of appropriate real estate and finding and training suitable staff as well as many other factors.
“In each of these cities, there are multiple considerations going into opening a store,” said Yuval Atsmon, an associate principal in McKinsey’s Shanghai office. “I would be careful. They [luxury retailers] need to make sure they have fully exploited the opportunities in the top cities first.”
Here, a look at some of the cities that are seen as potential fertile ground for luxury brands.
On the west bank of the Pearl River estuary and just north of Macau, Zhuhai was one of China’s first Special Economic Zones. Major foreign companies in the city, located in Guangdong Province, include BP Chemical, Canon, Mitsumi, Matsushita and Gree, an appliance maker. Stretching across a chain of 146 islands, Zhuhai could be considered a Chinese Cape Cod or Florida Keys. It has been recognized domestically and abroad for being one of the most environmentally friendly cities in China and for protecting its ecology during economic development. It has also been named one of the top tourist destinations in China.
With a population of 1.5 million, Zhuhai is much smaller than many of the other cities attracting luxury brands. Yet its large proportion of wealthy families makes it an up-and-coming destination for high-end retailers, according to Bain & Co., which highlighted Zhuhai as a “dramatic opportunity for new growth” for luxury goods. Although Zhuhai’s overall GDP, at around $13 billion in 2009, is lower than other second-tier cities, McKinsey analysts say luxury retailers should not overlook the city and similar locations where tourism, combined with a large percentage of the population with strong purchasing power, could mean untapped opportunity.
Known as the “City of Banyans,” Fuzhou, the capital of the southern coastal province Fujian (shown above), has flourished since China began opening its economy. Fuzhou’s per-capita GDP ranks in the top 30 among Chinese cities, and it has 10,200 renminbi millionaires, according to Hurun’s 2010 wealth report. Along with Hangzhou and Ningbo, a city also in Zhejiang, Fuzhou ranks among the top destinations for retailers, Debnam said. “We have seen so many IPOs coming from there,” he said. “There are a lot of young, wealthy businessmen in Fuzhou.”
Its main industries include food processing, textiles and chemicals, and it is ranked among China’s top manufacturing cities, attracting more Taiwanese businesses than almost anywhere in China. The local population is well known for leaving the mainland to set up enterprises overseas, particularly in America. It also receives a huge amount of Hong Kong and international investment (around $1.7 billion in foreign direct investment last year), because of its location and savvy businesspeople. In September, Louis Vuitton opened a new store in the city, its second in Fujian. Gucci, Ferragamo, Rolex and Burberry are also there.
With a population of 7.8 million, Hangzhou, a city outside Shanghai and the capital of Zhejiang Province, ranks near the top of the list in terms of its percentage of wealthy residents. According to this year’s Hurun Wealth Report, Hangzhou has 47,300 renminbi millionaires, 2,590 of whom have assets of more than 100 million yuan, or about $15 million. It’s also the home of China’s richest man, Zong Qinghou. Worth $12 billion, Zong amassed his fortune via the Hangzhou Wahaha Group, a company that makes soft drinks.
The city has been a magnet for foreign investment, attracting multinationals including Motorola, Toshiba and Mitsubishi. Other industries include textile manufacturing, chemical production and service outsourcing. The city is home to more than 40 Taiwanese enterprises.
Hangzhou, a city famous for its lakes and Chinese tea culture, is also a top tourist destination, attracting millions of domestic and foreign visitors each year. In October, a high-speed rail between Hangzhou and Shanghai was completed. All this means the city has long been one of the first — and top — destinations for luxury brands expanding beyond Beijing, Shanghai and Guangzhou. “Hangzhou has been important in the luxury industry for a long time,” said Nick Debnam, head of consumer markets with KPMG China. Chanel, Louis Vuitton, Zegna, Dior, Hermès, Balenciaga and Bottega Veneta are among the many major brands that already have stores in the city.
The largest of China’s four provincial municipalities and the
biggest inland port in the country, Chongqing is undoubtedly one of the hottest destinations for luxury retailers trying to reach the growing number of wealthy consumers in the country’s far-flung western regions. With a population of around 30 million in the city and its surrounding area, Chongqing has 9,700 renminbi millionaires and more than 2 million households with a monthly income above 3,500 yuan, or $514, according to a KPMG study.
The manufacturing of iron, steel, cars and pharmaceuticals has fueled the city’s booming economy. It has a GDP of $60 billion, the 24th largest in China. Agriculture also plays a major role, and more multinational companies are moving in — Nokia, Honda, and Samsung, as well as BP and Mobil, have facilities in Chongqing. The city, located near the massive Three Gorges Dam, has also benefited from Beijing’s “Go West” campaign, an initiative aimed at developing infrastructure and policies designed to encourage foreign and private investment in the region.
While luxury retailers may not yet be pervasive in Chongqing, they are coming, said Eugene Tang. A number of luxury brands, including Louis Vuitton and Gucci, are planning stores in Jiefangbe, the richest district in the city, Tang said.
Perhaps one of the more surprising locations for luxury expansion, Urumqi, the capital of Xinjiang, a province bordering Russia, Mongolia, Kazakhstan, Kyrgystan and other Central Asian countries, is increasingly on the radar of luxury firms. “Many people used to laugh about Urumqi,” said Debnam. “Now I know of some luxury companies that have opened stores there and are making money. Successful businessmen in a city like Urumqi know they need to look the part when they meet other businesspeople, especially from the West, and will spend a lot of money on a suit.”
Those successful businessmen have made their money mostly from mining coal (the city has more than 10 billion tons of coal reserves) and other minerals, like copper and uranium. Near the Gobi Desert, Urumqi — with a population of 2.3 million, half of which is made up of the Muslim, Turkish-speaking Uighurs — is also a top tourist spot in the region. Major international hotel chains have opened there, and a few luxury brands are following suit. Louis Vuitton, Ermenegildo Zegna and Cartier are all present in the city.
A small coastal city in Zhejiang, a province just south of Shanghai, Wenzhou, with a population of around 8 million and a GDP of about $32 billion, has become famous as China’s capital of capitalism. Wenzhou has almost no state enterprises, and its businesspeople, known around China and the world for their entrepreneurialism, were at the forefront when Beijing began loosening restrictions on private business in the 1980s. (Ninety-nine percent of all business in the city is in the private sector, according to the local government.)
The city produces 70 percent of the world’s cigarette lighters and 60 percent of its buttons, and its factories make consumer goods that range from electronics to auto parts. The textile industry also accounts for a substantial share of the local economy. Wenzhou is home to more than 2,500 clothing businesses, 290 of which are considered to be large-scale, according to China Apparel Net, a Chinese textile industry news Web site.
The city’s booming private sector has resulted in a high number of incredibly wealthy families. In 2009, one in every three overseas Chinese tourists was from Wenzhou, one-tenth of China’s luxury cars ended up in the city and more than half of the imported wine in Zhejiang Province was consumed there, Hexun, a Chinese news portal, reported. “The people there have been to Paris, Amsterdam, Liverpool,” said Hong Kong designer William Tang. “They have incredible businesses there [in Wenzhou] and can shop huge amounts of luxury brands.”
Retailers are capitalizing on the city’s wealth. In October, Gucci opened a store in Wenzhou; Louis Vuitton, D&G and Salvatore Ferragamo also have outposts. Yet even with the presence of such luxury brands, McKinsey’s research suggests some companies continue to overlook smaller cities like Wenzhou, which, with 20,000 renminbi millionaires, has as many wealthy households as Atlanta.