Not Beijing, Shanxi. That's the strategy Beijing's Scitech Plaza, one of the city's oldest high-end department stores, employed when it celebrated its 14th anniversary last year.
In promoting its 25 percent anniversary discount, the store skipped Beijing altogether and concentrated its ad blitz on Shanxi, an interior province in North China once mostly known for its dry hills and grim coal mines.
As the management correctly gauged, there's more juice in Shanxi's nouveau riche than the salaried of Beijing. Hundreds of Scitech faithful from Shanxi flocked to Beijing, many flying in for the yearly bash. They stayed at an adjacent luxury hotel, also owned by Scitech, and splurged on 14,000-yuan La Mer cosmetics, 20,000-yuan fur coats and 7,000-yuan shoes.
Together with an army of the fellow moneybags from Hebei, Inner Mongolia and Tianjin, the shoppers from Shanxi sent Scitech's sales figures soaring to 20 million yuan on the anniversary day, the store's highest-ever single-day revenue.
Scitech's anniversary strategy reflects a larger trend - of wealth spreading from a handful of traditional urban centers such as Beijing, Shanghai and Guangzhou to the so-called second-tier cities, and even obscure small towns.
Pick any weekend and check the license plates at the parking lot of Yan Sha Outlets on Beijing's 4th Ring Road. You will be surprised how many of those shiny sedans are from out of town, mostly from neighboring Hebei Province. Clearly, for the have-money-will-spend class in second-tier cities, driving to Beijing to shop for luxury brands has become the new Sunday morning sport.
Follow the money
The rapidly growing purchasing power and appetite for high-end products in small cities have drawn the attention of top international luxury lines, which are increasingly gravitating to second-tier cities.
Louis Vuitton, which entered China 15 years ago and has 16 boutiques spread across 13 cities, has opened shops in three new cities in the last two years - Wenzhou, Kunming and Shenyang. The company's next targets are Chongqing, Harbin, Sanya, Suzhou, Ningbo, Nanjing and Urumqi, according to the company's CEO Yves Carcelle.
French luxury giant Hermes chose Kunming, capital of Southwest China's Yunnan Province, to open its first watch boutique in China two years ago, selling timepieces for up to 260,000 yuan each. The following year, it expanded to Anshan, a steel manufacturing base in Northeast China's Liaoning Province.
Writing instruments giant Montblanc last year took over all its outlets from local partners and started operating directly, both in first- and second-tier cities.
Hugo Boss' strategy in secondary cities is simple: be the first, according to Lars Larsen, managing director of Hugo Boss Hong Kong Ltd. At the end of last month, Hugo Boss had 75 points of sale in nearly 40 cities.
The huge population base in small cities is the main attraction for the luxury segment. China's second-tier cities are huge compared to those in Europe or the United States. Luxury brand executives point out that China has over 100 cities with populations of over 1 million, opening up immense possibilities.
Economic liberalization has spawned tens of thousands of private entrepreneurs in Zhejiang, Jiangsu, Fujian and Guangdong provinces. In Northeast China's Liaoning, Jilin and Heilongjiang provinces, there is a long tradition of ostentatious consumption. In Shanxi, the ultra rich, mainly mine owners, are known to flaunt their Ferraris and flash their Omegas.
The demand for luxury products has been growing so rapidly in secondary cities that it has already exceeded the level of demand in first-tier cities 10 years ago. If high-end brands were eager to enter main cities a decade ago, it's thus hardly a surprise to see them flock to small cities now, says Liu Wei, chief analyst with Shanghai-based Integration Strategy Consulting Co Ltd.
Social marker
Liu says a new affluent class has emerged in small cities. They have a strong desire for social recognition and want to stand out in a crowd. "What they care about is not necessarily the intrinsic value of the products. All they need is something that's seen as expensive by others, such as Rolex watches and BMW cars," he says. Agrees Chen Zhan, a research director at TNS, a leading international market research firm.
Although the rich in both first- and second-tier cities have similar longing for luxury goods, those in smaller cities have a vaguer perception of brands than those in large cities, Chen says, with less knowledge about their origins, history and characteristics. What's known and understood, however, is their effectiveness as an immediate social marker.
Still, first-tier cities are still far from saturation. Trend trackers report the emergence of a new breed of big-city consumers they call "understaters", or individuals who prefer more low-profile brands such as Anna Sui and Mac Jacob.
Thus it remains imperative for brands to spread out. One strong factor is rising operating costs, with rentals and wages skyrocketing in cities like Beijing and Shanghai in recent years. It can take several million yuan just to set up a boutique on a Beijing main road.
Finding new growth areas with low costs tops every brand's agenda, especially for latecomers who have already lost the first round to market pioneers from a decade ago.
It's relatively easy to set up shop in emerging cities. After operating for over 10 years in the main cities, most brands have developed solid networks in distribution, logistics, hiring and staff training, so they can expand to smaller markets more easily, Liu says.
Local governments are game, too. They like to have luxury brands open outlets in their areas as their arrival shows that these cities have arrived.
Fighting piracy is another important factor propelling fashion brands to go to small cities. Fakes are, typically, more rampant in these cities than the top ones. Entering these markets is thus seen as an effective strategy to tackle the problem.
Industry observers say it's hard to tell whether big cities or the second-tier ones are more important for business. In big cities, sales growth may be slower as the largest group of consumers is the middle-class office workers. In second-tier cities entrepreneurs are the main patrons and sales growth can be much faster, they say.
Yet in terms of management, human resources, market environment, infrastructure and logistics, main cities are still miles ahead.
Xiao Mingchao, general manager of marketing research firm Shengshi Indexes, says customers in main cities are indispensable. "They still set the trends that their counterparts in second-tier cities follow."
Different strokes
Different market situations should result in different operational methods. The focus in main cities should be to develop brand loyalty, improve customer relationship management and encourage more purchases from regular customers, Xiao says.
In smaller cities, reaching out to new customers should be the main thrust. Thus luxury sellers should concentrate on raising brand awareness, carry out more public relations campaigns and improve the distribution channels in these cities.
Jewelry giant Cartier opens new boutiques in small cities mainly as a means of cultivating the market, rather than seeking profit, Nigel Luk, Cartier Greater China managing director, was recently quoted by the Fashion Times as saying. Reuters reports the jeweler aims to launch 22 to 24 boutiques in China by next year, almost double the existing network.
But some analysts say there is a gap between service quality in first-tier and second-tier cities.
Declining to name the brand, Dirk Jehmlich, general manager of Trendbuero Asia-Pacific region, says attendants at some of this brand's boutiques in Taiyuan, the capital city in Shanxi Province, are "pushy" and pester visitors to buy its products. But in the large cities, the same brand's outlets let customers be.
Jehmlich says such practices are dangerous. "Small-city customers may one day find out the difference when visiting Beijing or Shanghai. That may completely ruin the brand image."
