12
MALL OR NOTHING BOOM AND BUST AUTHORS Wai-Chan Chan, Asian Retail Practice Co-Leader Cinthia Chen, Partner Imke Wouters, Principal
MALL OR NOTHING BOOM AND BUST
AUTHORS
Wai-Chan Chan, Asian Retail Practice Co-Leader Cinthia Chen, PartnerImke Wouters, Principal
2
THE GREAT MALL OF CHINA
Retail sales in China are still showing strong growth (12% in 2014), not only driven by growing consumer incomes but also by a booming construction landscape. China is under construction as are its shopping malls: there are currently ~1,700 malls and another ~700 are under construction. 200–300 malls are being opened each year and more than half of all existing malls have only been opened in the past 4 years. Some of the best malls in the world from renowned developers are being built in China. Are all these malls going to be successful? How important is the shopping mall channel and how to select the right ones?
Oliver Wyman conducted extensive research on the shopping mall landscape in China
through shopping mall audits in some 50 cities, consumer surveys across city tiers,
interviews with leasing managers and brand/tenant productivity benchmarking
Exhibit 1: Number of malls by year
Pre
19
2000
27
8
2000
5
32
2001
24
90
2004
83
222
305
2008
239
593
832
2011
18
50
2002
27
117
2005
100
305
405
2009
1,148
2012
16
66
2003
64
158
222
2007
158
117
2006
188
405
593
2010
210
1,148
1,358
2013
1,576
2014
129
1,705
May2015
+873
Existing
New
41
218
1,358
316
832
1,576
Source: Oliver Wyman China Shopping Mall Database
Wuhan CC Mall by Orsun
Group – opened in
November 2013
Shanghai iAPM by Sun Hung
Kai Properties – opened in
August 2013
Chengdu IFS by Wharf
Holdings – opened in
January 2014
3
SHOPPING MALLS ARE A KEY CHANNEL FOR BRANDS
The China retail landscape is changing rapidly and the online channel is growing at an
incredible pace, taking share from the traditional channels. What will be the role of shopping
malls in this future landscape? We believe it is and will remain a key channel for brands as
malls offer the best offline experience, attract young consumers and are important for
brand building.
THE BEST OFFLINE EXPERIENCE
Despite the tremendous growth of online, consumers will still be looking for an offline
experience and shopping malls are the best positioned to offer this. For many, shopping
is only one of the reasons to dwell in malls as there are plenty of dining and entertainment
options. New malls recognize this and are dedicating more space to experience over
shopping and some even go one step further to differentiate themselves from the
competition through for example offering late night shopping and dining (Shanghai iAPM) or
art exhibitions (Shanghai K11 and Beijing Parkview Green).
TYPICAL “YOUNG” DESTINATION
Shopping malls attract younger consumers than department stores as they typically offer
younger brands and more entertainment, and they not only have a cinema but also hold
popular events inside the mall. Walking into a department store and a shopping mall, you will
be able to immediately spot the difference in the type of consumers browsing around.
Exhibit 2: Occasions for going to a department store, N = 240
Cosmetics shoppingPurchasing food
Sometimes go Shopping for necessitiesApparel and shoe shoppingShoe shopping
Dining Rarely go
Apparel shoppingTaking a look
Going with familyGoing with friend
Purchasing specific brandShopping for cheap goods
Apparel shopping with family
Invited by othersGathering
For discount goods
Source: Oliver Wyman Mall Customer Survey
4
KEY BRAND BUILDING CHANNEL
Consumers see shopping malls as spacious and premium and like to go there for a taste of new
brands and new stores. Shopping malls are therefore a key channel for offline brand building
as well as customer acquisition. Brands should invest in store decoration and store execution in
malls to stand out in the heavily competed Chinese retail landscape.
Exhibit 3: Occasions for going to a shopping mall, N = 240
Shopping for mid-high end productsShopping for fashion goods
Family gatheringGoing to hypermarket
Taking children outFriend gathering
ShoppingShopping for gifts Gathering
DiningSometimes goEntertainment
Window shopping Apparel shopping
Movie
Apparel and shoe shoppingShopping for high end products
Shopping for necessities
No purposeCosmetics shopping
Relaxation
Taking a look
Source: Oliver Wyman Mall Customer Survey
5
IT IS A DIVERSE CHANNEL
VARIOUS POSITIONINGS
Malls have different positionings in terms of both customer focus and price level. Some
malls, with a fashionable brand mix and entertainment offerings are typically targeted at
young consumers, while others are more focused on families and some try to capture all
types of consumers. Most malls in China are mass malls with mainly lower end local brands
or unbranded stores being present: these malls represent ~80% of the ~1,700 existing malls.
So shopping malls are not only about luxury and masstige, but more about mainstream and
upper mass shopping. Some of these malls have the potential of being upgraded with more
premium brands in the next few years because of their location, good traffic and good mall
infrastructure. As more world class malls are being constructed and international brands are
expanding in China, more mid and high end malls will appear.
Exhibit 4: Number of malls by price level
MALL PRICE LEVEL
High end
Mid end
Masstige
Mid end-mass
Mass
BRAND EXAMPLES % OF MALLS
~1%
~3%
~3%
~14%
~79%
LOUIS VUITTON
CALVIN KLEIN
H&M
METERS/BONWE GIORDANO SEMIR BALENO
OCHIRLY LA CHAPELLE VERO MODA ONLY JNBYUNIQLO
ZARA MISS SIXTY G-STAR RAWMASSIMO
DUTTI
DONNA KARAN NEW YORK
MARC BY MARC JACOBS COACH
BURBERRY GUCCI PRADA
Source: Oliver Wyman China Shopping Mall Database
6
Exhibit 6: Average number of existing malls by city tier, November 2013
104
Tier 1 Tier 2 Tier 3 Tier 4
16
31
Source: Oliver Wyman China Shopping Mall Database
Exhibit 7: Number of newly-opened Wanda Plazas by year by city tier
4
3
15
5
8
1
2011
9
6
1
2
20092003
2 211
2007
14
7
1
6
2010
18
9
9
7
7
2
2013
23
2014F2006
12
3
2008
11
2
2012
17
5
2
8
2
Tier 2
Tier 3
Tier 4
Tier 1
Source: Oliver Wyman China Shopping Mall Database
DIFFERENT DYNAMICS ACROSS CITY TIERS
The shopping mall channel is currently concentrated on a few key cities: 40% of the existing
malls are located in the top 7 cities. Consumers in these cities are very familiar with shopping
malls and new malls are focusing on a point of differentiation versus the existing malls in order
to attract brands and consumers in this competitive landscape. Mall developers are now also
rapidly expanding in lower tier cities, which are still largely dominated by department stores
and on average only have 1–3 malls. Each new mall will bring new brands and a new shopping
experience to these lower tier cities and there is still ample room for growth.
Exhibit 5: Number of malls by city, November 2013
Shanghai 85 243158
35
75 190115Guangzhou
45 151106Beijing
63 13370Shenzhen
42834Wuhan
30
37 72Chengdu 35
4212Chongqing
Share of totalexisting%
8%
8%
12%
7%
8% 4%
5% 6%
3% 4%
3%
2%
1%
1%
Share of total underconstruction%
~40% ~30%
Underconstruction
Existing
Source: Oliver Wyman China Shopping Mall Database
7
ource: FRAGMENTED LANDSCAPE
There are more than 1,000 mall developers in China, of which the majority has only one
mall each. Wanda is the leading developer with 106 shopping malls and another 40 under
construction. CapitaLand from Singapore is the number 2 with 55 shopping malls and
another 19 under construction. Hong Kong developers like Hang Lung Properties, Sun
Hung Kai Properties, Wharf Holdings and Swire Properties operate higher end malls and are
expanding their China portfolio.
Exhibit 8: Wanda is an absolute leading developer by store expansion and will soon have over ~150 shopping malls in ~100 cities
Open Construction
Mall examplesCity coverage1
Swire Properties 74
Kerry Properties 743
2
3
HutchsonWampo 64
New World 124 8
Sun HungKai Properties 95 4
Wharf 96 3
Hang Lung 117 4
COFCO 87
SM 117 4
Beijing Hualian 117 4
Longfor 3114 17
Powerlong 2714 13
SCP 4515 30
Bailian 2119 2
ChinaResources2 6732 35
CapitaLand 7455 19
Wanda 146106 40
1
67 (98)
33 (38)
22 (>40)
7 (8)
4 (9)
5 (9)
13 (40)
6 (7)
6 (7)
12 (22)
3 (3)
2 (4)
3 (5)
3 (7)
3 (5)
3 (4)
5 (9)
NUMBER OF MALLS IN OPERATION AND UNDER DEVELOPMENT BY MAJOR DEVELOPERS, DEC 2014#
Wanda Plaza
Ra�es City, Capital Mall
Mixc, Rainbow City
Bailian
In City, One City
Times Paradise Walk
SM Mall
Times Square, IFS
Joy City
Plaza 66
IFC, ICC(APM)
Tai Koo Hui
K11
Westgate Mall, Metropolitan Plaza,Oriental Plaza
Kerry Center
BHG Mall
Powerlong City Plaza
1 Current (including developments) 2 Including 8 Leduhui malls previously under Tesco Source: Oliver Wyman China Shopping Mall Database
8
NOT ALL SHOPPING MALLS WILL BE SUCCESSFUL
OVERSUPPLY OF RETAIL SPACE
Some cities have an oversupply of retail space which may come under more pressure
due to growth of online. The impact is more significant on higher tier cities with a more
developed retail landscape. Department store growth in some higher tier cities is stagnant
and consumers are spending more and more online. In lower tier cities malls are not yet a
developed channel and there is still enough room for growth.
Exhibit 9: Shopping Mall Provision per Metropolitan Consumer, 2012 and 2015
1.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
0.5
0.0
Shen
yan
g
Wuh
an
Ch
ong
qin
g
Zh
eng
zhou
Nin
gb
o
Dal
ian
Ch
eng
du
Shan
gh
ai
Suzh
ou
Xia
men
Qin
gd
ao
Bei
jing
Xi'a
n
Wux
i
Tian
jin
Nan
jing
Ch
ang
sha
Han
gzh
ou
Gua
ng
zhou
Shen
zhen
2012
2015
SQM PER PERSON
Source: Jones Lang LaSalle
MANY MALLS IN NEW “COMMERCIAL” ZONES
Most new malls require some time for traffic to ramp up and location and accessibility are
key to estimate how traffic will develop. Many cities in China have new emerging zones
where new malls are being built and some of these areas will never become successful.
Talking to local governments about their city plans, mapping the construction of residential
buildings and metro lines will help to assess if these areas are likely to generate traffic in
the future.
POOR SKILL SET OF SOME DEVELOPERS
Many malls in China are poorly managed with an unclear positioning, a wide range of brands
and bad space allocation to brands. Unless these malls are in the key locations, they will not
survive, unless they are supported by local governments. Even international developers are
not a guarantee for success.
9
HOW TO SELECT THE WINNERS?
With such a high number of malls being built, the retail landscape in China, especially in
higher tier cities, is becoming more and more complicated. It used to be easy to select
the winning malls or department stores as there were only a few and those were heritage
malls and department stores at key locations in the city. Now, in certain cities and key
commercial areas there are already plenty of options to choose from and there is even more
under construction. Given that lease terms are mostly 3 years, it is expensive to make the
wrong choice.
FOR EXISTING MALLS • How long has the mall been open? Has there been sufficient time to ramp up?
• How strong is the traffic and how has it developed in the past years?
• Is there evidence that existing brands have reasonable sales productivity?
• Is the positioning of the mall right for my brand?
• If a new mall has opened close by, what impact has it had on this mall?
• Which changes will make the mall more or less successful in the future?
− Is the mall in the process of being upgraded? What evidence is there of potential for upgrade?
− How is the neighbourhood developing?
− Are new metro stations expected to open nearby that will improve accessibility?
− Are new malls under construction nearby that will divert traffic?
FOR NEW MALLS • Is the expected positioning of the mall coherent with my brand positioning?
• Does the mall offer any point of differentiation compared to the existing offering?
• Has the location potential?
− Is it a heritage location or is it a new commercial zone?
− Does the area have critical mass?
− What is the average income level of the neighbourhood?
• Does the developer have a good reputation?
• Are there options to liaise with other brands to create critical mass for the mall?
After having selected the right malls for your brand, it is important to negotiate favourable
terms, especially for the first years in the case of a new mall which needs a few years to ramp
up. To attract a good brand mix, owners of new malls are sometimes willing to invest in store
decoration and have revenue based rent from the start rather than a high fixed rent in the
ramp-up period; for some brands this can be as low as 6% turnover rent. Strategic contracts
with developers can also be an option for accelerated roll out of your brand, although this
typically means you also need to open a store in less successful malls. Sephora and Zara are
examples of brands that have a “partnership” with Wanda: in 2011 and 2012 half of the new
Sephora and Zara shopping malls stores were in Wanda shopping malls.
10
Exhibit 10: Number of newly-opened Sephora shopping mall stores by year by type
21
2010
6
15
2013
17
4
13
17
8
9
21
2011 2012
10
11
2009
18
1
17
2008
5
15
2007
3
20062005
1
Wanda
Other shopping
14# of newly-opened Wanda Plaza: 1817159
Source: Oliver Wyman China Shopping Mall Database
Exhibit 11: Number of newly-opened Zara shopping mall stores by year by type
# of newly-opened Wanda Plaza:2013
18
27
1
16
201217
29
14
15
201115
25
13
12
201014
22
8
14
2009
11
2008
10
2007
2
2006
1
Other shopping
Wanda
Source: Oliver Wyman China Shopping Mall Database
11
BOOM AND BUST
OUR VIEW FOR THE FUTURE OF SHOPPING MALLS IN CHINA: • As the shopping mall channel is becoming more developed and more competitive, it
will become even more important for developers to have the best location, a clear and coherent positioning, a point of differentiation, and good mall management to attract the right traffic and brands
• There will be polarization in the shopping mall channel as there will be an increasing gap between the good ones and the poor ones. The good ones are the ones that are good today, plus those that come into this group given their positioning and strong execution. The challenge for brands will be to spot the malls that will enter the group of good performers. The poor malls are the ones that are poor performing today and given the competition will only get worse
• The winners will offer a one stop experience to consumers through offering alluring mall entertainment and dedicating more space to services and experience (eg. spas, hair salons, education, recreation)
• Not all malls will survive the coming years and some of the malls that are currently under construction will never open. However, bankruptcies of mall developers will not happen overnight. Many mall developers have an attractive financial structure and also receive income from attached offices and residential buildings, allowing them to stay in business
without strong commercial traffic
Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialised expertise in strategy, operations, risk management, and organisation transformation.
In the Retail practice, we draw on unrivalled customer and strategic insight and state-of-the-art analytical techniques to deliver better results for our clients. We understand what it takes to win in retail: an obsession with serving the customer, constant dedication to better execution, and a relentless drive to improve capabilities. We believe our hands-on approach to making change happen is truly unique – and over the last 20 years, we’ve built our business by helping retailers build theirs.
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JAMES BACOS
Global Retail Practice [email protected]
+49 89 939 49 441
CHRIS BAKER
North American Retail Practice [email protected]
+1 312 345 2965
WAI-CHAN CHAN
Asian Retail Practice Co-Leader [email protected]
+852 2301 7500
CINTHIA CHEN
+852 2301 7500
IMKE WOUTERS
+852 2301 7500
WAI-CHAN CHAN
Asian Retail Practice [email protected]
+852 2301 7500
MARÍA MIRALLES CORTÉS
Iberian Retail Practice Leadermarí[email protected]
+34 615 036 406
SIRKO SIEMSSEN
European Retail Practice [email protected]
+49 89 939 49 574
FREDERIC THOMAS-DUPUIS
North American Retail Practice [email protected]
+1 514 350 7208
CONTACTS
AUTHORS
BERNARD DEMEURE
French Retail Practice [email protected]
+33 1 4502 3209
NICK HARRISON
European Retail Practice [email protected]
+44 20 7852 7773
RICHARD McKENZIE
Asian Retail Practice Co-Leader [email protected]
+86 21 8036 9320
