follow the money
Posted by Laura Fitch on June 14, 2010 10:09 AM
Western fashion brands are looking to expand in mainland China, with Vivienne Westwood planning an additional 20 boutiques throughout the mainland, Burberry slated to add a whopping 66 new stores, Coach opening another 20 locations and Ferragamo planning 10 new stores, according to Alisa Gould-Simon at The Guardian.
That top fashion houses are salvaging the remains of declining international sales by catering to China’s growing population of nouveau riche is not news. But recent expansion plans may indicate an attempt by these fashion icons to expand into China’s second and third-tier cities, widely seen as the next, and potentially highly profitable, frontier for Western brands who have managed to gain a share of the market in Beijing and Shanghai.
The numbers certainly look promising. “It is estimated that the Chinese bought $7.5bn worth of luxury products last year. "We estimate retail sales will grow 16-18% this year," says Jessica Lo, of the China Market Research Group. A report published by McKinsey last autumn predicts that consumption will double in China's 100 biggest cities between 2008 and 2015.
Expanding into second and third tier cities, essentially anything outside of Beijing or Shanghai, will prove more difficult than anticipated for many. Each city in China has its own unique eccentricities in how business is done – from the details of securing rented property to construction of a new store to marketing relationships and public relations.
What worked in Beijing or Shanghai will not necessarily work in Harbin, Chongqing or Guangzhou. Franchise laws in China are close to non-existent, making the selection of who is running the new boutique a critical choice. Staff training issues and sky-high turnover rates, already huge problems in Beijing and Shanghai, are likely to be exacerbated in second and third tier cities that have yet to see the same level of development as their first tier counterparts.
This doesn’t mean that expanding into these cities is a mistake, but it does mean that research into the unique business climates of these cities and securing local business contacts for advice and help will be crucial to success.
It will be interesting to see who manages to pull ahead in this new market segment over the next year.