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Where to Invest in China

Luxury brands are optimising their store networks in the mainland to better target shoppers in both unconventional and prime locations amid an increasingly worrying outlook.
Chengdu Louis Vuitton boutique with a tigers tail made out of flowers weaving through the store exterior.
Louis Vuitton's newest store in Chengdu is part of a movement by luxury brands to optimise and localise their store networks in the mainland. (Louis Vuitton)
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As Shanghai residents queued for compulsory Covid-19 tests amid a stifling heatwave last month, fashion brands were moving into some of the most desirable luxury malls in a city that had only just come out of a severe lockdown.

Marni, Maison Margiela, Jil Sander, and Amiri — labels either fully or partially owned by Italian fashion group OTB — crowded into the newly opened JC Plaza on Shanghai’s Nanjing Road. Other openings were outside China’s fashion capital: A-Cold-Wall unveiled a storefront in Beijing’s Sanlitun area; Hermès revealed its renovated two-story boutique in Wuhan’s Heartland 66 mall; and both Louis Vuitton and Ralph Lauren minted new flagships in Chengdu, to name a few.

The openings come at a time when growth and consumer sentiment in the all-important luxury market have been dampened by strict zero-Covid policies, ranging from travel restrictions to snap compound-specific lockdowns. Official nationwide retail sales data revealed an uptick of 3.1 percent in July, signalling a slower recovery this time compared to earlier cycles during the pandemic.

The increasingly worrying outlook for the China market hasn’t deterred new arrivals like Nanushka, which will open its first local boutique in Shanghai’s IAPM mall next month, before launching a Chengdu outpost before the year’s end.

“Of course [lockdowns and zero-Covid policies] may play a role in the short term, but we’re looking at the country’s expansion as a strategic pillar of Nanushka’s growth,” said Peter Baldaszti, chief executive of the brand. “We’re extremely confident in the resilience of the country and the dynamism of its population; we also think we’ll learn a lot from our interactions with Chinese customers [in person at the new store].”

Direct customer engagement is increasingly important as Chinese shopping habits are changing, with both brands and retail developers adapting their store networks accordingly. From investing in smaller cities with emerging wealth to greenlighting high-impact flagships and concept-driven pop-ups in established shopping hubs, it’s clear that brands are still betting big on the mainland — even if economic recovery proves rocky in the short term.

Optimising Retail Footprints

Big-box luxury boutiques are still drawing crowds in China. In mid-July, media reports surfaced suggesting that Hermès’s new store in Wuhan’s Heartland 66 mall outperformed expectations on its opening day.

But this isn’t the case across the luxury sector or the wider mass market, as some shoppers have become more averse to — or cautious about — shopping indoors, according to James Macdonald, head of Savills Research in China. “In luxury malls, you’ve got the red rope and they’re only letting a certain number of people in. The degree of comfort and safety you feel within certain types of locations will be much greater, and the impact will be felt more by some than others.”

Even as keen new players plant their flags on the mainland and deep-pocketed heritage brand groups bet on offline activations to reap the rewards of the repatriation of luxury spending, brands are increasingly wary of investing heavily amid so much uncertainty.

Take Sanya, a popular resort city in China’s travel retail hub Hainan, which was locked down on August 6 following an uptick in Covid-19 cases. Tens of thousands of visitors were stranded on the island, and China Tourism Group Duty Free, the market’s biggest duty-free operator, saw shares slide ahead of its planned listing on the Hong Kong Stock Exchange.

From Macdonald’s perspective, the current pace of store openings reflects differing sentiments: some luxury retailers are following through with deals negotiated before the spring lockdowns, but others are relocating selectively while many are putting projects on hold. “The general sentiment is that China is still a large luxury market but isn’t growing that quickly in the short term,” he said. “There’s just no need for aggressive expansion at the moment.”

Companies have learnt the downsides of over reliance on the Chinese market the hard way. In Kering’s H1 results, it revealed that Saint Laurent, which is less active in China than other labels in the group’s portfolio, saw global sales grow 34 percent, while former frontrunner Gucci lagged at 8 percent due to a slowdown in the mainland. Then there’s the question of whether opening several new outposts will prove redundant, suggests Pablo Mauron, managing director of Digital Luxury Group’s China business. “When travelling abroad opens up, will these offline storefronts, especially in small cities, bring enough ROI?”

During the first half of 2022, developer Hang Lung Properties’ flagship Shanghai mall Plaza 66 saw revenue drop 17 percent and sales decrease 38 percent — a sobering reminder of the effect further lockdowns could have.

Though most luxury brands have shifted significant amounts of their China budgets to e-commerce including in-app social commerce platforms since the onset of the pandemic, many still rely on physical retail to drive traffic or to generate the majority of their revenues. Recent logistics logjams and supply chain disruptions have also demonstrated the fallibility of e-commerce.

Some cities can’t sustain three, four of the same Louis Vuitton stores.

But investing a lot back in physical retail also poses risks in a market where a real estate crisis looms. With indebted developer Evergrande recently failing to deliver a debt restructuring plan, several property giants could default on loans and homebuyers in over 90 cities are taking part in a mortgage boycott. Where a large proportion of Chinese wealth is held in the residential property market, consumer confidence could worsen still.

There are signs that some brands may have already overextended themselves in certain cities. Local media last week reported that Off-White shuttered four out of 11 of its mainland outposts, though it’s unclear whether local retail partner I.T’s plans go beyond scaling back the brand’s China presence.

Dickson Sezto, group chairman of Shanghai-based URF Group’s youth-focused real estate arm Center X, foresees luxury brands continuing to close underperforming stores, including those in main hubs like Shanghai and Beijing, to create a more streamlined retail footprint. “Some cities can’t sustain three, four of the same Louis Vuitton stores,” Sezto says.

The Hubs to Watch

That’s not to say there won’t be new boutiques. First and foremost, brands will appeal to younger shoppers in major hubs, rather than lower-tier cities, which they targeted in the 2010s to tap into heady growth. Though some see this as a product of luxury repatriation where domestic fashion capitals attract more provincial shoppers who previously travelled abroad, Macdonald sees it as a cyclical shift.

“Luxury has gone through these waves: ten years ago they were just in Shanghai and Beijing, then they aggressively expanded into second-, even third-tier cities, then there was a global financial crisis, and they pulled back.” In the wake of the pandemic, notes Sezto, resources from infrastructure to talent have been concentrated in the leading shopping and commercial hubs, so diligent brands are sticking to investments in first- and second-tier locations.

Take Nanushka, which following this year’s openings in Shanghai and Chengdu will open a Beijing outpost next year and then build a “proper flagship” back in Shanghai after that, mirroring the scale of its European flagship in London. Afterwards, says Baldaszti, the brand will look to Nanjing, Hangzhou, Guangzhou, Shenzhen and potentially a second presence in Chengdu. “I personally think there is still a lot of room to exploit in [first- and second-tier] cities before we go to [lower-tier cities with emerging wealth like] Hohhot,” he notes.

Clearly, provincial capitals and regional hubs like Wuhan and Chengdu are still on the rise. The latter, for example, houses a distinct cultural identity, high local spending power as well as an impressive volume of tourists, not to mention the sixth-highest retail sales in the country as of 2021, says Mauron.

China’s retail giants and top developers have already staked claims in both cities: in addition to longstanding malls by developers Beijing Hualian Group (which owns SKP), Swire Properties (Taikoo Hui), New World Development (K11), Wharf Holdings (IFS, Times Square) and Hang Lung Properties, the latter’s Heartland 66 opened its doors in Wuhan earlier this year, while SKP’s Chengdu outpost and Kunming location are slated for this fall and 2024, respectively.

Guiyang, the capital of Guizhou province, will welcome the opening of its first major luxury mall, Lavant, this year. According to Mauron, the likes of Louis Vuitton, Gucci and Cartier have already signed on.

Then, there are promising cities that aren’t provincial capitals, but are beginning to draw interest. Take Qingdao, where Louis Vuitton hosted an exhibition in April, Wuxi, Xiamen and Dalian, notes Mauron. Sezto names Guangzhou as a dark horse, because of its existing spending power and room for up-and-coming locations thanks to city planning efforts.

There are mixed views on Shenzhen, which the K11 Group last month announced will house its $1.4 billion new flagship, K11 Ecoast, opening in 2024. The city is a tech and finance hub, and benefits policy-wise from being part of the Greater Bay Area, but Sezto warns that neighbouring luxury hub Hong Kong, which in June brought on a new team of government officials, will benefit from tourism again once restrictions are relaxed. This would be a much-needed boost for the city, given the number of glitzy stores in top districts that have been shuttered in the wake of political unrest, Covid-19 and its effect on tourism from the mainland.

There are also tourism hubs set to benefit from China’s burgeoning full-price travel retail business. A priority will be the country’s top airports, which hold fewer obstacles for luxury players when it comes to brand positioning and experience. Louis Vuitton has already doubled down on airport locations while scaling back on downtown duty-free, and will operate six airport boutiques in China by the end of the year. In addition to airports in Hainan’s Haikou and Sanya — which Mauron also sees luxury brands tapping beyond travel retail stores due to an influx of high-end malls by SKP and MixC — he cites Guangzhou’s Baiyun, Chengdu’s Tianfu, Shenzhen’s Bao’an and Shanghai’s Hongqiao as the places to watch.

The Store of the Future

When it comes to where, within Chinese cities, brands will set up shop, it’s unlikely that many will expand beyond the tried-and-true areas of China’s top developers. Sezto notes that cities like Chengdu and Nanjing still have only one major commercial area suitable for the sector (Chunxi Road and Xinjiekou respectively), and that opening elsewhere would prove “very risky.” While getting the right location is of course critical, what brands do within the confines of their stores will set them apart.

When it comes to flagships and other major stores in top cities, the mantra still seems to be the bigger the better. The likes of Dior, Gucci and Hermès have either expanded or are in the process of upgrading existing prime locations to excite and signal their commitment to local shoppers with fuller ranges and exclusive merchandise. Within these boutiques, notes Mauron, providing a lifestyle element is becoming the norm — take Ralph Lauren’s bar in Chengdu and Tiffany’s Blue Box Café in Beijing and Hong Kong.

Omnichannel strategies that create seamless purchase journeys linking digital platforms like WeChat and the physical store will soon be table stakes for most brands.

When I met with brands in the last year, they were all thinking about new concept stores... It creates a reason for the post-pandemic shopper to go out.

In addition to the right mix of experiential outposts, pop-ups, exhibitions and other activations with a targeted angle, line and category will play a greater role in China retail strategies. In 2020, Chanel launched a footwear-only boutique in Chengdu, while Louis Vuitton and Dior are expanding their networks of menswear-only stores. Sezto sees more players testing new cities and approaching VICs with invite-only spaces, as well as drawing younger shoppers to concept stores that attract customers who like checking in on social media with ‘daka-friendly interiors.

“When I met with brands in the last year, they were all thinking about new concept stores,” Sezto says, adding that these spaces will fill the gaps left by shuttered, underperforming storefronts. “They might cross over with an artist, or have a store with a coffee corner, a cocktail bar, or DJ — something you can’t sell to the market. It creates a reason for the post-pandemic shopper to go out.”

The strategy allows brands to experiment with unconventional locations that may be unsuitable for permanent outposts and differentiate them from crowded prime luxury shopping districts, all while engaging with locals and tourists through niche themes, says Mauron. Brands are also increasingly looking for cultural properties, such as Prada’s Rongzhai residence in Shanghai, to better position them in the local imagination and create space for events with artistic or historical resonance.

While the preparation for the next major retail rollout has undoubtedly been happening behind the scenes, it’s likely that shoppers will only see much of brands’ efforts come to fruition after the easing of China’s zero-Covid policies, which many say will be at the end of the year, at the earliest. Sezto is optimistic that once this happens, there will be an “immediate” uptick in openings, driven in part by personnel changes that several groups made last year in a bid to freshen up local senior leadership teams.

“We haven’t recovered yet,” said Sezto. “[So] right now the strategy is not just about opening new stores, but about regaining attention and focus from young people [in existing stores].”

THE LATEST NEWS FROM CHINA

By Zoe Suen

时尚与美容

FASHION & BEAUTY

A shot of the Adidas logo on a glass storefront.

Adidas CEO Sees ‘Severe Challenges’ in China

Adidas’ sales and profit targets extending to 2025 could be compromised if growth in China continues to break down, said Kasper Rorsted, CEO of the German sportswear giant. In an interview with local news outlet Handelsblatt, Rorsted acknowledged that the company has yet to pick up its pace in China after getting mired in forced labour allegations surrounding Xinjiang cotton, supply chain disruptions and dampened demand in response to Beijing’s Zero-Covid policy. But he also admitted that changing tastes, where Chinese shoppers are increasingly looking for localised designs with a “Chinese feel,” are slowing Adidas down in the country’s lucrative sportswear race. “We don’t understand consumers well enough, so we left room for Chinese competitors who are better off,” he said. But the CEO remains optimistic about the market, which made up a fifth of Adidas’ sales last year, adding that he sees it making a comeback for other Western players as well. (Dao Insights)

Travel Retail Giant Seeks $2.16 Billion Hong Kong Listing

China Tourism’s new listing would be Hong Kong’s biggest share sale so far in 2022, a term sheet seen by Reuters reveals. The company, which operates the largest duty-free retail network in the mainland, is already listed in Shanghai. It plans to sell 102.76 million shares priced between $143.5 and $15.5 HKD ($18.3 and $21.1 respectively), the term sheet says; according to two people with direct knowledge of the listing, the offer has already been fully subscribed. It’s been a tricky month for the company: the news comes a week after Chinese duty free haven Hainan island was put under a strict lockdown due to an uptick in Covid-19 cases. Though China Tourism’s Shanghai-listed shares have largely recovered, the reported price range for its Hong Kong sale reflect a discount of over 29 percent from its closing price in Shanghai on August 11. (Reuters)

Sequoia Capital China Bets on Norwegian Label Holzweiler

Contemporary label Holzweiler is eyeing global expansion with the backing of the venture firm, which on August 8 announced its acquisition of a majority stake. The financial terms were not disclosed, but the brand’s founders, siblings Susanne and Andreas Holzweiler, and creative director Maria Skappel Holzweiler (also Andreas’s wife) will retain a minority stake. With the help of the investment from Sequoia Capital China, Holzweiler is aiming to surpass €100 million ($102 million) in sales. It has plans to expand its physical retail footprint, starting with a flagship store in Copenhagen, Denmark in October and its first London store in Spring 2023. Store openings in key US and Chinese cities will follow, with the brand also launching with Chinese online luxury etailer Tmall next month. (BoF)

科技与供应链

TECH & SUPPLY CHAIN

Alibaba office building. Shutterstock.

Alibaba Revenue Declines for First Time Since 2014 New York IPO

The retail giant’s Q2 revenue declined less than one percent year-on-year to 206 billion yuan ($31 billion), reflecting the impact that drawn-out lockdowns in cities like Shanghai have had on its business. It’s the first time quarterly revenue has dropped since Alibaba’s listing on the New York Stock Exchange eight years ago, but results overall beat expectations and sent the group’s shares up more than 6 percent in pre-market trading on August 11. There are several other factors weighing on growth, from the company losing e-commerce market share to rivals like TikTok- and Douyin-parent Bytedance and JD.com, in addition to pressure from Beijing’s regulators and China’s economic slowdown. Alibaba has also made headlines for other reasons: its largest shareholder, Japan-based tech and investment group SoftBank, is working to sell about one-third of its shares in the firm as it diversifies away from the mainland. There’s also news circulating around Alibaba delisting and upgrading to a primary listing in Hong Kong amid ongoing conflict between Beijing and Washington over audit records. (The Financial Times)

Chinese Firms in Fortune 500 Outpace US Rivals in Revenue

For the first time, revenues from the Chinese companies in this year’s Fortune Global 500 list outstripped that of US counterparts. A hundred and forty five mainland players, spanning industries including energy, tech and banking, made the new ranking and accounted for 31 percent of its total revenues, while US companies stood at 30 percent. China’s national energy provider, State Grid, is the top Chinese firm on the list at number three, following Walmart and Amazon. But Chinese companies are still lagging behind on productivity, where average profit was calculated to be $4.1 billion, against the list’s global average of $6.2 billion. For fashion, beauty and luxury, familiar names on the list include JD.com, Alibaba and Tencent, which were ranked #46, #55 and #121 respectively. (Technode)

Big Three Tech Players’ $1.2 Trillion Selloff Might Not Be Rock Bottom

The worst isn’t necessarily over for China’s top three tech stocks Alibaba, Tencent and Meituan, despite the three collectively losing $1.2 trillion in value since February 2021, when their total market capitalisations peaked. In the wake of recent regulatory crackdowns, Beijing’s strict Zero-Covid policy and local macroeconomic headwinds, Alibaba’s once $858 billion market cap has slid to $240 billion as of August 10, while Tencent recently hit a multi-year low and Meituan (the least hard-pressed of the three) is around 60 percent lower than its peak. Some investors are calling this a buying opportunity due to an easing of Beijing’s tough grip on tech and cost-cutting measures the companies are adopting, but others are more sceptical. With no end to China’s strict anti-virus policies and economic slowdown in sight, geopolitical risks relating to Russia, Taiwan and the US are only increasing. There’s also the country’s battered property sector, which could deter investors. (The Wall Street Journal)

消费与零售

CONSUMER & RETAIL

Shein app. Shutterstock.

Shein Beats Amazon in US App Downloads for First Time

The Chinese ultra-fast fashion giant drew 6.8 million downloads on US mobile platforms in the second quarter of 2022, surpassing local e-commerce behemoth Amazon for the first time locally, according to Sensor Tower data. Shein saw 13 percent growth in downloads from Q1 2022, while Amazon had a 7 percent drop; summer sales were likely a boost for the former, though it has seen consistent quarterly growth for downloads in the last three years. Shein still has a way to go when it comes to monthly active users (MAU) — Amazon’s average MAU for Q2 2022 tripled Shein’s, but the Chinese firm is catching up fast. In Q2 2020, Amazon had ten times its MAU, but Shein had narrowed this gap to four times by Q2 2021. According to Sensor Tower, the US (followed by Brazil) is Shein’s top market by app installation, making up 14 percent of the e-tailer’s global downloads. (Technode)

Retail Indicators Signal Slow Recovery Despite ‘Revenge Travel’ Boom

In a report released by China’s Chamber of Commerce, the country’s retail operations (based on industry-wide surveys) rose 0.8 percentage points during June to hit 49.8 percent last month, while the Retail Performance Index — an indicator for market confidence — reached 50.2 percent in August after remaining flat in July. The figures illustrate the country’s slow recovery as Beijing’s zero-Covid protocols remain in place, even as tourism makes a comeback across the country amid the summer season. Restrictions have relaxed for some destinations, and visitor figures surged as a result: 24 million tourists travelled to Xinjiang in June, for example, a 66 percent increase from May. But domestic tourism is still below 2021 levels and lagging far behind pre-pandemic standards; once pent-up demand is released when summer ends, demand is expected to drop once more due to China’s economic slowdown. (Fibre 2 Fashion, The South China Morning Post)

Hong Kong Retail Set for Slow Recovery Despite Easing Restrictions

Hong Kong’s government recently shortened its week-long mandatory hotel quarantine period to three days (followed by four days of medical surveillance at home), and its health minister expects visitor arrivals to increase as much as 80 percent. But the struggling luxury hub’s retail landlords aren’t expecting an overnight boost. Property experts advise tenants to extend leases only if they are confident they can sustain local demand, and foresee rents staying at their current low until signs of recovery are more apparent. According to Michael Cheng, mainland China and Hong Kong consumer markets leader at PwC Asia Pacific, mall and department store landlords are conceding to short-term leases and pop-ups to retain tenants. He expects sales in prime malls to slowly pick up in H2 2022 due to local spending, boosted by the government’s consumption voucher scheme. The latest round of vouchers, distributed this month, will see more than $30 billion HKD (around $3.8 billion) go into shoppers’ wallets, and officials expect some $13 billion HKD to benefit restaurants and retailers. (The South China Morning Post)

政治,经济与社会

POLITICS, ECONOMY, SOCIETY

Construction work with red cranes in a city skyline.

Real Estate Crisis Risks Greater Impact on Chinese Economy

As defaults and delayed payments continue to surge in China’s beleaguered real estate sector, it’s becoming clear that banks and provincial governments won’t be safe from the fallout. S&P Global Ratings warns that roughly a fifth of Chinese developers it rates are at risk of insolvency, after Beijing in 2021 began taking a tougher stance against mortgages and developers’ reliance on borrowing. Since then, some homeowners and unpaid suppliers have joined in on a mortgage strike and are refusing to make payments, a move likely to affect 900 billion yuan ($133 billion) of outstanding debt. For banks, lending to real estate players accounts for more than a quarter of China’s total outstanding loans, and local authorities are also on uncertain ground, having relied on selling rights to state-owned land to developers for income. S&P Global predicts that up to 30 percent of local Chinese municipal government could necessitate spending cuts by the year’s end. (Nikkei Asia)

China Prepared to Use ‘All Means Necessary’ in Taiwan ‘Reunification’

Following US Speaker Nancy Pelosi’s controversial visit to Taiwan during an Asian tour, Xiao Qian, the Chinese ambassador to Australia, told reporters at the National Press Club that Beijing would “not renounce” the use of force and would take “all necessary measures” to enforce its “one China” position. Xiao stated that a “peaceful reunification” was the best scenario, but that “we can never rule out the option to use other means so when necessary, when compelled, we are ready to use all necessary means.” Days later on August 14, a delegation of US lawmakers touched down in Taiwan, where they met President Tsai Ing-wen and demonstrated “the United States Congress’ firm support for Taiwan,” Taiwan’s presidential office wrote in a statement. Meanwhile, China’s embassy in Washington called it on Sunday proof “that the US does not want to see stability across the Taiwan straits and has spared no effort to stir up confrontation between the two sides and interfere in China’s internal affairs.” (The Guardian, Reuters)

Zhou Xiaoxuan Loses Appeal in Landmark #MeToo Case

Zhou, the woman at the centre of a landmark #MeToo case in China, said she would not give up after a court in Beijing rejected her appeal for an apology and damages, deeming her evidence “insufficient” in proving alleged sexual harassment. In 2018, Zhou accused Zhu Jun, a well-known state TV anchor, of forcibly kissing and groping her while she interned for the company, inspiring many others to speak up about their own experiences of sexual assault. “I won’t give up, but I also don’t know what to do next. We seem to have exhausted all the legal means,” she told The Guardian. In China, it’s still rare for cases like Zhou’s to make it to court, where many victims are reluctant to report crimes and the legal system places a heavy burden of proof on the plaintiff. Despite an uptick in discourse years ago following Hollywood’s #MeToo movement, Chinese activists are seeing online posts censored and find it harder to hold protests due to pressure from local authorities. (Reuters)

China Decoded wants to hear from you. Send tips, suggestions, complaints and compliments to robb.young@businessoffashion.com.

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