The slogan
BIG OFF! Is in fact from a "sale" sign outside a department store in Osaka, but it's still one of my favorites and it sums up the retail trade in China pretty much too (I might even use it in my stores one day).
As a retail store owner in three cities (Beijing, Shanghai and Lhasa) the condition of the retail business, particularly at the higher end, is of enduring interest to me. The last three years have seen the business change out of all recognition, as a wave of luxury brands has broken over China's cities. International brands felt compelled to get a foothold here, often driven by shareholders who were intolerant of any company that lacked a "China strategy". At the same time property developers have placed substantial bets on high-end retail malls. In the past 3 years there has been a roughly twofold increase in the amount of high-end retail space available in Beijing. Supply and demand were both in place, and a thousand deals were struck. Development time-lags being what they are, these stores are now opening their doors, 2-3 years after inking the deals.
So how are the new stores faring post-September '08, and how do Beijing and Shanghai compare? These are my impressions, unapologetically anecdotal.
First, Beijing's new malls.
Near to my apartment is the newly opened
Village at San Li Tun. I have watched this one since it was a large (and very dusty) hole in the ground, through its opening around the time of the Olympics. Initially skeptical, I have been won over by the architecture, which is fun and unexpected, and by a near-continuous stream of events run by a lively management team. Stores are mostly luxury clothing brands, plus a large Apple store, with a strong showing from Hong Kong chains. There are plenty of visitors, but ... and here is the rub ... most are holding cameras rather than shopping bags. The venue has become a fixture on the tourist map almost immediately, but stores look quiet, and most have had "SALE" signs on their merchandise within a month or two of opening.
The second (and equally large) phase of the Village will open soon, just north of phase 1. It will be interesting to see how that fares, opening up post-Olympics.
The picture is similar at nearby
Solana: a very large American-style mall also in Chao Yang. Here there are also many international brand stores, but the mall as a whole also seems rather quiet, even at weekends when it should be thronging. Solana has carefully segregated stores of different types and price-points, and the areas of the mall that seem to be busiest (at least in terms of foot traffic) are those with local Chinese brands, particularly mid to low-end, and those focused on a younger segment. There is an important clue here to the shopping habits of Beijing's new middle class.
North of the city in the Shunyi villa residential area there is the recently opened
Europlaza mall. This is another western-style development with good construction standards. It's a development that "ought" to do well, given that Shunyi is a high-end residential zone that seems under-supplied with quality retail. According to retailers who have moved in to Europlaza about 70-80% of the total space has been reserved, but the upper floors and many ground floor units are still empty. Retailers seem to be playing a game of "chicken" with the management, having put down deposits but declining to move in until things improve, or perhaps until a better deal is on offer.
Right now, Beijing retail seems to be facing a triple whammy:
1) the global slowdown
2) an oversupply of retail space coming onto the market at the same time
3) that post-Olympic feeling (harder to define, but think of the condition of the balloons you find on your living room floor on the morning after a party)
The logical next step to sort out the economic issues is a big decrease in rents. So far that hasn't happened in the new malls, or only at the margins. To understand why, consider landlord-tenant relations. For a landlord in the retail sector every negotiation with a tenant carries enormous risk: if a lower rent is given to one tenant it will eventually be given to all, particularly in local culture where there are few secrets and all feel entitled to the same deal. Relatively few landlords have "blinked" so far. Expect that to change rather slowly as '09 progresses, more retail space comes on the market and international brands scale back expansion plans. The all important figure is occupancy rate: malls that have achieved a high enough occupancy (70% and up) will hang on to their rents come hell or high water, while those that did not get their space signed up prior to the Olympics will be the first to blink.
The malls I mentioned will succeed in the end: they are good developments in the right places, in China's premier city. But investors and retailers alike should expect the climb to profitability to be agonizingly slow, since with a general slowdown occurring it will take longer for Beijing to absorb the excess retail capacity. My guess is that margins could be squeezed for the next five years, economic recovery notwithstanding. Retailers will also find it frustratingly difficult to negotiate rent decreases for the reasons I've mentioned already: this process will not begin in earnest until landlords are facing the loss of key tenants. The larger retail chains and international brands, with their eye on the longer term, will grit their teeth and pay the piper, but the smaller stores will need to be nimble and in some cases to cut their losses.
All of this will provide some delightful opportunities for Beijing's shoppers, of course.
I'm also a regular visitor to Shanghai. This city also has plenty of "SALE" signs in its store windows, but my impression is that the city is doing slightly better overall, at least in the luxury retail sector. The reasons are probably due to retail supply that has also surged forward, but not quite as exuberantly as in Beijing, combined with a lack of post-Olympic malaise (got the Expo to look forward to). That said, Shanghai's hinterland relies heavily on textiles and electronics, areas that are being hit hard in the slowdown, so expect a tough year ahead here too.
Shanghai also provides an example of the importance of value to local shoppers. While many top-brand stores in the city center do slow or moderate trade, the biggest hit amongst local Shanghainese is the "Outlets" mall. Situated way out of town at the end of a long and traffic-congested car ride, the mall is nevertheless thronging at weekends. The environment is pleasant, the cafes and restaurants decent but nothing special ... the lure is price. Famous labels sell their surplus stock here at discounts of 50-80%, a combination that is irresistible, especially in the current climate. Retailers take note.
So what of my own business? As a retailer (
Torana Carpets) I have responded to the changed climate (with startling originality) with price cuts and special deals. But the major change we are making this year is to close our Kempinski Hotel store (at the end of February) and focus our Beijing business at our new location in Shunyi, that we opened last year.
Moving out of the Kempinski is something that would have happened in any case over the next couple of years, but the economic downturn has brought this forward as we focus more on costs. I have a lot of fondness for the Kempinski location, but things have changed in the 10 years since the store was opened. The majority of our sales have always been to Beijing residents, but Beijing residents shopping habits have changed (hands up who shops in hotel lobbies these days).
The Shunyi location also gets us closer to a large part of our customer base, and gives us a larger space (200m2) to show an expanding range of carpets. Of this, more later.
Here endeth my longest post ever.
Those Beijingers who have read all the way to the end are congratulated and automatically qualify for a 25% discount on all the carpets ... please come to our Shunyi store to claim your discount! To claim your discount just come to our store, point to a carpet and say the secret code-phrase: "I'll take this one please".
