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Locations in Chinese Retail IndustryDavid F. Miller Center For Retailing Education and ResearchInternational Retailing Education and Training (IRET )page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThe importance of store location must not be underestimated. Location decisions can be complex, costs can be quite high, there is often little flexibility once a location has been chosen, and the attributes of a location have a strong impact on the retailers overall strategy: No matter how good its offering, merchandising, or customer service, every retail company still has to contend with three critical elements of success: LOCATION, LOCATION, and LOCATION.

Store location has a strong impact on both long-run and short-run planning. In the long run, the choice of a location affects the firms overall strategy. The retailer needs to be at a store sit that will be consistent with its organizational mission, goals, and target market for an extended period. The firm also must regularly study and monitor the status of its location regarding population trends, the distances people travel to the store, and the entry and exit of competitors- and to adapt long-run plans accordingly. In the short run, store location influences the specific elements of a retail strategy mix (product assortment, prices, promotion, and so on). A retailer in a downtown area populated by office buildings may have little pedestrian traffic on weekends. Therefore, it would probably be improper to sell items such as major appliances at this site (because these items are commonly purchased jointly by husbands and wives). The retailer would have to either close on weekends and not stock certain types of products or remain open on weekends and try to attract customers to the area by extensive promotion or aggressive pricing. If it stays open, it must invest additional resources in advertising to attempt to alter consumer buying habits. A retailer trying to overcome its location, by and large, faces greater risks than one adapting to its site.

1Segment 1 Types of LocationsDavid F. Miller Center For Retailing Education and ResearchInternational Retailing Education and Training (IRET )page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchSegment 1: Types of LocationsLearning Objectives:Know about major location segmentations and how to match different location characteristics with retail types

Learning Contents:Location definition and major location segmentationsCentral Place TheoryMatching location segmentations with retail typesLifestyle segmentation in Chinapage #Location ModuleDavid F. Miller Center for Retailing Education and Research3 Types of LocationsIsolatedStorePlannedShoppingCenterUnplannedBusinessDistrictpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchIsolated Store -- Freestanding retail outlet located on either a highway or a street. There are no adjacent retailers with which this type of store shares traffic.Unplanned Business District -- Type of retail location where two or more stores situate together (or nearby) in such a way that the total arrangement or mix of stores is not due to prior long-range planning.Planned Shopping Center -- Group of architecturally unified commercial facilities on a site that is centrally owned or managed, designed and operated as a unit, based on balanced tenancy, and accompanied by parking.

4Isolated StoreFreestanding retail outlet located on either a highway or a street. There are no adjacent retailers with which this type of store shares traffic.

Examples:Large-store formatsWal-MartCarrefourConvenience stores7-Elevenpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchIsolated Store -- Freestanding retail outlet located on either a highway or a street. There are no adjacent retailers with which this type of store shares traffic.

Examples:Large-store formatsWal-MartCarrefourConvenience stores7-Eleven5Isolated StoresFree Standing: No adjacent retailers with which this type of store shares traffic.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchFree standings in China and US are very similar. In big cities of China, because of the scarcity of land, free standings for a single retail store are not very common. In some first-tier cities, such as Shanghai and Beijing, however, many department stores will own or lease the free standing buildings.

6Isolated StoresAdvantages

No competitionLow rental costsFlexibilityGood for convenience storesBetter visibilityAdaptable facilitiesEasy parkingDisadvantages

Difficulty attracting customersTravel distanceLack of variety for customersHigh advertising expensesNo cost sharingRestrictive zoning lawspage #Location ModuleDavid F. Miller Center for Retailing Education and Research7Unplanned Business DistrictsCentral BusinessDistrictSecondaryBusinessDistrictNeighborhoodBusinessDistrictStringDistrictType of retail location where two or more stores situate together (or nearby) in such a way that the total arrangement or mix of stores is not due to prior long-range planning.page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchUnplanned Business District -- Type of retail location where two or more stores situate together (or nearby) in such a way that the total arrangement or mix of stores is not due to prior long-range planning.

Central Business District (CBD) -- Hub of retailing in a city. It is synonymous with "downtown." The CBD has the greatest density of office buildings and stores.Secondary Business District (SBD) -- Unplanned shopping area in a city or town that is usually bounded by the intersection of two major streets. It has at least a junior department store and/or some larger specialty stores - in addition to many smaller stores.Neighborhood Business District (NBD) -- Unplanned shopping area that appeals to the convenience shopping and service needs of a single residential area. The leading retailer is typically a supermarket or a large drugstore, and it is situated on the major street(s) of its residential area.String -- Unplanned shopping area comprising a group of retail stores, often with similar or compatible product lines, located along a street or highway.

8Unplanned Business DistrictsCentral business district (CBD): Hub of retailing in a city. The CBD has the greatest density of office buildings and stores.Secondary business district (SBD): Usually bounded by the intersection of two major streets. It has at least a junior department store and/or some larger specialty stores - in addition to many smaller stores.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchIn first-tier cities, the central business district and secondary business district always co-exist. For example, the Lujiazui Financial Center of Shanghai is in the CBD but there are also many SBS that exist in the middle of the ring/area.

9Unplanned Business DistrictsNeighborhood business district (NBD): Appeals to the convenience shopping and service needs of a single residential area. The leading retailer is typically a supermarket, a large drugstore, or a variety store and it is situated on the major street(s) of its residential area.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchIn China, there are many NBDs.

10Unplanned Business DistrictsString: A group of retail stores, often with similar or compatible product lines, located along a street or highway.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchIn China, there are many strings in the CBD or downtown areas. Motor vehicles are not permitted on strings. In fact, many strings are located in CBD areas. 11Unplanned Business DistrictsAdvantages

Excellent goods/service assortmentAccess to public transportationVariety of store types and positioning strategies within one areaWide range of pricesVariety of customer servicesHigh level of pedestrian trafficNear commercial and social facilitiesDisadvantages

Inadequate parkingTraffic and delivery congestionTravel time for those living in the suburbsMany aging retail facilitiesDeclining condition of some central cities Poor image of central cities to some consumersHigh rents and taxes for popular sitesMovement of popular stores to suburban shopping centersDiscontinuity of offeringspage #Location ModuleDavid F. Miller Center for Retailing Education and Research12Planned Shopping CentersRegional Shopping CenterCommunity Shopping CenterNeighborhood Shopping CenterGroup of architecturally unified commercial facilities on a site that is centrally owned or managed, designed and operated as a unit, based on balanced tenancy, and accompanied by parking.page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchPlanned Shopping Center -- Group of architecturally unified commercial facilities on a site that is centrally owned or managed, designed and operated as a unit, based on balanced tenancy, and accompanied by parking.

Regional Shopping Center -- Large, planned shopping facility appealing to a geographically dispersed market. It has at least one or two full-sized department stores and 50 to 150 or more smaller retailers. The market for this center is 100,000+ people, who live or work up to a 30-minute drive time from the center.Community Shopping Center -- Moderate-sized, planned shopping facility with a branch department store and/or a category killer store, in addition to several smaller stores. About 20,000 to 100,000 people, who live or work within 10 to 20 minutes of the center, are served by this location.Neighborhood Shopping Center -- Planned shopping facility with the largest store being a supermarket or a drugstore. It serves 3,000 to 50,000 people within a 15-minute drive (usually less than 10 minutes).

13Planned Shopping CentersCommunity shopping center: Moderate-sized shopping facility with a branch department store and/or a category killer store, in addition to several smaller stores. Regional shopping center: Large shopping facility appealing to a geographically dispersed market. It has at least one or two full-sized department stores and 50 to 150 or more smaller retailers. Factory outlets center: Sells high-end discounted foreign-branded apparel, furniture, electronics and other specialty items, most consumers tend to go to traditional department store or a wholesale market.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchIn China, shopping centers dont mean department stores, but a clustered community shopping area where people can have access to different retail category stores. In the US, we refer to shopping centers as plaza,. But in China, shopping centers are often referred to as shopping center, and only recently has the term plaza been used. For example, in the Huaihai Road CBD area of Shanghai, we have Hong Kong Plaza, New World Plaza, Pacific Shopping Center and many others.

Supermarkets have experiences an average growth of 16.7 percent. Local supermarkets are being pressured to be more efficient to compete with foreign operators who are just not ramping up to their full potential.

14Planned Shopping CentersAdvantagesWell-rounded assortmentsStrong suburban populationOne-stop, family shoppingCost sharingTransportation accessPedestrian trafficDisadvantagesLimited flexibilityHigher rentRestrictions on offeringsCompetitive environmentRequirements for association membershipsToo many mallsDomination by anchor storespage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchLarge Mega Mall in ChinaSouth China Mall in Dongguan, ChinaOne of the worlds largest shopping mall, arrayed in size separate themed areas. 9.6 million total square area1,500 stores

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchRetail Locations Comparison U.S. versus ChinaLocation TypesChinaUSFree standing XXMerchandise kiosksXCBD/NBDXXMain street/stringsXXInner cityXPower centersXShopping mallsXXLifestyle centersXFashion/specialtyXFactory outletVery FewXTheme festival centersXOpen air marketXVery Fewpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThe United States has almost every kind of retail locations. In comparison, the factory outlets are not very common in China. Lifestyle centers and power centers usually cannot be found in big cities in China. 17Retail Locations Comparison U.S. versus China

Open air market in China

Free standing in China

Free standing in the U.S.

Lifestyle center in the U.S.page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThere are two types of open markets in China.

Regular open market: Retailers just leave their goods in the market and they have a small storage space Old fair market: Small retailers will only gather up at a specific location on a specific date. Therefore, they need to carry their goods with them all the time and store their goods in storage warehouses.

For example: Wen Temple Old Fair Market in Shanghai only opens on Sundays. 18Location Segmentation in ChinaLocationsRetail Types (example)Free StandingAny retail typeCBDDepartment stores, convenient stores and restaurantsSBDDepartment stores, convenient stores, grocery stores, and restaurantsNBDSupermarkets, pharmacies, barber shops and restaurantsStringDepartment stores and restaurantsCommunity Shopping CenterSupermarkets, pharmacies and home goodsRegional Shopping CenterSupermarkets, pharmacies, home goods and clothing stores

Factory OutletsBranded goodspage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchBarber shops, clothing stores, and grocery stores are rare in CBD or SBD, but it is common for NBD or regional shopping centers to have those stores. 19Other Retail Formats in ChinaWet Marketinformal commercial sections that sell fresh fruits and vegetables. Vendors gather together to create a central place. Prices here are lower than in supermarkets of department stores. Products are not refrigerated.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchOther Retail Formats in ChinaOpen Air MarketSells a variety of merchandise. The area is usually covered with a roof but with only a small metal cage around the vendors. Bargaining is common in open air markets.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchOther Retail Formats in ChinaExotic MarketAlso major shopping centers and shopping districts with full-scale department stores. Carry designer brands, regular national brands, and private label merchandise, all of which are sold at a fixed price.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchOther Retail Formats in ChinaHypermarketsIn 1999, the number of hypermarkets was less than 100 in China, however, since that time there has been an explosion of this format. Many domestic firms opened hypermarkets only to find that they could not match the competitive muscle of the foreign companies like Wal-Mart and Carrefour. As a result most of the domestic hypermarket businesses have closed, leaving the foreign competitors alone to fight it out. Foreign retailers in China have focused on hypermarkets formats because they can forego the initial investment in distribution centers. page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchForeign retailers in China have focused on hypermarkets formats because they can forego the initial investment in distribution centers. Wal-Mart has two major distribution centers in China now. Carrefour and Wal-Mart entered China in the mid 1990s but were not profitable until 2003-2004. Foreign investors (Carrefour, Wal-Mart, and Metro) in China now rank in the top 10 retailers in the country.

23Retail Type Classification in ChinaBelow is the list of retail type classification from the Chinese Retail Industry website:

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThese retail type classifications are from the China retail industry website.24Central Place TheoryCentral Place Theory: A spatial theory that explains the reasoning behind the distribution patterns, size and number of central places around the worldAssumes the bigger size of central place is the more distant consumers will be attracted to the central place, as well as the boarder range of goods and services it provides. page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchCentral place theory is a spatial theory in urban geography that attempts to explain the reasoning behind the distribution patterns, size, and the number of cities and towns around the world. It also attempts to provide a framework by which those areas can be studied for both historic reasons and for the locational area patterns.

http://geography.about.com/od/urbaneconomicgeography/a/centralplace.htm

25Central Place Theory

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchCentral Place Theory- ChinaSettlement system in Zhejiang, China

The hexagon represents a town in the Zhejiang Province of Chinapage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThis is an example for the settlement system in Zhejiang Province in China.

According to the central place theory, the K-value represents the number of settlements which a central place is able to serve. There are three types of K-values, K=3, K=4, K=7. In a K=3 type of hexagon, a higher-order central place occupies one third of the market area in each of its surrounding lower-order places. Each area is located at the corner of a hexagon around a high-order settlement. Each high-order hexagon obtains 1one third of each hexagon in its surrounding. Also, a large hexagon takes up 6 small hexagons. Hence, K = 1 + 61/3 = 3. From the graph above, we can see that a high-order place, such as Wuzhen, has obtained one third of the market area in its lower-order places, such as Hongtang and Taoyuan.

The set up in Wuzhen town is consistent with the idea of group effect In China, many cities are known for their unique themes representing the cities. For instance, a town that has rich water resources might be referred as the Water Town. A town that is famous for the furniture it produces could be called as the Furniture Town. In the figure above, those central places are known as theme towns, while other small towns are categorized as lower-order places. Each small hexagon means a small town; each of the small hexagons is located at the corner of a large hexagon around the high-order central place.

27Central Place Theory Example

Example: A string in Guangzhou, ChinaThis is an example of the group effect in the central place theory where similar stores are clustered together. page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchCentral Place Theory ExampleExample: A string in Hong Kong. Similar stores are located near one another so consumers can easily compare prices and quality

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchSegment 2Site Evaluation & SelectionsDavid F. Miller Center For Retailing Education and ResearchInternational Retailing Education and Training (IRET )page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchSegment 2: Site Evaluation & SelectionsLearning Objectives:Know different site characteristics and the definition of trade areaLearn how to evaluate a site for a specific retail storeKnow the general idea of forecasting revenues and costs for a retail store on a selected site

Learning Contents:Site evaluationTrade area definitionHow to define a trade area in ChinaEvaluate the trade area for different retail storespage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThe is the core segment of this module, so everything in this segment is very important.

First, we need to understand location from the macro perspective: trade area definition in China.Then, we move into the micro characteristics of unique locations in terms of accessibility, visibility, and parking ratios.Finally, based on the macro and micro concepts of location, we can forecast and calculate revenue and cost for these retail stores based on some models.

31Selection of Store LocationSize and characteristics of the surrounding populationLevel of competitionAccess to transportationAvailability of parkingAttributes of nearby storesProperty costsLength of property agreementPopulation trendsLegal restrictions

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThe selection of a store location may require extensive decision making due to the number of criteria considered. These include the size and characteristics of the surrounding population, the level of competition, access to transportation, the availability of parking, the attributes of nearby stores, property costs, the length of the agreement, population trends, legal restrictions, and other factors. 32Choosing a Store LocationStep 1: Evaluate alternate geographic (trading) areas in terms of residents and existing retailersStep 2: Determine whether to locate as an isolated store or in a planned shopping centerStep 3: Select the location typeStep 4: Analyze alternate sites contained in the specific retail location typepage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchIn choosing a store location, retailers should follow these four steps:Evaluate alternate geographic (trading) areas in terms of the characteristics of residents and existing retailers. Determine whether to locate as an isolated store, in an unplanned business district, or in a planned shopping center within the geographic area. Select the general isolated store, unplanned business district, or planned shopping center location. Analyze alternate sites contained in the specified retail location type.

33Trade-Area AnalysisA trading area is a geographic area containing the customers of a particular firm or group of firms for specific goods or services

page #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://www.directionsmag.com/features/retail-trade-area-analysis-concepts-and-new-approaches/129766

http://www.tradeareasolutions.com/business_services.htm

The trade area is frequently measured by driving time and a 5-mile radius in U.S. However, in China, driving time is rarely use to measure a trade area because people are more dependent on public transportation in China.

34Benefits of Trading Area AnalysisDiscovery of consumer demographics and socioeconomic characteristicsOpportunity to determine focus of promotional activitiesOpportunity to view media coverage patternsAssessment of effects of trading area overlapAscertain whether chains competitors will open nearbyDiscovery of ideal number of outlets, geographic weaknessesReview of other issues, such as transportationpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThe Segments of a Trading Area

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThe Size and Shape of Trading AreasPrimary trading area50-80% of a stores customersSecondary trading area15-25% of a stores customersFringe trading areaAll remaining customerspage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchTrading Areas and Store TypeLargest

TRADINGAREAS

SmallestDepartment stores

Supermarkets

Apparel stores

Gift stores

Convenience storespage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchTrade Area of a New StoreDifferent tools must be used when an area must be evaluated in terms of opportunities rather than current patronage and traffic patternsTrend analysisConsumer analysisComputerized trading area analysispage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchFactors to Consider in Evaluating Retail Trading AreasPopulation Size and CharacteristicsAvailability of LaborCloseness to Source of SupplyEconomic BaseCompetitive SituationAvailability of Store LocationsRegulations

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchPopulation Size and CharacteristicsTotal size and densityAge distributionAverage educational levelPercentage of residents owning homesTotal disposable incomePer capita disposable incomeOccupation distributionTrends

Availability of LaborManagementManagement traineeClerical

Closeness to Sources of Supply Delivery costsTimelinessNumber of manufacturersNumber of wholesalersAvailability of product linesReliability of product lines

Economic Base Dominant industryExtent of diversificationGrowth projectionsFreedom from economic and seasonal fluctuationsAvailability of credit and financial facilities

Competitive Situation Number and size of existing competitionEvaluation of competitor strengths and weaknessesShort-run and long-run outlookLevel of saturation

Availability of Store Locations Number and type of store locationsAccess to transportationOwning versus leasing opportunitiesZoning restrictionsCosts

RegulationsTaxesLicensingOperationsMinimum wagesZoning

40Trade Area in ChinaRetailers use marketing area or target area in ChinaRetailers identifies a geographic area in which they plan on drawing their customers fromIt is broken down in the following order:RegionsProvince AreaMetro Area

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThe is the core segment of this module so everything in this segment is very important.

First, we need to understand location from the macro perspective: trade area definition in China.Then, we move into the micro characteristics of unique locations in terms of accessibility, visibility, and parking ratios.Finally, based on the macro and micro concepts of location, we can forecast and calculate the projected revenue and cost of these retail stores based on some models.

41Comparison of Trade Area in U.S. and ChinaU.S. Wal-Mart may use an 8 minutes driving time to describe its trade areaChinaWal-Mart may use a 20 minutes bus ride time in China to describe its trade areaPublic transportation is prevalent in ChinaMost retailers will choose to open stores near areas with public transportationpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchTrade Area Classification in ChinaRegions:

South ChinaNorth ChinaMiddle ChinaWest ChinaEast ChinaNortheast ChinaSouthwest ChinaNorthwest ChinaLarge retail chains like Wal-Mart and Carrefour define the regions in China as their trade area.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchSome larger retail chains such as Wal-Mart and Carrefour define regions as their trade area.

43Trade Area Classification in China

Province AreaMetro AreaExample: Guangdong area in the Guangzhou Provincepage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchAlso, some regional retail firms define trade area by using province and metro cities.

44Trade Area Classification in ChinaInner-cityVaries from cities to cities

Beijing5 rings to divide the districtsShanghai3 rings to divide the districts

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchShanghai: Three ringsInner ring: Downtown, CBDs, and up-scale lifestyleMiddle ring: Uptown, wealthy residential district, and secondary CBDsOuter ring: Suburban area, residential district, and neighborhood shopping area

Many big cities in China have similar trade area classification as well.

45Tier City SystemIn China, a tier city system is used to classify the cities into first tier, second tier, or third tier categoriesThe tier classification is based on the following factors:Political statusEconomic powerSize of cityRegional influence of the citypage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchWang, J. (2011). When In China - Doing Business in 2nd & 3rd Tier Cities. Retrieved from http://entrepreneurcommunityonline.com/blog/when-in-china-doing-business-in-2nd-3rd-tier-cities-by-dr-jeff-wang-isleinnisfree

46Top Cities in Each TierBelow is a list of the top cities in each tier where retailers choose to locate their stores:TierCities1Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin2Nanjing, Wuhan, Shenyang, Xian, Chengdu, Tianjin3Yinchuan, Xining, Haikou, Luoyang, Nantong, Changzhou, Yingkou**Yingkou is not a top tier 3 city. Yingkou was taken into account because it is a city that is rising rapidly as an economic development center.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchAccording to a Chinese newspaper, DaZhong Bao, the following cities were identified as the top cities in each tier segment ("Chinese Cities," 2011):

Tier 1 Cities: Beijing, Shanghai, Guangzhou, Shenzhen, TianjinTier 2 Cities: Nanjing, Wuhan, Shenyang, Xian, Chengdu, TianjinTier 3 Cities: Yinchuan, Xining, Haikou, Luoyang, Nantong, Changzhou, Yingkou**Yingkou is not a top tier 3 city. Yingkou was taken into account because it is a city that is rising rapidly as an economic development center.

Chinese Cities Latest Rankings: 1st, 2nd, 3rd tiers... (translated) (2011). Retrieved May 22, 2011, from http://bbs.dzwww.com/viewthread.php?tid=24703845

47Market MappingMarket MappingA commercial tool that retailers use to evaluate their product assortment compared to their competitors.Helps retailers consolidate competitive differences and identify opportunities in the marketplace. Steps to Market MappingIdentify retailers that are successful in the China market (domestic and foreign retailers). Look at:Product assortmentPrice architectureLocationUse the location of direct and indirect competitors as reference for retail site locationExample: Retailers like Nike and Adidas has a good reputation for finding good retail locationspage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchLocations of Chinese Clothing RetailersPopulationEuromodaGoeliaSemirTeenie WeenieWestlinkTier 1Beijing31517366Tier 1Shanghai5441371Tier 1Guangzhou3433Tier 1Shenzhen106187Tier 1Tianjin11711Tier 2Nanjing36110Tier 2Wuhan1211218Tier 2Shenyang1841912Tier 2Xian105414Tier 2Chengdu139224Tier 2Hangzhou123198Tier 3Yinchuan2152Tier 3Xining21Tier 3Haikou3511Tier 3Luoyang1312Tier 3Nantong22Tier 3Changzhou215Tier 3Yingkou 12Total Stores in China44037526349314page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchAccording to a Chinese newspaper, DaZhong Bao, the following cities were identified as the top cities in each tier segment ("Chinese Cities," 2011):

Tier 1 Cities: Beijing, Shanghai, Guangzhou, Shenzhen, TianjinTier 2 Cities: Nanjing, Wuhan, Shenyang, Xian, Chengdu, TianjinTier 3 Cities: Yinchuan, Xining, Haikou, Luoyang, Nantong, Changzhou, Yingkou**Yingkou is not a top tier 3 city. Yingkou was taken into account because it is a city that is rising rapidly as an economic development center.

Chinese Cities Latest Rankings: 1st, 2nd, 3rd tiers... (translated) (2011). Retrieved May 22, 2011, from http://bbs.dzwww.com/viewthread.php?tid=24703845

The table on this slide is courtesy of mhe Consumer. http://www.mheconsumer.com/

49Locations of Asian Clothing RetailersPopulationA02/AZONABossiniBSXEspritG2000GiordanoGirdearOchirlyUniqloJeans WestTier 1Beijing5733155314341231692Tier 1Shanghai2341375322012818121Tier 1Guangzhou61828532528438Tier 1Shenzhen133371019570Tier 1Tianjin89691161118Tier 2Nanjing51571327Tier 2Wuhan612441546Tier 2Shenyang431741317Tier 2Xian8263126Tier 2Chengdu932692550Tier 2Hangzhou441761437Tier 3Yinchuan8414Tier 3Xining212Tier 3Haikou115615Tier 3Luoyang114212Tier 3Nantong67Tier 3Changzhou2615Tier 3Yingkou 112Total Stores in China3687331718962251017347372577page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchAccording to a Chinese newspaper, DaZhong Bao, the following cities were identified as the top cities in each tier segment ("Chinese Cities," 2011):

Tier 1 Cities: Beijing, Shanghai, Guangzhou, Shenzhen, TianjinTier 2 Cities: Nanjing, Wuhan, Shenyang, Xian, Chengdu, TianjinTier 3 Cities: Yinchuan, Xining, Haikou, Luoyang, Nantong, Changzhou, Yingkou**Yingkou is not a top tier 3 city. Yingkou was taken into account because it is a city that is rising rapidly as an economic development center.

Chinese Cities Latest Rankings: 1st, 2nd, 3rd tiers... (translated) (2011). Retrieved May 22, 2011, from http://bbs.dzwww.com/viewthread.php?tid=24703845

The table on this slide is courtesy of mhe Consumer. http://www.mheconsumer.com/

50Locations of European Clothing RetailersPopulationAdidasBershkaC&ACache CacheDieselG-StarH&MMangoMassimo DuttiMotiviPromodPull & BearWEZaraTier 1Beijing184543558262759Tier 1Shanghai39171023511131865313Tier 1Guangzhou142123111Tier 1Shenzhen1311321034Tier 1Tianjin811911111Tier 2Nanjing4122321Tier 2Wuhan715111Tier 2Shenyang11111211114Tier 2Xian511111Tier 2Chengdu8137112Tier 2Hangzhou71224112Tier 3YinchuanTier 3XiningTier 3Haikou1Tier 3LuoyangTier 3Nantong23Tier 3Changzhou1113Tier 3Yingkou Total Stores in China25411231923133501324342016371page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchAccording to a Chinese newspaper, DaZhong Bao, the following cities were identified as the top cities in each tier segment ("Chinese Cities," 2011):

Tier 1 Cities: Beijing, Shanghai, Guangzhou, Shenzhen, TianjinTier 2 Cities: Nanjing, Wuhan, Shenyang, Xian, Chengdu, TianjinTier 3 Cities: Yinchuan, Xining, Haikou, Luoyang, Nantong, Changzhou, Yingkou**Yingkou is not a top tier 3 city. Yingkou was taken into account because it is a city that is rising rapidly as an economic development center.

Chinese Cities Latest Rankings: 1st, 2nd, 3rd tiers... (translated) (2011). Retrieved May 22, 2011, from http://bbs.dzwww.com/viewthread.php?tid=24703845

The table on this slide is courtesy of mhe Consumer. http://www.mheconsumer.com/

51Locations of American Clothing RetailersPopulationGuessLeeNikeQuiksilverT. HilfigerThe GapTimberlandTier 1Beijing7364824322Tier 1Shanghai103981103210Tier 1Guangzhou13403Tier 1Shenzhen11210214Tier 1Tianjin26262Tier 2Nanjing2341Tier 2Wuhan74413Tier 2Shenyang83013Tier 2Xian82214Tier 2Chengdu1134324Tier 2Hangzhou1926216Tier 3Yinchuan11Tier 3Xining11Tier 3Haikou35Tier 3Luoyang21Tier 3Nantong321Tier 3Changzhou36Tier 3Yingkou 3Total Stores in China2438440335195115page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchAccording to a Chinese newspaper, DaZhong Bao, the following cities were identified as the top cities in each tier segment ("Chinese Cities," 2011):

Tier 1 Cities: Beijing, Shanghai, Guangzhou, Shenzhen, TianjinTier 2 Cities: Nanjing, Wuhan, Shenyang, Xian, Chengdu, TianjinTier 3 Cities: Yinchuan, Xining, Haikou, Luoyang, Nantong, Changzhou, Yingkou**Yingkou is not a top tier 3 city. Yingkou was taken into account because it is a city that is rising rapidly as an economic development center.

Chinese Cities Latest Rankings: 1st, 2nd, 3rd tiers... (translated) (2011). Retrieved May 22, 2011, from http://bbs.dzwww.com/viewthread.php?tid=24703845

The table on this slide is courtesy of mhe Consumer. http://www.mheconsumer.com/

52Chinese Government Role in Site SelectionEnvironmental regulationsFuture site planImpact on lifestylePermission notes for store openings

* More details will be discussed in Segment 3page #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://wenku.baidu.com/view/12e29dbd960590c69ec376ca.html

The government plays an important role in selecting store locations in a merging market, such as China. Because of lands are owned by the government, real estate developers can only get the right to use of the land within a period of time, and real estate developers need to pay a transfer fee for the land to the Chinese government. The government agencies also control the development process and the licensing process for the land. We will talk about this topic in details later.

53Site Selection ConsiderationsParkingSizeTraffic VolumeAccessibilityVisibilitypage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchOnce we have defined the trade area of the macro concept of locations, we must analyze and compare different characteristics among various locations in order to serve the trade area. Usually retailers need to deal with some trade-offs between excellent locations and high costs.

54ParkingU.S.Standard parking for retail space is around 1 parking spot per 250 square feetStructure parking and a few garagesChinaStandard parking varies among citiesAverage ratio is 1 parking spot per 1000 square feetMostly underground parking garagesLimited structure parking

page #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://www.sydcyx.cn/dichan/article/111817174.htmlhttp://wenku.baidu.com/view/c64be368a98271fe910ef947.html

Due to the difference in car ownership between China and the U.S., the parking ratio requirement in China is not as high as in the U.S. Also, in big cities, there are more underground parking garages.Also, the parking ratio requirement is much higher in tier-1 city than tier-2 and tier-3 cities.

55SizeFloor Area RatioA ratio of the total floor area of buildings at a specific location to the size of the land in that locationIn some central districts in China, the floor area ratio can be 5 or higher as there are multi-story shopping centers

page #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://www.excaliburgrpllc.com/Files/Assessment_Services_Maroon.pdf

http://www.bouldercolorado.gov/files/PDS/planning%20and%20zoning/density_floorarearatio.pdfUnderstand ratio and floor area ratio

I want to point out that, in China, if a retailer is also the real estate developer who owns the retail store from acquiring the land, the retailer will usually do the planning and forecasting revenue based on the floor area ratio. For example, in the downtown area, the floor area ratio is 5, most real estate developers will design their buildings based on this floor area ratio to get their leasable floor space; then they will calculate the projected revenue.

56Traffic VolumeAlso known as traffic count* Very important consideration for retail space in China!U.S.Traffic volume refers to the number of cars passing by an areaChinaTraffic volume refers to the number of people and cars (since driving is not the major mode of transportation in China) passing by an areaFor example, a supermarket store requires a traffic volume of 4,000 to 8,000 (people and cars) / daypage #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://www.butlerplaza.com/docs/traffic.pdfTraffic count map from the Butler PlazaThe higher traffic volume, the better it will be for retailers and businesses. This is the same requirement for retailers in China and the U.S.

57AccessibilityEntranceNearby bus stopsEasy access to subwaysOn the way to work or on the way homeNearby major roadsExitSimilar to the criteria for entranceEasy to get back on the street where consumers initially came from

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchAccessibility Example

Entrances and exits are conveniently connected to major roads

The dotted line represents the subwayFriendly pedestrian sidewalks are necessary for shopping centerspage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchVisibilityEasy for consumers to find the locationThe retail environment should also give consumers a pleasant shopping experience

page #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://www.ehow.com/list_6685595_retail-space-requirements.html

60Visibility (in China)Free standings are not very common in China. Therefore it is very difficult for retail stores to get visibility directly from consumers. Most retail store shows good visibility by putting their logos on banners to attract the attention of the consumers.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchUnlike the United States, advertising for retail stores logos and location is extremely important in China. Some retail stores are located in non-visible areas and they needs to attract and guide customers to the stores from several hundreds yards away.

61Site Selection Comparison- Wal-Mart vs. CarrefourWal-Mart v. Carrefour- Who wins in site selection?Wal-Mart:Started in southern ChinaSecond-tier suburban areaCarrefour:Started in Shanghai and eastern ChinaFirst-tier cities, CBD and SBDMore aggressive than Wal-MartOne of the major reason why Carrefour became so successful in China is because of their site selection strategiespage #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://www.amendes.uac.pt/SEIO/ITOR.pdfRetail store location assessmenthttp://www.hi138.com/e/?i192131

Wal-Mart, Carrefour VS: Who wins in the future?They focused on so different business strategy and chose very different locations from the very beginning. Also, they are adjusting their strategies according to market changes. However, their possibility of future success is depending on the changes in the consumer market in China.

62Wal-Mart v. Carrefour ComparisonParkingSizeTraffic VolumeVisibilityAccessibilityWal-Mart

Free parkingVariesSuburban area, traffic volume fairVaries but always good visibilityGood designCarrefour

Free parkingVariesUrban area, crossroads, good traffic volumeFirst element:crossroadsGood designpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchCompared to Carrefours CBD strategy, Wal-Mart locked its prospect locations in suburban areas which have fair traffic volume. Over 80% of Carrefour stores are located on crossroads or interceptions.63Wal-Mart v. Carrefour Locations

page #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://www.amendes.uac.pt/SEIO/ITOR.pdfRetail store location assessmenthttp://www.hi138.com/e/?i192131

Wal-Mart vs. Carrefour: Who wins in the future?This is not the most up to date map, but we can clearly see that Carrefour has a faster move in the market in China.

64Wal-Mart v. Carrefour

Year: 2007page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchCarrefour competed against Wal-Mart from the beginning, however, since 2006, Wal-Mart started to expand into the eastern region. As shown in the growing chart, Wal-Mart has experienced a significant upward trend.

65Differences Between U.S. and China US China Households within 15 minutes drive time

Percentage of households with kids

Percentage of household in specific demographic segment

Size of the shopping center

Visibility from the street

Any anchor tenant in shopping center such as Wal-Mart, Target Households within 20 minutes bus driving time

Distance from subways stations

Distance from CBD or SBD

Size of the shopping center

Visibility from street

Any anchor tenant in shopping center such as Carrefourpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThey are different independent variables in the regression equation. If we can define different variables for unique retail locations and calculate betas based on statistical data, we can forecast dependent variable (revenue) easily.

66Differences Between U.S. and ChinaExample: Shopping centers in the U.S.Within 15 minutes of driving timeGood visibilityPercentage of households with children in the area is 40%Neither CBD area or close to a CBD areaSeveral anchor tenants in this shopping centerWhy would this type of shopping center not be successful in China?15 minutes driving time is more than 20 minutes bus riding time of other public transportationsLimited parking spacesFar from CBD or SBDpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchWal-Mart owns 65 percent of its Chinese retail operations and Carrefour owns 50-60 percent.. Wal-Mart and Carrefour are the major foreign competitors in China. Wal-Mart has focused on a value for money proposition and as located in more peripheral areas of cities. Carrefour has focused on fresh product and typically has locations within city centers. Interestingly, local companies have sort of divided into these two camps with Wumart following the price leader model of Wal-Mart and Lianhua being the fresh product leader, similar to Carrefour. Chinas Retail Sector Seeking Growth Amid Intense Competition. (2005).

67Segment 3:Regulations & Leasing ClausesDavid F. Miller Center For Retailing Education and ResearchInternational Retailing Education and Training (IRET )page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchSegment 3: Regulations & Leasing ClausesLearning Objectives:Understand the influences of building codes and government on site selectionsKnow about the specific clauses in Chinese retail leases

Learning Contents:Zoning and building codes- nationally and locallyGovernment regulationsEnvironmental concerns and sustainabilityProhibit Use and Exclusive UseLeasing negotiationpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThis is also an important segment because the influences from the Chinese government are everywhere in China! If an international retailer wants to do business in China, they need to meet the requirements from the Chinese government in every step.

69Different Retail Site SelectionsPurchase land for new constructions and developmentsPurchase a project which is under constructionPurchase an existing projectpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThere are three levels in retail site selections:

First, land purchasing and development.Second, under construction project.Third, existing project.

There are different governmental regulations that applies to these site selections

70Foreign RetailersForeign retailers have received special treatment from local government Reduced taxes Prime retail locations

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchForeign retailers have received special treatment from local government such as reduced taxes or prime retail locations to entice international retail names. This is likely to continue as the foreign companies expand into the second-tire cities. One advantage that local companies have over foreign ones is the mergers and acquisition category. They have a better local knowledge and can judge which M&A targets would provide the greatest synergy and what locations have the best growth potential. There is some advantage in getting properties through mergers and acquisitions because it is less expensive to acquire than to build.

71Land Purchasing and DevelopmentThe Chinese government owns the land and real estate developers need to purchase the right to them within a certain period of time.

For retail developers, they can choose either commercial or mixed use. ClassificationLand use periodCommercial40 yearsIndustrial50 yearsResidential 70 yearsMixed use50 yearsOther50 yearspage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchWe need to know that the time frame starts when the developer wins the bid fro the right of using the land being bided from the Chinese government. Sometimes the developer doesnt want to start constructions on the land immediately, which make the net usage life of the building becomes shorter than the time period that the developer has obtained.In China, real estate developers can be part of many different kinds of businesses and entities. They can work directly from acquiring a piece of land to leasing or selling the developed property. They can also be part of a management group that manages professional teams to finish a project. However, regardless of the format, they must follow all statutes and codes, and work closely with the Chinese government.In contrast, the U.S. developers work more closely with retailers. They usually design the layout of a building depending on the needs of their prospective tenants.

http://www.59148.com/zs/tc/49025.html Land Use Time Period (Chinese)

72Land Purchasing and DevelopmentZoning is used in the U.S. China uses a similar land use classification method.Developers need to get permission notes for a location in which they want to develop in. Developers need to pay land-transferring fees to the Chinese government. Local Finance Bureau is the governmental agency that collects the land-transferring fees. page #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://real-estate-law.freeadvice.com/zoning/zoning_legalese.htmWhat is zoning?

Right now, in China, there are only threes ways to get the right of land use:

First: BiddingBidding is an offer (often competitive) of setting a price one is willing to pay for something. A price offer is called a bid.

Second: ListingGovernment can list lands in an open market and developers can post their offers within a period. They can also change their offers before the deadline.

Third: AuctionAn auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder.

http://www.robroad.com/data/law/index.php/tender-land-auction-people/Tender auction listing to sell state-owned construction land use rights, which has Ministry of Land and Resources Department of the 3rd meeting of Council (21 September, 2007). The auction tender to sell state-owned land for construction purposes listed on the right to use that published, since November 1, 2007 will come into effect. Xu Shaoshi Minister September 28, 2007

http://blogs.forbes.com/robertolsen/2011/01/06/wilmar-wins-china-land-bid/Wal-Mart wins land biding in China

73Land Purchasing and DevelopmentBuilding codes have influences commercial development in many different ways. Influences includes the following:Floor area ratioSun exposureParking ratiosInternal circulation

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThe Chinese government has its own official building codes. Every province also has its local codes and standards.

If there is a conflict, we should follow the stricter one.

The floor area ratio (FAR) or floor space index (FSI) is the ratio of the total floor area of buildings at a certain location to the size of the land on that same location, or the limit imposed on such a ratio.

As a formula: Floor area ratio = (Total area covered on all floors of all buildings on a certain plot)/(Area of the plot)

Sun exposure calculation: the design must meet the minimum requirements for energy saving by using sun light in summer and winter.

74Under-construction ProjectsMust follow restrictions of the land use classificationThe design of buildings must follow the building codes

An under-construction project in Shenzhen, China for commercial land usepage #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://chinahousing.mit.edu/english/resources/BuildingCode.html

China building codesFor the building codes, we have both national codes and local codes, sometimes developers need to follow the stricter one.Developers and retailers also need to meet specific regulations based on retail types, such as tobacco and liquid stores.

75Existing storesFollow the previous land use classificationFollow the building codes if there is a need to do external decoration, maintenance or improvements. page #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://chinahousing.mit.edu/english/resources/BuildingCode.html

China building codesFor the building codes, we have both national codes and local codes, sometimes developers need to follow the stricter one.Developers and retailers also need to meet specific regulations based on retail types, such as tobacco and liquid stores.

76Site Selection Regulations for Foreign RetailersThe Chinese government have been very welcoming towards foreign retailers by removing most restrictions for foreign retailersThe Foreign Investment Administration Department issued a serious of regulations to decentralize its power of granting store opening approvalsCommercial zoningForeign retailers must obtain a commercial planning certificate

page #Location ModuleDavid F. Miller Center for Retailing Education and Research-- In response to its WTO commitments, China has removed most restrictions on foreign-invested retailers. These restrictions were related to governing location, proportion of ownership, and the number of outlets.-- On September 12, 2008, the Foreign Investment Administration Department (FIA) of the Ministry of Commerce (MOFCOM) issued a regulation to decentralize store opening approvals. In December 2008, MOFCOM issued guidelines for local commerce bureaus on the examination and approval applications for store-opening.--According to the Measures on the Administration of Foreign Investment in Commercial Sectors, when foreign retailers are applying for new sites, they must produce a commercial planning certificate from the local government certifying that the proposed site complies with existing zoning plans. A public hearing process is often required which adds three months or more to the approval process. Furthermore, some locations have incomplete commercial zoning plans which makes compliance confirmation become impossible for foreign retailers to obtain.

With the implementation of the store approval decentralization regulation, the Chinese government has effectively simplified the approval procedures for new foreign-invested retail stores and reduced operating costs as well as the length of time for the examination and approval process. AmCham-China applauds these moves to streamline the approval process and the resulting positive effects on the development of the retail sector in China.

However, despite the simplification of procedures related to the opening of stores by foreign retailers, discriminatory treatment and a lack of transparency still exist in certain areas of the Chinese government administration over the retail industry.

These issues continue to restrict the expansion of foreign retailers and discourage foreign investors. Expansion of foreign retailers would benefit the Chinese consumer and overall marketplace.

77Exclusive UseMost commercial leases for multi-tenant properties contain clauses that regulate their use of the leased premisesMany tenants will require landlords to grant them the exclusive right to operate a certain type of business or sell certain products to avoid competing with other tenants. These provisions are often referred as the exclusive use clauses. page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchSome popular brands or stores always have more bargain powers on the exclusive use clauses to protect the customer group in a specific trade area.

78Environmental RegulationsAn environmental impact assessment must be completed before construction or upon request

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchChina

The Environmental Impact Assessment Law (EIA Law) requires an environmental impact assessment to be completed prior to project construction. However, if a developer completely ignores this requirement and works on a project without submitting an environmental impact statement, the only penalty will be the Environmental Protection Bureau (EPB) may require the developer to do a make-up environmental assessment. If the developer does not complete this make-up assessment within the designated time, then the EPB will be authorized to fine the developer. Even so, the maximum fine is only capped at US$25,000, a fraction of the entire cost of most major projects. The lack of more strict and effective enforcement mechanisms has resulted in a significant percentage of projects not completing the required environmental impact assessments prior to construction.[17]

China's State Environmental Protection Administration (SEPA) used the legislation to halt 30 projects in 2004, including three hydro-power plants under the Three Gorges Project Company. One month later (Note as a point of reference, the typical EIA for a major project in the USA takes about one to two years.), most of the 30 halted projects resumed their construction, claiming that they passed the environmental assessment. The key factor to continue constructing on these key projects is to suspend for a short period of time and avoid to become noticeable.

A joint investigation by SEPA and the Ministry of Land and Resources in 2004 reported that 30-40% of mining construction projects went through the required procedure of environment impact assessment, while only 6-7% did so in some areas. This partly explains why China has witnessed so many mining accidents in recent years.

SEPA alone cannot guarantee the full enforcement of environmental laws and regulations, observed by Professor Wang Canfa, director of the center to help environmental victims at China University of Political Science and Law. In fact, according to Wang, the rate of China's environmental laws and regulations that are actually enforced is estimated to be barely 10%.[18]

79Prohibit UseA landlord may also include a prohibit use clause to prevent a tenant from using the leased premises in a manner of which the landlord believes is a nuisance to other tenantsFor example, a landlord may consider a bowling alley or a night club as a nuisance to other tenantspage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThis is important in site selection because you cannot simply just analyze the characteristics of the site, you also need to watch out for possible impacts that adjacent stores may have on your stores. For example, most restaurants do not want to be located next to a gym or fitness ceter. To avoid that, you can put the clause in the contract in advance or just simply choose a different location.

80Leasing NegotiationTenant mixWhen a business owner is conducting a site selection, he/she must consider the exiting tenant mix and prospecting co-tenants in a shopping center or a multi-tenants propertyGood co-tenants: complementBad co-tenants: substitute

For example: These two Chinese clothing retailers, Giordano and G2000 substitute each otherpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchLeasing NegotiationAnchor tenant and business brandsAnchor tenants are the main tenants in a shopping centerUsually it is essential to have a lease commitment from an anchor tenant like Wal-Mart, Carrefour or Best Buy before a shopping center will be financed. Anchor tenants usually have more power to negotiate leasing clauses with landlords regarding prohibit use and exclusive usepage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchProperty LeasesProperty leases also have an impact on the profitability pictureNew store leases are often 20% more expensive than existing store leases; however, when an existing store needs to renew their lease it might double. This makes it very difficult to anticipate profits.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchProperty leases also have an impact on the profitability picture. There has been a significant jump in rental costs. Many formerly state-owned stores were given low rates on highly desirable properties. Many of these leases are now up for renewal and at todays rental prices, it is having an impact on their profitability. New store leases are often 20% more expensive than existing store leases; however, when an existing store needs to renew their lease it might double. This makes it very difficult to anticipate profits. Department stores who received a long-term lease, like Parkson, have actually turned the rental increase to their advantage by renting concessions in their store at high rates. In the past, retailers typically leased properties, minimizing their investment requirements and allowing them to expand rapidly. However, with the shortage of good locations and the sharp rise in rental prices, retailers are seeking to buy the properties.

83Property LeasesProperty leases also have an impact on the profitability pictureNew store leases are often 20% more expensive than existing store leases; however, when an existing store needs to renew their lease it might double. This makes it very difficult to anticipate profits.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchProperty leases also have an impact on the profitability picture. There has been a significant jump in rental costs. Many formerly state-owned stores were given low rates on highly desirable properties. Many of these leases are now up for renewal and at todays rental prices, it is having an impact on their profitability. New store leases are often 20% more expensive than existing store leases; however, when an existing store needs to renew their lease it might double. This makes it very difficult to anticipate profits. 84Property LeasesDepartment stores who received a long-term lease, like Parkson, have actually turned the rental increase to their advantage by renting concessions in their store at high rates. In the past, retailers typically leased properties, minimizing their investment requirements and allowing them to expand rapidly. However, with the shortage of good locations and the sharp rise in rental prices, retailers are seeking to buy the properties.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchDepartment stores who received a long-term lease, like Parkson, have actually turned the rental increase to their advantage by renting concessions in their store at high rates. In the past, retailers typically leased properties, minimizing their investment requirements and allowing them to expand rapidly. However, with the shortage of good locations and the sharp rise in rental prices, retailers are seeking to buy the properties.

85Wal-Mart in ChinaWal-Mart Exclusive Use in ChinaNo similar business in the same building or shopping centerNo similar business within 1.5 kilometers (0.93 mile)

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchFrom the case study86KFC and McDonalds in ChinaKFC and McDonalds complement effectsNo exclusive use for each otherComplement effect not substituteAlways choose to open stores next to each other or in the same business district

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchSegment 4:Retail Models & Expansion Strategies in Site SelectionDavid F. Miller Center For Retailing Education and ResearchInternational Retailing Education and Training (IRET )page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchSegment 4: Retail Models & Expansion Strategies in Site SelectionLearning Objectives:Explore existing retail models and expansion strategies in ChinaUnderstand why site selections must match retail models and expansion strategiesLearning Contents:Retail ModelsCommercial real estate, direct operation, Franchising, etc.Expansion StrategiesFast and aggressive expansion, moderate expansionTailored Site Selection PrincipleScattered or concentrated, profit driven or attention driven page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThis is also an important part associated with site selection. Some retail stores formed different expansion strategy because of their different site selection criteria.

89Retail ModelsCommercial Real EstateRevenue model: Buy or lease a property and rent it out to suppliers; assets appreciation (buy)Advantage: Low initial store opening cost (lease) and low operation costStore size: Large (buy) or medium (lease)Applied products: Appliance, furniture, and apparelExampleGOME (appliance) (lease)Red Star Macalline (furniture) (buy)Pacific Shopping Mall (buy)page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchCommercial real estate has a large weight in retail models especially in appliances and furniture stores. Right now, more and more appliances and furniture stores prefer to buy the property because of the depreciation tax savings.

Appliances and furniture stores generate little revenue from operating the retail business; instead, these stores make reasonable profit by cutting down the cost - taking the advantage at leasing properties.

GOMEs official website: http://www.gome.com.hk/Red S Star Macallines official website: http://www.chinaredstar.com/web/news.aspx?sortid=0565cf2d-e00c-4bea-bcc3-f6bc87e18119&page=1

Leasing or buying a property depends on the business plans of these stores and their expansion speed. For example, GOME expands in a fast speed so it chooses to lease a property instead of buying.

90Retail Models

GOME (lease)Red Star Macalline (buy)page #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://www.monorails.org/tmspages/RedStarMacalline.htmlThe new Red Star Macalline store in Shanghai has one of the most unique monorails in the world. The furniture store features a mini-monorail system that spirals its way up inside the stores six stories, stopping on each floor. The 14-meter long system is the first of its kind in the world.

91Retail ModelsDirect OperationRevenue Model: Developing, sourcing, storing and sellingAdvantage: High inventory turnover, high gross profit and economy of scalesStore size: Large, medium or smallApplied Products: Groceries, furniture, etc.Example: Tesco (supermarket)IKEA (furniture)Best Buy (appliance)Lawson (grocery and convenience store)page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThis model can be found in every retail segment. Compared to the commercial real estate model, these stores must bear from economic and business risks.

92Retail ModelsFranchisingRevenue model: Franchising freeAdvantage: Easy for emerging brand to expand Store size: SmallApplied Products: Catering, hotel, entertainment etc. Example:KFCDisplay and Customer Experiencing StoreApplied Products: Innovative or upscale productsExample:Apple StoreMIcrosoftpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchFranchising first emerged in China in the late 1980s. In 1987, KFCs first Chinese franchisee was opened in Beijing, the capital city of China.

The new Regulation on Commercial Franchise, announced by the Ministry of Commerce on December 30, 2004, took effect on February 1, 2005. The new regulation has stimulated business in terms of its scale and standards. The new regulation for franchises replaced the 1997 measures concerning administration of commercial franchising. The regulation has clearly defined the way foreign brands can operate franchise businesses in China. The new rule should help building a legal environment and invite more foreign franchisers to conduct business in China. The franchising model, which allows people with limited capital to enter an established business, and it is well fitted to a developing economy. The franchise industry in China is just like an infant in its early stage, but it is set to enter a rapid growth development.

93Expansion StrategiesChain Store Expansion StrategiesFast and Aggressive ExpansionAdopted by retail giants that are expanding globallyNew and successful formatModels: Commercial real estate leasing, M&A by direct operation, franchisingExample: CarrefourModerate ExpansionRetailers that are new entrantFocus on geographic or demographic expansionModels: Keep the same pace with internal strength growth or external market growthExample: Wal-Martpage #Location ModuleDavid F. Miller Center for Retailing Education and Research See Attached Reading: Chain stores in China

94Site Selection: IKEA in ShanghaiRetail model: direct operationExpansion strategy: moderate expansionLocation: Inner area of major citiesFocus: revenue per square feet improvement instead of store expansionSelection principles: Enough distance between existing storeConvenient to target consumers with great purchasing intention and powerNo direct competitors nearbypage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchOpened the first store in Shanghai in 1998Opened the second store in Shanghai in 200195Site Selection: GOME in ShanghaiRetail model: Commercial real estate (lease)Expansion strategy: Fast expansionOpen more than 10 stores in Shanghai annuallyLocation: Populated areas expect CBDMay open stores near their competitorsLow set up and exist costs make it possible to open multiple stores and let the best stores survive through the competitorpage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchSite Selection: Apple Store in ShanghaiRetail model: Display and customer experiencingLocation: Stores in CBDs with high tourist flowApple sells their merchandise mainly through the China Unicom OutletStores sites are usually located in phenomenal and elaborate buildings where most attention can be drawn

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchSegment 5: Consumer Behavior in Retail Site SelectionsDavid F. Miller Center For Retailing Education and ResearchInternational Retailing Education and Training (IRET )page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchSegment 5: Consumer Behavior in Retail Site SelectionsLearning Objectives: Understand the different types of consumersKnow the relationship between consumer behavior and retail store locationsLearning Contents:Shopping stylesGroup buying shoppingConvenient shoppingComparison shoppingDestination shoppingOne stop mall shoppingLifestyle Segmentationspage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThis is a very important part in the Chinese retailing industry because the perception and feelings for retail locations is so different compared to western and eastern countries. Even within eastern countries such as Japan, Thailand, and China, people will behave very differently because of there backgrounds and cultures.

99Chinese Retailing CharacteristicsLifestyle and consumer behavior characteristics in ChinaExample 1: Group Effect ShoppingExample 2: Convenient ShoppingExample 3: Comparison Shopping (Price War)Example 4: Destination ShoppingExample 5: One Stop Mall Shopping

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchGroup Buying ShoppingPhenomenon: Tuangou which translates to group buying is when consumers approach retailers collectively as a big group to get big discountsConsumers offers to buy in bulk in exchange for lower pricesUsually organized via website or weibo (Chinese personal blog)This concept is also known as group bargainingProductsApplicable to all products (electronic, appliance, furniture, cars, cosmetics etc.)ImplicationsRetailers will have to offer more discounts but they will have more salespage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThe spectacular rise of the Chinese economy is giving more and more local people the freedom to spend on consumer goods. But with the rising cost of living in the cities, consumers are becoming increasingly savvy and focused on getting more for less. This situation has given rise to a new consumption pattern group buying. Knowing that big orders can get big discounts, some consumers are now approaching retailers in groups, formed within residential communities or via websites. And the phenomenon is growing.101Convenient ShoppingPhenomenonMany stores (ie: convenience stores) are likely to choose locations where consumers have easy access or high traffic areas such as CBDs, residential communities and subway stationsSpecialty stores will open in a specific area where other retailers are selling similar products Examples:Wedding Store StreetClothing StreetFurniture StreetProducts:Food and consumer goodsImplications:Chinese customers are likely to pay more at these retail stores because there is less commuting expensepage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchIn China , you can find these convenience stores everywhere. In almost every apartment complex, you can easily find at least one convenience store that opens 24/7 throughout the year. In these stores, people can buy hot and freshly made breakfast, and they can even eat inside. Convenience stores also offer other services such as first-aid, microwave oven, and pay utility fees.

http://www.nacsonline.com/NACS/News/Daily/Pages/ND0322114.aspxConvenient stores in China provide healthier meals.http://www.reuters.com/article/2009/05/06/us-walmart-china-idUSTRE5450YY20090506Wal-Mart enters China's convenience store market

This phenomenon created many specialized markets in China such as wedding store street, furniture street, restaurant street and club street. Some streets are famous for its specific stores located from the beginning to the end of the street. In order to compare prices and quality efficiently, Chinese consumers prefer to make purchases in a specific area where has many retailers selling similar products. Due to the supply and demand characteristics, demand determines prices of products so that consumers can get fair prices for their goods.

102Comparison Shopping (Price War)Phenomenon:Stores with the same product offerings usually competes against each other in price if they are located closely to each otherProducts: Food and consumer goodsImplications:It is very easy for supermarkets to be dragged into the price war if they are located close to each otherConsumers have greater bargaining power to drive down prices

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchIn China, price wars take place in every market segment especially those have homogeneous products. Therefore, people are more likely to shop in those stores that has one or two special offer or deals everyday. For example, a Carrefour store in Shanghai, every store must ensure that one vegetable's unit price is below RMB 1.00. Stores usually cant make any profit by offering this price but can win more potential consumers.

http://www.reuters.com/article/2008/04/16/us-agflation-china-retail-idUSHKG11361720080416China's retailers well-armed in food price war, for now

103Destination ShoppingPhenomenon: Some retailers are likely to open stores at a specific location without any competitors or similar product offerings nearbyExample:IKEAProducts:Products with unique characteristics and special featuresImplications:Loyal customers will more likely shop at these destination stores even if commuting expenses are high

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchOne Stop Mall ShoppingPhenomenon:In CBD districts, consumers, especially white collars and elite groups, are likely to shop at up-scale malls This is a growing trend in ChinaProducts:All kinds of commodityImplications:Increasingly, consumers who wants the luxury lifestyle prefers to shop at up-scale malls for all their products and services

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchToday in China, specialty stores usually dont operate very well because Chinese consumers are more likely to shop at huge and up-scale department store. They prefer one-stop shopping experience.Brand loyalty also plays a very important role in one-stop shopping. With the increase on consumer lifestyle, more and more Chinese consumers put more weight on brand value and quality of products. They can easily find many international famous name brands in department stores.

105Example: Jusco (Failed in Site Selection)Jusco is a middle-to-upscale department store/mass merchandiser in JapanFailed in China because Jusco opened their stores in Shanghai near railway stations which is populated mostly by the working classImplications: Sufficient market research must be conducted prior to opening a new store

Jusco offering major discount on their last week of store opening from July 17 to July 23page #Location ModuleDavid F. Miller Center for Retailing Education and Researchhttp://www.people.com.cn/GB/paper40/1022/146724.htmlWhy Jusco failed in China?

http://findarticles.com/p/articles/mi_m0WDP/is_2000_July_10/ai_63276181/Jusco closed shanghai division

http://www.shanghai.gov.cn/shanghai/node17256/node18151/userobject22ai1540.htmlJusco plans to give Shanghai a second chance

106Lifestyle Segmentation in ChinaSubject SegmentationSocialGroupIndividualValue Segmentation (most relevant to this module)Blue-collar lifestyleConsuming lifestyleLeisure lifestyle Social lifestyle Political lifestyleCommunity SegmentationCity lifestyleRural district lifestylepage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchThe value segmentation in China varies. With the accumulation of social networking wealth and personal fortune, the pure spending lifestyle is a leisure lifestyle that is increasing significantly. A leisure lifestyle model mostly comes from wealthy families or elite class. The gap between the wealthy and the poor in China is significantly huge right now. The middle class or working class can barely spend any money in luxury retail stores. These stores usually target a smaller and wealthy consumers group.

Value Segmentation (most relative to our topics)Blue-collar lifestyle: Working class Consuming lifestyle: Wealth familyLeisure lifestyle: Enjoy lifeSocial lifestyle: Networking orientedPolitical lifestyle: Plays important role in government agencies

107Lifestyle Segmentation in China

Blue-collar lifestyle: Basic consuming potentialConsuming lifestyle: Fashionable and luxury goods

Picture above: First Gucci store in Chinapage #Location ModuleDavid F. Miller Center for Retailing Education and ResearchLifestyle Segmentation in ChinaLeisure lifestyle: Enjoys the shopping experienceSocial lifestyle: Networking and socializing

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchLifestyle Segmentation in ChinaPolitical lifestyle: A very important class in China. They usually shop at CBD or SBD because they care more about their public image.

page #Location ModuleDavid F. Miller Center for Retailing Education and ResearchLifestyle Relative to Site SelectionBlue Collar LifestyleConsuming LifestyleLeisure LifestyleSocial LifestylePolitical LifestyleNBDXXCBDXXXXSBDXXXXStringXXCommunity Shopping CenterXXRegional Shopping CenterXFree StandingXXOutletsXXpage #Location ModuleDavid F. Miller Center for Retailing Education and Research