Major players already moving inland to expand footprint

Major brands from across Europe are looking toward China's second- and third-tier cities as the country's domestic market continues to grow outside of Beijing and Shanghai.

With a foothold already established in China's biggest cities, multi-national European brands as diverse as Ikea and Louis Vuitton are moving inland in search of new customers.

French fashion house Louis Vuitton has recently opened stores in cities like Urumqi, Kunming and Zhengzhou, while Ikea opened outlets in Tianjin and Wuxi this year, 14 years after the first store in Shanghai.

The move has sparked the realization that China's remarkable economic growth is not restricted to the "big three" cities of Beijing, Shanghai and Guangzhou. Indeed 35 regional cities that account for 17 percent of China's population also make up 39 percent of its GDP, according to the China-Britain Business Council.

"Companies that have traditionally flocked to China for sourcing products or manufacturing are now increasingly realizing that in lots of areas those products are now saleable in China itself, whereas 10 years ago they weren't," says Chris Lowsley from UK Trade & Investment.

A China-Britain Business Council report notes that companies looking to serve local consumer markets will be encouraged by the economic expansion, rising purchasing power and growing populations that the rapid urbanization of China's regional cities has engendered. Even since 2008, the attractive business opportunities that could be found in China's coastal cities have spread to the majority of mid to large cities nationwide.

But competition to sell to this new regional market is tough. Over the last two or three years, "regional" and "second-tier" have become buzzwords among most countries' chambers of commerce in China, with many commissioning reports in the hope of giving their members an edge.

"French companies are accelerating their steps to enter China's second-tier cities, including Qingdao, Changsha, Kunming and Xi'an, buoyed by the country's plan to stimulate consumer markets in second- and third-tier cities," Annick de Kermadec-Bentzmann, president of the French Chamber of Commerce, told China Daily in an earlier interview.

Meanwhile Swedish ambassador Lars Fredn personally attended the inauguration ceremony of the Tianjin Ikea earlier this year to promote the growth of Swedish brands across China.

Such attention to detail has served Swedish businesses well in China's second-tier cities. Swedish clothing retailer H&M, which only first opened a store in China in 2007, operated 64 across the mainland by the start of the year, in locations as diverse as Chengdu, Changsha and Harbin. The company plans to open more new stores in China this year than anywhere else in the world.

"Our business concept works really well in recently added and fast growing markets such as China where we can expand more rapidly," says H&M CEO Karl-Johan Persson.

H&M's growth in China has been rapid by any standards. The company is already more profitable there than in any of its other markets, according to Swedish bank Handelsbanken, and expects to treble its number of stores in China over the next three years. The majority of these will be in regional cities.

But major challenges remain. Domestic competition is becoming fiercer by the year as Chinese companies adapt to the presence of multinational firms. Those regional cities still relatively untouched by European and international retailers have had time to learn the lessons of domestic counterparts in Beijing and Shanghai when it comes to international competition.

For example, H&M faces stiff competition across regional cities from Metersbonwe, a Wenzhou-based apparel retailer that has a franchise network of some 3,000 stores selling casual wear to the same broad 18-30 demographic targeted by H&M.

Previously, foreign brands could thrive in regional cities by offering something previously unavailable. But they might be at a disadvantage when competing with domestic rivals, especially when it comes to marketing.

"I would think that the larger companies that are already set up in China have their feelers out and are looking at growing communities of consumers in these markets," says Chris Lowsley at UK Trade & Investment.

"If they want to access them, they particularly need to think about the Internet and how they can get themselves on the Chinese search engines. It is an area that needs to be stressed to companies.

"If you are in the consumer goods fields, you should be thinking not just about regional cities but about Internet-based sales in regional cities. Growth in Internet sales in China is outstripping anywhere else in the world."

For China Daily

(China Daily 06/15/2012 page12)