Inside China: retailing’s new powerhouse
Shanghai might be inside China – but the modern, affluent, westernised city with its glitzy architecture, expensive cars and countless luxury retailers is not the real China.
China is a tale of two economies: the fast, flashy city, and the hinterland where the majority of people remain relatively poor and eke out an existence waiting for their inevitable migration to the cities.
Which explains why you can walk around a gleaming new mall packed with expensive brands like Burberry, Louis Vuitton, Gucci, Prada, Tory Burch, or Dunhill in a nation with 1.35 billion inhabitants that is almost bereft of people.
You can almost hear the commentators – expats working in real estate, distribution, retailing, and locals – whispering in your ear, “be patient, they’re coming”. Because they are.
As Austrade trade commissioner, Brent Moore, told participants on the Westfield Asian Express Retail Study Tour, one in two Chinese will be classified as “middle class” by 2020,
and two years later, 320 million people will have an annual income exceeding US$20,000.
That’s the main reason China will ensure a long term, lucrative market for western retailers prepared to take on the complex challenge of establishing a brand and retail network in the world’s greatest trading nation and second largest economy.
The other is an unquenchable thirst for consumer technology and constant connectivity.
Facebook and Twitter may be banned by China’s government, but that has not prevented an insatiable thirst among Chinese for social media interaction.
Where young and middle aged westerners might check their Facebook timeline several times a day, most young, wired Chinese remain connected 24-seven to the Chinese alternative, WeChat, a simple mobile phone app which matches, markets, shares, and promotes individuals and companies around the clock.
The Chinese shop online en masse; more and more of them each day.
“In China, retail may be 10 years behind, but the Chinese consumer is 10 years ahead,” one presenter put it.
China by numbers
The numbers that tell China’s story never fail to fuel awe. China already represents a consumer market as big as Europe, with retail sales of more than US$1 trillion annually, according to figures from JLL.
Consumer incomes have been rising 14 per cent annually for the last 20 years. Where in the past Chinese saved money to create a future for their children, they are now spending more on themselves.
Products of a one child family, they are content to have just one child of their own, despite restrictions being eased in some areas as China wakes up to the fact it faces a declining population in the decades ahead.
“The [middle class] market is becoming more sophisticated, more travelled,” explains Rebecca Tibbott, head of retail leasing for eastern China with JLL in Shanghai.
“China always used to be a department store market. It was fashion heavy and suited older consumers, was typically state-owned, and sold from concessions. Now we are in the shopping mall era. Modern middle class Chinese want a more diverse shopping experience,” says Tibbott.
They’re also spending more, explains Andrew Wyles Waters, chairman of China Retail Group, an Australian who has spent 20 years in China.
“The Chinese are transforming from savers to spenders. They are no longer saving for their families,” says Waters.
A credit card industry is beginning to emerge and nearly everyone now has an ATM debit card which works through the local cash clearing network, UnionPay.
“This sums up the Chinese consumer: All I want is everything,” he says.
Back in 2001 there were just 50 shopping centres in the whole of China. By the end of this year there will be about 850, with 165 new malls opened in 2014 alone.
JLL’s definition of a shopping centre is a mall with more than 30,000sqm in floor area; it excludes hypermarkets with adjacent retail tenancies, which the International Council of Shopping Centres includes in its figures, which are thus even higher.
Tomorrow’s shopper will evolve even further, Tibbott predicts: Lifestyle centres will be the main draw cards, with people going to a destination for a day rather than a department store anchored mall.
They will see food, KTV, enjoy an experience in a historic building or entertainment drawcard like Legoland or Madam Tussauds. This trend will turn into a vital protection for retailers from the growing trend to shop online.
Shopping centres now dominate the retail markets of all four ‘tier one’ cities: Guangzhou (90 per cent of retail space), Shenzhen (88 per cent), Shanghai (79 per cent) and Beijing, (lagging, as in most metrics, at 67 per cent).
Such an explosion in malls has created a huge opportunity for foreign brands, as there aren’t enough established retailers and brands in China to fill the space. It’s also changed the mindset of landlords who once focused on luxury brands and now chase more moderate players.
With 61 stores, Gucci sits at the top of the luxury brand ladder in network size, but its market share fell marginally last year, suggesting there is probably little room for growth ahead in the short term.
Observes Waters: “Some people will say luxury is slowing down. The general luxury like Gucci might be, but the bespoke, super luxury, exclusive retailers are doing very well.”
Tibbott says affordable luxury is where the most growth is now – think Tory Burch, Kate Spade, Coach, and Michael Kors. There is growing demand for mid-market brands cashing in on the rapid rise of the middle class – Zara, H&M, F21, Uniqlo, Mango, Gap, Muji, and now Old Navy.
The list of newcomers to China’s retail market in the last year or so is long and distinguished, including Superdry, Jack Wills, Innisfree, NBA, Chipotle, Gordon Ramsay, Hamleys, Pret A Manger, Victoria’s Secret, House of Fraser, Abercrombie & Fitch, Fortnum & Mason, Legoland, and Jamie’s Italian.
Waters says Chinese shoppers are not only aware of brands, they are very aware of country of origin, often making irrational purchasing decisions as a result.
“Australia might be good for lifestyle and Italians are good at shoes. You could have the worst pair of shoes from Italy and they’ll pay for them, but if the best pair of shoes comes from Australia, you’d have to discount them.”
It’s a big mistake to think Shanghai and Beijing is China, warns Mark Schaub, partner in legal firm King & Wood Mallesons. There are more than 150 cities in China with a population exceeding 1 million.
Another speaker pointed out that while Shanghainese may have the highest income levels in the country, they also have the highest costs. Some smaller cities may offer more opportunity, because while their income is lower, so are their costs, and net disposable income may be considerably higher.
“There is a huge customer base in second and third tier markets, lower costs for leases and employees, and less competition from other retailers,” says Schaub.
“It’s easier to build brand awareness and you’ll likely get preferential treatment from local authorities.”
Nevertheless, most foreign brands entering China usually start in Shanghai, with its wealthy and fashionable population and huge domestic tourist throughput.
Shanghai has the same population as Australia, English is commonplace, and it’s culturally less intimidating for new arrivals.
“Shanghai is becoming more and more cosmopolitan,” explains Tibbott. “When I first arrived here I ordered my coffee in Chinese. Now I order it in English.”
JLL figures show the city has an overall retail vacancy rate of just 7.2 per cent, which gives tenants little room to negotiate on lease rates.
City wide, ground floor retail space costs around A$9.70 a day per square metre, up 1.4 per cent in just the last quarter. Overall, the rate is $2.60/sqm/day.
Despite an element of doom and gloom relating to the Chinese market overall (some commentators are spooked by the economic growth rate falling to seven per cent; most recognise historic rates of 11 to 12 per cent were unsustainable), Shanghai’s economy is sound. The average per capita disposable income in the city last year was A$8215, up 9.1 per cent, and retail sales are keeping track, up 8.6 per cent.
There are 22 shopping malls in Shanghai, with more under construction and even more in planning, yet there is still a six to nine month wait to open a new store.
Nevertheless, new shopping malls are taking a little bit longer to take off.
“We used to say one to two years until [retailers achieved] good traffic and good sales, but now we’re saying more like two to three years,“ says Tibbott.
This is the first in a series of features in coming weeks on China, Hong Kong, Macau and Singapore, as Robert Stockdill reports on the Westfield Asia Express Retail Study Tour. For information on future study tours, visit www.retailstudytour.com