Luxury Saturation in China’s Second Tier Cities?

on December 3 2013 | in Retail Trends | by | with No Comments

New Century Global Media Center, Chengdu, China, luxury shopping mall, shopping mall

A decade ago, The New York Times recalls, hardly any luxury goods were for sale in the lobby of the Sheraton hotel Chengdu, or in the Renhe Chuntian hotel nearby. Now, however, dozens of brands and boutiques fill both locations, as well as the Yanlord Landmark mall, opened in 2010, and Maison Mode. With the luxury markets of tier-one cities now fully mature, brands are expanding into tier-two locations, of which Chengdu is a favorite. But with two new high-end malls expected to open within two years, Chengdu – and second-tier cities more generally — faces the possibility of oversaturation.

“China’s tier-two cities are becoming extremely important. 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,” said Max Magni, a principal at McKinsey in Hong Kong. According to Magni’s firm, China recently surpassed Japan as the world’s top consumer of luxury goods. China’s repositioning has a lot to do with the growing spending in China’s second- and third-tier cities.

Chinese luxury consumers are no longer limiting their luxury shopping to trips abroad, where the lack of import duties can make goods 10 to 40 percent cheaper. Instead, to maintain relationships with friends and family, and to treat themselves to a taste of the good life, Chinese shoppers are making purchases close to home and plunking down more money to do so. And small luxury purchases – like accessories – may be more rewarding than large ones, like vehicles and properties. ““You can’t wear your yacht or your car the same way you wear your Cartier watch,” said Paul Husband, managing director of Husband Retail Consulting in Hong Kong.

Starcom MediaVest Group, a global marketing and media company, says that more than a third of China’s luxury goods spending already comes from outside Beijing, Shanghai, and Guangzhou. They also find that consumer spending in first-tier cities will increase by about 8 percent annually, whereas spending in second- and third-tier cities will grow at almost double that rate.

But rapid growth may mean that tier-two cities will soon find themselves inundated. Of Louis Vuitton’s 47 stores in China, 36 are located in second- and third-tier cities. Armani has 300 stores in 60 cities, and Tommy Hilfiger has 105 stores in 79 cities , including the remote autonomous zones of Tibet and Xinjiang.

The experts recommend that brands grow carefully. “Should luxury brands be in tier-two and tier-three cities? Sure,” said Magni, “But select wisely. You don’t want a consumer’s experience in Paris to be any different than in Chengdu.”

photo credit: david chao

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