Take a stroll down any of Shanghai's most famous shopping
streets and you'll find that they put New York's Fifth Avenue to
shame. These streets showcase enormous, glamorous flagship
locations of the world's most luxurious and well-known brands.
that it would open its largest store on Shanghai's major, prominent
shopping street, Huai Hai Road, by the end of 2013. The
Japanese-based fast fashion retailer joins a host of foreign
retailers who have launched notably large and opulent flagship
stores in Shanghai over the past few years.
just opened a five-story, 16,000-square-foot flagship store, which
is now its largest store.
opened its largest store in Asia last fall. And
) Shanghai flagship, which mimics the New York flagship, is its
most profitable store globally.
The "bigger store strategy" isn't limited to Shanghai. In
Chongqing, a Tier 2 city in western China,
) opened a two-story flagship location covered in crystalline
bulbs, allowing it to dazzle shoppers at night (pictured). And the
palace-like store isn't the only one; luxury retailers all boasting
large, glamorous flagships line an entire walking city street.
Yet at the same time,
that it would be shuttering its flagship store on Shanghai's other
famous shopping street, Nanjing Road.
Why is Nokia closing down its flagship store while other retailers
are focusing so heavily on flagship locations? It's partly because
of its poor performance in the country. But more importantly, it's
because of a strategic change in retail channel development.
Management stated it would focus more heavily on e-commerce going
forward. This strategic direction isn't surprising, given the rapid
migration of consumer spending to e-commerce.
In 2012, online retail sales increased 55% to RMB
194 billion ($31.5 million) and are expected to grow 37% to RMB 265
billion ($42.7 million) in 2013.
Online shopping is booming in China; in my opinion, it is a far
more important channel in China than it is in the US.
, founder of Alibab Group Holdings, agrees. He projects that even
at a conservative rate, online sales will account for 30% of total
retail sales in China in the next five years, as compared to about
According to a newly released
report by Jones Lang LaSalle
, the rise of e-commerce is impacting brick-and-mortar stores since
shopping malls are beginning to emphasize food and beverage options
as well as entertainment, rather than shopping. Shopping malls are
expected to evolve into channels for restaurants, and retailers
that offer unique products not as readily available online.
So why in the world are foreign retailers continuing to dish out
record amounts of capital to open some of the world's greatest
flagship locations in China?
Because flagship stores remain a vital entry point strategy for
retailers in new international markets. In China, flagships create
an impression of a brand, and can often be used to elevate the
perception of the brand's value compared to that of the West. For
) has famously positioned itself next to Louis Vuitton, Prada, and
Gucci stores in China, offering a more luxurious image than it has
outside of the mainland.
, Chinese consumers are often unfamiliar with a product because it
has only recently become available. Thus, many Chinese consumers
today prefer to be introduced to a brand via a brick-and-mortar
store since they want to physically experience the brand and
product. Additionally, it is difficult to find new brands online.
But once they are familiar and comfortable with a retailer and its
product, consumers often begin shopping for that brand online
rather than visiting the store.
The rise of e-commerce in China means that retailers need to get
more creative with their physical locations and provide incentives
to shop in a store, such as building elaborate flagship locations
that offer a unique experience, which could include events,
stylists, and strong customer service. However, ordinary purchases
will increasingly be made online.
Foreign retailers have found it difficult to physically expand in
China, with most falling behind store count targets. To effectively
capture the Chinese market, retailers should forgo aggressive
physical store expansion and implement a hybrid model in which they
open fancy flagship locations in major cities, but focus more on
developing an e-commerce platform with strong distribution and
The evolution of the retail sector in China differs greatly than
the evolution of the retail sector in the West because e-commerce
in China is present and rapidly growing before brick-and-mortar
stores have the chance to expand. Retailers investing in China
should keep focusing on building relationships between their brands
and consumers with over-the-top flagship locations. But they should
also rely on e-commerce as a volume driver of sales. There will
never be room for a large chain of mediocre stores in the Chinese
Kristin Graham, CFA,
is currently a consultant partnered with CRG, a multi-channel
retail services company that assists retailers entering and
expanding in China. She lives in Shanghai.