This piece was originally published in Mandarin in Forbes China. Below is an English-language version of the same article.

After two years of plunging sales, the battered global luxury goods market is poised to start rebounding in 2010. However, a full recovery will not take hold until the following year. When growth does return, it will be due in part to increasing demand by consumers in the emerging markets of Asia, with China leading the way.
 
But Chinese consumers continue to spend more on luxury goods purchased abroad than at home. According to the China Luxury Market Study by Bain & Company, in 2008, the domestic market totaled US $8.6 billion, equaling about 40 percent of all mainland luxury spending, while 60 percent was spent in overseas. Most striking is that as incomes rise, households continue to opt to buy luxury goods overseas where they find lower prices. Most domestic purchases are either impulse buys or made by shoppers who want access to good local service after the sale.
 
Mainland retailers are hard-pressed to compete with foreign merchants who offer significantly discounted prices and broader product selection. For example, the discounted price of one luxury brand during seasonal sales in Hong Kong is about 60 percent of the regular price in mainland outlets.
 
The most dramatic opportunity for new growth in China is not in Shanghai, Beijing and China's other largest cities. The new battleground for the luxury market is fast becoming Tier 2 cities such as Zhuhai, Shaoxing and Wuxi. There are about 330 prefecture "Tier 2" cities, Among them, 120 have urban populations larger than 1 million.
 
Consumers in these areas have both the buying power of shoppers in China's largest urban centers as well as similar interests in the quality and reliability of luxury brands. But to realize the growth potential, luxury brand makers must surmount three major hurdles: a scarcity of high-end retail space, the lack of well-trained luxury sales staff, and local malls that understand the unique needs and standards of luxury brands.
 
As competition intensifies for new luxury goods consumers, companies need to act now to ensure success in five critical areas.
 
Build brand awareness by investing to educate consumers about product quality and brand heritage. Emphasize unique traits to differentiate the brand in a crowded field. Weaker brands won't be able to compete with a well-orchestrated campaign. In Bain's 2006 study of "most desirable brands", Rolex was ranked No. 10. In the 2009 survey, Rolex moved up to No 4. This improved ranking is directly related to its brand building efforts.
  
Develop a strong retail talent pipeline, with processes in place for attracting and retaining employees, especially in Tier 2 and Tier 3 cities where there's a severe talent shortage. For example, leading brands offer international rotation programs to their store managers. Sales employees have the opportunity to enjoy a true luxury experience during special training sessions. LV even developed a specific training program for new Chinese graduates that introduces them to retail operation management.
 
Use customer relationship management tools to personalize customer relationships and add value to services. Outstanding service encourages customers to do more of their luxury shopping domestically. One way to win customer loyalty is to provide better service when they shop abroad by beefing up the number of Chinese-speaking salespersons. Several brands are developing a global database for VIP customers by collecting personal data, including the customer's name, nationality and purchase history. The database allows brands to recognize their VIP customers wherever they shop and give them top-notch service.
 
Invest in the Internet as a powerful communications channel. Use third-party platforms with caution. In the seven categories we studied, 70 percent of the top 5 brands have simplified Chinese websites offering product information and brand news. Some brands such as Lancôme go one step further. Lancôme pioneered an online beauty community, "Lancôme Rose Beauty," with over four million subscribers. Other brands opt to using third-party sites as a marketing channel. Omega, Chanel and LV all have used women channels of some portals as a vehicle for introducing their brands to Chinese consumers as well as launching and showcase products. However, as the marketing manager of a leading luxury brand pointed out, "Using a third party as a marketing channel is a double-edge sword." While it's recognized as effective and low-cost, there's a risk of diminishing the brand's value.
 
Localize products and marketing for Chinese consumers, while striking the right balance to maintain the value of the brand. Asia localization has already happened for example through the introduction of a wide range of skincare whitening products, specialized sizing and fit for clothing, and products emblazoned with brand logos for entry-level consumers..In addition, several brands have allowed local teams to select what they want to offer in Chinese stores.  Last, brands reach out to Chinese shoppers by using Chinese celebrities in their marketing campaigns—Ziyi Zhang for Omega, Bingbing Li for Gucci and Qi Shu for Hugo Boss.
 
However, luxury brands will not develop specific products for Chinese consumers. They view this as violating a core tenet of global luxury brands: the appeal of a Gucci handbag is that the quality and look is exactly the same no matter where it's sold.

Bruno Lannes is a partner in Bain & Company's Shanghai office, where he leads the firm's consumer products, luxury and retail practice in Greater China. Xuan Wang is a senior consultant in Bain's Shanghai office.