China has more online shoppers than any other country and is shortly set to overtake the US as having the world’s largest online retail sales market by total value. Yet the supply pipeline of new mega sized malls in its cities show no signs of abating. The latest research report Spotlight on China’s Retail Market 2014: Experience at the Fore in the New Retail Typology co-published by Knight Frank and Woods Bagot provides an analysis on the impact of e-commerce on traditional bricks and mortar. According to Knight Frank, shopping centres in China shows signs of oversupply but experienced operators will still have advantages over e-commerce. The gap between the performances of prime and non-prime shopping centres is expected to widen in China.
Highlights:
• International retailers’ expansion plans have been impacted by the moderated growth in overall retail sales in China. Looking back at the rollout plans of the 45 international retailers analysed by Knight Frank last year, 65% of luxury retailers missed their target number of store openings for 2013 whereas most fast-fashion retailers exceeded their expansion targets.
• On the supply side, the retail pipeline of new shopping centres continues. In 2013, a total of 68 new malls opened in 11 Tier-1 and Tier-2 cities, compared to 52 new malls in 2012. Mega malls remain a strong feature of retail landscape, particularly in Tier-2 cities.
• In 2013, the gap between rental levels in Tier-1 and Tier-2 cities has widened slightly with prime shopping centre rents in Tier-1 cities generally increasing by about 8% while those in Tier-2 cities edged down by 2%. Vacancy rates also showed divergent directions. The average vacancy rate of prime shopping centres in Tier-2 cities edged up to 10.9%.
• Meanwhile, online retailing has been growing rapidly in China. Online retail sales surged 37% year on year in 2013, accounting for around 7.4% of China’s total retail sales, up from 6.3% in 2012.
Paul Hart, Executive Director, Greater China at Knight Frank, says, “We find that many retailers missed their store opening targets last year. This can be due to a variety of factors, including the difficulty of finding good quality sites; sales were dragged by tightening government policies on anti-corruption; or a change in strategy for internal reasons. However, in broad terms, fast-fashion retailers remain one of the most active segments of the market and are increasingly forming the cornerstones of many malls.”
“Despite the rapid rise of online shopping amid the slowing growth in traditional retailing, we do not predict an abrupt demise of malls. To date, the impact on shopping centres has been felt more towards the lower end of the market with the low average spend per item online. However, if the average-item transaction figure increases significantly in the future, then more middle- and upper-tier centres are likely to feel the pressure.”
Paul continues, “Retail remains a dynamic sector in China. However, developers lacking experience, particularly with oversized centres in peripheral and poorly located areas, will increasingly find it difficult to maintain high occupancy levels and customer traffic amid the moderated growth in overall retail sales and the rapid rise in online shopping. Those shopping centres with good accessibility and that are well integrated to surrounding uses have the foundation to thrive, if they can adapt to their changing customer and tenant needs.”
Christian Wright, Senior Retail Consultant, Asia at Woods Bagot, says, “Shopping centre operators need to find new ways to engage and entertain customers. Pop-up shops, art and cultural uses and performance spaces all help to create interest and elements of surprise that encourage repeat visitation and prevent monotony. Developers will need to focus more attention on how these centres are designed and how they are managed in the future in the face of e-commerce competition.”
Thomas Lam, Director and Head of Research & Consultancy, Greater China at Knight Frank, adds, “Although shopping centres in China show signs of oversupply, experienced operators will continue to advance in the future. We see a different typology of new shopping centre emerging. Developers have been giving more weight on entertainment and food & beverage (F&B) in order to adapt to both the challenges and opportunities that e-commerce presents. Previously, the industry rule of thumb was that F&B use should occupy between 20% and 25% of the total lettable area in a shopping centre. However, this proportion is now increased to 30-35% in new shopping centres, alongside an increase in entertainment uses spurring a rapid rise in the number of cinemas, especially IMAX cinemas, across China.”
Thomas concludes, “We expect that retail sales growth in China will continue to moderate to 10% this year. The growth in luxury retail sales will slow while that in fast-fashion, mid-range fashion and F&B segments will maintain strong. Total online retail sales are expected to increase by more than 30% in 2014, accounting for 8.5% of total retail sales in China. China’s online shopping market will continue to be dominated by domestic operators. In 2014, prime shopping centre rents in Tier-1 cities are set to increase 5-10%.
Experience at the fore in the new retail typology: Spotlight on China's retail market 2014