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China: Fashion's New Frontier

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.

Comments

Adela Spain says:

Hy Laura! I also wrote an article about China and the luxury industry, and I must share my question with you. Do you think China is a steady market for these brands or that it will fade away once people start buying more than they can afford? Europe seemed a gold mine a few years ago also, and now retailers struggle to stay alive. I think that China has a lot of potential, but I have trouble seeing if expansion to China will be a long term success or just a short term opportunity. What do you think?

June 14, 2010 11:02 AM #

Laura says:

Hi Adela,

That's an excellent question. Considering the difficulties of setting up and running a business in China, I don't think that any company is looking at it as a short term venture. Whether or not they will survive long term is another story, but as long as the economy keeps growing, I think luxury brands have a chance, provided they do their research on the peculiarities of the local market and tweak their marketing plans accordingly. The massive economic stimulus package installed post-financial crisis managed to keep the worst of the mess away from China's economy, and is an indication of how important economic growth is to those in charge. Image is also an important aspect of Chinese culture, and the country's nouveau riche want to show off their wealth. I don't think this will change anytime soon. However, as they say, only time will tell.

June 14, 2010 10:34 PM #

Adela Spain says:

Hi Laura,

Thank you very much for answering. I am really curious to see how things are going to work out for China. If all the steps that you mentioned are going to be followed I suppose that everything will go well. My concern about China´s reliability as steady market for luxury brands was also based on what you´ve mentioned about the Chinese culture. Because, in fact, they actually buy fancy products just to show off. Anyway, I suppose we must let time play its part.

June 18, 2010 08:04 AM #

Jing Daily United States says:

We agree, in terms of localization being an important part of the marketing strategies, and it is happening in markets other than fashion. For example, it's fascinating to watch the localization strategies being employed by foreign automakers in the China market, and I think these strategies are going to continue to pay off in the long term, even as domestic Chinese brands gradually lose their stigma among wealthier buyers. I think companies like Geely and Chery are still several years away from having a vehicle that can be a viable luxury competitor to the ubiquitous Audis and BMWs all over China, but who knows -- if Chinese companies snap up western brands at bargain prices they might just figure out a way to do it sooner. http://bit.ly/yVH6y

June 17, 2010 02:58 PM #

forex says:

Well china really is one the most fast growing or you can say slowly higher and higher growing economy.China came in to existence in 1949 and that is really remarkable that it beats all the countries even which got the freedom before it.

June 21, 2010 02:31 AM #

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