Chinese tycoons rarely lack confidence in their abilities. Almost 20 years ago fridge manufacturer Li Shufu decided he was going into the car industry. Why be daunted, he told his friends and family, when car making didn’t look like much more of a challenge than putting together four wheels and a sofa?
Li went on to create Geely, which bought Swedish icon Volvo four years ago.
Zong Qinghou, China’s best-known drinks billionaire, showed similar chutzpah in announcing that his beverage firm Wahaha –which like Geely also hails from Hangzhou – was diversifying into shopping malls.
“Commercial property is simpler and easier than managing a beverage company,” he told China Real Estate Business News at the time.
Two years on, Zong’s optimism is being called into question by a falling-out between Wahaha and its landlord Zhejiang Zheou Properties at its flagship mall, Waow Plaza.
The trouble started with a dispute over rental payments earlier this year, reports Want China Times. Wahaha told its landlord it would be pulling out of the lease, which had been signed for a 16-year period. It looks like the dispute may end up in the courts as Wahaha is alleging that the break-up has been forced by Zhejiang Zheou’s failure to meet its contractual commitments.
When Waow Plaza was launched Wahaha bosses talked about a mall strategy based on introducing up-and-coming European brands to local consumers. But there were difficulties from the start. The first management shake-up came within 12 months and this year Wahaha changed direction again, converting much of the mall into a children’s education centre.
Zong denies that the problems in Hangzhou mean that Wahaha is going to give up on its new business line. But the company’s critics say that the beverage firm is out of its depth.
“Wahaha isn’t capable of discovering and promoting new clothing brands from Europe,” Liu Hui, a retail consultant, told Southern Metropolis Daily. “The truth is that most of the brands are from factories in Jiangsu and Zhejiang, so the positioning has been changed quietly.”
Wahaha is also said to have rushed into the new business area without adequate preparation, Li Lei, another retail analyst, told the Global Times. Li added the firm picked a location for Waow Plaza that isn’t popular for socialising or shopping. Even company insiders have admitted that Wahaha was poorly prepared for the challenges of managing malls. The business was conceived with more of a focus on real estate returns, an internal source told Southern Metropolis Daily. The plan was to invest heavily in the first few projects, hype them up and then syndicate a massive round of investment in 100 more shopping centres over the following five years.
But just two have opened so far: the troubled venture in Hangzhou, plus one more in Changsha.
Wahaha’s difficulties won’t come as a surprise to Yu Xianglai at the China Shopping Centre Development Association, a trade body. He says that mall projects generally proceed on a ‘fifty-fifty rule’”. Half of the ventures announced to the press haven’t started construction, Yu believes. When building does begin, only half the malls open for business. And for those that start trading, only half make a profit.
“In other words, the success rate for shopping centres in China is probably about one-eighth,” he says.
That doesn’t seem to have discouraged the developers. More than half of the mall space under construction in the latest 180-country survey from CBRE, a global real estate firm, is happening in China. Shanghai alone has more shopping centre space in the pipeline than the 86 European cities in the survey combined, the study noted in April.
Yuan Yafei, the boss of Sanpower – which recently bought the UK’s House of Fraser stores – told the Financial Times that 2,500 new shopping malls will open in China in the next three years.
This comes at a time of slowing retail sales growth. An increasing share of business is moving online in China too, from 0.6% of the total in 2007 to a forecast of 8.5% this year, according to CECRC, a research firm. In fact, e-commerce bulls have even been predicting that bricks-and-mortar operators are heading for disaster – Alibaba’s Jack Ma is one of those who thinks online sales could soon surpass those made in shops (although the internet titan wasn’t sure enough of his case to bet on it with Dalian Wanda’s Wang Jianlin, after they argued about the topic on TV – see WiC182).
Faced with the lower prices and greater convenience of shopping online, mall owners are rethinking how to target the next generation of customers. Because average purchases on the most popular sites like Tmall are about Rmb200 ($32.11), internet sales threaten lower-end malls more than most, says another retail study co-authored by architecture firm Woods Bagot and international realtor Knight Frank this year.
But over-dependence on luxury goods tenants can be a risk for mall owners too. The anti-corruption campaign has taken the steam out of luxury sales, while many more affluent shoppers prefer to purchase the most expensive brands on trips overseas.
One sweet spot for the mall owners is fast-fashion brands like Zara, Gap and H&M. They have been in growth mode, surpassing their store opening goals last year, the Knight Frank report says, in contrast to the 65% of luxury retailers who didn’t meet their new store targets.
Changing trends are also forcing a rethink about how shopping centres are designed. Out go the huge, out-of-town and standalone malls, traditionally anchored by older-style department stores. More favoured are smaller developments in premium locations, sometimes based around ‘mini-anchor’ concept stores which offer a range of goods to carefully identified groups of image-conscious shoppers.
Flagship outlets from the fast-fashion brands are welcome additions too because their product ranges are more affordable and change more frequently. This generates higher footfalls, especially from younger shoppers.
Most of all the new generation of malls is looking to provide a more engaging visit for its customers, with a broader shift to more ‘experiential’ shopping that encourages repeat visitors. That means creating brand loyalty to the mall and not just the stores themselves. Pop-up retail, art exhibitions and performance spaces, cinemas and ice rinks, plus a wider range of food and beverage choices all contribute to a more vibrant shopping experience, rather than a soulless visit to a vast emporium.
China Entrepreneur points to the joint venture between Swire Properties, a Hong Kong-listed developer, and Sino-Ocean Land, one of China’s largest property firms, as one example of this newer trend. INDIGO joined Swire’s first mall in Beijing, Taikoo Li Sanlitun, two years ago. Both are mixed-use projects in premium areas, combining shopping with cinemas and boutique hotels, as well as office space in INDIGO’s case.
The key targets for the malls are middle-market shoppers with a taste for “light luxury and fast fashion brands”, China Entrepreneur says. More curious about fashion than many premium-luxury shoppers, these customers are ready to spend more than the mass market. But they also want more of a shopping experience, so Swire’s malls have been designed with a focus on architecture, layout and engagement. Shopping space has even been sacrificed for indoor gardens, parks and piazzas. The idea is to create a neighbourhood feel that visitors can enjoy as a day out. Guy Bradley, Swire Properties boss in China, says the goal is to avoid “huge, empty spaces”. It will open similar malls in Chengdu later this year and in Shanghai in 2016.
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