Two-thirds of high-end retailers missed their targets for new store openings in China last year, according to an analysis of 43 retailers published by development and design consultants Knight Frank and Woods Bagot.
The shift reflects a government crackdown on lavish gifts, a growing preference among many Chinese to take advantage of lower taxes and buy their luxury goods abroad, as well as an emerging middle class looking for affordable brands.
For brands such as Samsonite the move downmarket is a welcome change. Last year, the luggage maker opened 200 new outlets in China. This year, the target is 500. “Before it was like we were unwanted people, illegitimate brands. They needed the luxury brands,” said Ramesh Tainwala, Samsonite’s president of Asia Pacific and Middle East. “The equation is changing.”
For developers who thought China would never tire of luxury, it could be a $25 billion miscalculation. James Hawkey, an executive at commercial property services group Cushman & Wakefield, estimates that up to a quarter of the 700 malls, department stores and outlets currently under development in China’s top 30 cities could fail, costing developers as much as 150 billion yuan ($24.60 billion).
For luxury brands that invested heavily in China, the stores are becoming expensive window-shopping destinations where customers can check out products before buying abroad.
Concerns about authenticity and domestic taxes that can top 40 percent have long lured wealthy Chinese to shop overseas. Now, easier visa requirements and a growing appetite for new experiences pushed the number of outbound Chinese travelers to 100 million last year, a 20 percent increase from 2012. Brokerage CLSA forecasts the number of Chinese travelling overseas will hit 200 million by 2020.
Gucci parent Kering said in October that Chinese tourists had boosted the company’s European sales by almost 10 percent and sales to Chinese visitors to the United States were “booming”.
“Given the slowdown in luxury retail sales and more Chinese travelling overseas, the shops in China are now for window shopping. Instead of opening three or four in each city, they might just open one or two,” said CLSA senior research analyst Susanna Leung.
Much of the new mall development is concentrated in smaller cities where average income is lower and customers are looking for mass-market brands.
A survey by the China Chain Store & Franchise Association last spring showed that about half of the developers surveyed would be expanding in top districts in these cities and nearly a quarter would build in average districts.
The world’s biggest luxury group LVMH confirmed early 2013 its expansion slow in China to 4 to 5 percent, about half the rate it recorded in 2013. “I can confirm that the idea is not to develop in the second-rate or fourth-rate cities in China. We do want to keep our presence in China in the iconic areas,” Chief Executive and Chairman Bernard Arnault told analysts last month.
Rival Prada Group also expressed concerns about extending its customer base too far in China and Gucci has said it will focus on renovating existing stores and renegotiating its leases as they come due.
Luxury brands’ increasingly careful assessment of the China market could hurt developers’ bottom line if it means cutting back on rentals. The average rent in a high-end shopping centre in a smaller city fell 2 percent last year while the average vacancy rate rose to 10.9 percent, the opposite of what happened in bigger cities, according to the Knight Frank and Woods Bagot report.
“For the newer centers in non-core locations, the landlords don’t have pricing power,” said Steven McCord, local director for China retail research for property firm Jones Lang LaSalle. “In order to fill up their malls they’ve got to be generous with rental terms,” he said, adding that developers are also offering to pay fit-out costs and pursuing less-expensive luxury brands such as Coach and Michael Kors.
adapted from Reuters and reports
More from ANALYSIS
Social media has changed the way individuals interact with each other and gain information about the world, but some of the biggest …
How to deal with the big yet complicate business of fragrances: let’s think outside the bottle! Ask any woman about fragrances …