Luxury Retailers Scale Back China Brick-and-Mortar Expansion in 2016

As Chinese luxury spending decreased in China, yet rose globally last year, luxury retailers are hitting the brakes on brick-and-mortar store expansion for 2016.

According to a report on retail in China published this month by UBS, wariness toward store expansion is at an all-time high. It found that 94 percent of retailers surveyed have a “moderate” attitude toward China expansion in 2016, rising from 85 percent in 2015 and 72 percent in 2014. A total of 67 percent said they will expand by less than 10 percent in 2016, while 6 percent said they will expand from 10 to 20 percent. Meanwhile, 22 percent of retailers plan to close stores this year.

The retailers with the biggest expansion plans are generally department stores, according to the report, but that’s not necessarily due to sales growth. It notes that larger stores generally plan their expansion at least five years in advance, so many department stores were preparing openings happening now during China’s era of rapid growth.

Among luxury retailers, Louis Vuitton was one of the most highly-publicized brands to halt expansion in China last year as it closed stores in Guangzhou, Harbin, and Urumqi. In addition, Chinese media reported this week that Gucci closed a Chengdu store as it readjusts its flagship arrangement in China.

Although the shift in spending abroad and online are factors in these decisions, luxury retailers are also focusing on recalibrating their location choices. U.S. think tank The Demand Institute wrote in a report last year that many foreign brands had expanded into smaller cities when they should have been focusing on the first tier. It stated that “overly optimistic growth and consumption projections for China have misled foreign investors” into expanding too far into lower-tier cities.

This appears to be Louis Vuitton’s position, as it opened stores in Beijing and Hangzhou last year even as it closed its other locations. A report by CBRE last year stated that slowing sales and over-saturation in the mainland “have prompted retailers to consolidate their existing store networks and slow their rate of entry into new markets focusing on operational efficiency.” This includes not only relocation of stores, but revamping design and adding lifestyle elements such as cafes, art exhibitions, and pop-ups.