A Chinese burn for luxury shops

The Chinese middle classes were unable to afford the top-end brands new retailers tried to tempt them with. As David Kilburn reports, this has fuelled a switch to selling cheaper goods.

A walk down Shanghai’s Nanjing Road confirms that China’s rising middle class has a taste for international brands; a taste that was satisfied under the leadership of Deng Xiaoping. Cosmetics and personal care products, not to mention detergents and cleansers from the likes of Procter & Gamble, Unilever, Colgate, Shiseido, and Kao compete for shelf space. Camera shops sell Fuji and Kodak film, and the latest models from Nikon, Canon, Olympus, and Pentax. Television sets from Matsushita, Hitachi, and Toshiba are trucked out of stores as fast as patient queues of consumers file through.

Rolex watches, Motorola cellular telephones, Prada, Hugo Boss, and Burberry raincoats are among the badges that help define status for the upwardly mobile. Foreign brands may sell for 50 per cent to 300 per cent more than their domestic counterparts where they exist, but in the eyes of many shoppers there’s a quality and an attraction in international brand names that justifies a premium.

For this very reason, foreign retailers rushed to China when, in 1992, they were allowed to set up joint venture stores. The newcomers come mainly from Japan and Hong Kong, but also include Wal-Mart from the US, French Carrefour, and the Dutch Makro. Marks & Spencer, now scouting sites, may join the list.

Most of the first wave of new retailers went for the top end of the market and open-ed new department stores, reck- oning competition would be too difficult and margins too slim at the low end.

That has proved a flawed judgement. All the new department stores are reported in the red, and one, Printemps, is for sale. Expensive goods are not selling as well as the newcomers expected.

Rising rents and operating costs helped undermine the original strategems. Added to that is the reality that though Shanghai’s average monthly income at 410 is almost 70 per cent above the national average, they do not afford the middle-class life styles found in Hong Kong and most other Asian countries even when differences in local prices and relative purchasing power are taken into account.

Now, American, Dutch, and Japanese retailers foresee Chinese consumers becoming more price conscious and value oriented – a little like middle-class consumers in many more advanced countries. Instead of luxury stores, they are developing no-frills warehouse stores and value clubs. Makro and Carrefour have both opened hypermarkets that offer bulk buys at prices China’s middle class can afford to pay. Wal-Mart, which opened its first Chinese store in Shenzhen last August, sources about 80 per cent of its products within China and the rest elsewhere in Asia. And sells at prices that compete with traditional Chinese shops and markets.

Analysts say the retail sector is going through a period of adjustment. Western retailers are now focusing on what Chinese consumers can afford, and using their expertise to deliver this.

Forecasters say retail sales could grow at 20 per cent or more each year until 2000, which suggests a wealth of opportunity for those who discover what China’s rising middle class really wants.

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