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Q: How are the gucci ghost malls financed?
Presumably they have owners and these owners aren't the state. What happens when a mall is loaded up with over-priced stock that doesn't move. How rich are these guys, and why aren't they bankrupted by making such a stupid decision of marketing 10,000 RMB apparel to people who make 3,000 per month on average before paying their household expenses?
Do you think they recollateralize?
8 years 46 weeks ago in Business & Jobs - China
I can only suspect they build these malls as a source of kick backs to the government. I think it goes something like this...
Government Official Guy : "Let's develop the city and add a new huge mall for no reason whatsoever!"
Real Estate Company : "Sounds good, give us the contract for 6 000 000 000 yuan and we will kick back 25% to you!"
Government Official Guy : "Sounds excellent, then we can sell/rent out the space to all those idiots... and make even MORE MONEY!"
Real Estate Company : "But what happens if nobody goes or nobody buys anything?"
Government Official Guy : "Oh that's easy... we buy out all the space from the idiots for a fraction of the cost when they go bankrupt, bull doze it... and do it all over again!"
Real Estate Company : "Sounds great! Just let me call up my thugs to kick these nong ming out of their homes first!"
Eorthisio:
Nailed it, everything works like that in China.
There is a new international school being built here in Foshan, the school stands out in that it has a partnership with Cambridge and is certified for IGCSE, A level and other curriculums. 5bl yuan was invested in it by a group of local business people, among them a guy I know, some government official who approved the project will get a good percentage of the profits after the school opens.
fada:
5billion yuan is 500 million dollars, actually much more than but for arguments sake lets say 5. 500 Million would get you a world class university campus and they are spending this on some farmer school? Are you sure about your figures?
Robk:
@fada - 6 billion yuan is closer to 1 billion USD
No, I am not sure about my figures I just made something up as example.
The main point is is corruption and kick backs.
laowaigentleman:
That certainly accounts for the debt to GDP ratio. It might be worth investing in demolition equipment and taking some provincial cadres out to lunch. The returns would be exponential!
I think the profit margin on the item is good enough that they break even selling 2 bags a week.
Designer gear is one of the biggest cons going.
Brands like gucci would not be operated by a franchise, they would be company owned, at least i would assume. At the end of each quarter or when ever new designs come in the old stock is destroyed in a furnace.
I can only suspect they build these malls as a source of kick backs to the government. I think it goes something like this...
Government Official Guy : "Let's develop the city and add a new huge mall for no reason whatsoever!"
Real Estate Company : "Sounds good, give us the contract for 6 000 000 000 yuan and we will kick back 25% to you!"
Government Official Guy : "Sounds excellent, then we can sell/rent out the space to all those idiots... and make even MORE MONEY!"
Real Estate Company : "But what happens if nobody goes or nobody buys anything?"
Government Official Guy : "Oh that's easy... we buy out all the space from the idiots for a fraction of the cost when they go bankrupt, bull doze it... and do it all over again!"
Real Estate Company : "Sounds great! Just let me call up my thugs to kick these nong ming out of their homes first!"
Eorthisio:
Nailed it, everything works like that in China.
There is a new international school being built here in Foshan, the school stands out in that it has a partnership with Cambridge and is certified for IGCSE, A level and other curriculums. 5bl yuan was invested in it by a group of local business people, among them a guy I know, some government official who approved the project will get a good percentage of the profits after the school opens.
fada:
5billion yuan is 500 million dollars, actually much more than but for arguments sake lets say 5. 500 Million would get you a world class university campus and they are spending this on some farmer school? Are you sure about your figures?
Robk:
@fada - 6 billion yuan is closer to 1 billion USD
No, I am not sure about my figures I just made something up as example.
The main point is is corruption and kick backs.
laowaigentleman:
That certainly accounts for the debt to GDP ratio. It might be worth investing in demolition equipment and taking some provincial cadres out to lunch. The returns would be exponential!
You have to remember that when Mr Decision Maker from Fancy Brand is looking at where in China to set up shop, he will be faced with a lot of malls, that all say they have international brands lined up. He will then think, "Oh, can't miss out" He will then be forced to sign a 5 year contract that starts right away even though mall is not completed.
I've seen income statistics for my hood of Zhuhai, done by a company hired by the contractor building a big mall. Wanna guess if the average income for the area was well into the 5-digits ?
ScotsAlan:
Intereresting. I wonder if they come over for a half day trip, see the fancy cars in the street and decide there is a market for their bags. Or maybe they are copy shops selling copy bags. The one thing I have never seen in China is market research. I suspect it is a case of " oh... there is a hermes shop their... quick lets open a gucci shop next door"
Scandinavian:
Market research is not allowed.... or that is, you don't want to bring in actual facts when we all know the real facts are made up by the party.
I often wonder this but I think Scots Alan is onto something about the profit margins - it doesn't take a lot of sales to reap lots of profits. Sure, most people can't afford the stuff but enough tuhao walk in and buy 5 bags to keep those places open and likely profitable.
laowaigentleman:
The thing that gets me is that anyone rich enough to buy that kind of thing is rich enough to go on holiday to a place which sells them much cheaper because they don't have the taxes imposed on them that China puts on.
Obviously the consumers here aren't as rational as where I'm from.
Mind you, presbyterian prudishness is predominant in NZ. Think of it as the diametrical opposite of tuhao ostentation. Maybe you have it in the US?
Kiwi: "you paid 10,000RMB for a bag?! What does it do, rub your balls for you while you sleep? I use a flannel before I climb into bed! Saves me a fortune by the way things are sounding nowadays!"
dongbeiren:
The thing is a lot of them do go abroad just to buy the same crap but others can't be bothered so they just buy it here - there are whole malls in my city that are entirely geared towards tuhao who are completely ignorant of how much stuff should cost or are just that filthy rich that they don't care. I was at one mall with my wife to buy her a Spring Festival skirt and not a single piece of clothing at this mall could be had for less than 3,000 rmb. Once I saw a teddy bear going for 1,500 rmb I said we are leaving now. So we walked across the street and found something suitable for around 300.
I have had someone brag to me about spending 2,000 kuai on New Balance sneakers - not exactly something I'd be proud of. I just laughed and showed him mine that I spent 600 rmb on in the states. He seemed to get upset and tried to lecture me on how his had all these extra features. Yea sure they did.....
You know there are so many people in China that have made so much money so fast but there is very little of value to spend it on - it's almost impossible to have a truly nice life here no matter how much money you have. If you want a basic house with a yard you will likely spend 10 million rmb plus. If you want a good quality car you pay double or more than you'd pay in a western country. So these super rich are trying to live a nice life but have to get completely ripped off in order to have anything half decent. And you wonder why they're all clamoring to move abroad....
coineineagh:
they may be rich enough to buy them on holiday, but if thier little mistress is stamping her feet for the bag right now, she can't wait until the next holiday to get it. mr. winkie is also whispering: "give her what she wants NOW so i can do her TONIGHT!" mistresses drive luxury consumption up like mad.
expatlife26:
Oh...Come on.
Profit margins on that kind of stuff are good. But they can't sell four 80k bags and turn a profit. Rents in those locations at market prices are in the 100Ks/mth.
It's a showroom. Brings people in the door to shop at the Uniqlos, lets people get excited about the new LV stuff coming out and then it looks like a bargain when they go to korea to actually buy it.
It's in everyone's interests to just have a prada store sitting there even not selling anything and paying no rent.
Robk's answer. They've built/building so many of these places in my little city right now that it's a head spinner. Every time you do a lap of town there's another one under construction.
Not that many people live here. There should be an enquiry.
Meanwhile a couple of dozen Kazakh migrants get burned to death the other day when the wind changed in their cardboard hovel just on the edge of town.
Not our business, said the govt. They're Tacheng's business. No local Hukao, so fuk them!
ScotsAlan's reply sounds valid, but I also think another scheme is afoot as well. Chinese that are involved in illegal activities shuffle their large "profits" to these businesses, known as front or dummy corporations making them appear to be breaking even or doing well. The main reason is probably tax evasion I'd say.
Chinese shopping malls suck because they don't really sell shit but clothing. In the modern city I live in, there is a huge shopping mall, something one would find in California or somewhere, and basically there is almost nothing in there I want to buy. Mostly, again, clothing. No electronics, household goods, game or toy stores, the book store went out of business, nothing but clothing, an decent supermarket (which isn't worth the distance to go out there), some Chinese restaurants, a McDonalds and that's it.
My city is also big on the big ticket designer shit too, but people here have money to piss about. I see Ferraris and Lamborghinis here and BMWs are easy to find. Chinese like to buy expensive shit to show off....."Look at me, and my expensive shit!" That is their thinking. I see people everywhere with IPhone 6s. Not because it is so great, but because the phones are like 3-5000 RMB and again, seen as an expensive accessory than something people need. Way of the road here.
Chinese shopping malls suck because they don't really sell shit but clothing. In the modern city I live in, there is a huge shopping mall, something one would find in California or somewhere, and basically there is almost nothing in there I want to buy. Mostly, again, clothing. No electronics, household goods, game or toy stores, the book store went out of business, nothing but clothing, an decent supermarket (which isn't worth the distance to go out there), some Chinese restaurants, a McDonalds and that's it.
My city is also big on the big ticket designer shit too, but people here have money to piss about. I see Ferraris and Lamborghinis here and BMWs are easy to find. Chinese like to buy expensive shit to show off....."Look at me, and my expensive shit!" That is their thinking. I see people everywhere with IPhone 6s. Not because it is so great, but because the phones are like 3-5000 RMB and again, seen as an expensive accessory than something people need. Way of the road here.
jetfire9000:
I love my iPhone 6. I also love my Macbook. These are supreme products in comparison to the available alternatives.
Hotwater:
Wow, where is this place? Iphone6 for 3000-5000? Bargain! That's heavily discounted.
dom87:
apple products are already shit because they are limited like the chinese internet.
my wife bought iphone 6, i bought samsung note 4. Note 4 is ahead in almost everything - gg
In Guangdong I cant think of a single high end "Gucci" mall that isnt stuffed with people 7 days a week from opening to closing.
They easily make a fortune.
The question that always bothered me was if everyone is shopping all the timenthen when do theu have time to work and pay for this stuff? I am really curious to know a true unemployment rate here.
dom87:
i went out for my visa during the week at 10:30 am - everything, everywhere crowded as shit. Seems noone is working anyways
quite often they are investments for the future. land investors aren't allowed to buy land without building on it first. they have to submit plans. what can be built is strictly regulated. has to tie in with kick backs from construction. these investors have deep enough pockets to survive any short term loses. i don't think they really care about what is on it at the moment
in the town i was in near zheijang province, the price of the property might have gone up 10 times since 2005. tripled since 2010.
another reason is that sometimes landowners/business people have more money than skills in commerce. i wonder how much research and analysis goes into what to build and where
This isn't something new. As early as the mid 1990s, these kinds of constructions are widely known among locals as face engineering, the same principle is used later to build ghost cities. Besides bringing 'face', they are a golden opportunity for corruption, and bring employment to many, especially lowly educated peasants from the countryside who flock to the cities (known as blind flows) looking for 'a better life'.
The land costed nothing, everything was state owned under communism. It was a state crime to own land! So, how come all of a sudden peasants owned land which they could sell to developers? Ever wondered why? This is the scam CCP uses. This is CCP's magic-money creation formula, out of thin air. Let them have 'ownership' and then sell it to create money, taking 50/50 or whatever ratio out of it. You get rich, we get rich, stupid West is impressed, local morons chant "long live CCP, our livelihood is improving, we have 'gucci malls', free air-conditioning during summer (heck, you think we go there to buy Gucci? We go there to get free air-conditioning, stroll the malls!, With these objects, now we have "face" in front of laowais. Look at how we insult and humuliate them anytime anywhere anyway these days!!!")
With the corruption money, now they can con laowais to sell them Mercedes and real Gucci!!! See the 'money genius' at work? These 'high end malls/cities' are thus self-financed. Fake gold with shit inside. True, many get fooled thinking 'look, look, china is modernised!'
Not all that glitters are gold.
I think you guys are reading too much into it in terms of face/corruption/chineseness etc.
You go into any of the real high end malls, of course there are going to be a bunch of luxury stores that look like they aren't going to turn profits...but they don't need to. They're just showrooms. These brands make a fortune off Chinese customers but not necessarily IN china. The point is just to give them a place they can go and browse and get excited about the new stuff as it comes out. Then the bag that costs 60K RMB in Beijing looks like a total bargan at 42K in Seoul. If somebody buys anything there it's all gravy.
The stores also get way below market rents on the showrooms because they are a draw. Even non-luxury people go to those malls to browse and get photos taken in front of the nice stuff (and to be fair that is because they are dumb)...and then the couple of regular stores clean up. Uniqlo/H&M at those places are packed. Even if Prada doesn't make any sales or pay any rent...it still gets people in the door. And then the lesser brands make up the rent difference because of the halo effect the luxe brands have.
I mean nobody thinks less of this place than me, but in that case I don't think it's as ludicrous as you guys are making it out to be.
earthizen:
Or you are too shallow and naive to understand the extent of corruption and face around here. Even if you haven't seen it first hand, didn't you read the news and saw the number of corrupted CCP officials listed? Haven't you heard of bribes and guanxi? Your version of explanation btw is of a western mindset of how marketing of luxury products works in developed countries of the world. Don't you know you are in PRC?
Start asking locals if they know what face engineering (面子工程) is, this will tell you how shallow you are, or if people who are aware of these facets of mainlanders' daily life is, are as ludicrous as you accuse them of.
expatlife26:
LIsten you're projecting values on me that aren't there.
I am in no way a china apologist. I think this place is full of shit and try to have as little to do with it as possible. Perhaps not coincidentally I feel I have a great quality of life with a minimum of aggravations given the circumstances. I don't let them in.
I'm sure there is tons of corruption/nepotism going on at the building contract level. I'm sure that governments do support vanity projects at taxpayer expense.
But that doesn't mean there isn't value in having those stores there at way sub-market rates to both the other tenants and the property owners. I'm not just talking out of my ass here...that IS the rationale in having these stores there at least in the couple of cases where I've talked to someone who knew that. That is the strategy. It's a halo effect. Prada + Gucci etc means it's a "great mall full of excellent products". The upper mid-tier brands get to cluster next to them and look like they're close to the same level. And then the fast-fashion mass market stuff cleans up because that's what people here actually buy on premises.
This isn't just my opinion. or especially that i'm being "shallow". That's what the strategy has been.
But i also think that certain types of expats want to believe that everything the locals do is stupid and illogical and ONLY based on corruption. Tons of it is. But not all. I personally don't give a shit about luxury clothes...but if people do theres $ to be made in properties which cater to that taste.
I'm going to project on you here and ask what it is that you do, which makes you feel like you're an expert on the China hi-end mall market. I'm not, and I asked that same question, but I asked it of people involved in property or fashion. That's why i'm not saying "this is just my theory" or something. It sounds like you're just assuming it's corrupt and illogical because you read stuff online and talk to locals who also don't really know what's going on.
earthizen:
As I have said, you are taking your western notion of marketing and projecting it here. If corruption isn't overwhelming why is Zie anti-corruption campaign/show there? That includes establishing contacts with government to track corrupted officials down, worldwide. I simply said this is a PRC nationwide business practice.
How long have you been in PRC? I have been here for more than a decade. Framing me doesn't work. I work with CEOs and CFOs of multi-billions (USD) joint ventures and personally audit their books. Have you?
I never said I am an authority on PRC but even I can immediately spot your lack of minimal knowledge of daily mainlanders' life. That's beside the point though, it is apparent your ego is threatened by what I know about China which you don't. Your ego just want to argue . Grow up.
expatlife26:
Well hey that's a very good answer to my challenge. Are you with a PE firm?
I've been here since 2010 and I'm also in an FP&A role, though not auditing.
What I'm saying is based on what a friend who spent a few years with Colliers and Jones Lang Lasalle about how the luxury malls work as well as the owner of a huge restaurant at one of the archetypical malls described in the OP. That's where I'm getting that from so I'm not just talking out of my ass.
Oh I totally know next to nothing about the daily lives of average locals. I DO like to speculate about them though.
I don't have an ego about any of this stuff, I just have a bit more information than I think some of the other posters have about how those malls are set up.
It definitely doesn't sound to me like you're one of these people, but there are tons of expats here who aren't really doing much of anything in terms of personal or career development and I feel kinda try to justify it by denouncing everything the locals do/want as being shallow or stupid while they're "smart" because they live the "simple life". And i'm not saying the locals don't do and want a lot of shallow and stupid things. But I think in this case the business model for these malls could make sense.
earthizen:
My clients trust me, period. I have seen my clients, including CFOs resign and go home. In private some confess to me the real reason they quit, "If I consent to what the chinese side (joint ventures) ask me to do (of course I know about it) I would lose my licence." Jones Lang wasn't my client, it is the other way round.
Most of the expats in this forum are responsible, good teachers who are doing a good job. A few are gifted in this area as far as I can tell. If they are just like many of the local teachers they would just take the bribes and close their eyes. This would be like many local accountants. Do you know how much bribe can one make out of just building a mere water fountain in front of a multinational giant? RMB 1 million. And that was the figure more than a decade ago. Ever wonder why some of the glass (windows) being used in temples on some mountain look so much like those the ones (one of) my client uses in their high tech factory, another multi-billion USD setup and you can't find any such glass elsewhere in that city? They are my client's glass (our factory windows)!
These locals definitely weren't/aren't dumb. Ruthless, unscrupulous, dishonest ....sure. Dumb people don't cheat the whole world for decades, wait patiently for decades with their mouth shut, only to flash their claws when they are ready. Not dumb in business sense, dumb in the sense of lack of wisdom. Jails all over the world have many such 'dumb people'.
Literally the whole world knows they are ready, now.
