SHANGHAI, China — At first glance, the cities of Dalian, Kunming, Wuhan, Shenyang and Wuxi have little in common.
Geographically spread across China, two of them are in the industrial northeast, one close to the financial centre of Shanghai, another in the far reaches of the southwest, and another in the middle of the country. Though all are ostensibly second-tier cities, some are provincial capitals, while others are centres of tourism, education or culture.
One thing now uniting these five cities is their identification by Gucci's parent company as areas ripe for brick-and-mortar expansion. Kering has signed a multi-faceted co-operation agreement with Hang Lung Properties, one of China’s largest real estate developers, to open 14 new boutiques for five brands in six cities throughout the country.
In recent years, Hang Lung, a Hong Kong-based developer — led by Executive Director Norman Chan, who oversees the group’s property and leasing in both Hong Kong and Mainland China — invested 1.6 billion yuan ($230.4 million) to upgrade its two Shanghai retail properties, Plaza 66 and Grand Gateway 66. The Kering agreement sees Saint Laurent relocating to larger premises, as well as Boucheron and Balenciaga opening permanent locations in the prestigious Plaza 66 complex, and new stores for Kering brands in Grand Gateway 66.
Hang Lung has also invested $4 billion in five projects under construction: four in provincial capitals such as Kunming in Yunnan province, Wuhan in Hubei province, Hangzhou in Zhejiang province and Shenyang in Liaoning province, in addition to a development in Wuxi, Jiangsu province.
Beyond Shanghai, the agreement means new stores for Gucci and other Kering brands in five of these fast-rising urban centres, a nod to the changing face of China’s luxury market.
“This agreement with Hang Lung gives us access to the entire spectrum of Chinese luxury shopping,” Kering’s Real Estate Director, Sergi Villar, said when the deal was announced. “From the traditional luxury consumer to the emerging affluent shopper.”
Big Deals in Lower Tiers
After government-imposed tariffs on luxury goods were cut in recent years, Chinese consumers have increasingly spent a larger proportion of their estimated $123 billion luxury goods budget at home. This reshoring is only being accelerated by ongoing political strife in Hong Kong — the neighbouring tax haven that was a popular Chinese luxury shopping destination.
Domestically, over half of the country’s luxury spend now comes from beyond China’s first-tier cities, according to a 2019 report from BCG and Tencent. In recent years, luxury brands have looked beyond Beijing, Shanghai, Guangzhou and Shenzhen to expand their brick-and-mortar networks in Chengdu, Hangzhou and Nanjing. Now, they are looking even further afield.
But this isn't their first roll of the dice. At the start of last decade, luxury brands were planning extensive store roll-outs across China to take advantage of what seemed an unquenchable desire for luxury goods. Those plans were scuttled by the ascendancy of Xi Jinping in 2012 and his trademark crackdown on corruption, which not only scuttled luxury growth and put plans for more luxury stores on hold, but also forced brands such as Louis Vuitton and Giorgio Armani to close existing stores.
It also forced luxury consumption abroad, where Chinese consumers enjoyed greater choice at significantly lower prices. While luxury brands may have reaped short-term rewards from skyrocketing sales in their European stores, it came at the expense of inadequate strategies for long-term development in these important second-tier cities.
According to Retail Strategy Consultant James Hawkey, luxury brands suffered as a result of “partnering with smaller local landlords with a parochial understanding of the luxury business. The result was that the poor-quality stores in lower tiers suffered poor sales and became unsustainable,” he said.
Even as stores were closed and consolidated, brands continued to remain alert for high quality opportunities in second-tier cities, Hawkey explained. Scoring partnerships with local operators boasting strong track records of operating luxury malls in China such as Hang Lung or The Wharf Holdings can give luxury players an edge in particularly opaque market regions.
“The luxury market [in any lower-tier city] is a small fraction of the size of the Shanghai or Beijing market,” he added. “Therefore, luxury retailers want to pick the project which will dominate each market, which is sometimes not an easy task.”
The Hubs to Watch
Kering’s interest in Dalian, Kunming, Wuhan, Shenyang and Wuxi, therefore, is tied to Hang Lung’s own ambitions to become the dominant player in these markets. But what are the underlying fundamentals that make these specific cities attractive now?
In China’s densely-populated centre, Wuhan has a population of over 11 million and is becoming one of the mainland’s most popular “influencer cities” among younger residents and visitors, thanks to relatively low living costs and an increasing number of high-tech jobs being made available in the city as a result of government subsidies.
Wuhan — despite becoming known as ground zero for a concerning strain of “new pneumonia” in recent weeks — has become a burgeoning tech hub. It is home to smartphone maker Xiaomi and livestreaming game platform Douyu, in addition to a second headquarters for Shanghai-based social commerce app Xiaohongshu.
The app’s co-founder Miranda Qu, herself originally from Wuhan, said the site would house 5,000 employees by the end of this year, but the reasons for Xiaohongshu opening shop in Wuhan weren’t simply sentimental.
“Wuhan has obvious advantages in science and education talents. There are [hundreds of] universities and [more than] 1.3 million college students, which means it has a rich talent pool,” a Xiaohongshu spokesperson told BoF.
This cohort of post-90s graduates are the same consumers McKinsey estimates are spending 25,000 yuan (around $3,567) a year on luxury goods — already as much as their Generation X parents, making graduate-heavy cities a natural draw for luxury brands.
At the other end of the country in the northeast or dongbei region — an industrial heartland that has suffered disproportionately from the country’s economic slowdown — a love of luxury has endured from earlier years. Just last year, Liu Xiaoran, a native of the capital of Liaoning province, Shenyang, opened her multi-brand store, Inner Shop, in the coastal city of Dalian. It now stocks brands like Ambush, Y’s and MM6.
“People in northeast China are crazy for luxury brands!” Liu said, joking that dongbei residents are responsible for “most of the luxury purchases at SKP,” a top mall in Beijing.
“The Mix-C mall [in Shenyang] is very popular, it’s one of the top 30 shopping malls according to profit in all of China. It’s where the rich people in Shenyang like to go.”
Though Shenyang, with its population of eight million and a well-worn luxury shopping district in Taiyuan Street has been a destination for luxury brands since the ‘90s (when Louis Vuitton and Ermenegildo Zegna first opened their doors), Liu says she chose to launch her store in Dalian because of the small but stable population of wealthy inhabitants who have less options when it comes to niche designer brands.
“We did some research on cities and found Dalian had a good foundation of fashion,” Liu explained, pointing to its International Fashion Festival, which has been running since the 1990s, long before fashion weeks and festivals were de rigueur for Chinese cities.
“Dalian is a coastal city and very liveable, rich people from northeast China like to move to Dalian… they had the first Hermès store in the northeast, even before Shenyang,” she added.
Wuxi wouldn’t be detracting customers from Shanghai; it would be adding new customers to the brand mix.
A different proposition is Wuxi, a city in Jiangsu province. Its proximity to Shanghai — less than an hour away by train — meant Kering’s Sergi Villar was initially worried that establishing a presence in the city would eat into business in the nearby metropolis.
“We had to be sure we didn’t have too many doors,” he said. “But Wuxi’s Centre 66 mall is a successful development in a local shopping mall, and in assessing customer behaviour we judged that Wuxi wouldn’t be detracting customers from Shanghai; it would be adding new customers to the brand mix.”
The capital of laid-back Yunnan province, Kunming is best known for its proximity to Southeast Asia and its unique vibe, populated with numerous minority cultures. The popular tourist destination’s high-end shopping developments cater to domestic travellers as well as the local population.
As a gateway for trade with countries to the south of the Chinese border, the city is a linchpin of the Belt and Road initiative. Investment for a high-speed rail network connecting China with Singapore via Laos, Thailand and even possibly Myanmar means that Kunming is earmarked to become an international transport hub.
While the five cities have different consumer strengths, demographics and characteristics, they share a common trait that companies like Kering and Hang Lung recognise as essential when deciding where to invest next. As dynamic regional powerhouses with the potential to growth their already engaged high net worth locals, they will continue to attract other big names to open and expand in their fast-evolving retail districts.
FASHION & BEAUTY
Diesel x Pronounce Debuts at LFW Men’s
Diesel has teamed up with Chinese sportswear label Pronounce for an 18-piece unisex ready-to-wear and denim collection. Part of the capsule collection was debuted during Pronounce’s autumn 2020 fashion show in London this week, while the full collection will be revealed during Shanghai Fashion Week in March. The collection, which is characterised by watermarks, tie-dye, contrasting stitching details and eye-catching logo graphics, will be available to buy in China and at certain Diesel stores from the end of March. (Diesel)
Brands Walk a Fine Line Between Chinese Netizens and Hong Kong Protesters
While 2019 saw a number of fashion brands apologise to angry Chinese netizens over products and websites that labelled Hong Kong and Taiwan as independent territories, Adidas has faced the wrath of protestors in Hong Kong for their choice of a new celebrity ambassador. Liu Yifei, the Chinese actress playing Mulan in the upcoming live action version of the Disney film, expected in theatres in March, has publicly shown her support for the police in their ongoing clashes with protestors. When Adidas announced Liu would be its womenswear ambassador recently, protestors attacked the brand’s flagship store in Hong Kong. The line between angering Chinese netizens and Hong Kong protestors is increasingly a tightrope. (Guancha)
Chinese Perfume Follows Path of C-Beauty Popularity
China's perfume market has experienced rapid growth in recent years, with a number of new perfume brands simultaneously rising to seize gaps in the market left by international players. The Uttori brand, founded in 2017, for example, is already well-known in the perfume industry for its focus on Chinese botanicals, including orchid, Chinese plum and pine fragrances. Although Chinese consumers accustomed to using perfume are still a minority, the rising middle class has increased its consumption of fragrances and annual sales for the sector are estimated to be somewhere between 30 and 50 billion yuan ($4.3 and 7.2 billion). (Aijing Wang for BoF China)
TECH & INNOVATION
Douyin Hits 400 Million Users
Bytedance’s short video app Douyin has surpassed 400 million daily active users (DAU), according to its 2019 annual report. The annual report also highlighted Douyin’s original music push amid Bytedance’s stalemate with major global music labels, which have been seeking higher royalties. Douyin has been facing fierce competition from rival short video platform Kuaishou, which entered “battle mode” in June in an effort to boost its DAU to 300 million by the end of January. Kuaishou is the exclusive interactive partner of CCTV’s annual Spring Festival gala later this month, commonly called the world’s “most watched” television event. (Technode)
Chinese Internet Giants Brace for New Anti-Trust Law
Draft legislation released by the State Administration for Market Regulation will expand the definition of what constitutes a dominant position with potential to harm competition. Companies' ability to collect and process data has been added to the criteria, as well as the scale of their internet operations and first-mover advantage. The move has been seen as targeting leading players such as Alibaba Group Holding and Tencent Holdings and follows moves by authorities in Japan, the European Union and elsewhere to rein in online platforms. The antitrust bill will be finalised by January 31. Other proposed changes include a framework for the government to review fair competition and a tenfold increase in the maximum fine for violations. (Nikkei Asian Review)
Huawei Profits Rise Less Than Expected Amid Controversies
Huawei Technologies said its full-year revenue would likely jump 18 percent in 2019 to 850 billion yuan ($121.72 billion), lower than its earlier projections, as a US trade blacklisting curbed growth and disrupted its ability to source key parts. The world’s biggest maker of telecom network equipment and the second largest manufacturer of smartphones, was all but banned by the United States in May from doing business with US companies, preventing its access to technology like Google’s Android operating system. The company did not break down fourth-quarter figures but according to Reuters calculations based on its previous statements, revenue in the quarter to end December 31 rose to 239.2 billion yuan ($23.28 billion), up 3.9 percent from a year earlier and slower than the 27 percent increase reported in the third quarter. (Reuters)
CONSUMER & RETAIL
Chinese Retailer Denies Copycat Claims
Chinese brand “Cherlss & Keich” has denied allegations of intellectual property infringement, after consumers complained of being tricked by its close resemblances with Singaporean fast-fashion brand Charles & Keith. On Weibo, users said they shopped at stores that looked almost the same as Charles & Keith’s only to find the brand name on the products was spelled differently. The Cherlss & Keich brand is run by a leather product company in the southern city of Guangzhou. The Chinese brand reportedly has close to 100 branches, and is looking to open more stores. Charles & Keith, nicknamed “little CK” in China (the “big CK” being Calvin Klein), has more than 280 stores in mainland China, according to its website. (Inkstone)
Harrods to Open in Shanghai, Sort Of
British department store Harrods will open its first stand-alone site in China by the middle of this year, but it won’t be open to everyone, and it won’t look much like the 90,000-square-metre original in Knightsbridge. The Shanghai version, called The Residence and due to open in Pudong District, will be limited to private shoppers, who will be able to enjoy a bar and tea room as part of its 464-square-metre footprint. Still, the move is seen as significant, marking the first physical location of this type outside of the UK and a concerted effort to more consistently engage with the Chinese VIPs who are responsible for a significant portion of Harrods' turnover. (Inside Retail)
Data-Driven Physical Real Estate Still Wins Chinese Consumers
Today, physical stores are often showrooms where consumers can test out new technologies or sample clothing, perhaps an experience augmented with a “smart mirror” that can explore the full range of styles and colour combinations. Even if they make the bulk of their purchases online, Asian consumers still like going to the mall for the social experience. Malls that can also offer experiential spaces can set themselves apart and gain a competitive edge. On the flip-side, even when dealing with physical property, digital information is key. Harnessing that flow of data is the key to success in creating the right blend of physical and virtual property to serve not only the market of today but also the needs of consumers tomorrow. (Urban Land)
POLITICS, ECONOMY, SOCIETY
Elon Musk Shows Foreign Companies How to Make Friends in China
Open Gigafactory in Shanghai, check. Make friends with Jack Ma, check. Publicly eat street food and hot pot, check. Endearingly awkward dance moves at public appearances, check. Elon Musk has been on an ongoing charm offensive over multiple visits to China since announcing the opening of his Shanghai factory a year ago. This week, he appeared once again in Shanghai to celebrate the first delivery of Chinese-made Tesla Model 3 vehicles to customers. If his aim was to engender goodwill in China, it has worked. Glowing tributes to Musk abound on social media and the state run Global Times has run with the story of Tesla in China as an example of the country’s “miraculous” manufacturing capabilities. (Global Times)
China’s Massive Annual Spring Festival Migration Begins
Over 300 million train tickets for the Spring Festival travel rush have been sold since pre-sales for the period began on December 12, 2019, according to figures from China's railway operator. This week saw a single-day record of 16.33 million tickets sold for train journeys on January 31, the first working day after the week-long Lunar New Year holiday, the China State Railway Group (CSRC) said. Popular trains of the day are return trips to major cities like Beijing, Shanghai and Guangzhou, with tickets for the holiday period almost sold out. Thanks to the nationwide promotion of electronic tickets, travellers can use their ID cards to enter and exit train stations instead of using paper tickets for boarding, according to the CSRC. (Xinhua)
China Reacts to Awkwafina’s Golden Globes Win
The actress became the first Asian-American woman to ever win a Golden Globe for best actress in a film category this week, when she picked up the Hollywood Foreign Press Association award for Best Actress in a Musical or Comedy for her star role in Lulu Wang’s The Farewell. And despite the film seeing its mainland China release delayed last year, the Chinese internet went into celebration mode at the news. The actress, who was born in Long Island as Nora Lum, is only the sixth actor of Asian descent to be nominated in the category. The Farewell — known as Don’t Tell Her in Chinese — is now set for a proper release in mainland China this week. (Radii China)
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