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What’s in Store in the Luxury Department?

Retail is on the rise again. Bloomberg reports that:

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 [1]” and “Bulls Hit the Shops in China [2]”). 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:

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:

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.

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