12 September 2012
According to the Economist Intelligence Unit, the retail sales in China is predicted to constitute 53% of the total in Asia Pacific in 2012, representing an increase from 43% in 2008. Based on the information by National Bureau of Statistics of China, the retail sales value of consumer goods in China increased robustly by 430% from RMB 3,415 billion in 2000 to RMB 18,091 billion in 2011, and the year-on-year growth has been keeping at a double-digit level over the past 8 years. The prosperous retail market of China is undeniable, but industry players looking to grab a piece of this lucrative market should be aware of the challenges, uniqueness and potential of the country beforehand.
China’s second-tier cities catching up
As expected, the first-tier cities - Beijing, Shanghai, Shenzhen and Guangzhou, which lead in city size, household earnings and population size, etc., see the highest number of luxury retail outlets, compared to the other cities in China. However, according to Colliers International’s latest white paper “Unlocking China’s Retail Potential”, a few second-tier cities including Xian, Shenyang, Harbin and Changchun recorded a higher number of luxury retail outlets per RMB 100 billion than Guangzhou, while Shenzhen, Beijing and Shanghai remains to top the country with a ratio between 42 and 49. This interesting finding signifies the huge potential for second-tier cities to catch up.
Catalyst of China High-speed Railway (CRH)
As of mid-2012, CRH consists of 4 north-south and 4 east-west lines, covering 22 cities in total. The network reduces travelling time between cities significantly. For example, “Shanghai – Wuhan - Chengdu” CRH Line shortens the commuting time between Shanghai (one of the four first-tier cities) and Nanjing (a second-tier city) from 80 to 50 minutes.
Currently, connection to another 14 cities is underway. Upon the full completion by 2017, it will comprise over 26,000 km of railway lines, representing more than 70% of the world’s total. “With the more established and convenient CRH network in pipeline, areas which were regarded in the past as remote will see more potential, which eventually brings China’s retail sales growth to a much more extensive scale,” said Simon Lam, Executive Director of China Retail Services at Colliers International Guangzhou.
Location, Location, Location
“Location, Location, Location” is the rule of thumb for success that is widely talked about in the retail industry. Many new coming retailers opt to test waters by opening their first outlets in a first-tier city, where retail sales are highly concentrated and most consumers are willing to try and accept new products and services from overseas. However, retailers need to pay real estate costs at about 30 – 50% premium over those in second-tier cities. Besides, retail sales in second-tier cities growing much faster than the first-tier ones by approximately four to five percentage points, which often cause retailers to make a difficult decision between first- and second-tier cities for their expansion in China.
“In order to have a better chance of winning market share and enhancing their bottom line, retailers can consider planning and opening outlets simultaneously in both first- and second-tier cities,” advised Lam. “Instead of focusing merely on first-tier cities where rents are high, it makes more dollar sense to open shops in second-tier cities.”
Lam added, “Opening first outlet in a first-tier city will undoubtedly enhance a retailer’s profile. This helps the brand generate greater bargaining power to negotiate a more favourable deal elsewhere, including second-tier cities. Furthermore, due to acute competitive retail market in China, retailers waiting for a too long time to see whether the first shop is successful may lose opportunity to their rivals.”
After identifying a city, it is essential for retailers to choose appropriate premises for their shops. Retailers will need to consider a number of major factors, which are equally important – or even more important – than securing the best spot in a particular retail development. For example, the aspects that retailers should pay attention include the premises’ management and operational capability, tenant mix and differentiation from competing properties.
Overseas retailers see their advantage in the China market as many Chinese consumers demonstrate their preference on international brands over local ones. However, overseas retailers should address to differences between China’s and western countries’ markets as well as amongst different parts within China, for example, infrastructure availability varying from different China districts at different stages of development, differences in preference, culture, tradition, weather and temperature amongst different regions within China and compared to the other countries, etc.
In view of unique features amongst different cities within China, the following discusses sample challenges in a few markets across the northern and southern region of the country:
Sherman Yeung, Executive Director of China Retail Services at Colliers International, said, “The spending power of Beijing, the country’s biggest luxury market, cannot be understated. Amidst the limited supply and high concentration of quality retail projects, occupational demand exceeds supply, which pushes rental rate to increase dramatically. This generates one of the most substantial challenges for retailers. In addition, as the capital and political center of China, Beijing is more easily to be influenced by the government policy than any other cities. Besides, a more traditional culture affects people’s consumption preference. The locals are more family oriented and less acceptable for trendsetting consumption. Thus, these factors make Beijing’s retail market less familiar for overseas retailers and extensive market research before launch is essential for entering the market.
More than 90% of the international brands choose Shanghai, where sees a culture of East meets West, as their first station in China. The rise of the Pudong financial center provides a more diversified selection of retail premises other than those existing in the commercial districts on Nanjing Road and Huaihai Road. The Pudong IFC shopping center is one of the recent successful examples in Lujiazui district. It houses flagship stores of over 100 luxury brands, representing one of the most substantial luxury-shopping destinations in China. Annie Houn, Colliers International’s Director of Retail Services of East China, believed that continued introduction of new international brands would be crucial for further growth of retail premises’ developers and keeping the leading position of Shanghai’s retail market.
Since the 2010 Asian Olympic Games, Guangzhou’s retail development sees gradual transition from traditional department stores into one-stop destinations combining shopping, leisure and entertainment elements. In the past two years, Guangzhou has opened nearly 20 shopping malls. They have given consumers a new shopping concept and altered their spending habits, which cause retailers prefer to the new retail premises. “There will be at least 800,000 square meters of new projects in Guangzhou over the next year, which will attract even more brand names to the market. The emerging Pearl District, Baiyun District and Panyu District will become the new destinations for international brands,” explained Simon Lam, Executive Director of China Retail Services, Colliers International.
As an international metropolitan, Hong Kong’s consumption concept and the ability to accept cutting-edge ideas are highly similar to other Western cities. Hong Kong has always been the trendsetting centre for mainland China cities, thus retailers having their shops in Hong Kong are more likely to be accepted by mainland consumers. Helen Mak, Senior Director of Retail Services at Colliers International Hong Kong, expressed that many international brands tend to open their flagship stores in Hong Kong to test waters before entering China. “Retailers recognises the benefit of brand awareness and the potential for high profit, so they are interested in opening flagship stores in the core shopping districts of Hong Kong, such as Central, Causeway Bay, Tsim Sha Tsui and Mong Kok, despite the high rental rates,” said Mak.