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Second-tier cities most lucrative China sector: ICLP Loyalty

November 29, 2011

Hugo Boss uses ecommerce to reach Chinese consumers

There are so many parts of China with different demographics, brand affinities and cultures that choosing a starting point can be difficult for luxury brands. Moreover, luxury brands often apply the same marketing techniques to each area, which is a mistake.

Surprisingly, the most lucrative sectors of China right now are lower-tier cities since the big guns such as Beijing, Hong Kong and Shanghai have peaked. Furthermore, the current application of Web-based marketing is the most effective channel to reach Chinese consumers.

“Nowadays, China’s economic excitement is in lower-tier cities, where luxury sales are exploding,” said Sara Beneroso, Shanghai-based marketing and public relations manager of global loyalty marketing agency ICLP China.

“On the one hand, in tier-one cities, luxury brands have reached their sales peak,” she said. “Affluent consumers have become more sophisticated, price-sensitive and brand-savvy, resulting in a more rational consumption.

“On the other hand, in lower-tier cities, luxury consumption is still very conspicuous and consumers are more impulsive.”

ICLP is a customer loyalty firm based in China and London. Its clients include Harrods, Visa and Global Hotel Alliance.

In this Q&A, Ms. Beneroso discusses the most lucrative areas of China, best-practice tips and how marketers can reach Chinese consumers.

What is the most effective marketing channel in China?
The online/digital channel.

In lower-tier cities, where brand awareness is lower and direct-owned store presence is limited or solely played by hardly-manageable local distributors, the online channel represents a key vehicle to ensure there is a layer of communication which is direct between the brands and the consumers to develop a consistency with the brand message.

Moreover, with luxury spending being driven by a younger Generation Y, non-traditional channels such as mobile, digital or social media have been incorporated at a much faster pace than in more mature markets such as Europe or America.

What is the most lucrative section of China right now? Why?
Nowadays, China’s economic excitement is in lower-tier cities, where luxury sales are exploding.

On the one hand, in tier one cities, luxury brands have reached their sales peak. Affluent consumers have become more sophisticated, price-sensitive and brand-savvy, resulting in a more rational consumption.

On the other hand, in lower-tier cities, luxury consumption is still very conspicuous and consumers more impulsive.

Proof of that are sales figures in cities like Chengdu — last year Cartier generated more revenue [there] than in any other city in China and Louis Vuitton registered record sales of $138 million.

How can marketers reach consumers in that area?
For brands who want to develop and grow in China, there are often significant business issues to contend with, such as supply chain, training, recruiting, distribution and pricing.

However, a solid customer-oriented strategy should be a core focus for any brands wishing to increase their penetration in lower-tier cities.

The ever-increasing level of knowledge and sophistication of consumers, coupled with fierce competition, means that consumers are increasingly shopping around before purchasing.

This presents brands with an opportunity to build stronger, more profitable longer-term relationships with their most valuable customers.

To capitalize on this opportunity, luxury brands venturing into China need to begin adopting a well-considered customer relationship strategy based on quality, customer data and insight while choosing the right channel of communication.

Why is it important to reach consumers in lower-tier cities?
Firstly, because luxury spending power is comparable of that of top-tier cities.

Secondly, because in these cities luxury brands are in a customer acquisition phase, representing a unique opportunity to start gaining market share.

And, ultimately, because we are talking about cities with a population of 6, 7 or 8 million, which is the uniqueness of the Chinese market, its size.

What are the main obstacles that marketers should watch out for when getting into this section of China?
Lack of brand awareness and to-the-point consumers will only distinguish Zara from Prada for their price.

Also, there is a lack of local talent with no high-end retail experience.

There is also little familiarity with the local retail estate market.

Final Take
Kayla Hutzler, editorial assistant on Luxury Daily, New York

Rachel Lamb is an associate reporter on Luxury Daily. Her beats are apparel and accessories, arts and entertainment, education, food and beverage, fragrance and personal care, government, healthcare, home furnishings, jewelry, legal/privacy and nonprofits. Reach her at rachel@napean.com.