Retailing China’s malls

STORE OF VALUE

10 December 2016

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W hen the Guilin-based travel agency China Highlights recently updated its list of the best shop-

ping malls in the country, four out of its top five picks were located in Hong Kong. While that might be a testament to the quality of the shopping experience south of the border, it was also a sign of the continuing crisis affecting physical retailers in the Mainland.

In 2015, 83 of China’s 5,000 or so major shopping malls closed down, according to data from the Chinese Academy of Social Sciences, a state-run research organiza-tion. That might seem a drop in the ocean but real estate specialists say China’s malls have been in decline for nearly a decade. In September, the academy issued a report forecasting that up to one-third of China’s existing malls will shutter by 2020.

Much of the shopping centres’ plung-ing fortunes are due to the rise of electronic commerce. China is already the world’s largest e-commerce market, with total retail website sales reaching 3.877 trillion yuan (HK$4.354 trillion) last year, a 33.3 percent increase over 2014, according to the National Bureau of Statistics of China. Sales during the second quarter of 2016 are estimated at 1.1 trillion yuan, 27.6 percent higher than the year-earlier period.

Online sales accounted for nearly 13 percent of all retail purchases in China dur-ing the year, compared with about 8 percent of those in the United States, 7 percent in

Australia, 2 percent in Singapore and less than 1 percent in Thailand.

“Consumers opt to shop online primar-ily because of the ability to shop at all hours, compare prices and secure better deals, as well as the convenience of not hav-ing to travel to a physical store,” observes Jessie Qian, Head of Consumer Markets at KPMG China in Shanghai and an Ameri-can Institute of CPAs member.

Qian suggests that bricks-and-mortar store managers have failed to adjust to China’s maturing retail consumer. “The meteoric rise in online and mobile activity,” she adds, “points to a Chinese consumer who is increasingly sophisti-cated, hungry for information, more likely to spend, and keen on accessing a greater variety of products.”

However, the shift to online shopping is not the sole reason for the malls’ decline. “China’s economic slowdown and rising salaries and rents have also put immense pressure on traditional retailers with large networks of physical outlets,” says Daniel Zipser, Greater China Consumer and Retail Practice Leader at McKinsey & Company in Shanghai. Refreshing experiencesAny customer who has wrestled with recalcitrant websites, rejected credit cards, frustrating delays and wayward deliveries knows there are downsides to online

China’s online commerce explosion has put pressure on bricks-and-mortar stores, especially in malls. But, as George W. Russell reports, the impending demise of physical retail in the Mainland might be exaggerated: developers and retailers are creating more innovative ways – from entertainment to in-store apps – to attract visitors and turn them into purchasers

Illustrations by Benedetto Cristofani

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Retailing China’s malls

commerce. As a result, traditional retailers can still compete on convenience.

In addition, special offers, on-site fittings and easier exchanges still draw customers to physical stores. “Bricks-and-mortar stores are still very important,” says James Macdonald, Head of Research at Savills China, a property consultancy. “Retailers still need them to display their products and engage with shoppers.”

As a result, some online retailers are retrofitting: In January, clothier Sugar Girl opened a bricks-and-mortar store in Hang-zhou, becoming the third Taobao original brand, after Inman and Chuyu, to do so. Technology brands such as Apple, Oppo, Huawei and DJI have also opened physical outlets. “We continue to see online platforms launching pop-up shops in malls to give buy-

ers a real-world experience,” observes Qian at KPMG.

The Chinese Academy of Social Sci-ences noted in its September report that those malls that are not forced to shut down will have to transform themselves, forecasting that one-third would become wholesale marketplaces, while the other third would thrive by integrating their operations with e-commerce.

While adding the physical incarnation of online brands can bring a freshness to shopping centres, mall owners and tenants should make a more coordinated effort to promote what Yeeman Chin, Credit Rat-ings Director for Asia Corporates at Fitch Ratings, describes as more “experiential shopping,” whether online, in-store or as a combination of both channels.

A recent PwC China report, Total Retail 2016, notes that although more Mainland customers are shopping online, there is a “need for an increasingly focused, curated and engaging brick-and-mortar store experi-ence… no matter what channel ultimately records the purchase.”

Some malls are reproducing the online experience in their physical stores. “The most common facelift strategies are to not only modernize interior décor but also to install technologies to make properties friendly, intelligent and compatible with con-temporary popular communication,” notes Clement Chan, Managing Director of Assur-ance at BDO China and a former president of the Hong Kong Institute of CPAs.

That can mean adding touch-screen kiosks, providing mapping services and transmitting mobile notifications. Aeon Mall, a Japanese company that owns a dozen shopping centres in China, plans to eventu-ally roll out free wi-fi, indoor Google Maps and Google Street View as well as robotic assistants and a driverless shuttle service.

Bright malls, big citiesShopping malls won’t be relying solely on technology to compete with e-commerce. “We will also strengthen our ability to attract customers further by enhancing the experience-based stores and facilities that only real malls can provide,” Akio Mishima, Managing Director and General Manager of Aeon Mall’s leasing division, told a recent shareholders’ forum.

Interpersonal communication is one of a mall’s major strengths. “Not all people have their heads buried in the Internet,” says Milton Wong, Senior Adviser to Hong Kong-based retailer Dickson Concepts Interna-tional and a former chief financial officer of the Jin Jiang Dickson Shopping Centre mall in Shanghai’s upscale Luwan district.

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“Most still have to go out dining and participating in social activities,” says Wong, an Institute member. “So the shop-ping centres may also survive by having cinemas, food courts, supermarkets, beauty salons, hair stylists and gyms, which custom-ers have to visit in person.”

Developers say different areas of China have diverse attitudes towards malls. Peter Sharp, Presi-dent of Taubman Asia, says there is strong demand for more retail space outside the tier-one cities of Beijing, Guangzhou, Shanghai and Shenzhen. “We have chosen to meet demand by opening CityOn.Xi’an in April and CityOn.Zheng-zhou in March 2017, two under-served tier-two markets with high disposable income and economic growth targets,” he says.

As such cities become richer, malls will offer more luxury retail goods. “I think the [impact on] shopping centres might happen mainly on the middle to lower sector of the market,” says Chan at BDO. “It will be much slower for the high-value items.” Indeed, high-end shopping is likely to remain the preserve of physi-cal stores. “People like to try on luxury goods before purchase,” Wong points out. “You wouldn’t buy a Rolex on the Internet.”

But even expensive retailers have to innovate: the Printemps department store within a mall in Shanghai’s Pudong district features a giant, five-storey, dragon-shaped slide for agile shoppers in a hurry. “Consumers will feel bored if malls

are too standard,” says Macdon-ald at Savills. “They want to be entertained and landlords need to provide new ideas and concepts.”

Macdonald says malls will see more regular exhibitions and activities as well as more innova-tive use of floor area. “There will be more open spaces, smaller kiosks, pop-up stores, and more decorations,” he says. “They have to make themselves stand out from the crowd and interact more directly with the consumers.”

Growth opportunitiesChina’s slowing economy has seen more sluggish sales growth, or even declining purchases, among many brands – including Louis Vuitton, Burberry, Coach, Giorgio Armani, Michael Kors, Hermès and Gap – weakening the pulling power of malls. “The market is likely to be very competitive and challenging for a number of opera-tors over the next five years,” says Macdonald.

Slowing expansion plans are no surprise, he adds, saying that many leading international brands have been in China for some years. However, there are still avenues for rapid growth. “Some of the more active retail segments such as sports or kids’ related brands are quite strong.”

Colin Currie, Managing Director at Adidas Greater China, says the role of bricks-and-mortar stores in China “is now more important than ever” to the sportswear brand despite its investment in online commerce.

“That’s why we’re planning to open a further 2,000 stores in Greater China by 2020.”

“E-commerce is hugely con-venient but nothing can compare to seeing and feeling a product first-hand in a store,” Currie adds. “More importantly, physical stores are key differentiators of our brand that help consumers get to know Adidas on a deeper level.”

Macdonald notes that the best malls aren’t always new. “There may also be some opportunities for the smaller, older projects in prime locations,” he adds, although noting that many such centres are facing stiff competition from larger, better quality malls in decentralized locations.

The mall’s changing role is having a wider effect on the Chinese real estate sector. “The shift from offline to online has also impacted the way rent is col-lected,” observes Kenneth Rhee, Chief Executive Officer of Huhan Advisory, a real estate consultancy in Shanghai. “Landlords increas-ingly are phasing out collection of a percentage of sales and instead only relying on base rent.”

Cultural considerations could also serve to keep physical stores alive. Sharp at Taubman Asia points to the practice of guangjie (逛街), roughly translated as “window shopping.” “Malls in China are evolving their retail experience – from a shopping destination to a social and entertainment destination. Bricks-and-mortar stores’ days are far from over.”

“They have to make themselves stand out from the crowd and interact more directly with the consumers.”

One-third of all shopping centres in

China will close their doors by 2020, a

recent report by the Chinese Academy of Social Sciences,

predicted.

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