For some shoppers, particularly younger ones, Italian brands that are well-known are still regarded as superior and are seen as a status symbol.

"In addition, most of the well-known brands have occupied the best store locations in shopping malls," says Jiang Nan, an analyst with China Market Research of Shanghai.

"Once a new brand cannot get an ideal place and is put on the second or third floor, next to second-tier brands, it will be judged as lower-end because customers know nothing about it."

When shopping malls choose brands, they tend to make their decisions based on the sales of the products in their home market or other overseas markets, Jiang says. Since Chinese customers are increasingly being lured by overseas shopping, fashion brands need to be mindful of how they perform in Italy, he says.

Lin of GBMax says: "Retail offerings have to be very much tailored to the Chinese market. The companies that are unsuccessful are the ones that roll out the same format believing China is a uniform and homogenous market."

Such companies fail to consider the huge variations between different provinces in population, per capita GDP, consumer spending habits, education and lifestyles, she says.

Yuval Atsmon of Mckinsey says it is not necessarily too late for new entrants.

"But the high cost in advertising and retailing make it harder for small brands to stand out".

One glimmer of hope for smaller brands is that Chinese customers are becoming more sophisticated and want something different from what the mass is buying.

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"Social media and digital marketing, targeting the overseas tourism market are all ways that new entrants can reach the Chinese consumer more cost-effectively," Philip Guarino says.

As Shanghai and Beijing become saturated with big brands, they should begin targeting second or third-tier cities, he says.

They also need to hold on to market share in Italy, he says, where Chinese tourists can be won over to the smaller brands before returning home and continuing to buy them as loyal customers.

Wang Weizhong, founder of AE Boutique, a Hangzhou-based multi-brand menswear boutique that sells Lardini, Guy Rover and other Italian fashion brands, says he is making the most of Chinese customers as they try to work out whether to trade up or trade down.

"What they are looking for is high-quality products that are unique in their style. They're not just after logos and brands anymore."

Although the brands he sells are popular in the Italian mass market, they are unknown to Chinese customers, he says.

"We're spending more time building brand recognition. But I think in the long run smaller Italian brands should get together or form a group to compete with big rivals in the cutthroat market."

As Chinese shoppers seek more discreet luxury, top Italian brands have their own worries.

Some brands are suffering from brand exhaustion, in part due to their great success over the past few years, over-expansion in retail in China and a change in consumer tastes.

Gucci's sales grew 17.6 percent in China last year, compared with 39.1 percent in 2011, and it plans to slow its expansion in China this year, it says.

"Given that 60 percent of luxury is purchased by Chinese overseas, shareholders still disproportionately allocate marketing dollars for China to store expansion," Guarino says.

"As a result, I think we will see a reduction over the coming years."

Large Italian brands have done a relatively poor job understanding and adapting their marketing to the behavior of younger shoppers in China, he says.

"Many of them have largely applied a European business development model to the Chinese market, such as opening stores, buying print advertising and hiring PR firms. All of this helps of course, but the demographic in China is younger, more connected and uses social media and the Internet for their information. Very few top brands understand, or have done a good job at utilizing these tools in the Chinese market."

The good news for the industry is that new wealth in China and the growing middle class are aspiring to buy designer or luxury goods.

For Lin Hong, who introduced the Max Mara fashion label to China 14 years ago, the biggest challenge is how to attract a new pool of consumers and maintain the positioning of its different seven brands in China.

"Any fashion house that enters China has to think carefully about the positioning of their brand to be successful with their strategy. I think that there could be more losers than winners in the long term."

In addition, Chinese consumers' changing attitude toward domestic brands is also creating a bigger challenge for smaller and inexperienced brands with no or small financial support, Lin says.

Guarino says: "I am bullish on the future of new luxury brands in China, with one caveat: that they engage with the Chinese demographic. Nevertheless, those who rush to open stores will find it difficult from a financial standpoint to deliver the returns their shareholders hope for."

yaojing@chinadaily.com.cn

(China Daily European Weekly 05/31/2013 page14)