We caught up with Corbett Wall to discuss retail location strategy in China for luxury brands. Corbett is a Senior Vice-President at AEG and partner at CW+, a firm that advises brands on retail location strategy and other key issues related to running retail in China. Corbett has extensive experience travelling to second, third and fourth tier cities walking malls and talking with retail landlords and operators, and has countless stories of brand successes and failures in both first and lower tier markets.
Q: Given the competitive retail landscape and high operating costs in Shanghai and Beijing, do you recommend that luxury brands enter the market in the first tier cities, or should they just go straight to second tier cities?
A: Entering Beijing and Shanghai is really a branding and marketing decision. It is almost a given that brands will not make money on stores in Beijing and Shanghai. There are so few good retail locations in each market, and every luxury brand is lining up to get the same few spots. On top of that, rents are high and most consumers in Beijing and Shanghai are relatively spoiled for choice. It’s really difficult to build brand loyalty in Shanghai and Beijing — all the same people go to all the parties, but once your event is over, they don’t really care anymore. However, from a branding standpoint, brands may feel that they need to be in Shanghai and Beijing.
More creative approaches to retail location for market entry are starting to take hold. We are seeing many luxury brands first locate in Hong Kong as their initial entry point to Mainland China, particularly given the difference in luxury taxes between Hong Kong and the Mainland.
I think luxury brands going straight to second tier markets for their entry to Mainland China is a great idea. If you were to go to a prominent retail location in a second tier city and tell them “I don’t like Shanghai and Beijing. I would rather locate here first”, they would love you and would give you an amazing location.
In general, it always takes much longer to open stores in China than expected. It typically takes at least a year to open a store, sometimes even longer if you are waiting for the perfect spot in Shanghai and Beijing. It may make sense to go to a second tier city first, demonstrate the performance of your store and then go back to Shanghai and Beijing to renegotiate with more leverage.
Q: Do brands that are part of a group (like a Richemont, LVMH, etc..) typically get better retail locations than stand alone brands?
A: Many of the brand groups retail location strategy is being driven by their Hong Kong offices, and they typically negotiate a block of retail space that they divide among their brands. This is both good and bad for them. Due to the large block of space and range of brands, groups have more negotiating leverage than a single brand would have. However, retail landlords will often bundle the best locations with the worst locations, so the brands with the biggest China business get great locations, and the ones that are newer to the market typically get saddled with the less than optimal locations.
Q: What is the biggest challenge for brands operating retail in second and third tier cities?
A: Next to retail location, service is the single biggest issue that retailers face in China, especially in second and third tier cities. There is no retail tradition in China and no veterans to train the young group of service professionals. Many brands are sending foreigners to train and run stores, but there are issues around language and local customs. The hardest thing to teach is the intangibles. Kentucky Fried Chicken has done the best job at training staff in China – they have set up Universities and invested heavily in training.
Retailers are paying high salaries for retail staff in second tier cities (often up to 8,000 to 10,000 RMB per month – on par with corporate staff in large cities), but just paying higher salaries doesn’t necessarily translate to better service.
Q: What trends are you seeing for luxury brands running their own China operations versus working with a national distributor or partner to operate for them?
A: We are seeing many of the luxury brands taking their business back from distributors and opting to run it themselves. There are still a number of distributors running brands in the market though – ranging from large scale operators to smaller, more niche players. In general, we are seeing the distributors acting like venture capitalists – they pick ten brands to represent, knowing that only one may make it big. They are hedging their bets and taking a portfolio approach for the most part.
An issue for both self-run operations and distributor run is the choice of local franchise partners in second and third tier cities. Due to the high cost of product to fill a luxury store, the nature of most local partners is that they are “connected in complicated ways”, so if you enter into an agreement with a partner that later turns sour, things can get very messy.
Q: Which luxury brands have the best retail location strategy?
A: Each of the brands is following a slightly different strategy, depending upon their customer base and brand positioning. Luis Vuitton for example has spread out very wide across China, and is in most tier 2 cities and a few tier 3 cities. Cartier, on the other hand, has gone to a smaller number of cities, but has gone deep into tier 3 and tier 4 cities. Many of the luxury brands are seeing a single store in a second or third tier city being their best performing store in the world.
In general, I tell brands to go where the money is, so long as you can handle it.