Outlet malls booming in China as department stores feel the pinch

Designer outlet malls are sprouting up all over mainland China, even as department stores find themselves struggling amid a slump in retail sales.

At least 17 new outlet malls are scheduled to open in China in the second half of 2016, according to a report by Outlet Sight, which tracks the industry. Some developers are betting on outlet malls because they typically offer off-season or factory excess goods priced at a discount to the in-season products sold by the same brands in department stores.

“We think designer outlets are more defensive than high-street retail,” said Chris Reilly, Asia-Pacific managing director at TH Real Estate, a property fund that manages nearly US$100 billion of real estate in Asia, Europe and the US. “Their fundamentals are better in terms of supply and demand.”

China’s department store sector has been battered in recent years by sluggish sales growth and declining profits, with store closures intensifying since 2015. Offline sales at the mainland’s top 50 retailers declined 3.1 per cent year on year in the first half of 2016, according to figures from the National Commercial Information Centre of China.

However, the discount mall sector appears ripe for strong growth; for a country with China’s population and spending power, there are relatively few factory outlet malls - just 40 at present - compared with as many as 300 in the US, said Zhong Beichen, chief executive of outlet developer Beijing Capital Juda, which has already opened four such outlets, in Beijing, Hainan, Zhejiang and Jiangsu.

“We aim to open outlets in more than 20 cities by 2020 and become the largest outlet operator in China,” Zhong told the South China Morning Post. “Discount malls can perform well despite economic ups and downs” because they offer customers cheaper price points, he said. “When the economy expands, people shop to dress nice, but outlets will still be the first choice for those seeking affordable luxury in an economic slowdown.”

Juda was spun off from state-owned property developer Beijing Capital Land Ltd and listed in Hong Kong in 2015.

The boom is attracting developers and investors to the fray.

London-based TH Real Estate launched an US$850 million fund in China, with two Italian village-themed outlet malls in Wuqing in Tianjin city and Shanghai.

“Our target shopper is the Chinese household earning more than US$20,000 a year,” said TH Real Estate’s Reilly. “This demographic group is already the largest in the world, and we expect the number to more than double over 10 years with the rise of the Chinese middle class.”

With TH Real Estate’s Florentia Village in Shanghai 90 per cent occupied, and its Florentia Village Wuqing full to capacity, Reilly said he is confident the China Outlet Mall Fund can grow to US$2 billion by 2020. Four more Florentia Village malls are slated to open in Chengdu, Wuhan, Chongqing and Qingdao by 2017.

Factory outlets face stiff competition from online retailers, but have the advantage of providing a complete experience, Juda’s Zhong said.

“Our strategy is to build outlets in places with beautiful scenery to attract families for the shopping experience,” he said, citing their 110,000 square meter outlet in Beijing’s Fangshan District, which is located near a forest park.

Themed malls, such as the Florentia Village brands, are also becoming popular. Covering 90,000 square meters and with 3,000 car parking spaces, Florentia Shanghai reconstructs scenes of Florence including an Italian-styled city plaza, paved streets, porches, fountains and luxury brands such as Versace, Ferragamo and Zegna.

“Shoppers like to visit outlets for the discounts, they want to try on designer brands, but what’s more important, it’s like a day out,” Reilly said.