BEIJING - It’s three o’clock on a sunny Saturday afternoon in December, and
Beijing’s Pacific Century Place department store is all but deserted. Bored
sales clerks in the cosmetics section give each other makeovers as a few
shoppers wander by on their way to the basement supermarket. Despite the glitzy
decorations and pre-Christmas sales promotions, it looks as if the store’s
hefty prices are just not right for most of the capital’s shoppers.
In the lengthy run-up to 2008 Olympics in August, retail development has become
a competitive sport in China’s urban centers, with Chinese consumers acquiring
a taste for Western-style superstores and exclusive, big-name brands. Eager to
cash
in on the perceived spending spree, developers have been rushing to construct
outsized shopping emporiums - China now has over 400 malls and large scale
retail spaces, with more than 20 currently under construction in Beijing alone.
Unfortunately for some developers, it seems as though the growth in
construction may have outpaced growth in disposable income. While many Chinese
love to visit luxury local malls with their feel-good finery, fewer are willing
to hand over the large sums of cash necessary to keep them in profit. Jillian
Chen, a Beijing office worker browsing in Pacific Century Place, comments, "I
like to visit malls like this one, but unless there are big sales I usually
can’t afford to do more than window shop."
While Prada boutiques and Tissot displays are seemingly de rigueur for
many Chinese malls looking to display their stylish credentials, focusing on
the wealthy elite may have effectively alienated them from the country’s massed
ranks of aspiring middle-income families. Vanity may be their undoing.
David Hand, managing director of the Beijing office of Jones Lang La LaSalle,
one of the world’s largest commercial real estate service companies, comments,
"In my view only 10% or 20% of China’s malls will realize their true profit
potential. Poor management, poor location, poor design, poor choice of tenants
and the fact that these places are just too big and too pricey are all
contributing factors. As the market becomes increasingly saturated the
underperformers will naturally find themselves squeezed out."
Malls built outside the downtown areas of major cities could have trouble
surviving, said Steven Beesley, co-founder of the Institute of Shopping Center
Management in Hong Kong.
"Many urban residents, especially the older generations, still like to shop
locally and simply can’t afford mall prices,'' he said. "Upwardly mobile
younger Chinese are visiting these megastores, but it’s doubtful they’re
spending enough to support the construction boom."
Despite all the hype about increased spending, on average Chinese consumers
still save about half of their income - after deducting basic living expenses,
there’s little left to splash out on a Louis Vuitton handbag or French
Connection sweater. According to government data reported by Forbes, the per
capita disposable income of China’s urban residents jumped 19.5% in the
first-quarter of 2007, but is still only 3,935 yuan (US$550). A recent report
by Morgan Stanley found that consumption in China is still only 35% of gross
domestic product, about half the rate in the US.
Since 1978, the retail sector in China has undergone radical change. Store
ownership has diversified considerably, increasing numbers of foreign retailers
have been allowed to enter the country, and many retail formats developed in
Western economies have been introduced. The total opening up of the Chinese
retail sector in January 2005, as agreed with the WTO, gave fresh impetus to
the boom, and has driven up demand for properties in both Beijing’s core and
non-core shopping areas.
Considering the escalating figures it’s easy to identify the main drivers of
China’s great mall frenzy. The growing Chinese middle class now numbers over
100 million, with household incomes in this bracket increasing annually by 12%
to 15%. The proportion of urban dwellers in China has grown from less than 20%
in 1980 to over 40% today and will reach 60% by 2030. Last year, Chinese
consumers spent 8.9 trillion yuan (US$1.2 trillion), a 13.7% year-on-year
increase.
In the face of these increases, however, a growing number of analysts are
concerned that the ongoing surge in mall building will flood the market and
drive down profit to unsustainable levels. Wang Yao, the deputy secretary
general of the China Industrial Association, recently told a retail forum in
Shanghai that China’s mall development urgently needs better control. "China
has too many shopping malls at the development phase," he said in remarks
published last autumn. "There will be more and more dead malls if no efforts
are made to improve management."
According to a report last summer by McKinsey & Co, many Chinese retailers
have a limited understanding of how consumers shop, and as a result many malls
are failing to fulfill their potential. Despite record sales in 2007, China’s
retailers earn an average profit of around 1%, compared to 3% to 5% in the
West.
In the hope of surviving the inevitable squeeze, some market-savvy developers
are now constructing so-called "mixed-use centers" - projects that combine
retail, dining, entertainment and residential living units, such as the
upcoming Yueda Xinyi Time Mall in Shanghai and Sanlitun SOHO in Beijing. They
are also restructuring their retail side, focusing more on housing shops that
sell affordable products, and less on glamorous high-end brands that still
remain out of reach for the majority of Chinese consumers.
Richard Wang is executive general manager at Gulfland Property Development, who
is responsible for construction of "The Gate", a 120,000-square-meter mixed
development in the so-called "West CBD" area of Zhongguancun, in northwest
Beijing, recognised as a technology hub of China. He comments, "We wanted to
create a destination attractive to everyone, not just a building for the
wealthy minority. All the tenants in our retail space were carefully chosen to
reflect the brand-conscious and lifestyle-oriented nature of our target
consumers."
After China’s post-Olympic glow fades away and market forces really start to
bite, it’s likely that the trend away from high-end store-dominated malls will
gather increasing momentum - those developers who continue to ignore China’s
middle-class shoppers do so at their own peril.
Josh Adams is a freelance writer and photographer who has lived in
Beijing for the last two years.
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