For many major luxury brands in China, inland is in. With top-tier markets like Beijing, Shanghai and Guangzhou becoming saturated with high-end brands, everyone from dominant players like Louis Vuitton and Burberry to more exclusive brands like Bottega Veneta and Bulgari seems to be opening a new location in a second- or third-tier city every week. Though cities like Hohhot, Zhengzhou, Changchun and Wuhan don't hold the same prestige outside of China as its glittering east coast gems, for many luxury brands they're potential engines of sustainable growth, where those who can afford it shop locally far more often than their Beijing or Shanghai counterparts and local governments are keen to increase high-end construction.
This week, the Swiss luxury brand Bally became the latest to announce further plans for expansion into lower-tier cities, with Dinesh Tandon, Bally's Asia-Pacific chief executive, telling Reuters that the company has already made a great deal of progress in smaller markets like Hohhot, Inner Mongolia and Kunming, Yunnan province. From Reuters:
[Bally's further] expansion would be focused around development within China and could constitute about 35 percent of overall business worldwide, Tandon said.
"We anticipate this to increase to around 50 percent in the next three years."
He said that although revenue levels in smaller cities were much lower than in bigger cities in per square foot terms, "because the markets are new, landlords are willing to enter into very competitive deals with tenants, allowing tenants to make a lot of profit initially".
Although luxury execs seem to be, on the whole, positive about the speed at which their brands are opening new locations in comparatively untested markets, this expansion is cause for concern among some observers. As we noted in a recent post, a number of academics and commentators have raised the issue of brand dilution in China, writing that brands risk losing their air of exclusivity in key top-tier markets (where brand loyalty can be lucrative) by opening too many locations in more remote cities. So will this be a problem for Bally? Possibly -- although the brand does benefit from relatively low brand awareness compared to counterparts like Gucci or Louis Vuitton, and if Bally can successfully leverage its long history in its China marketing it may -- for the moment -- sidestep any possible perceptions that it's "too common" among sophisticated top-tier city residents.