China is quickly finding itself in uncharted retail territory, with a huge influx of new shopping malls coinciding with the fast adoption of e-commerce by its rapidly-expanding consumer class. Competition is leading to mounting pressure for shopping malls to differentiate. Developers are looking to the rest of the world for solutions, but are finding that they will need to tread a new path. China's retail sector will be blazing its own unique trail as bricks-and-mortar facilities grow in tandem with omni-channel and experiential retailing.
The fundamentals supporting the China60 retail market remain compelling, underpinned by probably the most significant expansion of middle-class population in history. The China60 combined has an urban population of close to 300 million people, larger than the entire population living in U.S. cities. The 'addressable' consumer base for modern shopping malls in the China60 - i.e. those households earning over RMB 30,000 per annum (circa US$5,000) – currently stands at nearly 130 million, which is almost double the level of 2011. China60 consumer class is projected to increase by 70% to 220 million by 2020.
While national retail sales growth has slowed to more sustainable single-digit rates, the China60 cities continue to offer some of the world's most dynamic retail environments. The sector is evolving at an incredible speed as consumer habits change and organised retailing undergoes radical structural shifts. Shopping mall retailing has maintained its expansion across the China60 and while top-tier cities are moving into their third generation of malls, in many lower-tier cities 'mall shopping' is still a new concept.
China60 consumers are now more discerning and price-sensitive. Crucially, they also have taken to online shopping at a far faster pace than expected. Consumers are now travelling abroad in significant numbers and have become accustomed to higher levels of service and richer in-store experiences, and their expectations of retail offerings back in China have risen accordingly.
Omni-channel retailing (whereby retailers provide consumers with goods and services across multiple online and offline sales channels) will become a major force in the China60, and will fundamentally change the shape of bricks-and-mortar retailing across all formats and geographies. Traditional bricks-and-mortar retailers are fighting back - embarking on e-commerce strategies and seeking to improve in-store service.
Strong double-digit retail sales growth (over the period 2005-2012) has prompted a huge programme of mall development across the China60. Developers have often turned to retail as a panacea to boost the profile of their mixed-use developments, stimulate residential sales and generate long-term revenue streams.
Inland Tier 1.5 cities with substantial regional population catchments have seen the largest growth in shopping malls since 2011, notably
Chengdu, Wuhan, Xi'an, Shenyang and
Chongqing. This new supply is designed to tap the deep consumer base and inflow of customers across a wide geographic area. Further growth in mall space is on the cards, with Tier 1.5 cities having the potential to expand their stock by another 60% over the next three years. However, rising market saturation will lead to greater caution by developers and will curtail some development. We are likely to see a sharp slowdown during 2015 to single-digit annual stock growth.
With the shopping mall stock in the China60 almost doubling over the past three years, oversupply risk has become a feature of Tier 1.5 cities as they build out their modern retail infrastructure. Nonetheless, there remains an undersupply of high-quality malls, with only 10%-15% of the existing stock estimated to be of international standard.
In the increasingly competitive landscape of ever more shopping malls, the 'winners will take all' as retailers focus on expansion in existing high-performance properties and a select group of high-potential new properties. In spite of large shopping mall stocks in Tier 1.5 cities, successful 'third generation' malls are continually leveraging their good positioning, tenant mixes and layouts to consolidate their positions as citywide destinations as well as to achieve high levels of sales productivity.
Several factors are contributing to the more cautious sentiment among the top luxury houses in China. Anti-corruption/anti-extravagance measures put in place since 2013 to curtail use of public funds for gifting purposes have cut sharply into luxury goods' sales. Furthermore, slower growth in the private sector and in the number of newly affluent households has arguably reduced the growth of funds available for high-priced goods.
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