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Jan
2016

Luxury Insight China – Shenyang market

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In its report entitled China60: From Fast Growth to Smart Growth issued in April this year, Jones Lang Lasalle (JLL), the location ranked 3rd in terms of the number of luxury retailers immediately following Shanghai and Beijing was the Northern T1.5 city of Shenyang. However in terms of overall performance, the same city is only ranked seventh among all nine with the same level of economic status, described as ‘those Tier 2 cities that show great potential to catch up with Tier 1 cities’. With the lowest score in the JLL economic index (economic size and growth, population, wealth, infrastructure, exports, FDI and fixed investment, education, business environment) among all Tier-1.5 cities, the presence and volume of luxury stores in the city appears to be at odds with logical expectations.

So how does a city with relatively low overall economic strength attract such a high volume of luxury brands, and where is Shenyang anyway?

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The local economy

History

Shenyang is the capital city of Liaoning province, sitting in the Northeast region of China. Together with Dalian, Shenyang is the centre of the Mid-southern Liaoning Industry Base of China. Among all the four industry bases of the country (Beijing, Tianjin and Tangshan; Shanghai, Hangzhou and Nanjing; Shenzhen, Guangzhou and Zhuhai; and Shenyang and Dalian), the Mid-southern Liaoning Industry Base is the oldest and still the largest heavy industry base of all.

Sitting on various mineral reserves, the whole of Liaoning province has used this advantage to boost its economy and its heavy industry as the country has developed in the past few decades. Using the range of natural resources, Shenyang and Dalian, together with several satellite cities each developed across different industrial categories; working as a network to contribute to the economy of the province. (See list below)

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In 1978, Liaoning province’s industry added value reached 9.3% of the total national industrial added value, ranking it second among all Chinese provinces. The economy and income level of the province was elevated, and as the provincial capital, Shenyang became a portal of luxury stores and shopping malls to reach out to an increased number of affluent consumers, who not only came from cities of this province but of all the three northeastern provinces of China.

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The present

However, as of 2014, the industrial added value of Liaoning province was only 4.5% of the national total and only 8th in China. On one hand this is due to the growth of other industry bases and booming growth across the whole country, and on the other, it is due to the structure of Mid-southern Liaoning Industry Base having too greater an emphasis on heavy industry, making it rigid in responce to the changing economic environment. With government policy shifting towards greater service and finance industries, the province is losing support from Beijing and has been left to carry out reform to survive without central government assistance.

More critically, the economic growth rate of the province has dropped to the bottom five across the entire nation, not only in terms of the industry added value but also the provincial GDP growth. So if luxury retail locally did develop more quickly than the actual economy based on the confidence of the market, and that economy is unable to catch up fast enough, how long can retailers hold on becomes the current question?

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The Luxury Market

History

Through our regular monitoring of luxury brands, the number of luxury stores in Shenyang ranks third, right after Beijing and Shanghai. Although there is a huge and unsurprising gap between the first two and the rest. Merely looking at the total numbers, Shenyang has the third largest number of luxury stores in China, followed by Chengdu, which has become a more popular luxury city in recent years.

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The people of Shenyang were proud to say they had four LV stores alone a 7-kilometer shopping street: The Golden Corridor as it is known. There were over 100 luxury stores solely on this shopping street, representing the prosperity and bright market future of the city.

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In the JLL’s 2015 report assessing luxury and fast fashion retailers across 60 cities of China, Shenyang was ranked the highest in terms of number of luxury retailers among all the first to third tier cities, excluding two alpha cities of Shanghai and Beijing, matching the research of our own team. In the ranking of fast fashion retailers, Shenyang was also ranked among the top 5.

However, the number of luxury stores is a legacy of the more prosperous times Shenyang once had. The slow-down of the national economy has impacted the city greatly, gradual shrinking it, and the new strategies of luxury brands have already started taking effect.

The present

The recent news of stores being closed clearly demonstrates that big brands are rethinking their aggressive expansion in the Tier 1.5 and lower cities of China. So far, LV did not renew the contract for their oldest store in Shenyang, which was also their first step to the Northeastern region 7 years ago. Now they have three, one fewer but still quite impressive for a city like this.

Although other brands like Dior, Burberry and Cartier have closed one of their stores in the city, our research indicates that these brands were moving to more ideal locations and not reducing their footprint. The total number of the stores present in the city hasn’t changed; perhaps indicating that luxury brands still put faith in the local market.

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In our interviews with local consumers, stories of shopping mall operators leaving the city for good are common. From 2010, there have been four foreign shopping mall groups leaving the city. (See table above) An insider of one group revealed that the biggest problem of both Maison Mode and Seibu was that although the top brands on the first floor were performing well, the second to third tier brands on higher floors were constantly changing. These retailers left the malls in search of consumers that the mall did not attract. According to JLL, the mall vacancy rate in Shenyang was 24.3% in 2014, the highest among all the sub-provincial level cities of China.

The problem was also not confined to luxury malls, hotel operators had an issue; after ten years of operation in Shenyang, Continental Group replaced the Continental Hotel brand with another lower level offering from the group: Crown Plaza in 2010, reconfiguring the hotel for a lower level of guest services.

 

The Consumers

History

The radiation of the luxury stores of Shenyang covers the area far beyond the city. Many consumers drive 2 hours from neighboring cities to Shenyang, because it is where they can find the greatest density of luxury brands. Shenyang was the focal point of the entire northeastern region, attracting every brand that took its first step there.

The purchasing habits of the people of Shenyang are quite different from those of their counterparts in southern coastal cities. When consumers from the East and South are still comparing prices and trying to remember what is in their closet an item can match with, consumers from the Northern part of China have already finished paying for three items. One major contributor to the good performance of stores in Shenyang is that the consumers purchase for their “face”. In order not to lose face in comparison, they closely follow what everybody else is buying and act quickly. Sometimes even though luxury may cost a large amount of money, to them, it’s a gesture to show how “generous” they can be to themselves or to others.

The present

The current economic environment is preventing local consumers from making purchases as before. The Internet has also turned many young consumers into luxury specialists, allowing them to be even more selective when making purchase decisions in local stores, a fact is common across all China’s consumers.

“I agree that northeastern people purchase for ‘face’, it is one of the reasons why luxury brands were so popular here. It’s the personality that most our people share in common. But it doesn’t mean we buy things irrationally. People are becoming smarter and know where to collect information,” according to Miss Li, a 29-year-old TV station editor, who earns 10,000 RMB a month.

Miss Li is a frequent visitor to overseas online shopping sites and makes purchases 7 to 8 times a month, mainly buying cosmetics, affordable luxury, accessories, digital devices, and even food. In comparison, she only spends twice a year in local luxury stores, approximately 4,000 RMB each time.

“After all we are very resourceful. In a local luxury store, we may know the price of the same item from different countries. If the price doesn’t fall into our acceptable range, we probably would prefer to wait.” Speaking of price differences, Miss Li mentioned that if the local price is only 2000-3000 RMB higher than that using a Daigo (buying agent), she would make the purchase and that buying is also attractive to her if the discount reaches 6000 RMB.

However, another consumer, whose last name is also Li, pays far less attention to price fluctuation, and her fashion interest has already jumped over luxury to niche brands directly, such as some Hong Kong designer brands created to mimic Hermes. But as an ordinary consumer, she feels the number of local luxury retailers matches with the economic status of Shenyang.

“When I shop in the big malls, there are always 4 to 5 consumers choosing items in each luxury store. Perhaps it was because I always go shopping during peak times, but it also somehow shows that here are certain volume of frequent consumers in Shenyang, or from neighboring cities.” Miss Li herself earns 10000-20000 RMB a month, working in the finance industry. Even though friends around her talked about luxury, her focus was very much on value for money.

 

Editor’s view

Having assessed the city of Shenyang in 2012, we now see that local consumers have unsurprisingly improved their luxury knowledge and experience. Three years ago, the cities consumers showed a common interest in big logo and big brand names. Although this attitude was similar across all Chinese luxury consumers at that time, those in Shenyang were among the top followers for these reasons; demonstrating improved social status was important. However, the younger consumers now appear to be more rational and smart when shopping, and like many other Chinese luxury consumers, their interests extend beyond the more traditional and obvious brands.

The decline of the national economy has combined with the dependence of the local economy on heavy industry causing those who had made money previously from minerals and heavy construction equipment to have less money for luxuries and to spend more wisely. For luxury stores in Shenyang, they must deliver better service and offer products that still satisfy the need for face, but in lower volumes.

The brands must also contend with the greater number of local consumers traveling overseas from the city, which was 1.5 Million at the end of 2014. So although consumption may have slowed down, local stores need to engage more personally with consumers, leveraging the desire to show face with that of spending less and more wisely; not an easy task but after such a major investment in the city, they need greater flexibility as even the most stalwart consumers develop new attitudes.

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