China’s economy is experiencing a slowdown, but business is booming in the country’s rapidly growing outlet mall sector.
China’s economic growth rate recently decreased to 7.4 percent, its lowest in 24 years. The luxury sector has also suffered from President Xi Jinping’s austerity push, and displayed negative growth in 2014 at minus one percent at around $18.5 billion. Mainland sales of traditional luxury brands have plummeted from 20 to 30 percent gains over the past few years to flat growth.
And yet the luxury market is thriving in outlet malls located in the outskirts of large cities who are offering consumers discounts on brands such as Burberry and Giorgio Armani that range from 30 to 70 percent. Since 2011, the major mall developer RDM has noted 45 percent year-on-year sales growth and an average of 12 percent return of investment. Sasseur Group, a developer based in Shanghai, has seen a same store sales growth of 30 to 40 percent over the past few years, and has set a sales target of $645 to $800 million for the end of this year.
According to Vito Xu, Sasseur Group’s chairman and president, the rise of China’s middle class accounts for much of the success, and explains why malls offering discounts are reaping so much profit.
“China’s middle class segment is growing very quickly. This group wants quality at a good price,” Xu said in an interview with Women’s Wear Daily. “With the anti-corruption campaign, the political environment has changed. What we have noticed is that more and more consumption is for personal consumption instead of gift giving — outlets are the right [place] for people buying for themselves.”
James Roy, senior analyst at Shanghai-based China Market Research Group, says that luxury’s decline in the wake of the austerity push has “created opportunities for brands to merchandise their previous collections and surplus inventories,” benefiting outlet stores. He notes, however, that the boom is only temporary.
“Going forward, brands themselves will have less inventory, so this is not a long-term trend,” Roy said. “[Brands] will go from one area of feeling the pain to the next, as trends shift toward online flash sale sites.”
Developers are experimenting with strategies to maintain their hold on consumers. RDM’s tactic is to localize its approach and develop a firm understanding of the Chinese market. Sasseur has sought to improve the experience of shopping by adding lifestyle amenities like skating rinks and cinemas.
Urbanization is also driving growth in the outlet mall sector. China’s urban population is expected to reach 1 billion by 2030, and new markets are opening up in the country’s Tier 2 and Tier 3 cities. Though these will provide major opportunities as urbanization progresses, but some are skeptical of opening outlets in Tier 3 and Tier 4 cities too soon.
For his part, Xu is optimistic about the potential of lower-tier cities.
“These cities are ready for outlets,” he says. “The customers are ready but the question is whether the brands and the outlet mall operators are ready. Many of them are not ready for Tier 3 cities.”
image credit: sasseur group