The China Retail Story: Writing A New Chapter
China's retail landscape has been transformed since the country's accession to the World Trade Organization (WTO), and the opening of its retail and wholesale sector in 2004. Retailers subsequently poured into China to set up wholly owned foreign entities without requiring a local joint venture partner or distributor.
Within a few years, global retail brands became ubiquitous as new malls sprung up in Tier 1 cities, and later diversified their reach across Tiers 2 and 3. Local retailers also stepped up to meet the challenge of delivering new products for aspirational Chinese shoppers. In the aftermath of the global economic crisis, China’s retail boom became the envy of the world.
Today, a new chapter is starting to being written in the Chinese retail sector. Retailers, developers and mall operators are responding to the slowdown in sales witnessed in late 2012 and early 2013, and are setting new strategies to appeal to price-sensitive consumers in increasingly competitive markets.
The sales slowdown can partly be attributed to the Chinese government's tightening measures on official gift giving, entertaining and banqueting. This has certainly impacted sales of luxury products and five-star hotel and high-end dining. At the same time, consumers in China have been getting accustomed to a change of leadership and the realities of an economy that is growing more modestly than at any time in the last decade.
Seeking Sustainable Growth Consequently, retailing is entering a period of transition. "Most brands, from luxury goods to fast fashion, expanded extremely fast across China in the past five years," says Eugene Tang, Regional Director and Head of Retail, Shanghai and Greater China, Jones Lang LaSalle. “But the retail slowdown in 2012 was a wake-up call. Retailers will now be more cautious, analyze individual Chinese markets more carefully and follow a bottom-line driven strategy rather than investing in brand exposure. The result should be healthier growth in the second half of 2013 and 2014."
China's great strength is the potential size of its retail market. While South East Asia is emerging, both as a collective entity and with nations like Indonesia growing at a fast pace, China and India remain the pillar economies in Asia. The Yangtze River Delta region's economy, for example, is about 85% of the size of all Southeast Asia. In China, around 250 more cities will emerge in Tiers 2 to 4 in the next 15 years, and annual double-digit rises in incomes will see many cities having at least 50% of their populations within the consumer class by 2020.
The Chinese Government's drive to rebalance the economy should also catalyze consumer spending, with increased urbanization, the curtailing of income inequalities, and better social security provision being primary objectives. "The consumer sales slowdown we saw last year seems to be receding, and we expect confidence to pick up," says Steven McCord, Director of Research for Jones Lang LaSalle in Shanghai. "Policymakers are serious about promoting consumerism to play a stronger part in overall economic growth, and this should have a positive impact."
As China's consumer economy evolves, retailers are preparing for the long-term, and can be more selective as the choice of store locations proliferates. The total of new shopping centers in China this year is likely to be bigger than ever, with around 150 new malls opening in the top 20 markets. Mall sizes are also expanding, with the average size for a new mall exceeding 80,000 sqm.
"In Shanghai, for instance, one of the new retail centers in 2013 will offer a total of 320,000 sqm, with shop space of around 40,000-50,000 sqm per floor. We expect to see between up to three million sqm of new retail space in the next three years in Shanghai, and maybe three to four million sqm in Chengdu," says Eugene Tang. In addition, large volumes of retail real estate are being built in emerging cities, such as Jinan, Hefei, Kunming and Changzhou.
Overcoming the New Market ChallengesNot every new mall will succeed, however. While the sophistication in planning, building and delivering of malls is improving, developers, operators and retailers will become more strategic and analytical about growth objectives in China. With so many new malls opening, the competition to attract high-caliber retailers is fierce, and tenants are in the driving seat during negotiations.
Increasingly, rent terms are based on a percentage of sales turnover and generous fit-out subsidies are being offered. Competition between malls is also placing managers under greater pressure to differentiate their properties in terms of design and traffic flow, tenant mix, theme, customer base, and market positioning.
Simultaneously, an unpredictable new challenge is emerging: the growth of online retail. Lower-end brands, in particular, are vulnerable to this trend as price sensitive consumers switch their purchasing to the Internet. As a result, the design and composition of malls is changing, as operators seek to insure against the online threat.
"Non-traditional retail elements, such as entertainment, services, and dining, are increasingly important to the tenant mix," says Steven McCord. "Some mall owners are making it a strategic priority to have 60-70% of space dedicated to food and beverage and entertainment, such as movie theaters, game arcades and karaoke. They also put in a lot of service-oriented tenants such as early education centers, English schools, and weight-loss clinics. These are all things that can’t go online."
The design of the mall of the future is an integral part of China's new retail chapter. As operators, developers and retailers work to get on the same page, China's rising consumer class will play a central role in influencing this exciting new era.