WHILE some top international luxury brands are building bigger, flashier flagship stores in China to boost growth, others are shuttering outlets and refocusing marketing efforts online, underscoring a reshuffle in the world’s third-largest luxury market.

Despite the Chinese mainland luxury market’s strong performance in the first quarter of 2023 following the country’s reopening, growth slowed progressively as macroeconomic concerns arose, according to Bain & Co in a report on Thursday (Jan 25).

Since 2022, top brands including Hermes, Louis Vuitton and Christian Dior have been expanding in China’s biggest cities and doubling down on efforts to court and cultivate a particular group of wealthy spenders – “Very Important Clients”, or VICs, a customer segment that not only accounts for a big proportion of their sales, but is also more insulated against economic slowdowns.

Meanwhile, brands such as Michael Kors are increasingly looking beyond top-tier Chinese cities and relying on online tools such as livestreaming and e-commerce as they seek new growth.

These brands, which are labelled as accessible luxury, are highly dependent on middle-class spending and have been hit particularly hard during the pandemic.

Top brands: newer, bigger stores

A NEWSLETTER FOR YOU

Friday, 2 pm

Lifestyle

Our picks of the latest dining, travel and leisure options to treat yourself.

Sign Up

In recent months, new buildings designed and constructed as mega flagship stores for Louis Vuitton, Dior and Hermes have sprung up in Taikoo Li Sanlitun, a retail fashion landmark in Beijing. The Hermes flagship store will be the French fashion house’s first standalone store in the capital.

Just the temporary hoarding set up for the construction alone cost around 10 million yuan (S$1.9 million), a person familiar with the plans told Caixin, and some fixtures and materials have to be air-freighted from overseas. As a result, they will take a long time to build and construction could take until 2025, the source said.

Despite the high cost, standalone stores can help luxury brands stand out and strengthen their connections with consumers, which in turn will boost sales, said Zhu Jianhui, head of retail research at property services provider JLL China.

Europe’s biggest luxury retailers such as Chanel and Burberry have also stepped up efforts to upgrade their existing retail stores – with a focus on improving their VIP rooms – in an effort to enhance the shopping experience for ultra-rich clients.

In April, Hermes International reopened its outlet in The Peninsula hotel in Beijing, the brand’s first store on the Chinese mainland, following an extensive remodeling that nearly doubled its original size.

Shanghai, another luxury stronghold, saw an even more extensive and rapid upgrade, with 25 luxury stores opening or undergoing major revamps between last January and September, according to a September report by Luxe.Co, a firm that tracks China’s high-end consumer industry.

Dior expanded its flagship store in Plaza 66, revealing in October a four-story shop and a dedicated private space for VIP shoppers. Valentino also unveiled a refurbished two-storey boutique at Plaza 66 in August 2023, with a newly created VIP room.

Luxury spending on the Chinese mainland declined 15 per cent year-on-year in 2022, weighed down by weakened consumer confidence and pandemic restrictions, according to a report released by consulting firm Yaok Institute this week.

Growth returned last year when domestic luxury spending rose 11 per cent, but the figure was still significantly lower than the 37 per cent increase seen in 2021, its data showed.

Yet, brands still have reason to bet big on China and its ultra-rich. The Chinese mainland is ranked third globally in personal luxury goods sales – the heart of the entire luxury industry – with a 15 per cent share in 2022, behind the Americas at 32 per cent and Europe at 27 per cent, according to Bain’s report.

That figure is expected to jump to up to 26 per cent by 2030, with the country becoming the world’s biggest luxury market then.

Brands that depended less on offline traffic and more on VICs ended up faring better in 2022, as the economic slowdown affected entry-level luxury consumers more than high-net-worth individuals, according to Bain in a separate report in February.

China’s luxury market typically attracts a high concentration of VICs, and there was a further increase in concentration of VICs across brands that year, the report said.

Smaller brands: the opposite

Last year, American accessible luxury brand Michael Kors closed three of its stores in Beijing, including one in Taikoo Li Sanlitun, after nearly a decade there. Now Maison Margiela, a French fashion brand that sells mostly clothing items and leather bags costing upward of US$1,000, occupies the site.

Both Michael Kors and its parent company, Capri Holdings, reported an 8.6 per cent drop in revenue in the quarter ending Sep 30, 2023, the latter said in its earnings report in November.

Michael Kors isn’t the only luxury brand that is reducing its footprint in big cities.

Since the start of 2023, while some luxury brands have been expanding, leasing demand from boutique apparel, affordable luxury and designer brands in Beijing and Shanghai has declined, several local commercial real estate professionals told Caixin.

China’s uneven post-pandemic economic recovery and high unemployment among youngsters have seen increasing uncertainties on disposable income among the middle class and young people – the main clientele of accessible luxury goods – and many have put this area of spending on hold.

For entry-level luxury shoppers, luxury items are not something they need to buy regularly, and their motivations for making a purchase are diverse, JLL China’s Zhu told Caixin.

As a result, when income expectations are low, luxury spending is first to get cut back, with people easily replacing premium goods with cheaper alternatives, he said.

As luxury labels gradually reach saturation in China’s biggest cities, some affordable luxury brands are accelerating their entry into smaller cities in search of new growth.

Take Coach, for example. The US fashion brand has 241 retail and discount stores on the Chinese mainland, more than 60 of which are located in third- and fourth-tier cities such as Xingtai in Hebei province, Anshan in Liaoning province and Liaocheng in Shangdong province, according to Coach’s website.

The appetite for spending has been increasing from customers age 30 and below and located in second-tier cities and below, with the group emerging as a future growth driver in the luxury market, according to a joint report by Boston Consulting Group and tech giant Tencent Holdings released last July.

The lack of brick-and-mortar stores in these lower-tier cities have driven many to travel to bigger cities to make their luxury purchases in pursuit of genuine products, and better inventory and sales services, according to the report.

Meanwhile, many affordable luxury brands are also working on expanding their online presence.

In January 2023, Michael Kors joined the e-commerce platform of China’s TikTok twin Douyin and began selling its products via livestreaming. Soon after, Versace, also owned by Capri, brought its youth-targeted sub-brand Versace Jeans Couture into the livestreaming space.

On Alibaba Group Holding’s Tmall Luxury Pavilion, more than 200 luxury brands had established official accounts as of September 2022, according to the Chinese e-commerce giant.

While luxury brands are increasingly expanding their digital sales, some top brands have been holding off compared with their smaller counterparts.

Although Hermes has ventured into e-commerce platforms like Tmall and JD.com, products available are limited to perfumes and beauty products. Hermes’ flagship products, such as the Birkin and Kelly bags, are almost never offered on its official online channels.

This has to do with the business strategy of some of these luxury brands in preferring a direct-to-consumer approach for more control of their sales channels and due to the scarcity of their products, said Gao Qifeng, a vice-president of e-commerce solutions provider Shanghai Baozun E-Commerce. CAIXIN GLOBAL