Wertheim Village. Outlet centers across Europe are attracting visitors from as far away as China and Brazil with discounts of 60 percent or more on year-old apparel by luxury labels like Gucci and Prada. Photographer: Heiko Wolfraum/dpa/AP Photo

When Vancouver hosted the Winter Olympics three years ago, the thousands of travelers who flooded the city from around the world for the games also boosted duty-free sales at the local airport to a record-breaking level in one day.

“Remember this day, because you won’t see it again,” Freda, Cheung, the chief executive officer for Canada of World Duty Free Group, recalled telling a colleague in the airport at the time.

Yet just three years later, Cheung and her team proved those words wrong when a group of 600 Chinese travelers passed through the airport in January and smashed that Olympics sales record, which had involved sales to thousands of consumers. It was no accident, Cheung said here Wednesday. Rather, her company made deliberate, calculated steps to court Chinese consumers, planning well in advance with Chinese-language signs, Chinese-speaking staff and products and promotions to suit their tastes.

“Understanding why Chinese travelers are at our airports is key to selling to them,” Cheung told the Tax Free World Association’s “China’s Century” conference, which is meeting in the Chinese capital this week.

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Cheung joined a catalogue of industry experts and analysts on Tuesday to discuss insights and strategies related to the duty-free world’s most important growing group of customers: Chinese travelers and shoppers who buy duty-free products ranging from cosmetics and fashion accessories to cigarettes and liquor.

They discussed airport strategies inside and outside of China, economics and potential challenges, but the general agreement appeared to be that China’s fast-growing travel market combined with the heavy and growing demand for high-end goods at a decent price presents massive opportunities for the industry. Most agreed that any new anticorruption effort in China will not negatively impact growth in sales.

“The fact that we are gathered here to talk about one passenger is proof alone of the power of the Chinese traveler,” said Emmanuel de Place, ceo of LS travel retail ASPAC.

China’s tax-free shopping boom is unique and intimately tied in with both the country’s dramatic surge in wealth in recent years and government fiscal policies. Duty-free sales began here some 30 years ago, but in the past decade, they have increased exponentially, both within China and internationally. Steep taxes on the domestic retail sales of luxury goods mean duty-free products are significantly less expensive, so much so that international shopping trips to destinations like Paris and Tokyo have become common.

Hong Kong has built a massive tax-free shopping industry that caters to Chinese tourists, including weekend tourists who flock to designated duty-free malls designed with them in mind. Within China, the government has recently designated Shanghai as the country’s second duty-free shopping zone, joining tropical Hainan Island as a location where certain retailers will be able to sell middle and high-end consumer goods without charging the hefty taxes.

A regulation on the new Shanghai duty-free zone in January said the government will “explore tax rebates on departure in coordination with national-level administrations and select locations to set up duty-free shops,” according to a local press report.

Duty-free retail is such an important component of China’s high-end shopping scene that it’s even driving real-estate development in Hainan.

On the island, work has begun on a 7.7-square-mile residential, golf, spa and shopping development that will cater to tax-free shoppers, said Philippe Schaus, ceo of the duty-free giant DFS, which is a partner in the project.

“We believe this property creates all the elements to become an attraction and destination on itself,” said Schaus.

By the numbers, Chinese consumers made 50 million overseas trips last year and that statistic is rising fast. According to TFWA and the experts, Chinese duty-free shoppers, projected to have spent $80 million on those overseas trips, differ from other groups in several ways. They want personal interaction with staff, are eager for sales and discounts and buy more at holiday time, just before the Chinese New Year in late winter.

Retailers need to take these factors into account and plan and train staff accordingly, speakers suggested. Personal shoppers can be helpful, as is having staff who can speak Mandarin.

Beyond the international duty-free scene, industry executives spoke of tremendous growth opportunities within China’s borders as regional airports open up to international connections. At present, China is not a huge transfer hub and many international flights go through large airports. That is likely to change in the near future, opening up tremendous potential markets outside of Beijing and other large cities.

Sunil Tuli, managing director for duty free of the King Power Group in Hong Kong, said that while rising labor costs and other issues present challenges moving forward, the strength of the Chinese market will continue to grow and outweigh potential pitfalls.

“We face the newest and most exciting travel retail audience in the world,” said Tuli.

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Australian tourists Erica Kim and Michael Cai walk out of Bicester Village outlet mall near London loaded down with purchases including Jimmy Choo boots, Bally shoes and a dress. They figure they’ve saved about 1,000 pounds ($1,500) compared with shopping at home.

 

Outlet centers across Europe are attracting visitors from as far away as China and Brazil with discounts of 60 percent or more on year-old apparel by luxury labels like Gucci and Prada, as well as on jewelry and other goods. That’s lifting revenue at companies backed by investors such as Carlyle Group LP (CG), Hammerson Plc (HMSO) and Henderson Global Investors, and fueling the industry’s expansion even as conventional retailers struggle.

 

“When times are tough, people still like to shop, they still like brands,” said Robert Hodges, head of European asset management at Carlyle, which bought London-based outlet operator Freeport Group in 2007. “We’ve seen consistently better performances in terms of footfall and overall turnover at the centers and, because we’ve got percentage rents, that filters down to us as rental payments.”

 

Revenue at European outlet malls climbed to 10.8 billion euros last year, a 60 percent gain from 2007, according to estimates by industry adviser FSP Ltd. Owners and operators benefit more from rising sales than malls with full-price retailers because they keep as much as 18 percent of the price of each item sold by the brands at their outlets. There are 201 outlet malls in Europe, excluding Russia and Turkey, FSP said in January.

 

Increased Spending

Sales at the nine luxury-brand outlets built and operated by London-based Value Retail Plc, including Bicester Village, almost tripled to 1.7 billion euros in the five years through 2012. Spending per visit rose 9.4 percent in 2012. The closely held company, Europe’s third biggest outlet-mall owner by floor space, is forecasting a 20 percent gain in sales this year, according to Chairman Scott Malkin.

 

Rising revenue is increasing the value of the company’s assets at a time when conventional stores and shopping malls in the U.K. are depreciating. Hammerson, the London-based real estate investment trust that owns 22 percent of Value Retail, said last week that the value of its stake increased by about 18 percent last year.

 

Shopping-mall sales in mainland Europe fell 34 percent to 6.1 billion euros in the first half of 2012, according to data compiled by Real Capital Analytics Inc. U.K. commercial property values fell by 3.1 percent last year and retail assets declined 3.2 percent, according to Investment Property Databank.

 

Growth Prospects

Henderson Global Investors’ European outlet fund has generated annual returns of about 12 percent for investors since it started in 2004. The fund, which owns eight malls with McArthurGlen Group in Europe outside of the U.K., is due to mature next year. Henderson is in talks with clients to renew the investment pool rather than sell the properties, according to Andrew Rich, who manages the fund.

 

“There’s a lot more growth to come out of those assets,” he said.

 

The fund in September opened a 120 million-euro center in the German town of Neumuenster, about 57 kilometers (35 miles) north of Hamburg, in a joint venture with London-based McArthurGlen, Europe’s largest outlet-mall operator. The fund is considering expanding the mall and may increase the number of stores at a center near Berlin, Rich said.

 

Changing Hands

Henderson’s fund sold outlet malls in 2010 and 2011 at Troyes and Roubaix in France to Resolution Property Plc. Closely held Resolution, based in London, also bought Rosada Factory Outlet, 50 kilometers south of Rotterdam, in December from CBRE Global Investors. The three properties have risen in value by about 25 percent to 200 million euros since they were purchased, Resolution director Peter Todd said.

 

“They have fantastic potential for income growth,” he said in an interview. Resolution may spend an additional 200 million euros or more on outlet malls, he said.

 

Outlet malls in Europe differ from those in the U.S. because they tend to have a greater proportion of shops selling high-end luxury products, Iestyn Roberts, chief executive officer of Freeport, said in an interview. U.S. centers are more likely to sell apparel made specifically for discount stores.

 

Luxury goods account for about 40 percent of sales in Europe’s outlet malls even though they occupy only 22 percent of the space, FSP estimates.

Scattered Ownership

The U.S. outlet mall market is dominated by Indianapolis- based Simon Property Group Inc., the biggest shopping-center owner, and Tanger Factory Outlet Centers Inc. McArthurGlen Group has 15 percent of the U.K. market, while Madrid-based Neinver controls 9 percent. Both companies are closely held.

For foreign shoppers coming to Europe, designer brands tend to be a bargain even without the discounts offered at outlet centers. The cost of 20 luxury items in China, including bags and watches, was 72 percent higher than in France, according to a 2011 survey by China’s Ministry of Commerce.

Demand outside of Europe for brands owned by companies like Burberry Group Plc (BRBY) and Prada SpA means that foreign shoppers spend twice as much per visit than Europeans, according to data compiled by FSP. Scarcity and factors like import duty boost prices in countries like China and Brazil, Freeport’s Roberts said. Tourists from outside the European Union can also claim back the sales tax paid on their purchases.

Parking was hard to find on a Tuesday afternoon in January at Bicester Village, about 50 minutes by train from central London.

Chinese Buyers

Australians and Chinese were among those looking at Gucci handbags reduced by more than 75 percent from their original price of 500 pounds. Women’s black ankle boots by Armani were 70 percent off and navy chalk-stripe suits by London’s Savile Row tailor Gieves & Hawkes were marked down to 495 pounds from 2,250 pounds.

“Things are so much cheaper here,” said Kim, the shopper from Australia. “You can get luxury brands for reasonable prices.”

Hayden Dong, a mechanical engineering student from Beijing, said he bought a Gucci purse at the center after comparing prices with those in China. Spending by Chinese visitors to the U.K. rose 31 percent last year, according to tourism services provider Global Blue.

Meyer Bergman, a London-based fund seeking to buy assets worth as much as 600 million euros, has hesitated to invest in outlet malls, according to Zsolt Kohalmi, its chief investment officer. Bergman has yet to purchase any because of questions about liquidity in the market and the types of investors that would acquire the assets afterward, he said.

Profitable Investment

Earnings at Freeport have tripled since it was acquired by Washington-based Carlyle, the world’s second-largest private- equity firm, for 155 million pounds in 2007, Roberts, the CEO, said in an interview. He declined to say how profitable the company is.

Freeport plans to add malls at Lyons in France, Duisburg in Germany and La Spezia in Italy, and may take over the management of underperforming outlets from other operators, he said.

Sales at outlet malls are surging even in some of Europe’s most troubled economies such as Portugal and Ireland. Tourists, especially from Brazil, now account for as much as 25 percent of sales in the summer at Freeport’s center near Lisbon, a fivefold increase in three years, Roberts said.

Values Rise

That spending helped increase the center’s value by 25 percent in the three years through 2012. Values for the best shopping malls in Portugal fell about 15 percent in the same period before rent increases or decreases are taken into account, according to broker Jones Lang LaSalle Inc. (JLL)

“It’s also pushed us upmarket,” Roberts said of the Lisbon outlet. “Every time we put in a high-end brand we’ve increased our appeal to those tourists.”

Value Retail plans to expand its mall in Ireland’s County Kildare by about 60 percent, according to a filing to the country’s planning appeals board. Sales there have grown an average of about 17 percent a year in the six years through 2012, according to data compiled by the company. That compares with a decline of almost 25 percent in the wider market.

“They can shift the offer around to suit what the consumer is looking for at the moment,” said John Moran, chief executive officer of Jones Lang LaSalle’s Irish unit and an adviser to Value Retail’s Kildare outlet. “It’s also quite popular with retailers who are testing whether they want to open in Ireland.”

European Growth

Malkin aims to spend as much as 150 million euros on growth in Europe in the next three years, he said in an interview. The outlet operator will extend its mall near Barcelona by a third this year, Hammerson said.

Other real estate investors are planning to enter the market. Quintain Estates and Development Plc is building an outlet center with 85 shops near Wembley stadium in London. On the other side of the city, a unit of Anschutz Entertainment Group Inc., part owner of the National Basketball Association’s Los Angeles Lakers, may develop a 13,500 square-meter (145,300 square-foot) outlet mall near the Canary Wharf financial district, according to a filing to the local government.

Some management costs at outlet malls are higher than traditional shopping centers because more people are needed to run them than typical malls.

Operators tend to replace underperforming brands more frequently and have to fit out stores for new tenants and offer them rent-free periods as part of the leases, according to Todd. The operators also have to spend part of their fees promoting their malls abroad.

“Nobody walks into our centers naked,” Roberts said. “You have to persuade them this money is really worth spending.”

To contact the reporter on this story: Neil Callanan in London at ncallanan@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

http://www.businessweek.com/news/2013-03-06/investors-thrilled-as-shoppers-fill-europe-s-outlet-malls#p1

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