There have been much buzz about brands moving to lower-tier cities as retailers seek further growth. But now, the trend may be reversing. Lower-tier cities may be losing their appeal as a growing number of luxury retailers want to be in first-tier cities again.
The Wall Street Journal reports that economic slowdown in China is making real estate sales in second- and third-tier cities less appealing. “Investors’ tolerance for risk has gone down amidst more moderate economic growth. Buyers are going back to areas that already have mature retail markets and deep consumer bases,” said Steven McCord, the Shanghai-based director of China retail properties research at Jones Lang LaSalle.
Beijing-based economist Xianfang Ren with IHS Global Insight elaborated on the trend, saying that while retail sales are growing in lower-tier cities, the largest retail market is still to be found in the first-tier. So far this year, retail property investments in first-tier cities have hit $9.8 billion, already outpacing the $8.8 billion brought in for the entire 2012 year, said Jones Lang LaSalle. In the cities that the global real-estate services company defines as tier-1.5 cities, investments have fallen from $9.3 billion for all of last year to $2.3 billion currently.
“Key players in luxury retail sectors are realizing that too many stores in second-tier cities have negative impacts on their brand image and profitability,” said Wu Weiyi, vice president of AlixPartners consultancy, which restructures retailers. “Covering too many customers with less expensive products will dilute the brand’s image and is harmful to its luxury position,” he added.
Wu also said that average per-store sales for luxury goods are still much higher in first-tier cities than second-tier cities because of the huge population base and higher incomes. Retail property investors are still interested in first-tier cities because there are more properties with solid cash flow, enabling buyers to get financing, said McCord. He also said that retail property has become more affordable in these major cities in part because investors aren’t expecting rents to rise as fast as they once did.
The rekindling of interest in first-tier cities can also be traced back to an ideology held by the best foreign luxury brands. “It takes longer to stabilize sales in new markets, including in many third-tier cities, compared to building on strong performance in established core locations,” said Sebastian Skiff, executive director for Asia retail at the real-estate services firm CBRE, “A core group of luxury brands that have been in China for many years and have already established a large geographic footprint are now allocating more capital toward improving their stores in major cities.”
A prime example of this trend is Louis Vuitton. The brand currently has 47 stores in China, including the third-tier city of Urumqi, but right now the brand is funneling resources into renovating its flagship store in Beijing’s China World building. A spokeswoman for Louis Vuitton said that the brand is “focusing on improving [and] upgrading the existing stores instead of opening in new markets.”
Jones Lang LaSalle predicts that total investment in Chinese retail properties for 2013 will reach 19.9 billion yuan, matching last year’s total but falling short of 2011’s record high of 23.3 billion yuan.