Analysis: Malls empty as Chinese seek luxury abroad

Hong Kong - The biggest luxury brands are slowing their expansion in China as more consumers shop abroad, leaving mall operators holding the bag.

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.

Boutiques offer luxury brands in a mall in Guangzhou, China. Leading luxury brands are expanding slower in China as more consumers shop abroad, leaving mall operators holding the bag. Photo: Reuters. Credit: Reuters

Lower-priced fast-fashion brands such as H&M and Zara, however, beat their expansion goals. 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,” Ramesh Tainwala, Samsonite’s president of Asia Pacific and Middle East, said. “The equation is changing.”

Tainwala said he was now getting prime spots in department stores near Qingdao in eastern China and Urumqi in the north-west – places that would have relegated him to the luggage department just a year ago.

For developers who thought China would never tire of luxury, it could be a $25 billion (R270bn) 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 under development in China’s top 30 cities could fail, costing developers as much as 150 billion yuan (R265bn).

“The mid-market retailers are expanding fast, but they are not expanding fast enough to fill all of the shopping centres,” Hawkey said.

In some markets, such as Chengdu and Shenyang, there were as many as 10 shopping centres in the works while the likes of Zara and H&M only planned to open two or three stores, he said.

For luxury brands that have 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. Easier visa requirements and an appetite for new experiences pushed the number of outbound Chinese travellers 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.

Luxury brands’ increasingly careful assessment of the Chinese market could hurt developers’ bottom lines 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 centres in non-core locations, the landlords don’t have pricing power,” said Steven McCord, the local director for China retail research for property firm Jones Lang LaSalle.

The shift downmarket will challenge mall developers for years to come, said Paul Hart, the director for greater China at Knight Frank. – Reuters