Figures predicting an oversupply of malls and a clampdown on luxury spending in China have captured headlines globally in 2015, but a chain of outlet malls opened by a team of international investors has bucked the trend by attracting more than 6.7 million visitors to their three projects so far this year.
The Florentia Village outlets, which opened their first location in Wuqing between Beijing and Tianjin in June 2011, have followed up by opening new venues in Shanghai and Guangzhou this year. Now the three locations combined are expected to ring up sales of RMB 4.5 billion ($700 million) for high end boutiques operating in their outlets, at the same time that brands are closing shops in other locations.
While not denying that China’s recent anti-corruption campaign and this summer’s stock downturn have been causes for concern, executives at TH Real Estate, a European real estate investment management firm which is part of the Florentia Village partnership, say that the growth of China’s middle class and the demand for better retail venues on the mainland have created opportunities for outlet retail to thrive.
Four More Locations Planned in the Next Two Years
Formerly known as TIAA-Henderson Real Estate, TH in 2012 helped to set up Silk Road Holdings, a joint venture including Italy’s RDM Group and regional private equity house Gaw Capital, to expand on the success of the Wuqing project. The joint venture began developing a chain of retail villages where shoppers can browse boutiques operated by including Prada, Gucci and other luxury marques in European village settings located close to major urban centres.
The group opened an outlet near Shanghai’s Pudong airport in February this year, and introduced their latest branch in Foshan, near Guangzhou during September. Now, with these three locations operating, the Florentia Village chain expects to attract a total of seven million visitors for the full year.
To follow up on the warm reception for its existing outlets, the partnership is planning to open four more locations on the mainland with openings slated for Wuhan and Chengdu in the fourth quarter of 2016, and with Chongqing and Qingdao slated to get their own Florentia Villages in 2017.
Making Outlets Work on the Mainland
Unthinkable back when most Chinese got around by bicycle, suburban outlet malls have caught on with mainland consumers. Now with many members of China’s middle class owning their own cars, TH and its partners have found that mainland shoppers are willing to drive to a retail destination away from city centres if it offers genuine goods at discounted prices.
“There are a number of factors that need to come together to see whether a market is ready for outlet malls. You need to have the brands already established on the high street, so Prada and Gucci need to be there on the high street, or they won’t have anything to sell in an outlet,” Carsten Kebbedies, head of business development APAC for TH Real Estate told Mingtiandi.
“Then you need to have the right consumer mix. You need enough people who are able to spend at the outlets, and that is probably one of the smaller problems in China. Which is probably what makes China so attractive.”
Globally, the real estate investment management firm has about $36 billion in retail assets under management, with ten percent of that in outlets, particularly in Europe where it has invested in outlet projects in Poland and other developing markets.
A Market for Luxury at the Right Price
The outlet concept appears to be succeeding at a time when the overall luxury sector in China is facing headwinds. According to research by Mingtiandi, total sales of luxury apparel in China slid by 4.6 percent in 2014 compared to the previous year, as pressure from a crackdown on corruption and the development of grey market parallel import channels took a toll on sales on high end goods.
For fashion brand Burberry, popular for its trenchcoats and distinctive plaids, slowing sales led the retailer to cut its shops from 69 at the end of 2014, to just 59 by September of this year.
To TH, succeeding in this environment means making sure that a retail project is properly managed.
“We knew the operator, we know how outlets work, and if you have that knowledge and bring it together with the Chinese growth, in particular the growth of the Chinese middle class, then this makes an appealing opportunity for us,” Kebbedies explained. RDM Asia, whose parent company operates outlet malls in Italy, manages the Florentia Village projects.
Also working in favor of the outlet concept is the growing awareness of Chinese consumers of the price differential between luxury goods sold in many mainland malls, and those sold in other markets.
During China’s boom years luxury retailers grew accustomed to charging buyers of high-end handbags and clothes a premium of 50 percent or more over what those goods would cost in Paris or New York. While some of this markup can be attributed to import taxes on the mainland, much of the price difference represented retailers taking advantage of consumers who lacked access to international markets.
With increased international travel and higher Internet penetration making Chinese shoppers more aware of global markets, brands have had to cut prices as sales slipped. In March of this year Chanel cut mainland prices for bags, leather goods and apparel by 20 percent, while raising prices for those same items in Europe, and other luxury marques have followed suit.
According to the managers of the Florentia Village outlets, goods sold at retailers in the centres offer prices averaging 40 to 70 percent less than in high street locations in China.
Creating Shopping Destinations
Besides the appeal of lower prices, a key piece to bringing consumers into the Florentia Village chain appears to be giving Chinese shoppers a reason to get in their cars for a trip out to the suburbs.
To bring shoppers out for what can be an all-day trip, the three villages are organised into areas that mimic features of famous Italian cities such as Venice, Rome and Florence, with the Tianjin mall incorporating canals, complete with gondolas and gondoliers. The shops themselves are built with facades designed to resemble European homes.
“Our outlets are destination centres,” Kebbedies said. “You are in Guangzhou, and then you suddenly find yourself in Italy. It’s very hard to compare that shopping experience with a shopping centre.”
A white paper on China’s retail sector published earlier this year by Mingtiandi found that giving shoppers an entertaining experience, in addition to buying opportunities, was a major factor in attracting consumers to retail projects on the mainland.
Despite the growth of China’s ecommerce platforms, offline shopping continues to flourish on the mainland in part due to its vital social function.
In communities that lack adequate public spaces such as parks, gyms, and other activity areas, malls have quickly become popular meeting places, particularly in China, where homes are smaller and multi-generational living is common. They also have become destinations in themselves, drawing in people to enjoy a day out and fill their leisure time.
Competition Heating Up in the Outlet Sector
As is the case with any successful business, the success of early outlet mall ventures in China has brought other players into what is likely to be a niche market.
In January of this year, L Capital Asia, a Singapore-based fund manager backed by LVMH Moët Hennessy Louis Vuitton SA invested $100 million into mainland outlet mall operator and developer Sasseur Cayman Holding Ltd.
And both Sasseur and Florentia Village are competing with European outlet mall chain Value Retail, which opened its first mainland outlet mall in Suzhou last year, and is expecting to launch a new outlet centre near Shanghai’s Disney Resort in spring 2016.