This was originally posted as an Opionion Piece on the Luxury Society website
With literally hundreds of new shopping malls under construction across China and with many of them aiming to become luxury brand malls, a question often asked is “how many luxury malls in China are actually successful?” With a view to answering this question this in mind, consider the major issues these malls success
Obviously, success in business terms is measured by whether luxury tenants and the mall owners both make a profit from the mall. As study after study by management consulting companies such as McKinsey, KPMG and Deloitte etc. attest to, sales of luxury goods are increasing dramatically across China. While it is safe to assume that the major luxury brands occupying first and second floors of the malls are all doing great business, this doesn’t necessarily this translate to the entire mall. The studies don’t highlight the fact that a large percentage of luxury sales are going to the top 20-50 international luxury brands and that the brands on upper floors of malls may actually be experiencing lackluster sales.
Traditionally high-end retailing in China has all been done through the department store model, with the notion of flagship stores and modern shopping malls only starting to gain traction now. Although most of these luxury grade department stores to date have been very successful they are often quite small, don’t have any restaurants or entertainment facilities and lack sufficient parking space. These facts combined are becoming major detractors for China’s current generation of luxury brand consumers who are becoming more discerning and sophisticated.
In a nutshell, today’s luxury consumer wants to drive their Mercedes Benz to the mall, park in the basement, take the elevator up to the first floor, spend a lot of money at Hermes and Chanel etc., enjoy a nice meal or coffee and a fancy restaurant and then leave. The department stores in China can no longer offer this level of modernity, which is why modern shopping malls are taking over, but they too have many challenges to overcome.
New shopping mall developments in China are dominated by either Hong Kong and Singapore based Property developers such as Swire Group, Sun Hong Kai, Kerry Properties and Yanlord Land, or they are government backed and invested projects. The Hong Kong property developers have long experiences with retailing and are much more experienced in operating luxury shopping malls. Therefore they have much higher chances of success and have relative ease in bringing the luxury brands into their malls.
The government projects are a completely different story. With government backing, the developers are able to secure the best real estate for the malls and can easily combine public infrastructure including subway lines and new roads into the project. Moreover, these projects may have the special blessing of the city’s Mayor, who during his tenure wants to ‘modernize’ the city and leave his legacy through a brand new luxury shopping mall. With massive amounts of state investment, the developers are willing to throw money at the top luxury brands, offering long rent-free periods and hefty subsidies for store construction. These developers, (most common in emerging second tier cities) have little or no notion of what the luxury retail business is about. All they know and believe is ‘money talks’ and think that by throwing cash at the brands they will be happy to open big flagship stores in every mall on offer.
The brands obviously think very differently and although they do not shy away from construction subsidies and attractive rent terms, they are expert retailers and demand a multitude of right conditions in order to open a store. One major disconnect between the government developers and luxury brands is on shopping mall management. Chinese developers simply don’t have the experience or know how to manage a luxury atmosphere, create tasteful PR and marketing campaigns, attend to VIP customers and monitor CRM programs, all of which are at the forefront of the luxury brands’ minds and demands.
In this aspect the ‘software’ of many luxury malls in China can be deemed far from successful and the luxury brands often clash with mall management and have to do a lot of educating to achieve the standards they require. Its in reaction to the lack of well managed luxury malls in China that companies like L Real Estate (owned by LVMH and Groupe Arnault) are embarking on their own shopping mall developments, where they can use their luxury expertise to design, lease and then manage the mall to their own specific standards.
In general, if a luxury mall in China has a good collection of international brands then one can assume that these brands are performing well. Even if it is a new mall with very few customers, the fact that the world’s top brands have the confidence to enter the project shows that over time it will most likely be successful. With at least five years of rapid growth in the luxury market ahead for China and with room enough room for at least two luxury malls in over 30 cities that’s 60 luxury malls that China should have the capacity to keep in business for the foreseeable future.