China’s Smaller Cities Thirst for the Luxe Life

November 20, 2013

China’s Smaller Cities Thirst for the Luxe Life

By JEN LIN-LIU

CHENGDU, China — Just yards away from the enormous statue of Mao Zedong in Tianfu Square, Chengdu’s two most exclusive malls are doing a brisk business on a Wednesday afternoon. Shoppers in the Louis Vuitton flagship at the Yanlord Landmark mall are buying this season’s handbags in bright purples and blues. Just outside the store, a woman in crystal-encrusted high heels and a man carrying a bulging Dior shopping bag walk by. And two men stroll along arm-in-arm, one holding a black Bottega Veneta hand-braided clutch.Edwin Chen, who is sitting on one of the mall’s sofas, says he plans to buy several gifts for friends and clients on today’s shopping excursion. The information technology specialist estimates he spends about $40,000 on brands like Hermès, Gucci, and Louis Vuitton each year, and two-thirds of his luxury purchases are meant to further his “guanxi” — relationships — with friends and associates.

“But I also buy goods for myself, for enjoyment,” he said, echoing the sentiments of many of China’s wealthier residents who no longer wait to buy luxury goods on trips abroad, where the lack of import duties make them 10 percent to 40 percent cheaper. “I am going to see friends in Guangzhou next week, so I need to bring them some presents. Plus, I come to browse because the store managers and I have good relationships. They invite me to exclusive events.”

China recently surpassed Japan as the world’s top consumer of luxury goods, according to a recent report by McKinsey & Co., the global management consulting company. And with the luxury market already maturing in Beijing, Shanghai and Guangzhou, much of the spending that propelled China into the top spot came from the country’s second- and third-tier cities.

While there is no official list dividing China’s cities into tiers, second-tier cities generally are provincial capitals and special administrative cities, most of which have more than three million residents each. Third-tier cities are prefecture- or county-level capitals.

According to Starcom MediaVest Group, a global marketing and media company, more than a third of China’s luxury goods spending already comes from outside Beijing, Shanghai and Guangzhou. And while it expects consumer spending on luxury items in first-tier cities will continue to increase about 8 percent annually, that of consumers in second- and third-tier cities is expected to increase at almost double that rate.

“China’s tier-two cities are becoming extremely important,” said Max Magni, a principal at McKinsey in Hong Kong. “It’s the natural evolution of the market. In Beijing or Shanghai, consumers were already spending a good amount of money five or six years ago. But now consumers in tier-two cities are spending to show off their wealth.”

Chengdu is at the forefront of luxury growth in second-tier cities like Chongqing, Xi’an and Hangzhou. The city, the capital of Sichuan Province in southwestern China, is “the third or fourth most productive” in luxury-goods revenues per square meter, said Paul Husband, managing director of Husband Retail Consulting in Hong Kong.

The average income among Chengdu’s seven million residents has increased at a rate of 14 to 21 percent over the last three years, according to the Chengdu Statistics Bureau. And the city’s businesses attract consumers from across the province, which has more than 80 million residents, a number comparable to the population of Germany.

The annual wealth list compiled by the Hurun Report, a monthly magazine, notes that the province is home to more than 25,500 millionaires and 1,800 what it calls “super-rich” citizens, with assets of more than $16 million.

Compared with the yachts, top-end cars, and art collections that ultrarich Chinese have been buying in recent years, luxury goods are a bargain — and still the best way of showing one’s wealth, Mr. Husband noted. “You can’t wear your yacht or your car the same way you wear your Cartier watch,” he said.

A city known for its teahouses and mah-jongg games in parks, “Chengdu has a certain joie de vivre, a flamboyance that make it different from other second-tier cities,” said Mr. Husband, who also noted that the savings rate in Chengdu is lower than in other Chinese cities.

Another analyst noted that the uptick in luxury spending was particularly noticeable after the devastating 2008 Sichuan earthquake. “They became more likely to spend after the earthquake. They want to make the most of their lives,” said Robert Sue, deputy general manager of Starcom Shanghai, a brand and marketing consultancy.

Luxury fashion brands have taken note. Ten years ago, only a few select luxury goods could be purchased in the lobby of the Sheraton hotel or from the local department store Renhe Chuntian. In the last five years though, dozens of top-end names have opened flagship stores and boutiques here.

The Yanlord Landmark, which opened in 2010, has been particularly successful in courting luxury tenants, which now include Louis Vuitton, Dior and Burberry. Across the street is the Maison Mode department store, which in 2007 began bringing in names like Gucci, Ralph Lauren and Marc by Marc Jacobs.

On a recent visit to Maison Mode, Liu Yang, 30, impulsively purchased a Tiffany silver bracelet for 2,650 renminbi, or $430. “I buy more expensive luxury items in Hong Kong or Korea,” she said, adding that she has a collection of a dozen designer handbags and has already decided on her next purchase: a Chanel bag that retails for 30,000 renminbi.

With two additional high-end malls opening in the next two years, the pace of growth has been so quick that Chengdu is in danger of becoming “oversaturated” with luxury brands, Mr. Husband said.

The growth reflects a national trend. Louis Vuitton now has 47 outlets across the country, 36 of which are located in second- and third-tier cities, including Kunming, in China’s far southwestern province of Yunnan.

Armani has almost 300 stores in nearly 60 Chinese cities. And, “we have very ambitious plans for expansion of all of our brands in China,” said Paul Haouzi, chief executive of Greater China and Asia Pacific for the Armani group.

The more accessible luxury brand Tommy Hilfiger already has 105 stores in 79 cities across the country and has even extended its reach to Tibet and Xinjiang, two autonomous zones more known for their ethnic tensions than fashion.

“We have seen significant growth in China in the past two years, driven in large part by store expansion in second- and third-tier cities,” said Fred Gehring, chief executive of the Tommy Hilfiger Group. “Looking beyond China’s major cities has allowed us to connect with a rapidly growing middle-class consumer that embraces the preppy lifestyle and aspirational spirit of the brand.”

Though second- and third-tier consumers generally are perceived to be less sophisticated and showier than their first-tier counterparts, “simply building lots of stores in Chinese cities and offering merchandise emblazoned with famous logos in not sufficient,” a recent McKinsey report said.

China’s vast size requires different strategies, retail and business executives agree.

“China isn’t one country. The west is totally different from the east,” said Dave Law, associate director of the Savills real estate office in Chengdu. Certain locales are known for being flashier, like Shenyang in China’s northeast, while others are known for tighter pockets, like the inland river port of Chongqing.

Finding the right location, building and staff in remote areas are also big challenges. “Should luxury brands be in tier-two and tier-three cities? Sure,” said Mr. Magni of McKinsey. “But select wisely. You don’t want a consumer’s experience in Paris to be any different than in Chengdu.”