Walmart Inc. is going to school on China.
“We’re learning a lot from China these days,” said chief executive officer Doug McMillon recently. Despite two decades of experience operating Walmart stores and Sam’s Clubs, the retailer is still getting on-the-spot training. Nor is the Bentonville, Ark.-based behemoth alone. Global retailers and brands across the price spectrum are eyeing China’s newly minted and rapidly growing middle class of 400 million that’s estimated to reach 600 million by 2020. However, the learning curve for global retailers is steep, and changes come fast and forcefully as societal, political and market forces continue to shape the shopping boom.
McMillon was bullish on the region when Walmart reported its recent first-quarter financial results, saying he visited China during the earnings period, when the retailer opened its first small-format supermarket. The ceo crowed about being “able to offer over 90 percent of the items via e-commerce for delivery in less than 30 minutes. The fastest delivery on opening day from online order to customers’ door was nine minutes.”
Developers in China by 2025 are expected to add 7,000 shopping centers to the country’s 4,500 existing malls. Yet, up to one-third of the malls are projected to close if the boom turns to bust and older malls fade into irrelevancy. By comparison, about 1,000 malls are operating in the U.S., down from a Nineties peak of 1,500, but Wall Street equity analysts and research firms say the country is still overstored and have called for hundreds more to be shuttered.
Opening stores in China requires viewing retail through a different lens. Walmart China reported net sales were up 6 percent, and comp-store sales advanced 4 percent, representing the biggest increase in more than five years. “We believe there are opportunities to selectively expand this format in key regions,” McMillon said of the small supermarket format. “We can certainly see the benefits of making our stores, web sites and apps seamless with the capabilities of in-store shopping, buying online and picking-up in-store, and delivery.
“Our Walmart and Sam’s Club store formats, and the flagship stores on JD.com experienced significant growth. We expanded our one-hour delivery service with JD.com, bringing the total number of stores providing the service to 177,” McMillon said. Walmart in 2016 sold its e-commerce operations to JD.com, China’s second-largest e-commerce player measured by gross merchandise value, after an unsuccessful joint venture with China’s smaller Yihaodian.com.
“The U.S. hasn’t been a hugely expanding market for retailers,” David Zoba, chairman of JLL’s global retail leasing board, who led Gap Inc.’s expansion into China in 2010 as senior vice president of global real estate and store development. “For the retailers that have a compulsion to grow, India is the next frontier. A mall in China can go up quickly, but India is much more democratic. China’s ability to get things done is second to none.”
Gap grew to more than 100 units in China by 2015, including men’s, women’s and children’s stores. “We opened Old Navy in 2013,” Zoba said. “Before that, we started opening Gap Outlets. I believe that Gap is still growing and very committed to China.”
“We made some early mistakes that Gap has since corrected,” Zoba said. “As we were learning, China was learning.” For example, Zoba leased a storefront on an urban thoroughfare, despite the fact that global brands found strength in numbers at traditional malls. “One morning we went to the store, and…it disappeared,” he said. “Everything was gone. The landlord in Tianjin filed for bankruptcy. He hired 100 people to go and dismantle our entire store. You lived dangerously on the streets.
“When Zara, Uniqlo, H&M and Gap started to open stores in Chinese malls, the group drove a lot of better malls because you need players that will drive traffic,” Zoba said. “We would look to the other brands. Cotenancy mattered a lot because international brands like to be with other international brands. Some malls were very well capitalized. But some of the streets were where you had to watch yourself.”
Once Gap was established in Beijing, the company opened stores in more than a dozen of the 17 second-tier cities, Zoba said, adding the closer they are to Shanghai, the more well-off the consumers. “The corridor from Shanghai to Shenzen is where the money is — the technology firms are there,” Zoba said. “International brands have done better there. Abercrombie & Fitch operates company-owned stores, and American Eagle has opened through franchises. Nike Inc. owns a lot of stores and also has franchises and partnerships. Victoria’s Secret has started to open stores and is doing very well.”
Jean-Christophe Hermann, executive vice president of global retailing, luxury, fashion and consumer goods, and digital transformation strategist at Valtech, saw the writing on the wall when he was group online and multichannel director of Carrefour Group and Carrefour France from 2009 to 2012.
“Last-mile delivery is two or three-folds cheaper in China than in the U.S.,” Hermann said. “When you have that kind of last mile traceability and convenience, it can bring traditional retail to a stop. Basically, we’re hearing that some non-Chinese retailers are backing up. They’ve lost significant market share to local retailers and couldn’t keep up in grocery.” China is growing online sales at a faster rate than the U.S. — 11 percent of total online sales, versus 8 percent, respectively — in part due to affordable and readily available delivery methods.
“The approach in China is very different,” Hermann said, adding that quick and low-cost construction can justify writing off an unsuccessful project as a test or experiment. “In the U.S., if you want to [open a store,] you sometimes think twice before starting. In China, you’re able to develop it with such speed, that if it doesn’t work, you can always throw it away and start over.”
Hermann in 2012 became executive vice president of global digital strategy of Tommy Hilfiger. After he left the company in 2014, Hilfiger’s parent, PVH Corp., in 2016 took full control of the designer’s China business together with Apax Partners, acquiring the remaining stake in the joint venture it didn’t own. Elevating brand presentation improving productivity in existing stores and opening new ones were among the goals of the strategy, Hermann said.
“U.S. brands have to be involved in the China operations they take control of,” said an executive of an American brand with a retail network in China. “Consumers aren’t going into stores at all. The retail business model is very difficult to manage without the ability to analyze visitor engagement data. The pressure of e-commerce on brick-and-mortar retail traffic will continue if retailers aren’t able to track and identify all the value that can come from their stores.”
With existing shopping centers in Beijing, Wuhan and Wuxi, and three new regional malls on tap in Xi’an, Shanghai and Changsha, Ikea Centres is aggressively staking its claim to China’s consumers. Ikea has co-opted the mixed-use buzzword for the projects that will consist of fashion malls, office towers and hotels.
With 460 million annual visitors across its portfolio, Ikea Centres is primed with ambition to more than double that to one billion. “[The centers] are for the many,” Carsten Heidtmann, Ikea global leasing director said of three new egalitarian projects “that target middle-class shoppers, but it varies across markets and we have to adapt to customers in each location. We’re transforming from our traditional shopping centers to meeting centers for the whole community. We’re adding a lot of other components, such as more food and beverage.
“Fashion is a very strong component, we have 50 to 60 brands that are performing strongly,” Heidtmann said. “For the younger generation, it’s about bringing in new brands at luxury price points. We have a very ambitious growth plan with 45 shopping centers in operation now, and plans to add 25 more in first- and second-tier cities. We have to rethink [shopping centers] and become relevant. Gone are the days when you could re-paste and adapt space in a market.”
Taubman Asia’s CityOn.Xi’an, a 1 million-square-foot shopping center in the second-tier city of eight million, features nearly 300 brands. The majority are Western — the entire portfolios of fast-fashion giants H&M and Inditex; Danish fashion house Bestseller’s Only, Vero Moda, Jack & Jones, Only & Sons; Selected Homme/Femme; Muji, J. Lindeberg and Burberry — but relatively few American labels.
“Outside of the tier-one cities, there are very few American apparel brands in China, although plenty of opportunity exists,” said Peter Sharp, president of Taubman Asia. “There are a variety of reasons. Perhaps U.S. retailers don’t take enough time to understand Chinese consumers or merchandise and market products in a way that generates an emotional connection to their brand. They may not update merchandise or evolve quickly enough to hold the interest of the Chinese consumer.”
Sharp said physical stores are using the same tactics as digital giants. “Retailers at my best malls in China are using hand delivery and office delivery 16 to 22 percent of the time,” he said. “Think of it as Uber. People use their own vehicles. It’s more efficient and faster. We use them all over.
“International retailers in the fashion space [are stronger],” Sharp said. “H&M and Zara are doing well, while American brands may have expanded too much. With any foreign market, localizing, building teams and understanding the consumer takes time, patience and a significant monetary investment. I’m confident that the U.S. retailers will continue to break through.”
At the same time, brands born in China are upping their game. Once considered inferior to U.S. and European labels, the quality of China’s fashion has improved. “Chinese brands are continually evolving and becoming more well-received by the Chinese consumer,” Sharp said. Asked whether Taubman Asia is looking to add China-based brands to the merchandise mix at its centers, Sharp said, “The priority in China, as in other markets, is to look for the best fashion brands that speak to the consumer in any given market. “
Shopper demand prompted Taubman Asia to extend the hours of food and beverage operators until 10 p.m. “It’s positively impacted stay time and spending,” said Robert Taubman, chairman, president and ceo. “Taken together, these actions are driving very encouraging results.”
“Luxury brands had a terrible time three years ago,” Zoba said. “They went too early into China, seduced by free deals. When China opened up to Western investment, some major mall developers built a lot of mixed-use projects. You’ll find so many Louis Vuitton stores in China, because developers love to have the brand at their centers since it sends an [upscale] message and validates their projects as luxury residential properties.
“I’m hearing that luxury is very much coming back,” Zoba added. “One of president Xi’s initiatives is to make it hard for Chinese citizens to get money out of China. There’s a lot of money being created in China. I think retail is coming back. Some of the centers are high-quality and now, luxury brands have focused on where they need to be.”
“Retailers in 2007 and 2008 started going to China en masse without partners,” said Joel Stephen, a senior vice president at CBRE’s in Manhattan, who built and ran the firm’s China team, which helped 35 retailers set up shop. “We had a huge period of Chinese wealth growth when a lot of luxury brands and high-end hotels opened. Because of the government’s single child policy, the current generation of Millennials is not a massive population.
“Luxury, which had been growing in China since the Eighties, exploded in the last decade,” Stephen said. “China is the world’s largest consumer of luxury goods both inside and outside of the country, but the luxury sector in China totally overly expanded. Brands were in negative sales territory for a while, but they right-sized their portfolios and are seeing increases again. Consumers are still buying luxury products, but not at the same pace. People were buying abroad because they liked the story. The wealthy Chinese consumer has been to a lot of places by now. They’re not looking for a lot of handbags, they’re looking for luxury experiences.”
That’s not to say that shoppers have lost all interest in style. “Gucci is flying, and Balenciaga will do very well over the next couple of years. They have a big new block shoe. Generally, the same trends affecting China are being seen worldwide,” Stephen said. “In China there’s fewer stores, but maybe there’s a bigger flagship with a focus on brand experience and new services. Luxury retailers are trying to start to engage Millennials who could be their customers in five to 10 years. They’re doing it with social media and food and beverage. A couple of brands have opened restaurants at their stores in China.
“Among Chinese guests living domestically or internationally, the subtlety of fashion has become well understood,” Hermann said. “Chinese consumers are more mature now. It used to be about showing off a purchase, but now it’s about knowing what’s special and why it’s special. Customers are becoming more knowledgeable about international trends because of the research they’re doing online.”