For Designer Style, It's All Outlet - Value Retail News

SNapShOT ON ChiNa
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center in China – Florentia Village – in
June, between Beijing and Tianjin (see page
30). Its second center will be in Shanghai’s
Pudong, close to the future site of Shanghai
Disneyland. There are at least four
more planned Florentia Villages.
n Richly Field, a Hong Kong-listed
development fund, has partnered with
U.S.-based Horizon Group Properties
to develop Globe Outlets across
China. the first of its 10 planned centers
will be in Changsha.
n Outlet China Ltd., a joint venture between
state-owned Beijing Capital Group
and Government of Singapore Investment
Corporation, will use the operation
expertise of UK-based Freeport Retail
and France-based Société de Cooperation
Commerciale et d’Ingenierie pour les
Marques (SCCIM) to develop at least
10 Ballet Towns, planned to be upscale
mixed-use, mid-density new towns anchored
with outlet centers.
n Japan-based Mitsui is showing
interest in further expanding its Chinese
outlet business, in addition to its first
center in Ningbo.
n Private player The Outlet! Company,
led by a former executive of Simon
Property Group’s Chelsea platform,
is rapidly acquiring lands with local
partners. In addition to two projects
in Taiwan, The Outlet!’s first project
in mainland China most likely will be
in Wuhan, opening in the fall of 2012.
The developer has planned at least five
other outlet projects as well.
n UK-based developer GVA also
recently announced its interest in the
Chinese outlet business.
Increasing partnerships
The operation situation these years has
proved that all types of developers have
unique advantages and shortcomings. To
win this sophisticated market, it is increasingly
difficult to achieve success independently.
Partnerships are often formed in
accordance with the challenges.
State-owned enterprises can usually
leverage their government background
to acquire land and financing from
state-owned banks. However, it takes
time for them to be introduced to international
retailers. In response, they seek
international partners. For example,
Bailian partnered with Wharf Holdings
and Walton Brown in its early outlet
operation and Outlet China Ltd. is now
34 InternAtIOnAl Outlet JOurnAl Fall 2011
the influx of
top brands into
China’s FOCs
bodes well for
the sector.
cooperating with Freeport and SCCIM.
Private companies often come with
abundant equity and strong local relationships.
However, their shortcomings
are leasing and management, so they
usually engage third-party agencies or
directly hire people with retail experience
to address this issue.
Foreign companies wanting to enter
the Chinese outlet industry frequently
have great relationships with international
retailers. However, they need
time to understand such China-specific
issues as local franchise agreements
and complicated tax codes. Thus, they
seek local partners. For instance, RDM
has partnered with Waitex (a Chinese
supply chain and apparel operator), and
Mitsui has partnered with Shanshan (a
Chinese apparel-manufacturer).
Failed and distressed centers
Some outlet centers face multiple challenges
after they open. Some aren’t properly
designed, are difficult to access, have
an unqualified management team, have
the wrong retail channels, or are overwhelmed
by other outlet competitors.
At least two outlet centers were
closed during the past 12 months. They
are Chongqing Windsor Outlets (closed
in July of 2010) and Qingdao Kingcity
Outlets (closed in January of 2011).
Qingdao Kingcity is a textbook example
of a failed Chinese outlet project:
First, being part of a large suburban
mixed-use development, the center
was not initially designed as an outlet
mall. It was designated outlet when the
developer failed to find enough fullprice
anchor tenants.
Second, it is just a few miles from
Kingcity, an enclosed outlet mall that
Shengwen opened a few months later.
During development, neither center was
aware of the other.
Third, the leasing team had a tight
schedule that it couldn’t meet, so the
management team purchased inventory
and opened stores to occupy space.
Fourth, it takes time, typically up to
three years, for an outlet mall in China to
mature and prosper and Kingcity simply
couldn’t sustain for such a long time.
Many more outlet centers in China,
especially those run by inexperienced
local developers or rapidly expanding
commercial real estate developers,
are having the same issues as Qingdao
Kingcity. High vacancy, low sales and
low quality of brands will continue to
trouble these distressed centers. These
congenitally defective outlet malls will
be difficult to turn around.
retailers’ entry into
outlet channels
Chinese outlet developers and owners
have long been struggling with
the retail channels of global brands.
Dealing with distributors makes it
hard to get genuine products and good
discounts for consumers. On the other
side, there is a broader effort by major
international retailers to abandon the
licensing model and increase direct
ownership in China.
Thus, along with new flagship stores
and direct-owned stores rapidly opening
in every major Chinese city, retailers are
seriously assessing the outlet channels
in China. As of January 2011, the ratio
of full-price stores to outlet stores is
about 6:1 for luxury brands in first-tier
Chinese cities (see chart).
Currently, several high-quality outlet
centers in major cities have housed a
number of luxury retailers, a sign that
Chinese outlet centers are being recognized
by world-class tenants.
China’s outlet industry is rapidly
evolving: Chain developers are setting
ambitious plans, often with partnerships
to ensure the quality of the centers. Lowquality
centers quitting the market and
high-quality centers are attracting international
retailers. All developers, investors,
retailers and consultants are learning
that careful and detailed due diligence of
outlet retailing is a must before carrying
out any business plans. c
This industry update is a follow-up
of The Rise of Factory Outlet Centers
in Mainland China, which appeared
in Vol. 17, No. 2, 2010 of ICSC Retail
Property Insights and was excerpted
in the Fall 2010 IOJ.