SHANGHAI — Kering, the parent company of brands such as Gucci, Balenciaga and Bottega Veneta, has declared 2015 a year of “reflection” in its China operations following years of rapid expansion across the Greater China region.
Riza Silva, head of real estate for Kering Asia-Pacific, said that the company is currently reassessing the utility of its Chinese outlets, particularly in tier 2 and tier 3 cities.
“Between 2012 and 2015, it was a bonanza, all we did was open stores but now we are in a more reflective mode,” Silva said on the opening day of the MAPIC real estate conference here Thursday. “But we are not stopping. We are committed to what we have started in China,” she said, adding that China remained one of the company’s key regions.
This news signals a gear change in the company’s strategy amid emerging challenges affecting the Chinese retail sector and a fast-changing consumer landscape.
In the first quarter of 2015, a declining performance by Gucci China was blamed for a higher-than-expected decline in Kering’s global revenues. Sales at Gucci’s 500 plus stores worldwide fell four percent, with a 10 percent slide in the Asia-Pacific region.
This year marked MAPIC’s China debut, since launching in France in 1995. The new “Retail Real Estate Market (RREM) brought by MAPIC” was a two-day business, conference and networking event bringing together international and local retailers, master franchises, local retail real estate and shopping mall developers, service providers and investors.
It drew around 300 participants from around the world, including 150 retailers, half of whom were Chinese. The conference program included a series of client-pitching sessions providing companies with the opportunity to promote their brands, services and malls.
The two key concerns for the industry to emerge this year were the rise of Chinese e-commerce, referred to as “e-shock,” and the oversupply of retail real estate on the mainland.
“Ten years ago, e-commerce was non-existent in China. Last year, the industry generated 2.8 trillion yuan [or $450 billion at current exchange], constituting 10.6 percent of the total retail sector, up from 7 percent in 2013,” said Frank Chen, head of research at CBRE, the world’s largest commercial real estate services.
Chen described China’s luxury retail sector as sluggish but said those worst hit by e-commerce have been department stores.
Panelists said that the key to clawing back declining footfall and safeguarding the survival of the retail sector lies in offering consumers unique experiences, or “retail-tainment,” where adrenaline activities, entertainment concepts, and interactive leisure are combined with traditional shopping and food and beverage offerings to give families places to relax, bond and have fun.
“In the near future, shopping centers will become experience destinations, but they also need to serve people’s daily needs,” said Christophe Poisot, national property director at Carrefour China.
Another panelist described this transformation as a “new era of specialization.”
Jun Hu, president of the Beijing Railway Retail Management Company Ltd., was more upbeat in the face of the online threat.
“A retail podium has a very important function, that is, a social function, which is impossible to replace,” said Jun. “We’re in the right business — the human business — the social business.”
The K11 mall in Shanghai, part of the Hong Kong chain of “art malls,” was cited as a “landmark.”
The second major challenge to dominate discussion was that of oversupply of retail property. China’s double-digit growth over recent decades has been fueled by its construction industry, said panelists.
In a survey of the world’s cities with the largest number of shopping malls, four out of the top five are in China — the fifth being Moscow. However, in China’s “new normal” era of slowing economic growth, some property assets have started to turn bad.
One questioner described how in the town of Shenyang, malls with 40 to 50 percent occupancy were closing down.
“By the end of 2015, China will have 4,000 shopping centers, with an additional 30 being built per year for the next three years,” said Gergely Bodo, head of retail leasing at TriGranit. “The fear is that stock down the pipeline will turn into distressed assets. At the moment the potential of this happening is 30 percent. Tier boundaries are getting redrawn, as serious oversupply is piling up in front of our eyes.”
Yet despite concerns, there was some cause for optimism.
China’s disposable income is expected to continue growing rapidly at 9.3 percent in 2014, down slightly from 10 percent in 2013. According to the Economist Intelligence Unit, by 2030, 60 percent of Chinese households will make the equivalent of $25,000 a year. And China’s domestic consumption rate is currently only half to a third of that in most developed countries, leaving tantalizing room for growth.
Finally, there was approval of new regulations slashing import duties on international goods ranging from shoes to cosmetics aimed to boost spending at home, which were unveiled in May.
“Most mall owners will be pleased with the new regulations, which are a very good policy to stimulate growth and meet the needs of local customers,” said Lucy Wu, vice secretary general of the China Chain Store and Franchise Association.
The Ministry of Finance cut duties by half, on average, on imports including suits, fur garments and shoes beginning June 1.