The world’s 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.
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,” said Ramesh Tainwala, Samsonite’s president of Asia Pacific and Middle East. “The equation is changing.”
Tainwala said he is now getting prime spots in department stores near Qingdao in eastern China and Urumqi in the northwest – 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 $25bn 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 150bn yuan ($24.60bn).
“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 are as many as 10 shopping centres in the works while the likes of Zara and H&M only plan to open two or three stores, he said.
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% 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 travellers to 100mn last year, a 20% increase from 2012.
Brokerage CLSA forecasts the number of Chinese travelling overseas will hit 200mn by 2020.
“Really the investment we’re making in China is so that we also benefit when they travel outside China,” Burberry Chief Financial Officer Carol Fairweather told analysts in January.
Burberry, which has hired Mandarin-speaking sales associates globally, has 72 stores in China and will open its largest store in the Asia Pacific in Shanghai this spring. The luxury retailer will continue opening stores in mainland China but will be “making sure they’re in the right locations with the right adjacencies,” Fairweather said.
Gucci parent Kering said in October that Chinese tourists had boosted the company’s European sales by almost 10% and sales to Chinese visitors to the US 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.
Luxury brands prefer downtown locations in big cities like Shanghai and Beijing. The world’s biggest luxury group LVMH plans to slow its annual China expansion to 4 to 5%, 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.
