Recently in China retailing Category

Our new Beijing flagship store has just opened at Europlaza, in the Shunyi district. We are on the ground floor, between Coldstone ice cream and Comptoire de France cafe (two of my favorite treats in Beijing that had absolutely NOTHING to do with my choosing this spot, probably)

Celebrations, yes, but from a personal standpoint it's more about heaving a big sigh of relief. This last year has been even crazier than normal in Beijing (and it does get very crazy here for retailers).

As some will remember we had a nice store in Danshui town in Shunhuang road, a beautiful courtyard development that unfortunately stood in the way of "progress" in the area just south of the river. It was demolished a few months back, along with the entire south side of the street (though some buildings are still standing and things seem to have ground to a halt for the time being). In typical Beijing fashion the stores along that side of the road got 40 days notice from the local government to clear out. We managed to keep the business running, with the help of Ms Wang of the Dynasty furniture store directly opposite where Danshui used to be, who rented some space in her store to us at short notice. Credit also to my staff and to our decorations company who renovated a space in Dynasty and fitted carpet rails, lighting etc in the space of a week. Looking back I am still not sure how we did it.

The Dynasty store remains open, and we have our collection of antique rugs (especially Khotan and Kirgiz rugs) and also Afghan rugs and kilims there. I am not sure what the fate of the north side of Shunhuang road will be: there are rumors that it will be redeveloped this year too but the timing is uncertain. Now that we have the Europlaza store open I am less "zhao ji" about it.

I have never been a "mall kind of guy", but I've seen the writing on the wall as regards some of the more "characterful" projects hereabouts that I would otherwise be attracted to. Beijing is expanding, and what used to be countryside is fast becoming "downtown". There are some lovely courtyard developments and individual projects around north Beijing, but many will eventually fall prey to compulsory purchase and redevelopment just as we did. Landlords get some compensation as long as they have a structure built on the land they have leased (which explains some of the mysterious dash to construct apparently empty buildings on many sites in north Beijing), but businesses that rent these spaces get nothing.

Hence the choice of a mall this time. Europlaza is big and solid looking, has several floors so I am hoping it won't be demolished any time soon :-)

I am pleased with how the new store has turned out (once again, credit due to staff and contractors for a job well done).  Europlaza is well-maintained space in a good central location (at least for Shunyi area residents, a bit of a trek for those coming from downtown I admit), with good parking and space to let the kids roam safely. There are still some units that are not let on the upper floors, but the supermarket is open in the basement and proving popular.

We continue to focus on costs, which is why I'd love a large downtown store but it is unlikely to happen any time soon. Beautiful handmade carpets are not cheap, but we don't want them to cost more than they need to, and don't want to pay downtown rents that would make them unaffordable. So we will stick with locations some way from town, and hope that downtown residents will make the trip to see our store and buy a carpet at a reasonable price ... and also take advantage of designs and customization service that you can't find anywhere else.

There are contact details, maps and so on for our Beijing stores on our website.

Our air purifier store (Torana Clean Air Center), selling Blueair air filters, is also in the same location.

From May 1st 2009 we reduced the prices of all our own-make Tibetan rugs by 33%, with no compromise in quality. This is a major change for us, and the culmination of three years of hard work. It's also the most obvious indicator of some more profound changes in the way we run our business.

To backtrack a little, when we first opened our carpet business in Beijing in 1998 it was a very different kind of operation to the one we have today. We sold carpets in a very small boutique store in the Kempinski Hotel (we finally moved out of the Kempinski in March this year, and our Beijing store is now at Danshui in Shunyi). From the beginning however we found that most of our sales were not to hotel guests but to residents furnishing their homes. This realization guided most of what follows.

At the time we opened our store our carpets were contract manufactured for us by a supplier in Tibet. Those who know something of purchasing theory will know that having a single supplier is an uncomfortable position to be in: it doesn't leave you in a strong position to negotiate a better price, and you are very vulnerable if your supplier encounters difficulties.  So in 2001 we set ourselves the target of having three excellent suppliers, a target that came directly from purchasing textbook theory. One of these suppliers which would be our own workshop in Lhasa, in order to get the most competitive price and to ensure that we would always be in the driving seat as far as quality and design were concerned.

Candidly, I also had a personal motive in wanting our own workshop in Lhasa. I enjoy making textiles, and I enjoy experimenting with design and color. I also have an interest in natural dyes, which are not popular where commercial workshops are concerned. Owning our own workshop is a chance to experiment with fewer constraints.

So much for the theory. In practice it took us until 2006 to turn vision into reality. We bought land near Lhasa, on the banks of the Kyichu river, built a weaving workshop and we are gradually building up a skilled workforce. With our own production facility for our Tibetan rugs we are able to make exactly the designs we want, and also to ensure that no compromises are made with raw material quality. This latter aspect was a big problem with contract suppliers, who were forever looking for ways to cut costs, particularly by substitution of cheaper wools. This aspect can now be guaranteed.

While building up our own workshop, we added two more suppliers: the excellent and internationally renowned Michaelian and Kohlberg company who have been making handmade carpets in China for more than twenty years and who specialize in Middle Eastern rug making techniques. We have also recently added kilims and other items from rug makers in Afghanistan, who are very competitive in terms of price. These textiles complement our Tibetan rugs and ensure that we can offer the full range of styles and price points to those designing their homes.

My particular expertise is in design, development and color, and we have built a unique facility for creating new colors, using the best of both traditional and contemporary dye methods. Our eventual aim is to broaden our current scope to work with other professional carpet manufacturers in Asia, in addition to our own weavers, to make better and more varied carpets (and we invite potential carpet manufacturing partners to get in touch). We have already participated in a successful project to research and document traditional dye methods in Tibet, and more work is ongoing in this area. We also lead the field in environmental and product safety, particularly through correct choice of non-toxic starting materials and processes.

Back to price. Though this wasn't the only reason for founding our own workshop, it was a major factor, especially for our customers. By eliminating one layer in the supply chain as well as reducing costs generally in our operation we are now able to offer rugs at a significantly lower price, and that is what we have done. The true extent of this is only apparent when you consider that the price we charge today is actually 40% lower than when we opened our business in 1998: when inflation is taken into account our prices today are 60% lower in real terms than when we began. A major factor in our favor versus other carpet companies worldwide is that we don't maintain any offices overseas, since the overheads from these can often add up to more than the production costs of the carpets.

In keeping with our focus on design and interiors we moved out of our Beijing hotel location earlier this year, and we are now in a new store in Danshui town in the Shunyi district. We have more space here (200m2) and display a wider range of carpets and sizes. In Shanghai we have a lovely two-storey space in An Fu Lu in the French Concession district.

You can still find some rugs that are cheaper than ours here in China ... provided you are prepared to compromise on both wool and dye quality and accept (for example) short-fiber Mongolian wool and Chinese dyes you might be able to save a further 30% or so. Is it worth it? Come look at the colors and wool in our rugs and then decide.

We often get orders for rugs from former expat residents of Beijing and Shanghai who have returned to their home countries. While here in China it is easy to lose sight of the huge difference in price and service level between here and "back home". The kinds of service for custom rugs that we offer is only available in London and New York (for example) from a very few top-end suppliers, and it comes at a price that is usually at least five times the cost of one of our rugs, and often more. This is because the cost of employing a designer in a London office is quite staggering. Even a basic "off the peg" rug costs three times the price of a Torana rug here in China.

Both expat residents, local residents and visitors to Beijing and Shanghai are warmly invited to come see our stores, and also to contact me to talk about the services we offer. I am traveling fairly often these days, but always interested to meet in one of our stores by arrangement, if I don't happen to be there on the day in any case.

One final word: our price list for 2009 is now set, but we don't guarantee to keep our prices fixed at this level for ever. Most of the costs that can be driven out of our operation have been driven out already, and inflationary pressures will certainly build as economies come out of recession, led by China...

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".