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Expansion and evolution in Shanghai's luxury goods market

Shanghai is, arguably, the mainland's most affluent and stylish city. Qi Xiaozhai, Director of the Shanghai Commercial Economic Research Center, traces the changing demands and expectations that have shaped its current generation of luxury goods consumers and asks what exactly the future holds in this ever more packed market.

Photo: Shanghai: the mainland's most stylish and affluent city. (©iStockphoto/fotovoyager)
Shanghai: the mainland's most stylish and affluent city.

Despite the ongoing appreciation of the Renminbi, the retail prices of many imported luxury brand products on sale in Shanghai have basically remain unchanged. The prices of such goods have remained exceptionally high, showing a mark-up of approximately 30% above the cost of similar goods in overseas retail markets. This price difference has driven consumer demand for such items away from Shanghai retailers and towards outlets in other locations, where significantly lower prices can be secured. Hong Kong has been a prime beneficiary of this trend.

Spending by businesses has been somewhat constrained since January 2013 when Central Government introduced an initiative aimed at restricting overly extravagant expenditure. Despite this, consumer demand for luxury brand products has continued to grow. The price differential notwithstanding, this demand has been sufficient to spur the continued growth of luxury brands in the Shanghai market, while also acting to change the way these brands target the market and the way in which they are perceived.

Legislation challenges expansion, but growth continues

1. The luxury goods consumer sector cools down

It has been well-documented that the developed economies have seen an understandable slump in demand for luxury goods since the advent of the global financial crisis. The so-called "eight provisions" adopted across the mainland as part of a government initiative aimed at restricting public expenditure has had a similarly dampening effect. As a result, the mainland's high-end catering, high-end liquor and high-end gift sectors have all experienced a significant downturn since early 2013. The strict controls imposed on both government spending and spending by state-owned enterprises has inspired similar frugality among consumers, leading to a drop in conspicuous consumption, while reducing the enthusiasm for luxury brand consumption.

2. Luxury brands continue Shanghai investment

The Nanjing West Road commercial district has the highest concentration of luxury brands in Shanghai. It not only caters to local consumers, but also attracts high-end shoppers from the Yangtze River Delta region and many other well-to-do areas across the mainland. At present, several new luxury brands clusters are also emerging in central Shanghai. Grand Gateway 66 at Xujiahui commercial district, for instance, has seen the arrival of many top-tier international brands as a result of a brand reorganisation exercise.

Other areas have shown similar expansion in the sector. Shanghai K11, part of Hong Kong's New World Group, opened at the end of June 2013 on the Huaihai Middle Road. This new development has already proved attractive to a number of luxury brands, with several of them – including Vacheron Constantin, Dunhill, LV and Hermès – opening flagship stores on the site. This, though, represents just a small part of the activity in the luxury sector, with Lane Crawford now set to move back to Times Square and the new IAPM mall, under construction by Sun Hung Kai, a Hong Kong property developer, set to open at the junction of Huaihai Road and Shaanxi Road.

In order to fully appreciate the level of luxury-related activity, a number of other new developments should also be borne in mind – the new mall under construction at Nanjing East Road by Shanghai New World; the arrival of Giorgio Armani and Prada flagship stores (among others) at The Peninsula Shanghai and the Rock Bund; the formation of new luxury cluster at Lujiazui at Pudong, with Shanghai IFC of the Sun Hung Kai Properties Group as the leading attraction and the opening of the Takashimaya and L'Avenue upmarket department stores in Hongqiao. All of this new activity comes on top of the existing high-end stores at the Hongqiao Friendship Shopping Centre and the Global Harbor site.

Evolving consumer behaviour and altered priorities

The main spur for many luxury brand consumers is the pursuit of social respect and approval, with the opportunity for ostentation being a major factor for a significant number of individuals. Other considerations include a desire to emulate stars and celebrities.

With the market maturing, conspicuous consumption of luxury brands is now less popular, with many consumers opting for a more subtle approach to high-end items. In order to understand the current state of the market, it may be useful to examine the evolution of conspicuous consumption in the Shanghai market.

1. Conspicuous consumption in the 1980s and 1990s

Conspicuous consumption in the Shanghai of the 1980s was characterised by hanging around the street and playing a multi-speaker hi-fi system at top volume. By the 1990s, the stereo had been replaced by the first-generation of mobile phones, making it de rigueur to make loud calls using one of these brick-sized handsets in busy metropolitan areas. Labels were also very much in style, with foreign-sourced suits worn with the labels still attached to the cuffs, while imported sunglasses were sported with the lens labels still in place. While many people now find these ostentatious gestures ridiculous in retrospect, they were considered highly fashionable at the time.

2. Conspicuous consumption in the post-millennium period

By the turn of the century, conspicuous consumption had moved up several notches. Labels became more prominent, largely due to the emphasis placed on them by consumers who wanted to sport them in as ostentatious a fashion as possible, while still allowing the design to appear natural. Consumers also favoured brands that had wide recognition, feeling that spending on little known brands represented a bad investment.

The process of forefronting brands has continued to evolve subsequently. Today, instead of having the logos displayed prominently, sophisticated consumers prefer their branded products to display their heritage and quality through unique fabrics, distinctive patterns, high standards of workmanship and individual cut.

Photo: Luxury brands continue to expand Shanghai retail channels. (©iStockphoto/nikada)
Luxury brands continue to expand Shanghai retail channels.

3. Changes in luxury brand loyalties

The most favoured premium brands among 1980s consumers were Goldlion and Playboy, changing to Montagut and Rolex in the 1990s. Following the turn of the century, consumer tastes increasingly broadened, encompassing such brands as Giorgio Armani and Vacheron Constantin.

Today, many young consumers are familiar with a vast number of global luxury brands, but are not au fait with the culture that engendered them. Many of them have shifting preferences, flitting between the variety of recognisable international brands currently en vogue with mainland consumers. Most consumers lack strong brand loyalty, frequently defecting to those brands offering the greatest discounts or, while shopping abroad, opting for those brands offering the greatest price differential compared to mainland outlets.

4. Emerging consumption trends

For the foreseeable future, it seems likely that the market for luxury brands in Shanghai will only continue to expand, although consumers in the sector will become increasingly segmented.

A number of consumers are now moving away from their previously reckless spending patterns and adopting a more rational approach. This has coincided with a departure from the "keeping up with the Joneses" approach to spending in favour of a more individualistic consumption pattern. This is partly because many upmarket consumers abandon previous brand favourites when they are adopted by the mass market.

This sophistication has seen the brand loyalty of certain consumers becoming somewhat enhanced, moving from having an interest in premium brands in general to focusing on a few particular brands. These consumers pay greater attention to brand culture and favour those products that align closely with their own styles and are unique, but not ostentatious. For these individuals, great importance is attached to personal experience and to enjoying the consumption process.

As part of this greater maturity, a number of consumers now seek a stylish look and lifestyle, but opt to not be overly ostentatious. This is particularly true of many public figures, whose consumption of branded products is now typically more subtle than extravagant.

A new retail approach to luxury brands

1. Evolution of retail formats

In Shanghai, the retail formats of luxury brand outlets have evolved away from hotels, department stores and shopping centres in favour of specialty stores.

Back in the 1980s, the shopping malls within a number of upmarket, multi-star-rated hotels and airport duty-free shops first began to stock premium brands. In the early 1990s, when the Orient Shopping Centre and Jingpin, another upmarket retail site, first opened, a small number of premium brands were introduced in response to consumer demand. The subsequent opening of a number of Sino-foreign JV department stores, notably No. 1 Yaohan, the Maison Mode Department Store and the Jin Jiang Dickson Centre, ushered in the era of dedicated outlets for luxury brands.

In the late 20th century and early 21st century, the Citic Square, Plaza 66 Shanghai and Join Buy 900 had followed the lead of the Westgate Mall and set up on Nanjing West Road, establishing a commercial area that combined luxury brand shopping with catering, entertainment and leisure facilities. It was also at this time that Giorgio Armani, Ermenegildo Zegna and Cartier first set up their specialty flagship stores at Three on the Bund and Bund 18.

2. Emergence of new retail formats

Outlets

Young people now have a higher brand awareness, leading them to assert their individual status through premium brand consumption and a desire to show they are at the cutting edge of style. As they are new recruits to the workforce, however, they often lack the purchasing power to invest in more than just a few premium products. Bearing this in mind, some outlets have now learnt how to meet the demand for premium brand products by young consumers with low purchasing power and an eye for bargains.

The success of the Bailian Outlets Plaza at Zhaoxiang in the Qingpu District has led to the gradual expansion of this particular retail format across a number of different locations. Two such outlets are now being set up near the Pudong Disney Resort and the Pudong Airport, with both having strong overseas partners and an emphasis on functional design, tenant recruitment and product sourcing. There are also other similar outlets in the Songjiang, Jinshan and Baoshan districts. As a result of this expansion, it is expected that intense competition in Shanghai will eventually force some luxury retailers out of business.

Direct sales platforms

The first direct sales platform for global luxury brands in Shanghai, MCG (Modern City shopping Garden) had its soft opening in May 2013, and attracted some 60 well-known European brands as part of its initial offering. It now sends its own buyers to contact overseas brands and manufacturers directly in a bid to cut out any middleman and reduce costs. MCG prides itself on offering products in step with the seasonal collections and styles on offer in the European markets. It has also set its prices at least 30% lower than those in leading shopping malls. The platform also offers several lesser-known luxury brands, ones that are internationally popular, but not widely recognised across the mainland. It is also believed that such direct sales platforms appeal more to consumers that favour a low profile, somewhat reserved approach to luxury goods.

Photo: Brand new: consumers have fickle preferences. (©iStockphoto/raisbeckfoto)
Brand new: consumers have fickle preferences.

Online sales

As well as direct sales, online sales are increasingly a factor in the luxury goods market.

In terms of consumer-to-consumer (C2C) sales, state regulations allow for goods below the value of Rmb5,000 to be brought into the country tax-free if for personal use. Those mailed into the country, with a payable duty of less than Rmb50, are also tax-exempt. In light of stricter customs regulations, overseas purchases via third parties are now restricted. In 2012, these stricter regulations saw a former air hostess convicted for smuggling cosmetics. This prosecution had wide repercussions and led to a drastic drop in the stock available from those sellers that had made overseas purchases for consumers, resulting in a dramatic reduction in their profit margins.

In terms of business-to-consumer (B2C) sales, a number of luxury brands are now setting up online sales channels and looking to combine the advantages of speedy online information transmission with the premium shopping experience offered by physical stores. Overcoming the difficulties involved in reconciling the conflict between online and offline prices, however, remain a daunting task. In order to uphold their brand value, most luxury brands are still opting to steer clear of online sales channels.

Qi Xiaozhai, Director,
The Shanghai Commercial Economic Research Center


Content provided by Picture: HKTDC Research
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