SHANGHAI — When it comes to China’s shopping malls and department stores, “retail” has become something of a dirty word.
Keen to differentiate themselves from the go-to mall developers of the early part of the 21st century, with their hasty “build it and they will come” attitude to Chinese consumers, today’s developers tout the “experiential” nature of their shopping centers. More common are shopping centers boasting a larger array of food and beverage on offer (particularly important in China, where eating out is a way of life), entertainment options such as cinemas, skating rinks de rigueur and indoor playgrounds, and health-focused and community initiatives.
“Going forward, what a lot more people are talking about is retail centers becoming more community centers, so having social services, having hospitals, clinics or education centers within malls as well, making it part of the community,” said James MacDonald, head of China research at Savills.
“Obviously, that has implications in terms of the amount of revenue a mall can generate, but it’s much more stable anchor in terms of bringing the community into that retail mall.”
The optimism permeating the industry today is a far cry from the doom and gloom surrounding the sector in 2016, when a report from the Chinese Academy of Social Sciences predicted as many as one-third of malls would close within five years.
Department store and shopping mall landlords knew they needed to focus on more than just their tenant mix or the products on offer, with competition from the country’s e-commerce boom eating into their margins, they needed to focus more on things people can’t buy online: experiences.
“What we’ve seen is that a lot of the mall developers are changing their layout of their malls, so things like entertainment, food and lifestyle have increased a lot. Previously, a mall was something like 20 percent food and beverage, now we are more commonly seeing it at 30 or 35, even all the way up to 50 percent,” said Rebecca Tibbott, CBRE head of retail China.
“The tenant mix has really changed a lot, entertainment is really playing a big part and that could be a really typical entertainment provider, like a cinema, or kids entertainment, or things like pop-up stores or experience stores, like the biggest Starbucks in Shanghai, for example.”
Even the development most associated with China’s chronic oversupply of retail space, Dongguan’s New South China Mall, which is famously more than twice the size of the Mall of America, has bounced back in recent years. Virtually a “ghost mall” for a decade following its opening in 2005, New South China mall leased less than 10 percent of its 660,000-square-meters on average, and a dismal one percent was occupied at its lowest ebb in 2011. Fast-forward to 2016, however, and a refurbishment and remix of the space to include an IMAX cinema, amusement rides and food and beverage options, as well as a repositioning of the retail away from the luxury sector, toward more accessible brands, has bought more visitors than ever before.
The example of New South China Mall typifies many of the trends now apparent in China’s retail real estate market, which has entered a new stage of maturity after two decades of relentless, and often thoughtless, development.
Rebounding Retail and Consumer Confidence
Compared with any point since Xi Jinping took the reins of China’s government in 2012, retail sales, especially for luxury goods, are strong across the country.
Total retail sales of consumer goods reached 36.6 trillion yuan in 2017, up nominally by 10.2 percent year-on year, according to China’s National Bureau of Statistics.
Global market research firm Nielsen also measured a rise in consumer confidence in 2017, suggesting a positive consumption atmosphere in the world’s most populous country.
China’s Consumer Confidence Index reached 112 points in 2017, up from 106 points in 2016, with job prospects, personal finance and willingness to spend reaching two-year highs.
“We are seeing all of our retailers very positive on the market. Just yesterday I met with one of the big luxury groups and they mentioned very high, double-digit sales for all of their brands across the board. Now they are recording their best sales growth globally from the China market, so that’s a change to what we were seeing two years ago and it’s really healthy,” Tibbott said.
Over the five years through 2017, revenue for the Department Stores and Shopping Mall industry in China has grown 8.1 percent per year to an estimated $243.7 billion, according to IbisWorld Department Stores & Shopping Malls in China 2017 report. In 2017, revenue was expected to grow by 6.6 percent.
China had a total of 5,703 department stores and shopping centers in 2017, up 2.9 percent for the year. ACMR-IbisWorld forecasts that industry revenue will rise at an annualized rate of 6.2% to $329.3 billion in 2022.
The picture painted by this data, as well as those closely following the industry here, seems to be that growth is steady and likely to continue, but when measured alongside a supply of physical retail unmatched anywhere else on earth, there is no guarantee of success, even with these positive indicators.
“Overall growth in shopping center supply and other physical retail is still in double digits in many cities, and this means we are getting pockets of oversupply, centers that are struggling to lease, and high vacancy. So, there is some oversupply in certain locations,” James Hawkey, JLL’s head of retail for China.
“At the same time major retail developers such as China Resources and Swire are reporting very strong rental growth in their portfolios. So, the picture developing is one with winners and losers, where experienced developers are performing, but where less well located, poorly conceived and executed and less well-managed projects struggle.”
If any single group can be said to be particularly bullish on the brick-and-mortar potential in the Chinese market, it’s the country’s tech giants. Since early 2017, Alibaba and Tencent have spent more than $10 billion between them on retail-focused deals, both pursuing a strategy of online-to-off-line integration between their e-commerce platforms, social media platforms, digital payment systems and real world retail offerings.
China’s e-commerce boom has been well-documented, with the total transaction value of online retail sales amounting to 7.18 trillion yuan in 2017, or $1.149 trillion at current exchange, up by 32.2 percent on the year. Online sales accounted for 15 percent of the total retail sales of consumer goods in China, according to the country’s NBS.
In the second half of 2017, there were 772 million Internet users in China, of which, 533 million were online shoppers, according to data from the China National Commercial Information Center, but Alibaba and Tencent are looking for an even bigger slice of the consumer pie and the Alibaba-coined term, “New Retail” is a major buzzword in China’s retail real estate environment.
“There were lots of exciting developments and major investments in New Retail in the last year,” Hawkey said, with the most developed experience of the New Retail concept, Alibaba’s supermarket chain and app, Hema Xiansheng, proving a hit with consumers. “Hema Xiansheng continues to expand rapidly, showing sales performance at levels significantly higher than competitors. Ultimately, it is strong sales performance that will drive the expansion of New Retail, with consumers at present responding well to the concept, pricing and convenience of Hema.”
Other major acquisitions include Alibaba’s investment in Sun Art Retail Group, owner of Auchan, as well as an 18 percent stake in Hong Kong-listed Lianhua Supermarket and an approximately 74 percent stake in department store chain Intime, which it has helped take private.
“New Retail is something we do today and we’ll be doing a lot more of in the future. It’s a very exciting part of our business. Some of our competitors appear ready to kill the off-line retailer. We don’t want to, we want to support the off-line retailer and integrate it with online activities. Look at a market like China where 15 percent of total retail is online, that means 85 percent is off-line. We’re interested in the 85 percent of the growth opportunity in addition to the 15 percent,” Alibaba president Michael Evans said last year at WWD’s CEO Summit.
In January, China’s Tencent Holdings announced its lead investment to take a 14 percent share in one of the country’s largest mall developers, Dalian Wanda Commercial Properties.
The deal will see the WeChat owner, alongside prominent retailers Suning Holdings, JD.com, and the country’s fourth largest property developer Sunac China Holdings, invest approximately 34 billion renminbi, or $5.38 billion.
The new ownership structure is set to accelerate Dalian Wanda Commercial’s growth, the announcement said, helping the company to achieve its goal of 1,000 shopping malls in China “as early as possible,” up from the 235 Wanda Plazas it has now.
“Some people believe that the online players are looking purely at logistic centers, so physical space they can use as performance centers or for client engagement. Some others see the online market as being too crowded, it’s hard to capture a consumer’s attention when you are inside, because there are so many competitive forces out there,” MacDonald explained.
“If you are in the physical space, then you can have more direct connection with the consumer, or a more captive audience, to a certain extent. It’s not just the fact that they’re getting into the physical space but they are bringing with them their understanding pf consumer behaviors and consumer traits into the physical space, giving a different dimension to what landlords have previously had.”
It comes as no surprise that China is a large and multifaceted market, with no simple equation guaranteeing success. So, where does opportunity lie for retail real estate moving forward?
According to researchers, the example of HKRI Taikoo Hui in Shanghai, which opened with great fanfare in November and has already found a following for its unconventional retail mix and the draw of the world’s largest Starbucks, shows that there is still room in the highly developed Tier One market for quality developments.
“Strong developers are now really using their imagination to bring consumers new experiences and attract particular segments of the market. There is always room for a new project — where it brings something new to local consumers,” Hawkey said.
Tibbott points to some particularly strong openings due in second-tier cities this year as an indication that experienced developers are looking to makeover markets beyond their first-tier comfort zones that until now have been dominated by old-fashion local department stores.
“In some of these Tier Two cities, we are seeing some of the really experienced developers going in, which I think will make quite a big change. For example, SKP opening in Xi’an recently, which I think will really change the landscape there, they have a great tenant mix with a lot of high-end brands and that previously was a market that was previously dictated by local department stores. In Changsha, we have IFS to open, again a really great operator for that city, so I think we are really starting to see a lot of these big, experienced developers going into the lower tier cities and creating a different environment,” she said.
Though retail sales are growing faster off a lower base in China’s lower-tier cities, beyond the second tier, and certainly any lower than third-tier cities, developers need to be wary of over-reaching into markets not yet developed enough to absorb the kind of investment necessary for a good quality, luxury mall.
“In a second or third-tier city, it’s questionable how many luxury centers you require. I think in China there’s always been lots of developers or lots of governments like to develop or create luxury hotels or retail malls, however they are not necessarily looking at consumer demand or tenant demand. There is some demand but it’s not necessarily that strong in smaller cities,” MacDonald said.
Alongside the general veil of optimism around retail is a lingering conservativism among retailers who have been previously burnt by over-expansion in a market that seemed to be growing inexorably — until it didn’t. Today, according to the experts, smart retailers are studying the fundamentals of the market, expecting continued, steady growth and choosing where they compete.
“It won’t be the very aggressive expansion that we’ve seen before. I think some of those retailers are more confident after seeing 12 months of growth, so maybe starting to look at new locations, but they are still being relatively conservative, they want to make sure this growth is long-term and sustainable rather than a slight bump,” MacDonald said.
“I think there is this sense that this recovery is more of a longer-term recovery in terms of the market. It is a consumer demographic that has gradually shifted into the affordable luxury or luxury segment and they will continue to remain in that segment.”