A Neo-Westward Movement: Luxury’s Geo-Expansion In China


Alexander Wei | July 27, 2023

Hermès sets up its “Le Monde d’Hermès Kiosk” in Haikou.Credit: Courtesy

The Chinese luxury market is showing no signs of slowing down. Luxury brands are continuing to expand physically in China, how will their playbook change in the post-pandemic era?

In early June, a signature orange hoarding was placed in front of the Centre 66 in Wuxi, marking the return of one of luxury's most prestigious brands to one of China's second-tier city in the Jiangsu province, after more than 10 years.

Hermès new store is set to open in early 2024, and its decision to relaunch in Wuxi indicates just how important its consumers are. With the third-highest GDP per capita, beyond Beijing, Shanghai, and Shenzhen, Wuxi is close to major shopping hubs like Shanghai and Hangzhou, but unlike many cities impacted by the long-lasting effects of the global COVID-19 pandemic, tenant sales have increased 1 per cent year on year in Centre 66. This high-end mall, where Hermès will be located, has already welcomed brands like Balenciaga and Tiffany & Co. in the last year. For those already based there, like Louis Vuitton, business is thriving. Sales at its store in Centre 66 reportedly exceeded 100 million RMB last year.

And Wuxi is not the only location that Hermès is opening stores in. It opened stores in Zhengzhou and Tianjin in 2022 and 2023, respectively, at the "one-new-city-per-year" pace mentioned by its Chief Executive Axel Dumas at the previous earnings meetings. Additionally, the company renovated its two flagship locations, The Peninsula Beijing and Plaza 66.

But the further push into China from luxury brands expanding their physical stores comes at a time when, after three years of strict travel restrictions, Chinese tourists are beginning to travel abroad again to buy luxury goods in other countries. Which begs the question, what kind of Chinese consumer is the luxury industry targeting today?

A Two-Pronged Approach

The idea behind China's constant expansion of luxury is fairly straightforward – Bain & Co. forecasts that China will surpass the United States as the world's largest luxury market, along with the growth of high-net-worth individuals, regardless of future international travel patterns.

And despite the easing of travel restrictions, the majority of Chinese consumers will still purchase luxury goods domestically in the near future because of the limited flight capacity – a point mentioned in the interviews given by Philippe Blondiaux, Global Chief Financial Officer of Chanel, and Guillaume de Seynes, Managing Director at Hermès.

According to DAST, the number of international flights has only recovered to 46 per cent of the levels seen in 2019, and as of the 9th of July, the recovery rate varies between nations.

“We believe a significant portion of Chinese luxury consumption will continue to take place domestically. Luxury products are exclusive, the urgency of ownership prompts purchases of luxury products and travelling abroad does not happen frequently,” said Willi Sun, Head of Advisory, Consumer & Retail of KPMG China. “In addition, consumers already developed the habit of shopping domestically and built the connection with many FAs during the pandemic era.”

The luxury market in mainland China experienced a quantum leap during the pandemic, more than doubling in size in just three years. High-end commercial real estate development has also been fuelled by it. Leading real estate companies like China Resources, Yintai Group, and Hang Lung Group continue to be instrumental in bringing luxury brands to cities like Fuzhou, Nanning, and Dalian. The brand portfolio in these cities was also enriched by the success of a few smaller players, including David Plaza in Zhengzhou, Hankyu in Ningbo, and Wushang Mall in Wuhan.

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China's recent economic growth has increased purchasing power in lower-tier cities. According to a recent report co-released by Tencent Marketing Insights and BCG, luxury spending in second-tier and lower cities, where consumers make up 51 per cent of China's luxury consumer base, is expected to increase by 11 per cent.

These consumers formerly had two options for shopping: online or in higher-tier cities. With the opening of luxury malls, a well-positioned infrastructure begins to draw brands with stringent store location requirements, like Louis Vuitton and Chanel, to cities outside the first tier.

However, there is still room for brand footprints in China's megacities thanks to the abundance of retail space and Very Important Customer clusters, which encourage brands to establish one-of-a-kind experiences here and bolster their market presence.

According to Jacques Roizen, Managing Director, Consulting at DLG (Digital Luxury Group), he believes that brands need to “remember that dollar millionaires are supposed to double in China over the next three years; these people need to be treated with a level of exclusivity and services that shouldn’t be visible to occasional buyers, as it would dilute the experience.”

To provide a more comprehensive selection and increase its VIP space, Chanel has started renovating the storefronts of IFC and Plaza 66 in Shanghai, which will be its second and third three-story locations in China other than the Peninsula one. In Guangzhou and Shenzhen, the brand intends to debut its exclusive VIP store, Les Salon Privés. Blondiaux asserts that the brand in China has recovered to double-digit growth following the pandemic, more than making up for the sluggish US market.

Asset Enhancement

The "premiumisation" of commercial real estate in China has been a driving force behind expanding the retail network in first-tier cities. In 2021, Ronnie Chan, Chair of Hang Lung Group, stated that the company invariably strives to upgrade its sub-luxury portfolio to luxury, noting that – “Besides much richer rental margins, [top-end malls] are far more difficult to be replaced by e-commerce. They are much more defendable.”

The group's portfolio in Dalian and Wuxi has delivered results, and its Parc 66 in Jinan is still undergoing its three-year AEI (Asset Enhancement Initiatives). Luxury beauty labels like Tom Ford and Gucci Beauty have already established their presence in Parc 66.

Aside from Hang Lung, almost all high-end developers are enhancing their assets, and a noteworthy example is Swire Properties. The HKRI Taikoo Hui is situated on Nanjing West Road, which is surrounded by prestigious shopping centres. Taikoo Hui, the group's mid-tier project, has a less 'luxury' brand mix than Taikoo Li. However, the mall started bringing in high-end brands like Loewe last year, and in June of this year, Balenciaga's hoarding arrived on its north podium. The cost of the store is reportedly over 40 million RMB.

The group’s other flagship project – Taikoo Li Sanlitun, is now in its 15th year. As a fashion landmark in Beijing, this commercial complex has had a tumultuous history. In the early days, The opening of Taikoo Li initially drew a large number of flagship stores, including the first Apple Store in China. But as the market changed, names like Off-White and Maison Margiela shut their doors.

The Thom Browne storefront in Taikoo Li SanlitunCredit: Courtesy of Thom Browne

This commercial complex is celebrating its high points this year with the presence of Louis Vuitton and Dior in the north section and rumours that Hermès will open a stand-alone store next to them. Taikoo Li Sanlitun is now one of the four upscale shopping centres that Bernard Arnault visited in Beijing.

Sun states that when choosing their store locations, brands typically focus on five main aspects: positioning and heritage, location and mall environment, brand and tenant mix, service quality, and high-end consumer base. “A quality commercial complex should be located downtown or commercial district, and also provide private and exclusive place to luxury tenants while being able to collaborate with high-end brands to do mall innovation,” he explained. “To distinctly classify retail brands and non-shopping tenants, clear brand clusters must be planned.”

A North and South zone were planned for Taikoo Li from the outset, with the Southern zone concentrating on FMCG and mid-tier brands and the Northern zone housing premium and luxury brands. Having three or even four floors of a standalone store was a risky investment for brands in the early years of China's luxury market when it was still in its infancy. The time is now right as the market soars

Unexpected Getaways

Launching pop-up spaces not only provides luxury companies with a marketing opportunity, but also demonstrates that brands are aware of the market's growth potential and prepared to explore it.

Different luxury brands, including Loro Piana, Valentino, and Gucci, are betting on the hottest destinations, including St. Tropez, the Amalfi Coast, and Ramatuelle, to unveil chic experiential spaces and focus on high net worth individuals on their summer getaway as the world moves past the shadow of COVID-19 (especially given that Chinese tourists are returning to the West).

It is no exception in China.

On June 5th, a limited-time space for Louis Vuitton opened at a beach near Xiamen, Fujian. This pop-up includes a Louis Vuitton bookstore, dining experience, and items from the brand's “LV By The Pool” collection and bag set that are only available in Xiamen.

Louis Vuitton opened a limited-time space for its summer collection in Xiamen.Credit: Courtesy of Louis Vuitton

Luxury brands are being encouraged to offer more upscale experiences, campaigns, and stores by the repatriation of Chinese luxury consumers. Along with Louis Vuitton, brands like Dior and Hermès also take advantage of summer and winter vacations to open pop-up shops in popular tourist areas in China. As an illustration, Changbaishan, Sanya, and Aranya have grown to be well-liked venues for brand activations.

Roizen states: “For brands, it's really about choosing locations that convey exclusive and luxury DNA, and initiating meaningful experiences that say they are a part of the lifestyle that the people who go there have. In this context, consumers can associate both the aspiration to visit these locations and the aspiration to purchase from the brand.”

In contrast to other travel spots, Xiamen not only has tourism resources, but it also boasts a sizable local HNWI population. While Tiffany & Co. recently opened its first store in this city, Louis Vuitton started to expand its storefront in the MixC Xiamen starting last year.

Although brands can reach consumers anywhere in China with the help of online channels, offline presence is indispensable for luxury. “In-person services and quality checks are important considerations in luxury purchases, which are difficult to realise in online channels,” opines Sun. Based on recent research that they have conducted on HNWI consumers, 87 per cent of respondents believe that shopping malls will not be replaced, he adds.

The Chinese luxury market is showing no signs of slowing down, and in the wake of the pandemic, luxury brands' ventures there appear to be just getting started.

China | Retail | VIP