What’s in Store in the Luxury Department?

Related entries: Business Issues, Consumer Market, Corporate News, Economy, General, Investment

Retail is on the rise again. Bloomberg reports that:

    “China’s retail sales rose at the fastest pace in 17 months in May as increasing incomes spurred spending on cars, furniture and electronics…Sales jumped 14.2 percent to 617.6 billion yuan ($77.1 billion) after climbing 13.6 percent in April, [according to] the Beijing-based National Bureau of Statistics”.

With such strong growth, the domestic consumer market continues to generate a lot of interest, and the retail sector is beefing up to take on the challenge. (See related posts “Local Consumers (and Foreign Retailers) on Spending Spree” and “Bulls Hit the Shops in China”). The Wal-Marts, B&Q’s and others have already made an impact in the mid market, but now there are plans (reported by the FT) to develop more high-end, luxury department stores. The paper reports that:

    • Taiwan’s Shin Kong Mitsukoshi is launching a US$64 million store in Beijing in 2007, together with (50 percent) local partner the Hualian group. Another store is planned for Chongqing in 2008.

    • Saks has also got China plans. They are reported to have a deal with Roosevelt China Investments Corp (RCIC) to open a 300,000 sq. ft. store on Shanghai’s historic Bund in 2008. They also plan a store in Macau.

    • Dickson Concepts is holding off on mainland China for its top-end Harvey Nichols brand – though it has opened in Hong Kong, and has also set up three Seibu stores in Shenzhen (2) and Chengdu. Another may be planned for Shenyang (where I was surprised to see that my favorite Spanish designer already had a store when I visited around 5 years ago!). The FT reports that “Mr Poon believes mainland shoppers are still not ‘sophisticated enough’ to have a full understanding of high fashion”.

While the top end of the retail market is just starting to develop, there are big changes afoot in the retail sector as a whole – driven by the no-longer-elusive, middle-class consumer. In another article, the FT points to the rapid emergence of department stores, chain stores, hypermarkets and shopping centres.

As with other sectors, from accounting to logistics, the pace of change has created bottlenecks and the need for new professional services. The paper notes that:

    ”…there are still no credible specialist developers of retail property on the mainland. Developers have adopted easy solutions, either leasing property long term to a department store or hypermarket, or selling it in small units to investors and entrepreneurs. This leads to a satisfactory outcome for the developer but brings monotony for the shopper and a growing number of ailing retail centres…Chinese developers need to be able to work with retailers to create a much more attractive shopping experience for consumers”.

The question remains, is there sufficient demand for all the luxury stores? Perhaps there is – despite the many high-end, and mostly empty, designer shops you can see in malls in Shanghai and elsewhere. The Chinese are apparently already the biggest market for Swiss watches (though many are wisely bought outside China).

To my mind it all comes back to how you define “China” as a market. Anyone who has spent time in Shanghai, Beijing or Guangzhou – the top tier – will know that there are plenty of real consumers (including some pretty “sophisticated” ones) of luxury items, and that these purchases are not part of a fad that will fade. Indeed the trend is for growth. However, you don’t have to go far from the biggest cities to find a very different sort of market that is more attuned to mid-market or value offerings.

The FT refers to an ACNielsen report, saying that “only 7 per cent of Chinese have purchased designer brands, well behind their Indian counterparts at 31 per cent and the Asian average of 20 per cent”. I think this is typical of some market research on China, which often misses the point that the relevant, accessible market is very focused in a few cities. Factoring in the massive rural population – who have little interest in wearing Prada – produces figures, such as the quoted 7 percent, which can be misleading.

China needs to be broken down into its different markets (by region, province, wealth, infrastructure, or other relevant criteria) in order to make any sense of it. For the luxury retail market, China can certainly not be defined in the widest sense. It is all about the big cities for now.

See news sources:

    China’s Retail Sales Rise More Than Expected in May (Update3)
    Bloomberg – USA
    June 13 (Bloomberg) — China’s retail sales rose at the fastest pace in 17 months in May as increasing incomes spurred spending on cars, furniture and …

    Dawn of the designer culture
    Several high-end retailers are planning to open new department stores in China over the next three years, on the expectation that urban incomes will rise and local consumers will grow more conscious of luxury labels.
    www.ft.com (subscription)

    Developers need retail therapy
    Shopping space has proliferated but imaginative solutions to create an enticing, long-lasting environment are also required, writes James Hawkey, executive consultant for Cushman &Wakefield in China.
    www.ft.com (subscription)

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