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
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
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 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,
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
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
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."