Online retail sales in China increased 55 percent to RMB 194 billion ($31.5 million) in 2012 and are expected to grow 37 percent to RMB 265 billion ($42.7 million) in 2013, according to Nasdaq. How do we account for the burgeoning of expensive flagship stores in this shifting marketplace?
Some experts believe that flagship stores are instrumental in drawing consumers to new brands and, simultaneously, augmenting online sales.
“In China, flagships create an impression of a brand, and can often be used to elevate the perception of the brand’s value compared to that of the West,” said Kristin Graham, a consultant partnered with CRG, for Nasdaq. In this transitional period, flashy and expensive flagships are being used to educate Chinese consumers, and hopefully lure them to do their ordinary purchases online.
Many big stores are making their way to Shanghai. Sephora just opened their 16,000 square-foot flagship on Nanjing Road. It is the brand’s largest store. Last fall, the Forever 21 flagship moved in down the street. In the Pudong New Area, Apple put down roots for a store that mimicked the New York flagship, and got its most profitable location in the world. Japanese clothing brand Uniqlo announced it would open its largest store in Shanghai on Huai Hai Road by the end of this year.
This sort of expansion is not limited to Shanghai. Louis Vuitton placed a two-story flagship in Chongqing, a Tier 2 city. All of these brands have hoped to gain greater visibility though expensive real estate ventures, and for the moment they seem to be succeeding. “Chinese consumers are often unfamiliar with a product because it has only recently become available. Thus, many Chinese consumers today prefer to be introduced to a brand via a brick-and-mortar store since they want to physically experience the brand and product. Additionally, it is difficult to find new brands online,” said Graham.
Jack Ma, the founder of Alibaba Group Holdings, projects conservatively that online sales in China will jump to 30 percent of total retail sales in China in the next 5 years, from the current 5 percent. To this end, flagship locations will have to be more creative in their presentation, offering more than just what a consumer can get on the brand’s website. This means adding events, stylists, and strong customer service.
“Foreign retailers have found it difficult to physically expand in China, with most falling behind store count targets. To effectively capture the Chinese market, retailers should forgo aggressive physical store expansion and implement a hybrid model in which they open fancy flagship locations in major cities, but focus more on developing an e-commerce platform with strong distribution and logistics capabilities,” Graham offered.
photo credit: mike kalasnik