Retail outlet companies are trying to reverse the trend of Chinese shoppers flying overseas to shop for luxury goods

The number of affluent Chinese who are flying overseas in the hunt for luxury goods is soaring, mostly because prices for high-end items are higher on the Chinese mainland due to import tariffs. Many are willing to pay for a flight to the United Kingdom for a chance to shop at the outlets of Bicester Village in Oxfordshire or to Woodbury Commons in New York.

But a few Chinese retail companies are trying to change that outbound trend. Companies such as the Bailian Group, China's largest retail conglomerate, are trying to bring the luxury items to affluent shoppers by building outlet centers in major cities across the country.

More than 300 outlet centers have been built in around 81 cities in China over the past decade, says Guo Zengli, director of Mall China Information Center, a nonprofit organization serving China's retail property. Recent deals and openings this year, however, show that Chinese companies, as well as foreign firms, are looking to add to that number.

In March, the Bailian Group signed an agreement with Simon Property Group, the world's leading retail real estate company, to develop an outlet center in Shanghai adjacent to the Shanghai Disney Resort. Beijing-based Yansha Outlets Shopping Center is poised to build the second outlet mall and Beijing Scitech Premium Outlet Mall will soon break ground on the second phase of construction. Outlet (China) Ltd's BalletTown in both Beijing and Foshan, Guangdong province, is scheduled to open at the end of this year.

Value Retail, a luxury outlets company based in London, said it will also open its first outlet mall in China next year, a 60,000-square-meter center in Suzhou, Jiangsu province.

With many international luxury brands investing in the Chinese market and the country's urban middle class growing in wealth, the prospects for the outlets industry in the second-largest luxury goods market are rosy but a bit "messy" at the moment, Guo says.

"There are fewer than 30 authentic outlet centers among the 300 in China. Most of them cannot meet the criterion of a real outlet center. Some of them are just small discount stores without any well-known brands," Guo says.

In comparison, since the world's first multi-tenant outlet center, the Reading Outlet Center, opened in 1974 in Pennsylvania, there were 179 outlet centers in the United States in June 2011, according to Value Retail News.

Kou Ping, general manager of Yansha Outlets, says one of the reasons why Chinese outlet centers have been disappointing in the past is that many of the centers misunderstood the business model and luxury brands were not attracted to the Chinese market.

"We did not understand the nature of the outlet center at first," she says. "Luxury brands also could not provide enough leftover products as they were not expanding in China at the same speed as now. Consumers also knew nothing about outlets."

Ten years ago, Yansha Outlets, the first outlet mall in China, opened off the Fourth Ring Road in Beijing at the Yansha Youyi Shopping City out of two converted workshops.

Last year, sales at Yansha Outlets totaled 3.2 billion yuan ($506 million, 396 million euros), a dramatic rise from 300 million yuan in sales in 2002. More than 700 brands are sold in the mall, Kou says.

With the opening of a third wing five years ago, Yansha Outlets introduced more brands such as Hugo Boss, Zegna and MaxMara. Western lines account for 50 percent of the brands at the mall, compared with just 10 percent a decade ago.

Although Kou knows that discounted luxury items are at core of the mall's allure, she is cautious about increasing the proportion of luxury brands.

"Before 2008, we were just testing the waters and I think we have figured out an appropriate model which fits the local situation," Kou says.

While only a small percentage of China's population travels overseas to shop for the best in luxury brands, the market is massive: According to the World Luxury Association, Chinese travelers spent about $7.2 billion on luxury goods during the Spring Festival earlier in the year.

An obvious problem, however, is that unlike in Europe and the US, most Chinese consumers cannot afford luxury brands. Furthermore, China charges high duties on imports of high-end goods such as clothing, footwear and watches.

Statistics from the Ministry of Commerce show that watches, suitcases, garments, liquor and electronics are priced 45 percent higher on the mainland than in Hong Kong, 51 percent higher compared to the US and 72 percent higher than in France.

Luxury items imported into China are subject to three taxes: customs tariffs (at a minimum of 4.4 percent but at a maximum of 60 percent), value-added tax (17 percent), and a consumption tax (up to 30 percent).

"Compared with Western outlet centers, we don't have the price advantage," Kou says.

Ninety-five percent of the customers at Yansha are Chinese shoppers so the mall must keep its local brands to attract a broad range of consumers and stick to the high quality, low price concept.

The Beijing Scitech Premium Outlet Mall, on the other hand, is a completely different experience from Yansha. Operated by Hong Kong-based investment holding company PCD Stores (Group) Ltd, it opened in 2009 and was built to look like a complex of European villas. It offers not only shopping, but entertainment and leisure as well over 150,00 sq m, though the car park has a capacity of only 1,600.

Top name brands include Armani, Burberry, Coach and MCM and most are sold at discounted prices starting at 20 percent off and as high as 80 percent off. Along with brands such as Tommy Hilfiger and Calvin Klein, Western brands account for three-fourths of the more than 200 brands at Beijing Scitech.

Located along Xiangjiang North Road in Chaoyang district, about a 25-minute drive from the center of Beijing, the stores are housed within two-story goose yellow buildings on wide streets and sidewalks. It is common to see lovers snapping photos and parents playing with their children near the fountain at the square.

"About 30,000 customers come here on the weekends. On weekdays, the number is half or one-third of that," says Anthony P. Chan, chairman of Scitech Group Company Ltd.

Turnover for the outlet center reached 1 billion yuan last year, more than double from 2009. More brands, Chan says, hope to open stores in the complex as a way of branching out in China.

"The second project in Beijing will be started in the first season of 2013 and its Shenyang outlet will be opened in July," Chan says. About 15 percent of the brands at Scitech supplement their stock of goods with merchandise especially created for the outlets store, a common practice in many outlets in the US and Europe.

Gap, the San Francisco-based clothing retailer, will open its first outlet store in China at Beijing Scitech Premium Outlet at the end of this year.

Guo from the Mall China Information Center says an obstacle to the long-term development of malls such as Scitech is that big name brands are not producing enough special or out-of-season products for outlet stores.

Problems not withstanding, the government's continuous moves to tighten real estate policies in the residential market has led more property developers to turn their eyes to commercial properties, which means more malls.

Outlets (China) Ltd, backed by the Beijing Capital Land Ltd and the China Infrastructure Group Ltd, is expected to invest 12 billion yuan in three malls in Beijing, Guangdong and Zhejiang. According to the company, it will set up a batch of outlets in China's major provincial capitals and tourist sites within a decade.

Outlet malls will be one of the company's engines of growth, accounting for 20 percent of its compound real estate product line, says Lin Zhuoyan, chairman of Outlet (China) Ltd. The company also hopes to use entertainment squares, convention centers, cinemas, supermarkets and hotels in the BalletTown projects.

"We have to develop residential buildings together as we can get part of money back quickly after we sell the residential projects," Lin says.

To ensure a variety of goods at low prices, the company will work with parent companies abroad instead of their sales agencies in China.

"But we will allocate a different mix of brands in each city depending on different consumer groups, different spending habits and different degrees of brand awareness," Lin says.

Hu Yuanyuan contributed to this story.

yaojing@chinadaily.com.cn

(China Daily 05/25/2012 page10)