Cartier ventures into Yiwu.

Gucci Group NV, the high-end luxury retailing unit of the French-based PPR Group, reported a 3.4% drop in sales volumes for the first quarter of this year. But Gucci's revenues soared 25% in the Asia Pacific outside Japan. In Greater China alone, revenues went to 13% for the same period.

So it's indisputable that Asia has become the focal point for a retailer that relies on the disposable wealth of the most affluent. In the wider context, China overtook the US in January as the second biggest consumer of luxury goods in the world.

Luxury goods have been moving up the high-end ladder regionally. La Prairie, a leading Swiss brand of skincare products, will be marketing its Cellular Cream Platinum Rare face cream on the Mainland at a unit price of Rmb10,000.

Bang & Olufsen, a Danish audio-visual brand, will be launching by the end of the year a 103-inch LCD TV on the Mainland with a price tag of about Rmb1 million.

Having reached maturity in first-tier cities, luxury brands are beginning to venture into second- and third-tier cities. A businessman in Ningbo pointed out that famous brands like LV, Cartier, Zegna, Mont Blanc and Blancpain will be moving into the city before the end of the year.

Cartier opened a new store in Taiyuan in May and another one in Yiwu in June. The Ningbo store, which opened for business at the end of July, is its 28th in China.

According to a Cartier China executive, the brand will "venture into Wuxi and Suzhou in the second half of this year and has a packed 'new store opening' schedule this year." It is understood that Cartier is opening seven to eight stores on the Mainland in 2009.

Gucci, which opened its Wuhan store on 7 July, has been busy opening new outlets in China since last year.

"We opened new stores in Changsha, Fuzhou and Xiamen in the first half of this year and our Shijiazhuang store will open for business in September," said one Gucci executive.

LV has 27 stores in 22 Chinese cities, including second- and third-tier cities like Changsha, Xian, Qingdao, Xiamen, Wuxi and Wenzhou.

Hermès is extending its business to Wuxi, while Piaget has chosen Suzhou as the location for its new store.

According to an industry source, these cities support the international sales growth of such globally-famous luxury brands.

Half a million in half a day

A huge consumer population is the main reason for luxury brands attaching so much attention to second- and third-tier cities.

Preferred Brands of China's Richest 2009 published by Hurun Report in Shanghai this year noted that 52% of rich people live in cities other than Beijing and Shanghai, while residents of second- and third-tier cities have high brand recognition for luxury items.

Goldman Sachs predicts that the number of people in China willing to spend on luxury goods will increase from 40 million to 160 million over the next five years, while second- and third-tier cities are the centres for growth.

"Our survey indicates that 54.6% of residents in second-tier cities said prices would not affect their purchase of luxury goods, only 4.3% lower than in first-tier cities. Their attitude is optimistic," the report concludes.

This view is also shared by Ruder Finn's just-released 2009 China Luxury Forecast.

Some 39.8% of Forecast respondents in second-tier cities said they often go to Hong Kong for shopping, while 33.3% of consumers in Eastern China gave Shanghai as their first preference. The remaining 23.9% said they were happy just to shop locally and saw no need to make a special trip to first-tier cities.

According to the person in charge of the Cartier store in Yiwu, which opened for business in June, the store grossed nearly Rmb500,000 at the end of its first day of business without any publicity.

A man wearing a diamond watch bought a watch of the same model as the one he was wearing after asking about its price in other places. "I used to shop in Hangzhou and Shanghai. Since we now have our own Cartier store and prices are the same, it's simpler just to buy locally," he said.

"Consumption maturity is also important. Leading commercial brands have more or less reached a point of saturation among the trendy set in first-tier cities like Beijing and Shanghai, where high-end consumers are more inclined to choose niche brands with character," said an industry player.

"Growth in first-tier cities is slowing down, whereas preference for major commercial brands is growing in second- and third-tier cities. This potential is what draws luxury brands to these cities," he added.

from Eileen Zhu, Hangzhou Office