SHANGHAI — In the outer suburbs of Pudong, past farmland grazed by scraggly sheep, you will find an ersatz Italy. Terracotta and lemon yellow arches line the entrance of a 970,000-square-foot altar of fashion (made with real marble, no less). This is Florentia Village Shanghai, the second outlet mall of RDM China, the real estate development company of the Italy-based Fingen Group.
The extravagance of Florentia Village, which opens Thursday, speaks for a sector on the rise. While China’s economic growth rate has slowed to 7.4 percent, its lowest in 24 years, its outlet mall sector is bucking the trend. Across the board, retail profit margins are suffering except for in two areas. The first is well documented — the online retail market, made famous by Alibaba’s historic $25 billion initial public offering last autumn. The second is outlet malls, less well known but still thriving.
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According to consulting firm Bain & Company’s latest study released in Shanghai earlier his week, China’s luxury market in 2014 shrank 1 percent to approximately $18.5 billion. Overall, traditional luxury brand sales on the Mainland have dropped from 20 to 30 percent gains to flat in just a few years, driven by President Xi Jinping’s anti-corruption campaign, an influx of emerging brands, and the economic slowdown.
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At the same time, luxury outlet malls found on the edges of big cities offering between 30 and 70 percent discounts on brands such as Giorgio Armani, Burberry and Ralph Lauren, are making hay. RDM, who manages one development in Tianjin with another six in the pipeline to open by the end of 2017, has seen an average of 12 percent return of investment and 25 percent year-on-year sales growth since 2011.
“In China growth is much faster. In Europe you are lucky if it will grow 8 to 9 percent [year-on-year],” said Maurizio Lupi, vice president of RDM Italy and executive vice president of RDM Asia, which invested a total of 1.5 billion renminbi ($240 million) in the Shanghai project.
Shanghai-based Sasseur Group, which will this month launch its fourth development in Nanjing with another four in the pipeline to open by 2015, has seen a 30 to 40 percent same store sales growth in recent years, with an optimistic sales target for 2015 at $645 to $800 million.
So what is powering this growth? According to James Roy, senior analyst at Shanghai-based China Market Research Group, the decline of the luxury sector has “Created opportunities for brands to merchandise their previous collections and surplus inventories,” in turn, feeding the outlet sector.
Secondly, Chinese consumer preferences are changing. “China’s middle class segment is growing very quickly. This group wants quality at a good price,” said Vito Xu, chairman and president of the Sasseur Group, adding, “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.”
Finally, urbanization is opening up new consumer markets in China’s vast Tier 2 and Tier 3 cities. By 2030 China’s urban population will reach 1 billion. According to Xu, the big players — including Bailian Group, Scitech Group, Value Retail, RDM — currently occupy around 30 percent of provincial capital cities in China. He sees opportunity in the Tier 3 market especially.
“These cities are ready for outlets. 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,” said Xu.
Not everyone agrees. “It’s too early for Tier 3 and Tier 4 cities,” said Lupi. “This business follows distribution. To open an outlet when the brand is not known does not have an effect.”
Despite the potential, taking on the Mainland market is risky. Exposure to property bubbles, divergent brand strategies, capricious consumer trends and changing regulatory conditions present constant pitfalls.
“Going forward, brands themselves will have less inventory, so this is not a long-term trend,” said Roy, of the current discount “boom.” “[Brands] will go from one area of feeling the pain to the next, as trends shift toward online flash sale sites.”
To maintain their edge, companies are employing different tactics. Sasseur’s chairman is dedicated to transcending the shopping experience by incorporating lifestyle brands and amenities, such as cinemas and ice rinks. Its approach is based in art and design, taking inspiration from nature and China’s 5,000-year-old heritage, hence the mock Ming dynasty gate at the new site in Nanjing.