Understanding luxury in China: Shenzhen

This article is part of our Advanced Membership package. To enjoy unlimited access to The Long View from Vogue Business and bi-monthly Market Insights Reports and webinars, sign up for Advanced Membership here. To receive the Vogue Business China Edit, sign up here. High-level summary: Since Shenzhen became one of China’s first special economic zones (SEZs) in 1980, the city has been an essential growth driver for the country’s economy. In a speech marking the 40th anniversary of the SEZs in October, Chinese President Xi Jinping emphasised the city’s continuing role as an international tech and innovation hub at the heart of the Greater Bay Area cluster, which comprises 11 cities in southeastern China including Hong Kong, Macau and Guangzhou, and has the ambition to rival Silicon Valley and Tokyo Bay. The market-oriented reforms and favourable financial, investment and trade policies initiated in the 1980s transformed Shenzhen. A village of 314,000 people in 1979 was transformed into a metropolis of 13.4 million by 2019, attracting labour from across the country with the promise of economic opportunity. Between 1979 and 2017, Shenzhen’s disposable income per capita and GDP grew at an annual rate of 10.9 per cent and 22.4 per cent, respectively. Initially, a convenient location for companies to relocate labour-intensive manufacturing, often from neighbouring Hong Kong, the city has developed into a high-tech centre, giving birth to some of China’s most successful tech companies including Huawei, Tencent, ZTE and DJI. In 2020 it ranked 17th among the top 20 leading technology innovation hubs outside Silicon Valley, according to KPMG. Together with Beijing, Shanghai and Guangzhou, Shenzhen is today one of the “big four” first-tier cities in China, way ahead of other cities on many metrics including economic development, GDP, population, infrastructure and political and cultural influence. It’s the third city for disposable income per capita in Mainland China and in 2019 had the second-highest per capita expenditure after Shanghai. That should make it a prime location for luxury brands. However, it is striking to note that brands like Louis Vuitton, Gucci and Prada have far fewer stores in Shenzhen compared to Shanghai, Beijing and Hong Kong — usually only one, compared to as many as 14 in the other locations. Chanel has none. One reason for this is the proximity to Hong Kong, according to Steffi Noël, project leader at Daxue Consulting. Hong Kong is only 50 kilometres away and offers cheaper prices and more choice in terms of brands and categories, attracting many shoppers from Shenzhen. In fact, in 2019 Shenzhen ranked below cities like Chongqing, Tianjin and Chengdu for share of luxury consumption. “When we talk about luxury shoppers in Beijing and Shanghai, we also include the people who are travelling there [tourists], but there are not many travellers in Shenzhen because it’s right next to Hong Kong,” says Noël. However, over the past 18 months, Hong Kong’s status as a shopping and travel destination has been downgraded following social and political unrest, returning waves of Covid-19 and the imposition of a national security law. Tourist arrivals dropped 99.8 per cent in October compared to the same month in 2019. Retail sales plunged 27 per cent in the first 10 months of 2020 compared with the same period in 2019. Credit Suisse anticipates brands with from nine to 12 stores in the city will close three stores in the medium term. Where Hong Kong is faltering, Shenzhen is taking up the slack. Repatriation of spending to Mainland China is also fuelling the shift of focus. “There is definitely some evidence of repatriation, not only from Hong Kong but from the rest of the world back into China, in the South especially, so we want to sustain this clientele and drive growth,” says Josie Zhang, head of China for Burberry. The British brand chose Shenzhen to open its first social retail store in August, in partnership with tech giant Tencent, becoming its second store in the city. The Chinese government’s 2020-2025 Implementation Plan, announced in October, aims to consolidate the image of Shenzhen as an example of “socialism with Chinese characteristics”. That includes optimising the business environment through legal and financial reforms, increasing intellectual property protection and facilitating acquisition of foreign talent. It’s not all one-way traffic. Shenzhen will not replace Hong Kong as a financial centre any time soon. Terence Chong, associate professor of economics at The Chinese University of Hong Kong, explains: “Hong Kong is a place where money and people can come and go freely. Shenzhen can develop as a technology hub, but not a financial hub.” In truth, the proximity of Shenzhen to Hong Kong is to the mutual benefit of both cities as well as the development of the Greater Bay Area cluster. Chong believes the cluster is particularly well-positioned to take the lead in Industry 4.0, the ongoing transformation of manufacturing processes through AI, data and the internet of things, because of Shenzhen’s access to technology and competitively priced labour combined with Hong Kong’s financial power and global connectivity. The Shenzhen luxury consumer Shenzhen’s luxury shoppers are typically aged between 20 and 45, female and well educated, according to Daxue Consulting. They often have employment in sectors such as IT and finance, rather than consulting companies and advertising agencies as in Beijing and Shanghai. That makes them less flashy and more conservative in terms of style. Chanel, Dior, Louis Vuitton and Prada are among the most popular luxury brands, in line with national preferences. While Hong Kong captures some of their spending, they are becoming less price sensitive and buy in Shenzhen when stores and services can offer added value. “It’s a national trend, but the behaviour of luxury consumers in Shenzhen regarding offline shopping is even more [geared towards] retailtainment and the leisure side of retail,” says Noël. “If they have access to experiences in Shenzhen, they will buy in Shenzhen.” Among the best places for retailers are MixC, a high-end mall with two locations in Shenzhen’s Luohu and Nanshan districts, and Coco Park, a shopping complex in Futian district catering to a younger clientele, which presents more accessible labels. They offer the mix of entertainment, culture and shopping that attracts young Shenzhen shoppers who might otherwise shop online or in Hong Kong. Steffi Noël highlights Burberry’s new Shenzhen store, located in MixC Shenzhen Bay in Nanshan, which offers a similar winning mix of leisure: highlights include its branded Thomas’s Café and interactivity via a dedicated WeChat mini program and in-store connectivities. Malls and mixed-use developments Shenzhen’s retail recovery from the Covid-19 pandemic is encouraging. Overall retail sales declined 7.5 per cent to RMB 685.8 billion (£78 billion) for the first 10 months of 2020, but monthly sales have posted year-on-year growth since July. This year, the city’s retail vacancy rate reached a record 9.8 per cent, but new projects are in the pipeline. Shenzhen’s prime retail stock is currently 4,996,329 square metres, with 2,179,083 square metres of new projects under construction until 2023, according to Cushman & Wakefield. Shopping malls are popular in China as a whole, but they are particularly essential to luxury brands in Shenzhen. The city’s commercial street caters more to mid-range and fast fashion, contrasting with Beijing and Shanghai, which have streets suitable for luxury brands (such as Shanghai’s Huaihai Zhonglu). “High-end brands that want to go to Shenzhen can only go to shopping malls, it’s where they get all the traffic,” says Steffi Noël of Daxue Consulting. Mixed-use development is the way forward, according to Claude Touikan, co-founder and executive director of Lead8, the architecture and design studio behind MixC Shenzhen Bay. That includes a blend of office, residential leisure and commercial spaces. “Any project we do is actually a mixed-use project,” he says. “People don’t go to shopping malls to shop, because the line is blurred between shopping, work, entertainment, exploring, enjoying and living so we want people to live in these spaces.” He notes the increasing importance of rentable spaces for product launches, pop-up stores and events, responding to the luxury retail trend for online to offline integrations. Current government incentives promote commercial spaces in the Houhai area of Nanshan district, which makes the area, already convenient for its proximity to the Hong Kong border, even more appealing. Lead8 is working on a development there, slated to open in Q3 2021. Homegrown fashion Never mind the tech. Shenzhen’s fashion industry has been under development for almost three decades and the data proves it. “Shenzhen’s fashion industry has a very solid foundation in terms of manufacturing, product design and supply chain,” says Pan Ming, president of the Shenzhen Garment Industry Association, citing leading brands such as Marisfrolg, Ellassay, Eeka Fashion and Yinger Fashion Group. Pan Ming points to the sheer number of fashion brands that have emerged in Shenzhen — 2,500 apparel brands at the last count, the highest number in China. Some 70 per cent of brands sold in China originate from Shenzhen or are produced in the city. In 2019, sales for Shenzhen’s apparel sector were estimated to be worth over 260 billion RMB, representing 10 per cent of the Chinese apparel market. Export sales exceeded $10 billion. In total, Shenzhen has 1,010 publicly listed fashion and apparel companies. In 2016, Italian fashion education institution Istituto Marangoni bet on the potential of Shenzhen with the opening of the Fashion and Design Training Centre of Istituto Marangoni Shenzhen, launched in collaboration with the local government, which has been highly supportive of the city’s fashion development. Sarah Yang, school director, says: “Shenzhen is a city for migrants in China, making its culture highly diverse and inclusive as well as open to areas such as sustainable fashion. That’s in line with the future trajectory of the global fashion industry.” The solid manufacturing industry base also gives students at Istituto Marangoni Shenzhen campus extra benefits. “The costs for fashion design students making graduation projects in Shenzhen is around one-third of that in the Milan campus,” notes Yang. “Students can find any materials they need in the city.” Shenzhen is also well resourced to bridge the gap between technology and fashion. With the proximity of tech giants such as Tencent, Huawei, DJI and Vivo, fashion brands have plenty of access to digital technologies to improve their shopping experience. The average age in Shenzhen is 32.5, making for a consumer who is ready to embrace tech innovation. Shenzhen is a useful testbed for brands to experiment with retail and marketing tech. On Burberry’s China retail strategy: “The objective is not to be present everywhere, but to be strategically well placed for the longer term, especially in the post-Covid-19 world. The majority of brands are pivoting towards omnichannel, digitalisation and an emphasis on experience. Digital is in our DNA and the Burberry store in MixC Shenzhen Bay is a very good example of a starting ground for merging the [digital and physical] experience. We will continue to focus to drive performance through large-scale immersive activations and innovations including gaming and WeChat, which is part of the collaboration with Tencent, and creating new ways of reaching out to customers with a number of live-streaming events, remote selling activities, which remain critically important.” On Shenzhen and its consumers: “Shenzhen is definitely a vibrant city with young and wealthy inhabitants. One of the characteristics we are seeing is that they are a cohort of digitally savvy clientele and they are really young. The core pillar for us are millennials, but now we are seeing more of a pivot towards Gen Zs, who are extremely socially and digitally led and want to be immersed in both the online and offline worlds. We believe in Shenzhen’s potential in terms of luxury industry growth. There are more retail properties coming on, so definitely the city has potential not only for luxury, but for retail as a whole.” On Burberry’s first social retail store: “The opening in the summer created a strong buzz with higher than expected commercial performance. We are seeing great interaction from clients with our dedicated WeChat mini program and continuous gaining of social currency. Consumers are very impressed with the experience, which is super-immersive, and our community space, the Thomas’s Café, is fully booked on a daily basis. The project itself is outperforming our expectations and attracting a younger clientele, acquisition wise. We are looking forward to building on this momentum in Mainland China and we have a strong pipeline of launches and campaigns over the coming months.” On China’s luxury consumers: “Chinese consumers overall want to be inspired and the time they spend on inspiration is much longer than the rest of the world. They are extremely digitally savvy, they want to be part of the brand and part of the community, they want to share the experiences either online or in real life with their friends, so as a brand we continue to emphasise elevating experience and elevating our customer journey.” On navigating China’s cities: “Beijing, Shanghai, Guangzhou and Shenzhen dominate the luxury market landscape in China. Shanghai and Beijing have long been recognised as China’s most sophisticated cities, but the country is starting to see new cities, such as Shenzhen, emerge as cultural hotspots. I don’t think there is a particular approach towards China as a single market; the strategy needs to be catered towards each city because consumer behaviour and purchase power vary from one city to another. Not to mention plenty of opportunities in second- and third-tier cities within China.” Ellassay is a premium fashion brand in China owned by Shenzhen Ellassay Fashion Industry Co. Ltd., one of the largest womenswear companies in Shenzhen. Shenzhen Ellassay Fashion Industry was founded in 1999 by Xia Guoxin, who is also the chairman and general manager. The company went public on the Shanghai Stock Exchange in 2015. It then pursued an aggressive overseas shopping spree, acquiring Western brands including Iro, Ed Hardy, Jean Paul Knott, Self-Portrait and Laurèl as well as the Chinese business of Vivienne Tam. Today, the brand portfolio spans high-end fashion to streetwear, allowing the company to cater to diverse consumer groups. As the core product line, Ellassay positions itself as a premium brand for contemporary Chinese women who are independent, elegant and of discerning taste. On recent developments after Covid-19: “Covid-19 has sped up the reform of the company and pushes us to respond swiftly to the new normal. Ellassay has not only worked on the development and operation of an online sales system, it has also accelerated the digitalisation of bricks-and-mortar stores, including private traffic, social CRM etc. “Data is the foundation of any business in the future. Thus, Ellassay has started to build its consumer database, integrating sales figures and customer data in different channels and then providing customised service and products to each consumer based on our AI technologies.” On brand acquisitions: “The strategic goal of Ellassay is to become a high-end fashion group with international competitiveness. The company has built up a solid brand portfolio in fashion, streetwear, affordable luxury and haute couture through investment, merger and acquisitions and all types of other partnerships. “As the Chinese fashion industry continues to develop and expand, an increasing number of Western brands will enter the market to look for new opportunities. But the complexities of the commercial environment in this country will push Western brands to look for quality Chinese partners. Ellassay, with its sophisticated sales network, logistics system and in-depth understanding of Chinese consumers, is in a good position to help international brands explore the market. On the other hand, forming partnerships with international brands allows us to accumulate operation experience both overseas and in China as well as learn about international standards and attract international talents.” Key takeaway: Shenzhen is a tech hub boosted by favourable government policies. It has a young population, an established local fashion scene and high disposable income per capita, making it an appealing market for luxury. Local consumers have traditionally travelled to neighbouring Hong Kong to make their luxury purchases, but repatriation of spending — together with challenges to the Hong Kong retail sector — is leading to more spending online and at home by Shenzhen consumers. Shenzhen consumers are particularly open to crossovers between fashion and tech. For offline retail locations, they favour a mix of leisure, community, entertainment and shopping. You can watch our Market Insights: Shenzhen webinar here: To receive the Vogue Business newsletter, sign up here. Comments, questions or feedback? Email us at feedback@voguebusiness.com.

Make better business decisions

Make better business decisions