The Need for Globalization in China Outlet Markets

Introduction

With 1.3 billion of population, China formed a massive market to its local retailers. And over the past decades of openness and internationalization, the country is undergoing a new constellation of consumer spending pattern, living standard and shopping taste, bringing more challenges to retail than ever.

Back before 2002, the outlet wasn’t at all popular in China until it had first set its foot in Beijing in 2002. Since then, there has been a sharp increase in the number of outlet stores in China. The opening of outlet stores began in major cities such as Beijing, Shanghai and Guangzhou then expanded to tier two to three cities such as Chengdu, Wuhan, Suzhou and Qingdao over the years. The number of outlets in tier two cities has now taken up the majority portion out of the total number of outlets in China.

Outlet markets face fierce challenges under the shadows of e-commerce, many online retailers such as JD.com and Alibaba Group are offering luxury products at a discounted price, some are even offering free worldwide shipping, attracting many Chinese consumers to purchase luxury goods online. It is believed that outlet markets can no longer rely on low pricing as the sole business strategy. In fact, it is becoming crucial to outlet developers to re-create new strategies and be proactive in engaging shoppers from store planning design to management and promotions.

Given the lower land cost, the majority of outlets are located in the suburban area. They are strategically positioned near airports, theme parks, or scenic spots. Most are designed in a half-opened space and spacious area, serving mostly mid-income and price-sensitive shoppers. Some successful outlets engage its consumer by bringing a cultural taste through their architectural design such as the Florentia Village, some include a diverse of facilities such as a playground for children, fountains, and a wide range of F&B choices.

Outlets in Japan, U.S and Europe have already entered a mature market, with US having over 200 outlets country-wide, and over 160 outlet malls in Europe. In Japan, local fashion brands and the luxury’s limited version products attracted a lot of tourists and youngsters to shop at the outlets each year.

In China, many of the successful outlets are developed by multinational developers and local conglomerate firms such as the RDM, Bailian and Capital Grand, which they have an experienced management team and developers. Yet, the outlet market in China has still not fully developed, many tier two and three cities are awaiting for outlets to be brought to the market. China can take reference on the successful overseas outlets examples how it can apply to its local market.

1st Tier Market Outlet Problems

There are many successful outlets operating in cities including Beijing, Shanghai and Tianjin given the government’s favorable urban development policies in the cities. The Shanghai Outlet Plaza located in Qingpu, Shanghai is one of the government’s CBD projects, which has now become a well-known outlet to both locals and tourists. Outlets located in the first-tier cities benefit from tapping the mid-to high-income consumers and tourists. But on the other hand, these outlet stores face fierce competition from major cities outlets in the world including Japan, Hong Kong and the U.S. given their price and the country’s currency can become more competitive than that in China.

As air ticket options are becoming less expensive nowadays, consumers who can afford to travel will rather purchase the luxury goods from foreign countries given the better deal and wider range of brands and product choices. Another popular option to consumers is through “Daigou”, which is quite prevalent in China in the past years, where an overseas personal shopper will purchase on behalf of the consumers from foreign countries’ outlets.

There is no doubt that first-tier luxury brands are the major draw on consumers to visit the outlets. Many luxury brands tend to value a long-term relationship with a specific outlet developer such as Prada, Bottega Veneta, Fendi and Bvlgari’s relationship with RDM. These international brands also set restrictions on the distance between their primary retail stores and outlet stores, meaning the outlet stores cannot be built near the city level where its retail store was situated. Likewise, in China, the set proportion of a retail and outlet store is four to one in a city. These made outlet markets’ competition for tenants even competitive. Some developers will attract these brands to set outlet stores in their mall by offering free rents or even free renovating fees to attract consumers and other brand’s entrance.

2nd and 3rd Tier Market Outlet Problems

The government’s openness and supporting plan in second and third tier cities are crucial to outlet developers as economic infrastructure is the base of supporting the retail sector, especially to outlet malls which is located at suburban areas. The government initiative - Greater Bay Area aims to bring closer the southern part of the cities together for business trading and exchange an increase of consumers and visitors around the region. Under the HK-Zhuhai- Macau bridge and the Express Rail Link, the transport routes and commute will become easier between cities.

The consumers from second and third tier cities are mainly composed of lower to middle-income group. These group of consumers are most attracted to leisure products such as sports brand and mid-priced garments. Hence, brands such as Nike, Adidas, Gap and Converse became most prevalent than first-tier luxury brands in the market.

Seeing the success and popularity of outlet malls, some developers attempt to get a piece of the action through expanding to outlet business; while some others see the outlet concept as a solution to reposition their stance on the retail market, especially those who are struggling with its existing shopping mall performance tried to adopt the same model from outlets in mature markets. Yet, many of these developers had attempted failure due to the lack of experience on managing an outlet business. With unregulated store management, some tenants who are sell counterfeit goods, which led to a devastated impact on the mall’s reputation and its consumers’ trust. As a result, there are cases where outlet malls are closed down after a short period of time.

Solution

Brands, cleanliness, and convenience have always been the top consumer concerns when shopping at a brick-and-mortar store. But today, you can expect the list to go on and continue to evolve in the coming years.

The reason behind the change is driven by first, technology and e-commerce, second, consumer behavior. The consumer power has been shifted towards the Millennials and Generation Z. It is predicted that the generation will have significant influence over the retail market in the coming years as their income level continue to raise. This generation is a group of tech-savvy and sophisticated consumers, who are greatly influenced by new technology changes brought to their daily lives. They are also proficient in discovering new alternatives through online and offline channels.

Hence, travelling to outlets in the suburban area the transportation time raises these consumer’s expectation on outlets, with not simply a list of outlet stores, but a combination of cultural, tourism and entertainment in one place that caters shoppers at all ages. To attract the tech-savvy audience and growing middle class, developers should be clear on the taste and trends of the group of each provinces, and seek to be more appealing to younger Chinese. upgrading shopping choices improve health and lifestyle

Not only does the climate and geographical location from different provinces may differ the consumer’s needs and spending habits. Retailers should cater the needs of products rather than just stock up its oulets with unsold items from last quarter. To modify outlet trends, developers should carefully conduct research and analysis on the city’s consumer demographic and its spending behavior.

For example, the weather difference between the Northern and Southern part. Chengdu residents often drive out of the city at the end of the work week, while Shanghai residents tend not to leave the city on weekend jaunts. The ones in climate difference, or a city with older age dominant versus younger age dominant as well as their perspective on luxury brands. Second, unlike shoppers in the United States to drive to estimation. but or public in China usually takes public transport to destinations within the cities, hence accessibility to the location is an important factor to consumers.

On valuing an outlet, the key is the location of the place, as it determines certain factors such as the consumer group, rent, transportation accessibility.

Conclusion

China is the most rapidly growing global market for online shopping particularly in 3rd and 4th-tier cities, given the relative lack of quality retail space. Over 45% of consumers in China are purchasing via smartphones. As the second and third tier cities growing rapidly, it is of great potential in developing more outlet malls, but that requires a good long-term planning and an experienced management team to carry out. As the major consumer group is shifting towards the millennials.

Outlets should be aware of the group’s habit and western how digital content and social media could draw the group’s attention. Taking western successful outlets and China’s local market trend. With an abundant supply of land in suburban areas, outlets are sure to have abundant space to develop a more diverse and different experience to its customers. and more spacious outlet malls for to create a more diverse experience including children’s playgrounds, attractions etc.

On the other hand, some developers also tried to use outlet to manipulate the prices of the nearby housing or retail stores, creating a delusion to property investor on the future property prices with increasing foot traffic to the area. Whilst once it had achieved the price, the developer may quit from the construction of the outlet and leaving out the project. The restrictions set in the outlet malls to give.

Chinese consumers are among the most important consumers to luxury goods. The establishment of accessible infrastructure and transportation will bring economic value and more people to the cities. The success of an outlet does not only come from offering a wide variety of brands, but also a favorable location. On top of these factors, it is crucial to have an experienced management team from developing a good mix of first-tier tenants to the shopping