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Why Gucci Is Investing Big in These Five Cities

A multi-faceted partnership with one of the China's biggest luxury mall developers is just part of the equation.
Gucci's Disney Chinese New Year Collection and it's Pin pop-up concept | Collage by BoF
  • Casey Hall

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.

Hang Lung's Olympia 66 mall, located in Dalian | Source: Aedas

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.

Consumers outside Prada's store in the IFS shopping district, Chengdu | Source: Shutterstock

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.

Inside Inner Shop, a new multi-brand store in up-and-coming Dalian | Source: Courtesy

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.


Diesel x Pronounce | Source: Courtesy

Diesel x Pronounce Debuts at LFW Men’s

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Chinese Perfume Follows Path of C-Beauty Popularity

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Chinese mobile users commuting in Beijing | Source: Shutterstock

Douyin Hits 400 Million Users

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Chinese Internet Giants Brace for New Anti-Trust Law

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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)


A Charles & Keith storefront in Singapore | Source: Charles & Keith

Chinese Retailer Denies Copycat Claims

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Elon Musk | Source: Shutterstock

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