SUZHOU, China — Value Retail, the developer of the nine Chic Outlet Shopping Villages in Europe, celebrated the grand opening of its first outlet mall in China amid what the company’s chief executive officer said is becoming one of the most complex markets for retailers worldwide.

This story first appeared in the October 21, 2014 issue of WWD. Subscribe Today.

Suzhou Village outlet center, which had its grand opening last week after a soft opening in May, is located in Suzhou, a city about an hour outside of Shanghai. Value Retail will open a second location next year adjacent to the now-under-construction Shanghai Disney Resort. Around 1,000 guests attended the Suzhou opening on Thursday night, which featured a performance curated by David Quadrio, a Shanghai-based curator and critic.

According to Scott Malkin, founder and chairman of Value Retail plc, between 10,000 and 20,000 visitors have come to Suzhou Village weekly since its soft opening. Around 50 of the 70 or so brands slated to have stores there have opened, with the remainder expected to be open by December. So far, average consumer spend has been higher than that of Bicester Village, Value Retail’s outlet center located near London. Brands that have opened in Suzhou Village range from Kate Spade and Michael Kors to Brooks Brothers and Valentino.

“The experience has fundamentally been very positive,” Malkin said. “Suzhou Village is perhaps the best we have ever done, and the reaction from consumers is better than we had hoped. Brands and people who serve brands should have a very productive, profitable business here. But it is not happening seamlessly. It takes real effort.”

As a sign of the complexities of the Chinese market, in particular protecting brand equity while avoiding what Malkin calls “the commoditization” of brands, Value Retail has scaled back initial plans to open around a dozen other shopping centers across China, instead now planning to open up to six new locations in coming years.

“Retail in China is not only a big opportunity, but a very demanding opportunity at present,” Malkin said. “Nobody is suicidal but nobody is walking along smiling, saying this is just great. I don’t think it is going to get any easier.”

This decision was perhaps partly motivated by a realization that brands that have come to China and expanded with breakneck speed are having to take a massive step back and reevaluate their business operations in order to appeal to a more savvy Chinese consumer seeking not only first-rate products from Western markets but also shopping experiences above and beyond what may even be on offer in other markets.

“In China, to be relevant, you have to be global. To be global you have to be in China, and in China, you have to become more sophisticated and mature in a way that the market isn’t,” Malkin said. “You have to have a detail focus and an execution focus. To be a global brand, without being commoditized in execution, delivery in the creation of experience, that is the unknown puzzle, and we are all facing it now in real time for the first time.”

Malkin said what he sees in the Chinese market right now is well-established brands that once assumed top-line growth would continue indefinitely, but are now having to completely rethink their operational model alongside newer entrants who are taking a more cautious approach yet are, for the most part, achieving sales increases.

“When you had top-line growth without thinking too hard about it because you were able to open new stores in a market like China, you didn’t focus too much on your individual consumer. You focused on flow,” he said. “I think where the market is now for an indefinite period is that every new full-priced consumer is going to be a hard-fought battle. There is no easy ride for brands in the current climate. Customers are more aware. They are more demanding.”

He added: “The biggest failing for brands today is they don’t have the right human infrastructure in place, and they don’t have joined-up leadership and management strategies.”

The digital environment in China is also game-changing, he said. The growth of e-commerce combined with product knowledge obtained online and shared via social media, as well as the evolving concept of online-to-offline retail whereby brands leverage the Internet to drive traffic to brick-and-mortar locations or vice versa, presents additional challenges.

“China is the most interesting story in retail right now,” Malkin said. “It is the place where the relationship between digital retail and physical retail will be defined sooner and more decisively than anywhere in the West. To me, China is the laboratory. Chinese consumers are leapfrogging brands.”

As for retailers’ willingness to open in outlet malls, Malkin said there is still some reluctance in China, as there had been in the U.K. when Bicester Village opened. There is a growing realization that dumping excess stock online is posing significant threats to brand equity whereby if consumers see a brand discounted online enough in China, demand for its products could be impacted.

“Wise brands are and should be fundamentally conflicted about outlet distribution. It is not only a necessary evil, but it is the least damaging of the options available,” the executive said. “The Internet is a disaster. If they are seen to be dumping online, they are destroying their full price point positioning.”

Malkin said brands will be successful in Suzhou Village and other outlet centers if they maintain consistency. “If they are operating coherently, if they are stocked coherently and if their products are understood, brands are already easily achieving beyond sales expectations in early trading,” he said. “The challenge is for brands how to address the consumer’s expectations successfully.”

In terms of future openings in China, Malkin said the focus will be on first-tier hospitality destinations. Suzhou, for example, receives 90 million domestic and foreign tourists annually, Malkin said. Future projects will not be catered to regional tastes or spending habits, but instead be globally focused because that is what Chinese consumers expect.

“The barriers to successful projects are higher and frankly the cost and complexity of running something this sophisticated and this special are very high,” he said. “So you are only going to do it where you can execute it and get rewarded for executing it. Suzhou Village is the future in China. I think the basic logic is correct, and if we work really hard we can keep up with the changes. The model allows to be able to adapt if we work at it.”

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