As China’s luxury sales slow, a new report finds that brands’ rush to open new retail spaces has tapered off as well. Instead of rapid expansion, retailers are now focusing on quality over quantity when it comes to retail real estate in China as they adopt new strategies such as opening restaurants and promoting children's clothing.
According to CBRE’s recently published “The Future of Luxury Retail in Asia Pacific,” Asia remains a crucial region for the global luxury market, with Chinese consumers driving the bulk of sales both inside and outside China. The region accounted for a third of all personal luxury goods sales in 2014, with China, Hong Kong, Japan, Singapore, South Korea, and Taiwan dominating the market.
China has been a key source of investment for luxury brands in the region, but the country’s luxury sales slowdown has been causing many to rethink their retail strategies in the country. Luxury retailers are more established in mainland China than in anywhere else in Asia, including Hong Kong, Japan, and Singapore. China has an 87 percent market penetration rate for luxury retailers, followed by Hong Kong at 81 percent, Japan at 79 percent, and Singapore at 75 percent. The mainland and Hong Kong were the most popular destinations for brands new to Asia and accounted for one-third of new market entrants.
But as mainland China’s luxury market slows, the report finds that many brands have discovered they may have expanded too quickly in China. “Over-saturation, surging operational costs, and weaker retail sales—especially in Hong Kong due to the slowing mainland China economy—have prompted retailers to consolidate their existing store networks and slow their rate of entry into new markets focusing on operational efficiency,” says Henry Chin, the head of research at CBRE Asia Pacific.
The factors behind the slowdown have caused many luxury brands to rethink their China retail strategies. “The change in shopping behavior among mainland Chinese tourists—who are demonstrating a stronger preference for shopping in Europe and Japan—has prompted luxury brands to review their expansion and rationalize their real estate portfolios, strategies, and requirements,” says Chin. “Since most luxury retailers remain cautious towards expansion, especially in China, retailers are now focusing on consolidating their footprint into a solid network of stores in high quality locations, as opposed to expanding rapidly and opening many smaller stores, in order to extract the highest value from their sales network.”
Brands are focusing more on their flagship stores and “making a stronger statement in the market” through displaying more product lines, accordion to the report. It also notes that there is weaker interest in department stores but continued demand for prime locations. Brands wary of committing to a retail space are also increasingly embracing short-term projects to encourage consumer awareness such as exhibitions, pop-up shops, an concept stores.
There are several key segments that have especially seen an influx in China’s luxury retail sector in recent years, including affordable luxury, food and beverage options, and children’s clothing.
As China’s middle class grows, affordable luxury labels such as Michael Kors have expanded rapidly. According to the report, two-thirds of all 237 new luxury market entrants in Asia between 2012 and 2014 were affordable luxury brands, with Hong Kong, Beijing, Tokyo, and Singapore listed as the most popular cities for expansion.
Meanwhile, luxury brands have also shown a growing interest in food and beverage in Asia, such as Gucci’s new restaurant in Shanghai and Dior’s new cafe in partnership with Pierre Hermé in Seoul. “Among many luxury retailers there is a view that entering the F&B business is a key step towards transitioning their brand from being totally fashion-oriented to more lifestyle-driven,” says the report. By introducing new restaurants, brands can create a “more complete” experience for consumers that allows for relaxation and socializing while shopping—as well as sharing their experience on social media. And, like affordable luxury, F&B options are a way to reach more mass-market consumers.
In addition, luxury retailers are investing in Chinese parents’ interest in spoiling their “little emperors” with new clothing lines for children. China’s low birth rate due to the one-child policy that was ended last week has meant that affluent families have more disposable income to invest in their child. “Luxury childrenswear stores are particularly attractive to high-end shopping malls as their price points are in line with their existing tenant mix,” says the report.
Despite the luxury slowdown in China, the Asia-Pacific region “will remain a hugely important market for international luxury brands,” says Joel Stephen, the senior director and head of retailer representation at CBRE Asia. “Even though leasing demand will slow to a more sustainable level, prime space in core areas will continue to be keenly sought after.”