Shanghai’s high-end retailers: “less than meets the eye”?

Now this is a topic I’ve wanted to write about for a long time, but was waiting for a piece to appear in the established media that would help to back up my personal observations. With this article, I have my opportunity.

Amid the towering glass-and-steel splendor of the Plaza 66 mall – with boutiques from Dior, Prada, Cartier and other luxury brands – shop clerk Xu Junyuan idly scratched his bald head as a lone shopper browsed the deserted aisles.

“I’m just bored,” said Xu, who works at the jeans boutique Diesel.

At Fendi, black-suited clerks yawned as they propped themselves against counters. At the palatial Louis Vuitton shop next door, a 7-foot-tall plasma television played to no one.

In this populous city of fanatical shoppers, Plaza 66 is what some locals call a gui gouwu zhongxin – a ghost mall. The prices are so high that no one buys much. But then, no one really cares.

Just as Stalin erected Potemkin villages to display the glories of communism to outsiders, Shanghai is creating its own illusion of prosperity out of the world’s most luxurious brands.

Offering cut-rate rents to top-tier fashion houses, this city of 18 million is determined to make itself look like a world capital of high fashion. And retailers such as Burberry, Hermes and Chanel are happy to join the charade.

“Most leading luxury brands will need to have a flagship store in Shanghai if only to put Shanghai along with London, Paris, Milan on their bags,” said Paul French, founder and China chief of Access Asia, a marketing research firm in Shanghai.

The illusion is so thin that some stores don’t bother to carry much stock. Others might have lots of clothes on the racks, but only in one size: medium, which is too big for most Shanghai women.

Some shops “don’t ring up a single sale for days,” Xu said.

Interesting issue. I wrote one of my most controversial posts ever on this topic long ago on the now defunct site known as Living in China, and I stupidly failed to post it on TPD so it’s lost. This topic, questioning whether the Chinese middle class as perceived by the West truly exists, raised unusual ire and defensiveness. I think that was mainly because the argument was misunderstood; the key phrase in the previous sentence is italicized: as perceived by the West.

Only an idiot could deny the existence of a huge middle class in China. However, to become a member of that middle class you need to have an annual income of $5,000 (see the comments to this post for reference; unfortunately most of the links are now dead). That’s nothing to sneeze at in China. But when we in the West are fed stories of China’s vast middle class, it is in the context of the expected wave of Chinese tourists making international voyages, buying Armani suits and Louis Vuitton bags along the way and maybe a Lexus while they’re at it. The Western middle class does those things. (I have an Armani suit, and I guess if I wanted to I could buy a Lexus on my middle class salary, albeit I’d be paying it off for quite a few years.) And therein lies the myth. Only a fraction of China’s middle class (as defined by China) can afford to do these things and continue living at a middle-class level. On $5,000 a year, it’s simply impossible. [For some more eye-opening numbers, here’s the original article that kicked off this debate back in 2004.]

Anyone who’s walked around Shanghai’s more prosperous areas (and Beijing’s as well) is well familiar with the glut of luxury stores, with Bulgari and Gucci boutiques everywhere you look. This always fascinated me – the sheer number of such places in areas where I knew there couldn’t possibly be enough customers to ensure sustainable long-term profitability. I would sometimes stand outside the shops and watch for as long as half an hour (I didn’t have much better to do on the weekends). I remember seeing the shopkeepers going to fantastic lengths to look busy. One of them kept dusting the shelves obsesively. Another kept a book (or maybe a magazine) discreetly under the counter, at an angle where she could read while keeping an eye on the front door. One kept rearranging her hair. Another must have had the best-filed fingernails in all of Asia. This wasn’t a scientific study, of course, but based on what I saw with my own eyes I was convinced the high-end luxury goods stores had been overbuilt, and that eventually they’d either have to pack up and leave or keep eating what had to be painful losses.

I’ve heard different schools of thought on this issue. One of my colleagues assures me these high-end stores are thriving, and that there are enough Chinese nouveau riche to keep them going. The numbers (again, see the article that first got me writing about this topic) and my own observation tell me it just isn’t possible. I also know, as a PR person who has worked with some of the big brand names, that everything isn’t coming up roses for them in China (although all of my own clients are doing fantastically well, of course). Among these companies, there seems to be a somewhat ingrained belief that goes something like this:

“We must be in China. This is the last great market left and even if we lose money for years, that is simply an investment for the future. 1.3 billion people: if we can only attract one-half of one percent of that market….”

Of course, anyone who’s read the classic China Dream knows the folly of this kind of thinking. (The book tells the classic story of the P&G executive telling his sales team the potential for deodorant sales: “2 billion armpits!”) And i think today’s plaintive article on Shanghai’s ghost malls really says it all: China has incredible potential (duh), a fast-growing middle class, but nothing at all to compare with the purchasing power of the middle class of developed countries. Not yet.

Go read today’s article. I love Shanghai, and quite honestly I hope to live there some day. But let’s be real. A lot of it is tinsel and window dressing. It feels so good and it’s so wonderful – I admit, I am totally enchanted with it. But that doesn’t change the fact that there is a lot less to Shanghai than meets the eye.

The Discussion: 23 Comments

i was just commenting to my freind the other night about some shops in beijing, at the new oriental plaza, for example, are selling shirts for around 2000 yuan. who the hell pays that much for a shirt?

he told me that alot of those types of stores get free rent. i didnt believe him. perhaps he meant that the corporate head offices pay the rent, and the local owners are not held accountable. still sounds fishy to me. i have to pay a heafty rent for my school. i wish the magic rent fairy would pay my way.

July 17, 2006 @ 3:43 am | Comment

I imagine the only people who can afford to buy at those prices are those who are spending other people’s money – ie the cadres and managers who milk state-owned enterprises for all they’re worth. The same people who spend spend spend in Macau.

July 17, 2006 @ 5:23 am | Comment

I noticed this ghost mall phenomenon when I was in Shanghai last month. It was especially noticable in Plaza 66. On a mid-week afternoon there would have been me and about a dozen other window shoppers. I didn’t see anyone buy anything. Have a look at the little shopping mall under the Jin Mao Tower. Very, very expensive, but no shoppers at all. I suppose its aimed at rich tourists, but then rich people don’t go to Shanghai to buy Prada. You can do that anywhere. I saw one shop assistant in a boutique — drop dead georgous, espensively dressed and probably excellent English — playing solitaire on her computer. I wonder how many customers she’s had? If you can take the boredom, there are probably worse jobs, I suppose.

July 17, 2006 @ 6:01 am | Comment

it is in the context of the expected wave of Chinese tourists making international voyages, buying Armani suits and Louis Vuitton bags along the way and maybe a Lexus while they’re at it. The Western middle class does those things. (I have an Armani suit, and I guess if I wanted to I could buy a Lexus on my middle class salary, albeit I’d be paying it off for quite a few years.) /b>

Richard, your definition of middle class is very different from mine. I don’t know a single person who owns an Armani or other high-end designer suit. In the parking lot of my place of employment, there is one Mercedes and one BMW. The remainder are mostly Toyotas and American makes, lots of SUVs. “Middle class” is a broad term that spans an income range of about $30,000 to $75,000. An upper middle class family of four with two incomes equaling over $100,000 could afford a Lexus and a designer suit or two depending very much on the cost of living of the community.

I do agree with your main point and details about how visible displays of wealth do not reflect the economic realities of China.

July 17, 2006 @ 8:38 am | Comment

Chris, I read this article – some of those stores DO get free rent!

The article also points out that Chinese who are shopping for these sorts of luxury goods are much more likely to buy them in Hong Kong or even Dalian (why Dalian? It didn’t say), where the selection and prices are better.

And I agree with Sonagi – I associate those sorts of goods with upper class, not middle class, lifestyles.

July 17, 2006 @ 10:16 am | Comment

I second Sonagi, those types of ghost stores in Shanghai aren’t middle class even in America and are indicative of potemkin luxury.

Seriously, how packed are Cartier stores generally?

To find the true Chinese middle class, you need to visit second tier Chinese cities, or really anyplace other than Shanghai and you will usually find markets and malls jam packed. I had to shoulder my way through malls in Jinzhou and the town is in the back end of nowhere.

Even Beijing is significantly better than Shanghai in this regard. The Ito Yokado (that Japanese department store) in downtown Beijing was doing pretty brisk business when I was there and the prices I thought were pretty outrageous.

July 17, 2006 @ 3:19 pm | Comment

The comparison to Stalinist Potemkin villages is right on. Go and take a tour of the Moscow metro (subway) stations. Gorgeous, brilliant artwork, and made to last for a long time (UNlike Shanghai’s tinselly crap.) And not the least bit representative of how 99 percent of Russians lived in the 1930s when it was constructed.

July 17, 2006 @ 3:43 pm | Comment

This is just a guess – but I wonder if the luxury goods shops are somehow intended to blunt counterfeiting complaints by the same luxury goods makers? Somewhat along the lines of see – we’re not counterfeiting Gucci purses since we’re selling the real ones right here!

July 17, 2006 @ 4:54 pm | Comment

Maybe those shops HELP counterfeiters by giving them a place to study the goods they want to knock-off. Or maybe the luxury goods companies are undermining themselves by flaunting their unaffordable wares, thereby increasing the demand for fakes.

July 17, 2006 @ 5:08 pm | Comment

I’ve been making the same observations for quite a while. A typical example is the cost of an “outfit:” blouse, pants or skirt, shoes, and a hand bag. At any mall/department store whether it’s in Shanghai,Beijing or even in Kunming, the total price is equal to one or two months salary (or two or three months of rent). Richard is right on with the Western expectation of middle class. Yes, there is a class in between the cleptocrat cadres and the hordes of incredibly poor farmer class, but their buying power is extremely limited.

Much of the Western argument is about “getting in on the action.” It’s a shame that West cannnot or will not apply some restraint in this approach because it smacks of blatant opportunism and short term greed rather than a long term investment. Oh that’s right, we in the West can’t think beyond a stock analyst’s quaterly projection, can we?

July 17, 2006 @ 7:08 pm | Comment

There’s also a certain amount of Hong Kong envy involved in Shanghai and Beijing, which results in governments there desperately wanting to attract the appearance of Hong Kong’s wealth.

Though there is a HUGE difference between the rich malls of Tsim Sha Tsui and Hong Kong Island and the malls located out in the New Territories, last weekend Burberry was holding a sale at Ocean Terminal and had to close the doors and post security guards to limit the number of prospective buyers. (Compared to Yuen Long or Tung Chung, where you’ll find factory outlet stores for the low-end Esprit and Baleno and Blue instead of Burberry and Prada.)

July 17, 2006 @ 7:23 pm | Comment

I guess it’s a matter of how we define middle class, which isn’t easy to do. Personally, I’d say anyone making from $30,000 to $100,000 a year is in that category (depending on the number of dependents), which we can further tier with upper- and lower-middle class. I know many, many, many people who are right in the middle who, every six months or so treats him/herself with something they can’t afford to buy on a regular basis – a Prada bag, an Armani suit, a pair of expensive shoes. We know it will set us back for a few months, but it’s worth it because we love our object of desire, and we know that with a steady paycheck we can pay for it eventually. I believe this kind of spending-above your-means accounts for a huge chunk of name-brand business. We can’t really afford it, but we buy it anyway and make up for it – we have enough disposable income to do this and retain at least an acceptable level of security.

The Chinese, at least historically, take a different approach to their money, and are more inclined to save than to splurge, and while they are now travelling abroad in droves, they ususally do so within a tour group and are famous for economizing all along the way (this applies to the droves, not the super-nouveau riche who can go first class and pick up a Ferrari along the way). Based on my own reading and observation and actual work experience, I think the big retailers expect an equivalent proportion of Chinese to spend like Americans – laying out more than they can afford for something they love. (Which is why America is enslaved by credit card debt.) It’s not going to happen, at least not to the extent they hope for.

But let’s say all these lovely things for sale in those boutiques are indeed meant only for the upper classes. If that is so, then why on earth are these stores everywhere you look? Why are they in the malls that are trafficked mainly byu the middle classes and salivating wondow shoppers? Something’s out of synch here and these boutiques can’t go one perpetuating themselves on every other block of Shanghai without eventually coming to terms with reality.

July 17, 2006 @ 7:30 pm | Comment

As bad as this is in Shanghai, it is, at least in some ways, even worse in some of the second tier cities, where there is less wealth.
For example, Qingdao has a Bang & Olufsan store. Who can afford that in Qingdao?

July 17, 2006 @ 8:02 pm | Comment

Generally my alarm bells go off whenever anyone talks about China’s huge domestic market. It’s only world’s “second largest internet/auto/electronics market if you are counting product volumes. I generally would measure a market by earnings.
I’m a total bear on China and see a major 1997-style correction as inevitable.
That said, there is a relatively large group of ‘middle class’ consumers in the coastal cities.
Yes, Shanghai’s luxury-brand malls are empty, but the emerging middle class is out in full force at places that cater to middle-income earners: Carrefour, IKEA, Pizza Hut, Starbucks and consumer electronics markets.
Only a few people here will buy a Lexus, but there are a lot of people looking at Buicks (nb: there is not always a correlation between increasing incomes and good taste.). While I doubt LVMH is selling many original products, you will see a lot of locals with iPods (which are trendier, far more useful and much more difficult to counterfeit).
Just about all of the luxury companies here are expecting losses for years. There is the mythical China Dream aspect to explain their presence, but some are also here so they have a presence/rep office that they can use to pressure Beijing and local authorities over IPR issues.

July 17, 2006 @ 8:24 pm | Comment

I spent some time in Plaza 66 four years ago when one of the French designer boutiques hired the services of the language training center where I work (which tells you straight off that many of the customers are not locals). I recall marveling at the small number of customers, and the boredom of the clerks. How many Chinese can afford a 10,000 rmb handbag, for heaven’s sake? I think most of the actual customers at places like these are well-heeled tourists. Plaza 66, for example, is right in the center of Shanghai’s highest concentration of expensive hotels (btw, I think Russian tourists are the explanation for Dalian’s shopping prominence).

Part of the answer is that the cost of living (Shanghai rents aside) is comparatively cheaper in China than in the west. Gov’t subsidies of gasoline, electricity, etc help to keep those affordable. Restaurants are a good example – I can have a nice meal out in Shanghai for comparatively much less than back home.

Another part of the answer is the exchange rate. This is always a problem when comparing income or prices in China, as most publications simply use the 8:1 rmb:dollar exchange rate, which does not reflect reality. In terms of purchasing power, it’s more like 3.5:1. So, when you talk about Chinese spending $5,000 worth of rmb in China, that’s actually something closer to $17,000 in terms of local buying power.

Also, as we all know, when it comes to luxury designer goods, few Chinese buy the “real article”. Hordes of Shanghai women have LV bags, but I bet less than 1% of them are real. Few Chinese see much value in paying five or ten times the price to get the “real” thing, when a knock-off may in fact be just as “real” (e.g. intentional factory overruns sold out the back door).

Another big difference in spending habits concerns the amount of clothes that the western middle class wears. Chinese middle classers (especially men) tend to have far less clothing in comparison. Sometimes I think we could learn something from them in this respect – do we really need so many changes of clothing for the office, or has persuasive marketing led us to feel this “need”?

In short, I think the Chinese middle class (at least what I see here in undeniably atypical Shanghai) actually does live pretty well. They only visit places like Plaza 66 for window shopping.

July 17, 2006 @ 8:29 pm | Comment

Not much to add to the debate, but the lost Living in China article (plus comments) is available at the Internet Wayback Machine: The Myth of China’s “Middle Class”

July 17, 2006 @ 11:51 pm | Comment

zhwj, thanks for that link – I had no idea it was archived there. What a flood of memories it inspires…

July 18, 2006 @ 12:30 am | Comment

Now, if only I had links to the old Brainysmurf and Gweilo Diaries sites… Those were certainly the days.

July 18, 2006 @ 12:38 am | Comment

It’s a sign that China’s economy is not yet as efficient as it seems (due to corruption and bad loans?) that buildings get built without tenants that can pay for them, and that land is used by shopping centers like these, rather than a use (housing?) where there would be a higher demand.

July 20, 2006 @ 1:23 pm | Comment

I have done quite a bit of work with the high end retailers in China. Speaking with them, it is more about building brand recognition and image than about selling actual items. For the most part, the only people who buy from these stores in Shanghai are the rich provincials who cannot or do not travel overseas. Shanghainese will typically go to Hong Kong where the prices are much lower (due to the 15% duty plus 17% import VAT plus 10% consumption tax in China) and also because they doubt the authenticity of the products even in the major stores. Also by the way, the stores in Plaza 66 are not actually owned or run by the foreign brands but rather by a mall management company. The foreign brands are unable to control their operations.

July 25, 2006 @ 4:07 am | Comment

Intresting observation. If these are indeed their only customers, how on earth can all these thousands of boutiques possibly remain in business and operate with a profit? I’d have to say it’s impossible.

July 25, 2006 @ 8:03 pm | Comment

Just to answer the question about Dalian etc doing better than Shanghai – as I was the one quoted and got all the flack from the PR people from the luxury brands! It’s a combinatiion of things – a lot of Korean and Japanese money, some Taiwanese too mixed with the four core constituencies of luxury shopping in China – er nai, whores, gangsters and corrupt officials. Not a perfect customer profile but the upside is it’s probably one of the only luxury markets, flawed as it is, which is an overwhelmingly cash business!

August 7, 2006 @ 11:37 am | Comment

[…] than two and a half years ago I wrote about the inevitable collapse of China’s luxury malls. A brief reminder: Anyone who’s walked around Shanghai’s more prosperous areas (and Beijing’s as well) is well […]

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