In early May, while the high streets of major cities in Europe and North America were emptied of customers kept home by lockdowns, one shopping mall in Shanghai had its busiest day since it opened a few years earlier — a record that was beaten the very next day, and again the next day after that.
It seems hard to believe in this age of the retail apocalypse, but during China’s nationwide May holiday period from May 1 to 5, Shanghai Village saw sales grow 63 percent compared to the same period in 2019, with customer footfall and spend per visit (SPV) metrics up across the board. But this is no ordinary shopping centre. Shanghai Village is an off-price designer outlet that sits adjacent to Shanghai Disneyland in the far reaches of suburban Pudong.
“The numbers were absolutely spectacular,” said Simon Williamson, chief merchant at Value Retail China, which operates Bicester Village Shopping Collection outlets at the Art Deco-inspired Shanghai Village (a complex with almost 180 stores) and in Suzhou, which is currently undergoing an ambitious expansion that will make it the largest of the Bicester Village Shopping Collection properties around the world.
“I think there was a pent up demand [but we] also reached a new demographic as well: that traveling luxury consumer who is stuck at home, which is a big piece of our growth,” he explained, adding that Value Retail’s China business, even following prolonged shutdowns in the first quarter of the year, had returned to positive territory for the year-to-date by the end of May.
Shoppers Return, In More Ways Than One
It seems a major repatriation in Chinese consumer spending is underway in 2020, as a significant percentage of the sales once guaranteed to outlet malls around Europe and the US from their loyal Chinese consumers are redirected to domestic retail.
It is a trend that will be welcomed by international brands desperate to make up some of the ground that is being lost elsewhere, and it is also music to the ears of China’s central government, which has been working since 2016 to repatriate at least some of the billions of dollars spent by their citizens on luxury goods overseas. Estimates vary, but it’s believed a half to two-thirds of Chinese luxury spending happens abroad.
“[For] the past five or ten years [many Chinese consumers] have done the bulk of their shopping abroad and not thought much about shopping domestically, but the market has changed significantly over [that time],” Williamson said.
In a market like China, where consumers are highly attuned to price differentials across markets and through different channels, the pumping of luxury product into outlet malls will obviously be welcomed by consumers who have been starved of overseas and travel retail options, as well as for outlets, who can improve their offering to local consumers.
For brands, however, there is a risk that short-term gain in liquidating more stock at a discount now, will come at the long-term cost to perceived brand value.
“It’s dangerous for brands to offer big, broad spectrum discounts [or] price dropping on stock to move it because that trains the consumer and they don’t ever want to pay full price [again],” said China Research Group Managing Director Ben Cavender.
There are other issues to consider. Although Value Retail’s China properties are currently riding a wave of repatriated spending, questions remain as to whether the change will be a permanent one. Once international travel becomes an option again, will Chinese consumers still favour their local outlets for off-price luxury?
“I think that the consumer has been pleasantly surprised at what is available domestically and might think twice about whether they have to shop abroad [for off-price luxury in the future],” Williamson said, conceding that the international proportion of spend will continue to be significant but perhaps not an overwhelming proportion like it is now.
Jason Yu would be inclined to agree. According to the General Manager of Kantar Worldpanel for Greater China, even in a year that is going to be inherently challenging, there are going to be pockets of growth, including domestic spend on discounted luxury goods.
“The demand of Chinese consumers is still there; it’s just being repatriated back to China. This is something that brands and retail developers really need to be focused on this year,” he said.
Indeed, as fashion brands worldwide face a glut in inventory, many scrambled to vector more stock into China — the only major market in the world open for business for several months. According to Williamson, many of Value Retail’s international brand partners continue to look to China as a “lifeline” in 2020.
“Some brands are really pushing and pumping a lot of merchandise into this market for full-price and liquidation purposes. It means brands might come to us to do pop ups — some brands have been doing pop ups with us that have absolutely exceeded expectations — so it creates those opportunities for brands to liquidate and deal with terminal goods, but also really surprise and delight the consumers because we’re able to bring them that retail newness,” he said.
An Off-Price Culture Grows in China
However, the pandemic didn’t really cause the current rush on discount luxury shopping in China; rather, it exacerbated a trend that already existed.
Research released by real estate firm CBRE in 2019 showed that China had 110 outlet malls nationwide. Though it doesn’t seem like a huge number, considering China’s population and reputation as a luxury consumer powerhouse, the growth of the sector is impressive, with a building boom leading to a doubling of the country’s outlet malls between 2017 and 2019.
According to investment brokerage firm CGS-CIMB, sales at China’s outlet malls tripled to 49.1 billion yuan ($7 billion at current exchange) between 2012 and 2016.
The pace of growth in the outlet space is certainly outpacing that of physical retail in China overall. Bailian Group, one of China’s largest retailers, reported sales at its Chinese outlet malls grew by 10.8 percent on the year in 2018, while sales at its regular shopping malls declined 1 percent over the same period.
If, as CGS-CIMB predicted in 2018, Chinese outlet malls do see annual sales grow 25 percent from 2018 to 2020, the sales growth of the sector will even have outpaced China’s spectacular growth in online sales, which swelled 24 percent in 2018 and 16.5 percent in 2019, according to National Bureau of Statistics data.
The story of China’s post-Covid consumer flocking to off-price options is echoed by other players in Shanghai, with a slightly different model to the traditional destination outlet malls.