Is the Guangzhou luxury market underestimated?

In 2020, many luxury brands saw a swift sales rebound in China after the COVID-19 outbreak was largely contained, mainly benefitting from repatriated luxury purchases.

Guangzhou's appetite for luxury goods rebounded remarkably with Hermes hauling in USD 2.7 million sales on the reopening day of its Taikoo Hui store in April 2020. A few luxury brands in Taikoo Hui witnessed long queues even on weekdays, which was rarely seen before the outbreak, except at popular restaurants. As a result, Taikoo Hui, the top-tier mall housing most of the luxury brands in Guangzhou, experienced a 27.3% sales increase y-o-y in 1Q-3Q20, a whopping improvement from -21.2% recorded in 1Q20.

Many luxury brands may have underestimated Guangzhou’s potential for luxury consumption. In recent years, China’s retail market has seen younger generations becoming the core customer segment for luxury goods. Guangzhou is no exception. Cross-brands collaboration to capture fashionable trends, limited-editions, personalised products, and so on, are some of the most popular marketing schemes to appeal to young consumers.

Figure 1: Major luxury brands: boutique presence in Guangzhou vs. no boutique presence in Guangzhou

Source: JLL Research

Figure 2: Number of total stores of 20 selected luxury brands in major cities of mainland China

Note: Number of stores excludes outlet stores and stores in airport
Source: JLL Research

Yet, a large number of luxury brands are still absent from the Guangzhou market (see Figure 1). Meanwhile, luxury brands that are present in Guangzhou command rather low penetration rates (see Figure 2) and are largely clustered in one single mall, namely Taikoo Hui. As offline is still expected to be the preferred luxury sales channel in the future, despite brands’ online exploration, we expect more luxury brands to make their debut in Guangzhou, and existing ones with strong sales performance to consider setting up additional stores for deeper engagement.

The challenge, however, is that viable prime retail facilities are highly limited.

Vacancy in Taikoo Hui is limited, while there are few other suitable locations for expansion or entry. Guangzhou’s lack of proper shopping malls that are suitable for luxury brands' expansion is mainly for the following three reasons:

• The hardware of many existing malls is less than ideal for luxury retailers, such as small and irregular floor plates, flawed flow design and poor store visibility.
• Many luxury mall developers like Wharf Holdings or Hang Lung Group have not yet entered the Guangzhou market. Neither have foreign luxury department store brands such as Galeries Lafayette or Printemps.
• Guangzhou is also short of an innovative retail format with superb design and suitable positioning.

So, what should be Guangzhou's gambit to introduce more top-tier malls that are needed more than ever? In our view, leading luxury destinations in mainland China, particularly the latest ones, typically take the form of a rectangle- or square-shaped big-box with a floor plate above 20,000 sqm (GFA). We suggest the Guangzhou government to providing a well-shaped commercial land parcel to experienced luxury mall developers or luxury department store operators, in the future urban planning for emerging areas close to the city centre. Additionally, urban renewals in the heart of the city offer developers opportunities to explore new formats of luxury retail properties like an open-air fully integrated mall with a heritage landscape surrounding. The completion of more top-tier malls will not only help raise the retail profile of Guangzhou but will also support in building itself as an international shopping city.