SHANGHAI — Led by high-quality international players, China’s outlet mall sector is seeing impressive sales growth and numerous new openings.
Questions remain, however, about how long the party can last as more and more developers jump on the outlet bandwagon.
According to data from the National Commercial Information Center of China, department stores in the country have weathered sluggish sales growth and declining profits in recent years, with closures intensifying since last year. Off-line sales at the Mainland’s top 50 retailers were reported to have declined 3.1 percent year-over-year in the first half of 2016.
“There has been huge full-price commercial real development activity in China. The number of high-end shopping malls is too large, and we are now seeing natural selection at play,” said Luca Solca, sector head for global luxury goods at Exane BNP Paribas.
“The middle class is driving most of the luxury market growth at this point. Middle-class consumers have lofty ambitions, but limited spending power. Off-price is an effective way for them to boost their ability to acquire products.”
Steven McCord, national director and North China head of research for real estate service provider JLL, describes the phenomenon driving China’s burgeoning middle-class consumer segment as the “three Os”.
“Online, overseas and outlets. All of them have to do with price sensitivity and the desire to purchase goods at lower costs,” McCord explained.
“For large purchases, individuals fly overseas to take advantage of favorable exchange rates, better services and better selection. But for smaller shopping sprees, they are likely to stay closer to home. Our outlook on the sector is very positive, as we believe customers continue to be very price-sensitive, and like to drive to where they shop. Coupled with high car ownership, outlet malls are a natural choice for many consumers.”
Value Retail is one of the international outlet mall developers that has come into China and benefited from this movement, opening its first Mainland shopping area in Suzhou in 2014, and its second by the newly opened Shanghai Disney theme park earlier this year.
Desirée Bollier of Value Retail Management said they have been “pleasantly surprised” with the results from their China villages, and were particularly encouraged by how much the Chinese consumer’s love of their offering has translated to their home market, without the added cachet of overseas purchasing.
“We knew from their reaction when they came to Europe that they enjoyed the product, offer, atmosphere, etc., but we did not know if that would translate well in the country itself,” she said.
“Was it a success because it’s exotic and you are visiting another country, or would it be a success when it was part of the landscape of the country, and the remarkable results are really very reassuring.”
In September, Value Retail’s Suzhou Village saw gross sales up 55 percent over the same month in 2015, with footfall up 21 percent and average spend up 28 percent on the year.
For October’s Golden Week, highest single-day sales and footfall records were recorded at Suzhou Village and Shanghai Village, with Suzhou seeing 125,000 visitors over the seven-day holiday period and Shanghai seeing 80,000 visitors.
One of the leading domestic players on the outlet mall scene is Sasseur Group, which last year attracted $100 million in investment from L Catterton Asia, the Asian private equity business backed by LVMH Moët Hennessy Louis Vuitton SA.
Sasseur Group’s annual turnover reached more than 5 billion yuan, approximately $738.7 million at current exchange, in 2015. In the same year, annual sales at Sasseur Western Outlets in the southwestern Chinese metropolis of Chongqing hit around 33,000 yuan, or $4,873 per square meter, making it one of the top-three performing outlet malls in the country.
“The outlet mall industry is a promising industry, it is one of few sectors that didn’t suffer from the global economic crisis,” Vito Xu, founder and president of Sasseur Group, told WWD ahead of the group’s latest opening in Kunming next month.
According to experts, the outlet mall sector in the country is splitting into two tiers, with the top tier led by international players such as Value Retail and RDM, alongside experiences local developers, such as Sasseur Group.
“It is changing a lot. A lot of that is the big international retailers coming in, people like Value Retail and RDM, so they’ve changed the game a little bit in terms of the quality of outlet malls being delivered,” said Rebecca Tibbott, CBRE’s senior director and head of retailer representation for China.
“One thing we are seeing is a lot of local developers with no experience having developments in more decentralized areas and thinking, ‘Well, I’ll just turn it into an outlet mall.’ And of course there is a risk to that, it’s a sort of, if we build it they will come mentality and that never really works.”
At the luxury end of the market, Tibbott said the brands CBRE has been speaking to are looking at opening between two and four outlets throughout China at most, meaning there is a limited capacity of high-end brands to partner with the increasing number of outlet malls coming online over the next five years.
“I think we are probably nearing capacity now,” she added.
According to Bollier, it’s not difficult to see outlet malls in China charting the same trajectory as retail operations globally, both on and off-line, as those that offer a whole package of experiences, including food and entertainment, rise to the top of the pile.
“In a crowded market, we are starting to see outlets popping up left and right in the marketplace, but clearly what our product is offering might be outlet in business strategy, but it’s really a destination in its own right,” she said.
“Even in an overcrowded market, you put yourself in a league of your own and, like everything else, the best will rise, the bad ones will end up consolidating or out of business.”
Though the developers at the top of the China outlet pile, including Value Retail and Sasseur Group, are very happy with the results of their Chinese properties, they are taking opposite approaches to future development.
Sasseur plans to bring its number of outlet malls to 20 by the year 2020, with group president Vito Xu maintaining it’s a “reasonable development plan” based on the growth of China’s middle class and their “solid operating experience since 2008.”
Value Retail, however, is taking a decidedly more cautious approach to expansion. Beyond looking to break ground on the second phase of Suzhou Village in March, Bollier said it would take an extraordinary opportunity to lead the company to open a third China outlet in the medium term.
“We’re on the lookout, [but] I don’t think we expand for expansion sake. I would prefer to have two of the best outlet malls than 10 average ones,” she said.
“In all of Europe, we have nine malls and it took us 20 years to build them. It would have to be an unbelievably promising location for us to embark on a third one [in China].”