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Lower luxury tax would reshape retail landscape
March 28, 2012, Wednesday
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INTERNATIONAL luxury retailers are becoming very well established in the urban cores of China's major cities. For instance, the Italian fashion powerhouse Gucci opened two new stores in Shanghai in the first quarter of this year and now has seven stores in Shanghai and more than 40 across China.
China is now the world's second largest luxury consumption market after Japan. There is one thing that may be holding back China from entering the number one spot: high taxes on imported luxury goods.
Taxes mainly include a customs duty tax, a consumption tax and a value added tax, all adding up to 30 percent to 60 percent in additional costs to consumers in China.
As a result of the high tax rates on imported luxury goods in China, we see large numbers of consumers buying luxury products on trips outside the mainland, in cities ranging from Hong Kong to Paris to New York.
Sometimes, low-tax luxury purchases are a major goal of these trips. According to the World Luxury Association, Chinese consumers spent a record US$ 7.2 billion abroad, purchasing luxury goods during the Spring Festival holiday this year. That's up 29 percent, year on year. These are sales that Shanghai's downtown shopping malls are missing out on.
Last June, the Ministry of Commerce reportedly proposed a reduction in the customs duty tax rate and consumption tax rate on imported luxury goods. Recent media reports suggest that these reductions are still under discussion and could be rolled out in phases.
Rental growth
If and when this happens, lowering the luxury tax would bring mainland luxury prices much closer to their overseas counterparts, leading to more Chinese people making those purchases onshore rather than while traveling abroad. This could provide a sizeable boost in sales for ground floor tenants in prime shopping areas in many Tier I and Tier II cities, where luxury retailers have a strong presence. If it does happen, we expect to see additional rental growth for retail malls, particularly in the country's top luxury shopping destinations in central areas, such as Nanjing Road West in Shanghai and the central business district in Beijing.
In Shanghai, lower luxury taxes may strengthen the role of downtown malls as luxury shopping destinations.
Downtown shopping malls have regularly upgraded their tenant mixes over the past few years by introducing more shops with higher priced goods.
This trend may accelerate as the domestic demand for luxury goods rises, causing luxury retailers to open more shops in downtown shopping malls. As the luxury tenants replace other tenants, the overall tenant mix becomes more high-end. Downtown will become a destination for infrequent, high-priced purchases.
Mid-market brands will become most concentrated in the new decentralized retail precincts. In Shanghai, areas such as Wujiaochang and Xinzhuang have emerged as major decentralized retail clusters that offer the full range of international mid-market brands, such as Gap, Uniqlo, H&M, and Zara.
For these mid-market brands, the main role of downtown will be for large flagship stores with larger product selections, while most of their stores will be located in decentralized areas. Uniqlo today has more decentralized stores than it does in downtown.
Similar to the Tier I cities, the major Tier II cities are also experiencing the same emergence of new retail nodes. There is a striking resemblance between new retail precincts in Suzhou, Hangzhou and Chengdu, for example.
New CBDs
Some of the new retail precincts forming in Tier II cities are more than just retail nodes. In fact, they cannot be described as decentralized. Rather, they are entirely new central business districts following in the footsteps of Shanghai's Lujiazui.
Several top international luxury brands have adjusted their rigid site selection criteria to include locations like these. A revealing example is the assortment of luxury brands in the MixC retail development in Hangzhou. It is located in Hangzhou's Qianjiang New City - a new master-planned area. Louis Vuitton opened its largest flagship store in China - 2,000 square meters - there and was followed by other luxury brands such as Dior, Fendi, Cartier, Boss, and Zegna.
In sum, the potential tax reform in China is poised to play a role in the ongoing shift in the retail landscape happening in major cities.
China is now the world's second largest luxury consumption market after Japan. There is one thing that may be holding back China from entering the number one spot: high taxes on imported luxury goods.
Taxes mainly include a customs duty tax, a consumption tax and a value added tax, all adding up to 30 percent to 60 percent in additional costs to consumers in China.
As a result of the high tax rates on imported luxury goods in China, we see large numbers of consumers buying luxury products on trips outside the mainland, in cities ranging from Hong Kong to Paris to New York.
Sometimes, low-tax luxury purchases are a major goal of these trips. According to the World Luxury Association, Chinese consumers spent a record US$ 7.2 billion abroad, purchasing luxury goods during the Spring Festival holiday this year. That's up 29 percent, year on year. These are sales that Shanghai's downtown shopping malls are missing out on.
Last June, the Ministry of Commerce reportedly proposed a reduction in the customs duty tax rate and consumption tax rate on imported luxury goods. Recent media reports suggest that these reductions are still under discussion and could be rolled out in phases.
Rental growth
If and when this happens, lowering the luxury tax would bring mainland luxury prices much closer to their overseas counterparts, leading to more Chinese people making those purchases onshore rather than while traveling abroad. This could provide a sizeable boost in sales for ground floor tenants in prime shopping areas in many Tier I and Tier II cities, where luxury retailers have a strong presence. If it does happen, we expect to see additional rental growth for retail malls, particularly in the country's top luxury shopping destinations in central areas, such as Nanjing Road West in Shanghai and the central business district in Beijing.
In Shanghai, lower luxury taxes may strengthen the role of downtown malls as luxury shopping destinations.
Downtown shopping malls have regularly upgraded their tenant mixes over the past few years by introducing more shops with higher priced goods.
This trend may accelerate as the domestic demand for luxury goods rises, causing luxury retailers to open more shops in downtown shopping malls. As the luxury tenants replace other tenants, the overall tenant mix becomes more high-end. Downtown will become a destination for infrequent, high-priced purchases.
Mid-market brands will become most concentrated in the new decentralized retail precincts. In Shanghai, areas such as Wujiaochang and Xinzhuang have emerged as major decentralized retail clusters that offer the full range of international mid-market brands, such as Gap, Uniqlo, H&M, and Zara.
For these mid-market brands, the main role of downtown will be for large flagship stores with larger product selections, while most of their stores will be located in decentralized areas. Uniqlo today has more decentralized stores than it does in downtown.
Similar to the Tier I cities, the major Tier II cities are also experiencing the same emergence of new retail nodes. There is a striking resemblance between new retail precincts in Suzhou, Hangzhou and Chengdu, for example.
New CBDs
Some of the new retail precincts forming in Tier II cities are more than just retail nodes. In fact, they cannot be described as decentralized. Rather, they are entirely new central business districts following in the footsteps of Shanghai's Lujiazui.
Several top international luxury brands have adjusted their rigid site selection criteria to include locations like these. A revealing example is the assortment of luxury brands in the MixC retail development in Hangzhou. It is located in Hangzhou's Qianjiang New City - a new master-planned area. Louis Vuitton opened its largest flagship store in China - 2,000 square meters - there and was followed by other luxury brands such as Dior, Fendi, Cartier, Boss, and Zegna.
In sum, the potential tax reform in China is poised to play a role in the ongoing shift in the retail landscape happening in major cities.
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