For one of China’s leading outlet mall operators, extreme weather and lockdowns have been taken in stride. Chongqing, a city of 30 million people on the Yangtze River in western China, is famous for its hotpots. It is reputed to have more than 50,000 hotpot eateries and indeed the hotpot concept probably originated there. But at times in recent months, the whole city has turned into a hotpot: on 18 August for example, the mercury reached an astonishing 45 degrees, the highest temperature eve
ever recorded in China outside the desert region of Xinjiang. For retail property operators in the city, like Sasseur Group, it was the first of a one-two punch to hopes of finally getting back to normal foot traffic. It’s customary for retailers and retail property owners alike to fall back on bad weather as an excuse for underperforming. In the history of the industry you’d be hard-pressed to find a single player that hasn’t used it at some point. In this case though, it’s hard to argue that the problem isn’t genuine. Sasseur, which operates two huge factory outlet centres in Chongqing, had to run them on shorter opening hours for days at a time to save energy, under orders from the local municipal government. Worse, rolling Covid-19 lockdowns throughout August and September continued to disrupt operations and dampen growth. The effects hit Sasseur’s top line heavily, with sales growth for the first nine months of the year coming in negative, at -6.3 per cent. The bottom line rose slightly, by 0.4 per cent, thanks to Sasseur’s business model of indexing base rent. Small portfolio, big upside Sasseur Group is one of the leading operators of outlet malls in China, although at this point that is still very much an immature and growing industry sector. Founded in 1989 by Vito Xu, it manages 15 outlet malls housing more than 3,500 brands. (A 16th, Nanjing 2, is due to open this month.) Four of the 15 centres were bundled into a real-estate investment trust (REIT) in 2018, which is traded on the Singapore stock exchange. It was the first outlet mall REIT ever listed in Asia and Sasseur Group has a 57 per cent stake in it. Xu goes a long way back in retailing. He was a distributor for international brands in China beginning in 1989, and in 1992 he created the women’s fashion label Sasseur. His role as a fashion brand distributor made his entrée into the factory outlet business a fairly natural step. Sasseur’s first outlet mall, which commenced operations in 2008, has a net leasable area (NLA) of 50,885sqm allocated across 391 tenants. It was 100 per cent occupied at the end of the third quarter, a tribute both to the demand for high-quality Chinese outlet space and the stoicism of the retailers that occupy it, given all the ongoing disruptions to trade. A second centre, Chongqing Bishan, opened in 2014 (NLA 44,706sqm, 94.8 per cent occupied), followed by the massive Hefei outlet mall in 2016 (NLA 144,583sqm, 341 tenants, 96.2 per cent occupied). Also in that year, Sasseur opened an outlet mall in Kunming (NLA 70,067sqm, 268 tenants, 96.9 per cent occupied). Sasseur’s outlet malls are not short on international luxury brands. Gucci, Hugo Boss, Armani and many others are represented, but it is the mid-market brands that top sales. In fact, Nike and Adidas are the top-selling brands at both Chongqing Bishan and Kunming. Across the portfolio, no single tenant accounts for more than 5 per cent of revenue and the top 10 tenants collectively contribute less than 17 per cent. So the tenant contribution is diversified and the company is not dependent on a few retailers. Overall, international brands contribute 14.1 per cent of NLA and 19.3 per cent of revenue. Domestic fashion accounts for 34.7 per cent of NLA and 42.7 per cent of revenue. For Sasseur’s outlet centres, as for any other physical outlet mall, shopper traffic is key, and the shopping experience needs to be sufficiently superior to the online experience to make people want to travel there. Indeed, e-commerce is perceived as the chief competitor and Sasseur makes strenuous attempts to distinguish itself. This involves a combination of shopping, leisure activities, design and ambience, which is heavily influenced by the owner’s love of art. Key to getting the centres fully occupied is the economics: the company operates on a base-plus-variable rental model, with base rent accounting for approximately 10 per cent of sales and the variable component about 5 per cent, depending on the centre and the particular tenant. Sasseur states that its 15 per cent or so take compares well with the approximately 20 per cent commissions e-commerce platforms siphon off. Sky’s the limit Looking forward, Sasseur is particularly keen on nurturing its VIP member list, which is now 2.9 million strong, a number that has almost doubled since the end of 2019. VIP members contributed more than 60 per cent to outlet sales in the third quarter and Sasseur is making investments to keep them happy, including the upgrade of the VIP experience with lounges and other tiered experiences. The company also has a pipeline of three new projects covering a gross floor area (GFA) of 309,000sqm. Back in Chongqing, with an accessible population of 30 million and a rising middle class, there is plenty of spending potential and no shortage of contestants for it: department stores, conventional malls and other outlet developers are entering or expanding in the market. Among them is Florentia Village, a chain of outlet centres that offers discounted brand shopping with, as the name suggests, a Tuscan architectural theme. The seventh of these outlet centres opened in Chongqing in 2021. The outlet mall concept has steadily gained popularity in China, Japan, Korea and South-east Asia (particularly in Thailand and Malaysia) in recent years and the potential market for it across the continent is huge. It provides aspirational consumers with entry-level access to high-end brands, and provides the brands themselves with a market complementary to their mainstream customers. The concept has become professionalised and made state of the art through joint ventures between premium outlet developers in Europe and the US, and local partners with local customer knowledge. For outlets in Asia, the sky’s the limit.