L Catterton bets on growth in China outlet malls (Amended)

Singapore

IN the face of sluggish high-street retail in China, outlet malls are seen weathering the slump with sterling growth, with more sprouting up to tap the spending power of the rising middle class and the popularity of discount concepts.

The growth of outlet malls in China has drawn international capital in the likes of L Catterton and Ping An Real Estate, which have invested undisclosed sums in local operator Sasseur Group.

After clocking 40 per cent average annual growth in sales over the past eight years since it entered the outlet mall business, Sasseur Group is now looking to maintain a growth rate of more than 30 per cent in the next decade through the "super outlet" concept.

Founder and president Vito Xu explained that this "super outlet" concept goes beyond the traditional outlet model to becoming an activity and lifestyle-driven destination providing other options such as entertainment, sports and cuisine.

Mr Xu's comments to BT were made in conjunction with a launch ceremony held at its Chongqing outlet mall to unveil its "super outlet" concept.

Clad in Italian red bricks, the Chongqing outlet built in 2008 stands out for its blend of Italian-inspired architecture and influence from the ancient city walls of Nanjing, eastern Sichuan houses and An Hui-style architecture.

Investors and developers are betting on the success of outlet malls, which typically offer off-season or factory excess goods priced at a discount to the in-season products sold by the same brands in department stores.

Steering away from hard numbers, Ravi Thakran, chairman and managing partner of L Catterton Asia, said that he expects to generate "superlative returns" from the investment in Sasseur given the growth in existing outlet malls and the ramp up of new ones.

As a proactive partner in developing its portfolio companies, L Catterton - the merged entity of LVMH's private equity and real estate arms and US private equity firm Catterton - has made a total of 26 investments from its Asian funds into brands from Australia to China.

Mr Ravi noted that what sets Sasseur apart from other operators besides its strong ties with local and international brands is the unique blend of art and commerce to address the aspirations of the new China.

To him, outlet malls not only fulfil Chinese consumers' demand for discounted concepts but also provide a channel for brands to alleviate pressures from inventory build-up.

The size of each new mall is about 300,000 sq m on average and they provide anything between 40 and 90 per cent discounts throughout the whole year.

While high-street retail is sensitive to the economic cycle and susceptible to competition from online shopping, discounted luxury retail is seen as more defensive.

"The company's core strategy is not competing in providing the highest discounts possible, but establishing its own unique business mode incorporating attractive lifestyle elements," Mr Xu said.

Started off as an art-inspired coffeeshop in 1989, the Sasseur brand cracked the clothing industry from 1992. In 2008, the group entered the outlet business and clocked a turnover of 450 million yuan (S$92 million) in the first year. Its revenue in 2015 was over five billion yuan and is expected to hit 6.5 billion yuan this year. Sasseur has become the largest outlets chain brand in Asia, with more than five million VIP members.

"Already, China has 300 million middle-class, and this number can only rise, making the outlets business model ever more competitive compared to regular high street retail," Mr Xu said.

Among its current operating assets, Chongqing West Outlets is the flagship outlet mall with an annual turnover of two billion yuan. Despite being a mature asset, the mall can still achieve a 10 per cent annual growth rate. Among newer portfolio assets, the Nanjing mall clocked sales of 800 million yuan in the first year since opening and the Hefei mall racked up 700 million yuan.

China still lags behind the US and Europe, where there are 220 and 157 outlet malls based on CBRE's estimates. A 2015 report by CBRE estimated that there were 38 prime outlets in the 17 major cities, with a total stock of 3.2 million sq m. But nearly half of the developers of outlets in China are domestic companies with relatively little outlet operation experience and relatively scarce brand resources.

At least 17 new outlet malls are scheduled to open in China in the second half of 2016, according to a report by Outlet Sight, which tracks the industry.

London-based TH Real Estate had in September partnered Gaw Capital in launching China Outlet Mall Fund, which was seeded with two existing Italian village-themed outlet malls in Tianjin and Shanghai worth US$850 million.

The fund's Florentia Village in Shanghai is 92 per cent occupied while Florentia Village Wuqing is fully let; three more Florentia Village malls are slated to open in Chengdu, Wuhan, and Hong Kong by 2017. And the portfolio for China Outlet Mall Fund is targeted to hit US$2 billion by 2020.

Amendment Note:In the original story, we mentioned that Warburg Pincus has invested in the Sasseur Group. The group has since followed up with BT that Warburg Pincus has exited the investment. A group error in the amount of discounts offered in the outlet malls has been corrected.