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Selling to Shenzhen’s Tech Millionaires

To unleash the full potential of ‘China’s Silicon Valley’ luxury brands must invest more in the vibrant city at its core and better understand the local mindset.
Luxury is underpenetrated in ‘China’s Silicon Valley’ but brands need to better understand the nuances of the local consumer to unleash the city’s full potential.
To unleash the full potential of ‘China’s Silicon Valley’ luxury brands must invest more in the vibrant city at its core, Shenzhen. (Getty Images)

Key insights

  • Demand from Shenzhen used to be fulfilled by stores in nearby Hong Kong but more brands expanded to the innovation hub during the pandemic.
  • The city has a highly educated, affluent and ambitious population with a consumer base that tends to be quality focused but not necessarily anti-glamour.
  • Retail space is abundant and more affordable than other Chinese cities with similar spending power and there are new formats in the pipeline.

A sprawling metropolis like Shenzhen should be a goldmine for luxury brands but until recently it has been something of an afterthought. Home to more billionaires than London — it has 94, according to this year’s Hurun Rich List, compared to the UK capital’s 87 — the tech hub is one of China’s richest cities.

It is also one of the country’s most entrepreneurial places, serving as the headquarters of WeChat parent Tencent, phone maker Huawei, the world’s biggest electric vehicle maker BYD, drone giant DJI and a dizzying array of firms across a vast hardware manufacturing ecosystem. In other words, Shenzhen is an innovation hotspot. So for global luxury brands looking to invest in underserved markets, the city’s workforce represents a much wider consumer base than its exclusive billionaire club.

In 2022, the number of high-net-worth individuals (US dollar millionaires) in Shenzhen reached 45,700, trailing only Beijing (128,200) and Shanghai (127,200) on the Chinese mainland. Though Hong Kong’s millionaire population was higher at 129,500, it is shrinking fast (Shenzhen, by contrast, is surging). To put the local luxury market into a global perspective, Shenzhen is now home to more than twice as many millionaires as places like Monaco, Abu Dhabi or Riyadh, according to consultancy Henley & Partners citing data from New World Wealth.

Despite all that, Shenzhen has traditionally sat further down the priority list for most luxury brands expanding across China, often coming after the southwestern cities of Chengdu and Chongqing, which are known to be more freewheeling and edgy stylistically, and sometimes Hangzhou, which is home to a refined and moneyed crowd including tech workers from Alibaba and NetEase.

Now, however, there are signs that the luxury industry is finally waking up to Shenzhen’s true potential — even if it has yet to fully grasp the nuanced shopping preferences of its residents.

“In the past five years, Shenzhen has transformed from a ‘fashion desert’ known for its fast-paced work [culture] to a city full of shopping malls,” said Justin Peng, chief executive of Labelhood, a trendsetting fashion retailer that opened in Shenzhen in late 2021.

The expansion of that store from its home base in Shanghai points to the maturation of Shenzhen’s shopping scene away from the mega-brand mix available at top malls like MixC, Mix Tiandi, K11 and One Avenue that dominated the market. “Nowadays, it not only has luxury malls, but also shops [with] different kinds of buying. For example, [we’ve] brought some relatively niche designer brands to Shenzhen,” Peng added.

The city’s reputation as an ‘oddball’ luxury market is nevertheless hard to shake.

Shenzhen’s economic and demographic fundamentals are solid. With a population of roughly 13 million, it has enjoyed powerful government backing going back to 1980, when it was established as one of China’s first special economic zones. Last year, despite Covid lockdowns Shenzhen managed to grow its economy by 3.3 percent to 3.24 trillion yuan ($462 billion). But its proximity to Hong Kong has been a double-edged sword.

It has benefitted from being part of the Greater Bay Area megacity cluster that includes not only special administrative regions Hong Kong and Macau but also other cities in Guangdong province like Guangzhou and Zhuhai. Because of that though, most high-end shopping demand in Shenzhen could be fulfilled by the retail offering in Hong Kong, which high speed trains can reach in 14 minutes, or in Guangzhou, which is a half hour away and still on the mainland.

“Perhaps 10 years ago, people [from Shenzhen] would purposely go to Hong Kong for shopping because of the collection of fashion brands from all over the world, as well as buying stores such as Joyce boutique and Lane Crawford,” Peng said.

The need for brands to prioritise Shenzhen only became apparent when lockdown perimeters were put around cities across China and easy cross-border travel to Hong Kong was suspended for three years. With demand trapped in Shenzhen, brands had to belatedly make their move.

Chanel established its first store in the city during that period, and Delvaux and Moynat were among the newcomers. Brands like Hermès and Louis Vuitton expanded their footprint to a second Shenzhen store and Galeries Lafayette, the Paris-based luxury department store, started planning its third store in China after Beijing and Shanghai, which is set to open in Shenzhen later this year.

Calling it a “booming market”, Galeries Lafayette said in its announcement it was investing in the city because Shenzhen is a “world centre for innovation, technology and fashion, and is very popular with Generation-Z.”

No wonder Burberry unveiled its first high-tech “social retail” store in the city in 2020 through a collaboration with Tencent. Other brands soon realised the city’s vibrant entrepreneurial energy could one day give Hong Kong a run for its money.

While Hong Kong’s dominance as a financial hub is less in question, Shenzhen has a burgeoning local fashion week of its own and is connected to the wider Pearl River fashion manufacturing cluster. The city has produced a wave of acclaimed designer brands like Samuel Guiyang, Pronounce, and Xu Zhi, and is host to art world institutions like OCAT and a museum affiliated with the UK’s Victoria & Albert.

So even though the border with Hong Kong fully reopened at the start of this year, some expect the local shopping habits that consumers picked up during the pandemic to end up being sticky. Although tax and price gaps still exist, not all will feel compelled to make the journey across the border for their shopping needs, particularly if Shenzhen’s plans to create several duty free zones in Luohu, Yantian, and Qianhai districts come to fruition.

It helps that Shenzhen consumers are becoming increasingly sophisticated, fashion industry insiders suggest.

“I think for a long time, it was not considered a very fashionable city,” said Yichi Zhang, founder of ASP Consulting and a Shenzhen native. “But they’re smart spenders, you know? It might take a bit of time to pick up [the slack but] they’re not the type who resist [fashion either].”

Although Shenzhen is often dubbed China’s Silicon Valley, Zhang said there isn’t an anti-fashion current in its tech crowd like there is in San Francisco in the US. Intentional wardrobe blandness or dishevelment aren’t ways to signal intellectual superiority in Shenzhen.

“It’s not ‘oh, I’m cooler than this fashionista and I don’t care about fashion’… they love to dress up a bunch and are open to fashion ideas. Shenzhen was the very beginning of the fashion manufacturing industry in China, right?” said Zhang, referring to the wider industrial region.

Peng from Labelhood agreed that people outside the fashion industry in Shenzhen tend to dress casually and spend a smaller percentage of their money on clothes and accessories compared to other first-tier cities in China, “but there has been an upward trend in recent years,” he noted.

Also sensing an opening, cool multi-brand retailers like SND and Hug from China’s more fashionable Chongqing and Chengdu, respectively, have started encroaching southwards opening their firsts outposts there.

Last year, the opening of the Houhai Harbour complex, which houses the AUNN Museum and the new SND store, created a new youth-centred shopping hub that includes Tokyo’s Studious boutique, streetwear retailer Nowre, and sports labels like New Balance.

Despite the flurry of recent activity, the picture across Shenzhen’s retail market is mixed. According to a March report by Cushman & Wakefield, Shenzhen’s overall retail vacancy rate remains at a historical high level, and approximately 644,000 square metres of new supply is slated to enter the market.

“We can expect intensifying competition to attract quality tenants,” said Zhang Xiaoduan, who oversees research for south and central China for the property brokerage. “Shenzhen’s retail sales year over year growth rate in 2022 was at 2.2 percent, [which] ranked first among the tier one cities, indicating its market potential... [but] retail consumption behaviour nonetheless remained cautious in Q1.”

Some of the uncertainty could stem from the rising youth employment rate in China which is sitting at record highs. Because Shenzhen skews demographically young, it has been more exposed to restrained spending among that cohort. The recent regulatory crackdown on big tech and the property slump could also be factors.

Nevertheless, ASP Consulting’s Zhang said she advises her clients to take a look at the city now while there is a clear opportunity to enter or expand. Property firm Jones Lang Laselle is forecasting a bottoming out of rents to come by the end of this year.

“It’s so saturated in markets in Shanghai and Chengdu,” Zhang said. “Shenzhen is a place that has the spending power and people are willing to try new things because an international outlook is inherently part of the city’s DNA.”

But some suggest that Shenzhen’s nearest neighbour, Guangzhou, might still be a slightly higher priority for brands considering a retail roll-out.

“If I was advising a new fashion brand, I’d say start with Guangzhou but then make sure that you cover Shenzhen as well. You’re not going to go wrong [with that strategy] because between Guangzhou and Hong Kong, you are going to cover off a lot of the top [fashion consumers living] in Shenzhen,” said Rupert Hoogewerf, founder of the Hurun Report.

Zhang, however, seems to believe that the ideal window of opportunity for Shenzhen is imminent. “[If you invest big now] probably you’re doing it a little bit ahead of time, but you don’t want to do it [late] when everyone is already there — unless [you can afford to because] you’re a big mega-brand.”

THE LATEST NEWS FROM CHINA

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Perfect Diary Parent Q1 Revenue Slides 14%

Chinese beauty group Yatsen Holding reported a 14 percent year over year decline in revenue to 765 million renminbi ($108 million) in the first quarter. Its core colour cosmetics business declined by 20.1 percent from a year ago but revenue from its skin care division which includes Eve Lom rose 34.2 percent. Skin care now contributes 32 percent of total revenue up from 20.5 percent last year. (Ladymax, Yahoo Finance)

Shein Allowed Back into India Market

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消费与零售

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5/20 Chinese Valentine’s Day Spurs Spending

The number of consumers shopping for 5/20 products to celebrate one of China’s three Valentine’s Days increased 1.4 times year-on-year on Douyin between May 12 to May 20. Fragrance sales increased 186 percent year-on-year and lipstick sales surged 143 percent. (Global Times)

April Retail Sales Jump 18.1 Percent

China’s national retail sales jumped 18.4 percent year over year in April but under the forecast for 21 percent increase. Still, it marked the quickest growth rate since March 2021 and was significantly faster than the 10.6 percent increase in March. Apparel and accessories rose 32.4 percent, cosmetics was up 24.3 percent, and jewellery rose 44.7 percent. (Reuters, LinkShop)

Alibaba Misses Revenue Estimates, Plans Layoffs in Cloud Unit

Alibaba Group posted a 2 percent rise in quarterly revenue that missed expectations. The group’s cloud unit, which will be one of the largest once spun off, is reportedly planning to reduce headcount by as much as 7 percent. (BoF, Bloomberg)

Chinese Growing Trend to Travel ‘Like Special Forces’

A popular viral trend for Chinese tourists looking for ways to pinch pennies is to “travel like special forces,” meaning to make an aggressive assault on a tourist area to see and do as much as possible for as little money as possible. Over the past May holiday travellers spent an average of 540 yuan versus 603 renminbi in 2019. (Reuters)

科技与供应链

SUPPLY CHAIN & TECH

TikTok Sues Montana for Banning App

ByteDance-owned TikTok has launched a lawsuit against Montana, after it became the first American state to attempt to ban the social media app. The company argues the ban, which would take effect next year, violates the US First Amendment rights of both the company and users. (BoF, BoF)

China’s Fibre Imports from Australia Drop 41 Percent

China’s imports of fibre, mainly cotton, from Australia have dropped 41 percent in the last four years even as Chinese apparel exports to Australia have grown 44 percent in that same period. The two nations have grappled with diplomatic tensions including over the issue of Uighur forced labour, although trade relations have somewhat improved in recent months. (Fibre2Fashion)

China Issues Ban on US Chipmaker Micron

American chipmaker Micron carries “serious network security risks,” Chinese authorities said, announcing a ban on the firm’s products from key infrastructure projects. The move is seen as a response to US efforts to restrict China’s access to key technology. (BBC, Reuters)

政治,经济与社会

POLITICS, ECONOMY & SOCIETY

China Rebuffs G7 Stance and US Expectation of Relations Thaw

China rejected the Biden administration’s prediction of a thaw in US-China relations, also summoning the ambassador of Japan, which hosted the G7 summit in Hiroshima, to complain that the meeting which took place recently showcased “bloc confrontation and Cold War mentality” towards China. (WSJ)

Free Trade Zone Values Up Nearly 7 Percent in Q1

The value of trade in China’s free trade zones increased 6.6 percent year over year in the first quarter with total foreign trade in 21 zones totalling 1.8 trillion yuan ($260.5 billion), according to the ministry of commerce. A British Chamber of Commerce survey found that three quarters of British companies expressed “cautious yet conditional” optimism about doing business in China. (Fibre2Fashion, Caixin)

Skills Mismatch Leaves China’s Young Graduates Without Jobs

China has an excess of college graduates, particularly in the tech and education sectors, even as factories struggle to fill roles, according to a recent report to Goldman Sachs. Regulatory crackdowns in tech, education and real estate over recent years has shrunk the size of those sectors, fuelling an unemployment rate for people ages 16 to 24 to a record high of 20.4 percent last month — much higher than the overall jobless rate of nearly 5 percent. (CNBC, WSJ)

China Braces for New Covid Variant Wave

China is in the midst of an XBB variant Covid-19 wave projected to peak near the end of June with 65 million infections a week, according to a senior health official. A resurgence in cases has been seen since late April as immunity among the Chinese population wanes after an initial wave last December and January when the country first dismantled zero-Covid policy measures. (Bloomberg)

China Decoded wants to hear from you. Send tips, suggestions, complaints and compliments to our Senior Correspondent Tiffany Ap at tiffany.ap@businessoffashion.com

© 2024 The Business of Fashion. All rights reserved. For more information read our Terms & Conditions

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