Social marker

Liu says a new affluent class has emerged in small cities. They have a strong desire for social recognition and want to stand out in a crowd. "What they care about is not necessarily the intrinsic value of the products. All they need is something that's seen as expensive by others, such as Rolex watches and BMW cars," he says. Agrees Chen Zhan, a research director at TNS, a leading international market research firm.

Although the rich in both first- and second-tier cities have similar longing for luxury goods, those in smaller cities have a vaguer perception of brands than those in large cities, Chen says, with less knowledge about their origins, history and characteristics. What's known and understood, however, is their effectiveness as an immediate social marker.

Still, first-tier cities are still far from saturation. Trend trackers report the emergence of a new breed of big-city consumers they call "understaters", or individuals who prefer more low-profile brands such as Anna Sui and Mac Jacob.

Thus it remains imperative for brands to spread out. One strong factor is rising operating costs, with rentals and wages skyrocketing in cities like Beijing and Shanghai in recent years. It can take several million yuan just to set up a boutique on a Beijing main road.

Finding new growth areas with low costs tops every brand's agenda, especially for latecomers who have already lost the first round to market pioneers from a decade ago.

It's relatively easy to set up shop in emerging cities. After operating for over 10 years in the main cities, most brands have developed solid networks in distribution, logistics, hiring and staff training, so they can expand to smaller markets more easily, Liu says.

Local governments are game, too. They like to have luxury brands open outlets in their areas as their arrival shows that these cities have arrived.

Fighting piracy is another important factor propelling fashion brands to go to small cities. Fakes are, typically, more rampant in these cities than the top ones. Entering these markets is thus seen as an effective strategy to tackle the problem.

Industry observers say it's hard to tell whether big cities or the second-tier ones are more important for business. In big cities, sales growth may be slower as the largest group of consumers is the middle-class office workers. In second-tier cities entrepreneurs are the main patrons and sales growth can be much faster, they say.

Yet in terms of management, human resources, market environment, infrastructure and logistics, main cities are still miles ahead.

Xiao Mingchao, general manager of marketing research firm Shengshi Indexes, says customers in main cities are indispensable. "They still set the trends that their counterparts in second-tier cities follow."

Different strokes 

Different market situations should result in different operational methods. The focus in main cities should be to develop brand loyalty, improve customer relationship management and encourage more purchases from regular customers, Xiao says.

In smaller cities, reaching out to new customers should be the main thrust. Thus luxury sellers should concentrate on raising brand awareness, carry out more public relations campaigns and improve the distribution channels in these cities.

Jewelry giant Cartier opens new boutiques in small cities mainly as a means of cultivating the market, rather than seeking profit, Nigel Luk, Cartier Greater China managing director, was recently quoted by the Fashion Times as saying. Reuters reports the jeweler aims to launch 22 to 24 boutiques in China by next year, almost double the existing network.

But some analysts say there is a gap between service quality in first-tier and second-tier cities.

Declining to name the brand, Dirk Jehmlich, general manager of Trendbuero Asia-Pacific region, says attendants at some of this brand's boutiques in Taiyuan, the capital city in Shanxi Province, are "pushy" and pester visitors to buy its products. But in the large cities, the same brand's outlets let customers be.

Jehmlich says such practices are dangerous. "Small-city customers may one day find out the difference when visiting Beijing or Shanghai. That may completely ruin the brand image."

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