Homes, services will cluster around new discount outlets
WANNING, Hainan - Explaining the relatively new concept of discount retail outlets in China has not always been easy - or without its surreal moments.
When Outlets (China) Ltd Chairman Lin Zhuoyan introduced the idea to a vice-provincial governor some years ago, the official thought he was talking about luxury cars because the pronunciation of the last letters of outlets and Rolls-Royce sound similar in Chinese.
"Rolls-Royce are high in quality and expensive. Outlets also offer quality goods but they are often for sale at a big discount," Lin replied.
Lin encountered many confusing situations like this when negotiating with provinces and cities across the country over developing his company's stores. Now, the idea has caught on and has become popular.
According to Lin, there are about 200 stores using the name "outlets", but fewer than 10 of them are genuine, offering first-class quality at a bargain-basement price.
Biggest luxury market
The Chinese Academy of Social Sciences in August released a report showing that China is now the world's second largest consumer of luxury goods. The country's total consumption of high-end brands accounts for 27.5 percent of the world's total. In five years, it is predicted China will be the biggest global luxury market.
Lin Zhuoyan, Chairman, Outlets(China) Ltd
When Beijing Yansha Outlets shopping mall opened in 2002, it was the first outlet discount store in China. Its founder, Wan Wenying, was in charge of brand operations. Major partners with Outlets (China) are Beijing Capital Land Ltd, China Infrastructure Group Ltd and Europe's two largest outlets operators, British Freeport and French SCC."A strong supply of goods is essential for the success of outlets in China and our strategic alliances make us competitive in attracting international brands," Lin said.
Lin added that the company persuaded 300 international brands to join them, of which 30 percent to 40 percent are high-end. Lin said that Louis Vuitton and Hermes also hope to sell products in outlet stores.
"They would like to cooperate with us because we are both the developer and operator and they do not need to worry that their stores will be withdrawn suddenly. Furthermore, our international team can make negotiations more efficient," Lin said.
According to Lin, many luxury brands are not well known, so he decided to display their history in outlet stores.
As an example, he pointed out the business suit he wore was the same brand favored by UK's Prince Charles, but it is found in fewer than 20 stores in the world. One of his friends thought it was inferior because he had never heard of it. The experience prompted him to consider eye-catching methods to promote luxury brands.
Lin promised to give customers a 50 to 70 percent discount on prices offered in branded stores, franchises and concessions. He said they are developing many outlet stores across China so the company can be more competitive in bargaining with suppliers. As the director of Outlets China Association, he said he is negotiating with customs on tax policies.
"If we regard outlets as a developing industry, we should first deal with red tape," Lin said. "Could goods enjoy a different tax policy if they enter China through the channel of outlets?"
He pointed out that a Zegna business suit can be sold at 20,000 yuan ($2,973.98). Outlets pays a wholesale price of 5,000 yuan but, on top of that, is taxed 4,000 yuan, making it difficult to offer a good discount. Lin said tax negotiations were making good progress.
"Our goal is not only to bring in genuine Outlets stores, but to set up a new town led by Outlets," Lin said.
Lin said that the inspiration came from Las Vegas. Although the city is famous for gambling, that brings in lower revenues than conventions, vacations and entertainment.
"Outlets stores are the engine of the business model, and many modern commercial service clusters will be introduced as well, such as entertainment squares, convention centers, cinemas, supermarkets and hotels," said Liu Xiaoguang, a director at Outlets (China) Ltd and chairman of the board of directors at Beijing Capital Land Ltd.
Liu said that they will also develop apartments and take advantage of local resources to create an innovative business model.
Liu said the plan is to build 30 towns in 10 years. Six are already under construction - in Fangshan, southwest of Beijing, Foshan in Guangdong province, Huzhou in Zhejiang province, Jiujiang in Jiangxi province, and Tieling in Liaoning province. The company is seeking international private equity to fund the program and is planning to go public in Hong Kong before the end of 2012.
Zhao Xueqin, a senior industry analyst at CIIIC Securities Co, said that the challenge for Outlets lies in attracting first-class brands.
"International first-class brands will not open more than 20 discount stores in China, so it is extremely difficult for Outlets stores to bring in the top brands," Zhao said.
According to Zhao, the current well-performing Outlets stores - Beijing Yansha Outlets and Shanghai Qingpu Outlets - are managed by department stores so that they can have access to an abundant supply of goods.
Zhao said that outlets development programs are very intensive in China. Many other companies are also interested in the discount store industry. In order to survive and develop they must establish brand, goods and price advantages.
