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Oct
2015

The changing face of the retail experience in China

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The rapidly developing luxury market in China is principally driven by consumer attitudes and expectations changing at a dramatic pace, as a result of their increased exposure to the international market as they travel and shop abroad. These new expectations, have led in recent years to the entire shopping experience changing and malls becoming destinations and not just places to find luxury stores. So who are the developers leading the charge and what are they offering?  

The key players

The China Real Estate Association, China Real Estate Research Association and The China Real Estate Appraisal jointly announced their findings in the report entitled ‘Appraisal of 2014, Top 500 Real Estate Developers in China’. In the report, the top foreign developers in China were ranked, the top 10 of which come from Hong Kong and Singapore. Unlike developers from the west that focus on investment, Hong Kong and Singaporean developers bid for land and establish the buildings themselves, as they understand the Chinese way of operation better and have more advantages when communicating with the local governments. These developers were:

Duplicating the success of Hong Kong malls

The entrance of any luxury brand into a Chinese city is determined not only by its strategic plan for market expansion, but also by location and availability of space that fit the brand image and expectation in terms of footfall etc. In many cases, luxury brands have directly followed the opening of new high-end malls, however in the current market, their choices have become greater than in the past, and the developer now has to work harder to attract and secure them. Local Chinese developers have their own model of operation that differs from those from Hong Kong and Singapore that are now taking their successful international operational formats and directly replicating them here in China. The following are examples of successful duplication by Hong Kong developers.

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International Finance Square (IFS)

Original development: Harbour City
Developer: Wharf Holdings
Planned cities: Chengdu, Wuxi, Chongqing, Suzhou and Changsha

Wharf Holdings operates one of the most popular shopping destinations in the world; Harbour City in Hong Kong. In 2014, the turnover of Harbour City reached HKD 35 billion (USD 4.5 billion as per exchange rate of 31st December 2014) with HKD 5.67 billion gross revenue (USD 730 million). Its LV and Chanel stores are always no.1 globally for the brands. Wharf Holdings plans to build five duplicates of Harbour City in Chengdu, Wuxi, Chongqing, Suzhou and Changsha. Other than those in Wuxi and Suzhou, all complexes will include shopping malls, residential and office buildings. The big question is whether the duplicate copies will actually work in tier 1.5 and tier 2 cities bearing in mind the relatively less experienced consumers?

In January 2014, the first copy of Harbour City, The Chengdu International Finance Square (CD IFS), opened. With potentially a better start than might have been expected, the turnover reached 2.1 billion RMB (USD 343 million) during the first year. “This is only the first IFS. For now, it’s performing beyond our expectations” according to the CDIFS manager Siu Yau Shung.

In mirroring Harbour City, CDIFS strictly copied the original business format of 80% retail, 15% Food & Beverage and 5% entertainment, unlike the traditional ratio used in the mainland of 5:3:2. The mall also established the image and positioning of delivering the greatest number of luxury brands in the city just like that of the original Harbour City, and by bringing 90 brands that have either made their debut in mainland China or in the south-west region.

Naturally, the cooperation between CDIFS and the luxury brands originated from Harbour City and the history and long-term relationships in Hong Kong. The reputation of Wharf Holdings helped to extend relationships with the premium brands and into these new cities. The result; some premium brands’ achieved top three sales nationwide, and some even became the top store in China.

According to the CEO of Wharf, all the five IFS developments will be open by the end of 2017. There will be in total of 2 million square meters of construction area, with 24% allocated as retail space and 59% as office buildings.

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ICC (APM)

Original development: International Commerce Center (ICC), with APM as its shopping mall
Developer: Sun Hung Kai Properties.
Planned cities: Beijing, Shanghai, Nanjing, Chengdu

Other than the Beijing APM which was a renovated department store, the Shanghai iAPM and Nanjing APM are both part of the newly developed complex project called International Commerce Center(ICC). The original ICC was a 484m tall building standing in West Kowloon, Hong Kong. Surpassing the International Financial Center (IFC), the new ICC is the tallest building of Hong Kong. As the shopping mall of ICC, APM had a HKD 3.5 billion (USD 451 million as per exchange rate on 31st December 2013) turnover in 2013, with HKD 400 million (USD 51 million) in rental income. APM was built to provide an iconic shopping experience based around the concept ‘shop till midnight’ to fill in the blank of nightlife, hence the meaning of its name: the combination of am and pm. Now the same model has been duplicated in Bejing, Shanghai and Nanjing.

Although the number of high-end brands of APM is not as many as IFS, APM delivers a different shopping experience and lifestyle, still positioning itself as high-class and fashionable, which has been embraced by consumers. After an upgrade to the business format and the addition of a series of user-friendly facilities and services, it turned over 2 billion RMB (326 million USD) in 2014, achieving a daily footfall of 180,000 during the National Holiday period. The Shanghai iAPM is located in Huaihai Road, one of the oldest business circles in the city that is full of office buildings and department stores but lacked fashionable stores and food options. The opening of the development upgraded the entire business area, making this end of Huaihai Rd. a popular destination among not only working people but also youngsters. Its turnover reached approximately 1.2 billion RMB (196 million USD) last year.

A further ICC will be developed by Sun Hung Kai in cooperation with another two of Hong Kong’s biggest developers: Wharf Holdings and Henderson Land Development. A new phenomenon whereby rival developers cooperate in building one project together, to reduce the risk associated with the uncertainty of the Chinese real estate market.

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K11

Original development: K11 Hong Kong
Developer: New World Develpment Company Limited
Planned cities: In total 19 cities, so far cities announced are Beijing, Shenyang, Wuhan, Guangzhou, Hainan, Tianjin, Qingdao, Guiyang.

The Shanghai K11 was regarded as a ‘dark horse’ in China’s shopping mall landscape. Covering a mere 35,500 m2, K11 has so far outshined others by providing a unique art-focused shopping experience. In 2014, it even exhibited masterpieces of Monet, causing the footfall to peak to 1,000,000 during the four-month exhibition doubling and even tripling, the first floor rent.

The original Hong Kong K11 was renovated from an ordinary shopping mall in 2009. In the first year after renovation, it tripled the turnover of the previous one. This 38,000 m2 shopping mall successfully integrated art, humanity and nature into the retail environment and became a destination that differentiated itself from most of the malls in Hong Kong that purely provide space for retail business.

In 2013, taking similar space in the New World Tower on Huaihai Rd. Shanghai, the heir of New World Group opened the second K11. Being the neighbour of landmark luxury stores and department stores, Shanghai K11 reformed people’s understanding of the shopping experience and how art can be used in commercial space. The CEO of the group regards K11 as a ‘shopping museum’.

Innovation in malls is not only driven by greater like-for-like competition, and the fact that online shopping is taking a greater share of the consumers cash leading to the only real solution for mall operators which is to provide a unique and differentiated shopping experience.

On the increasingly brutal retail battle ground of mainland China, these three developers clearly differentiate themselves from others and generate consumer interest to visit and shop. The business models that work in Hong Kong also appear to work in Mainland Chinese cities. Their precise positioning and utilization of their relationships with brands back in Hong Kong also add up their attractiveness as a destination amongst the array of malls bidding for the business of luxury brands. As importantly, they can become a measure of wealth of the local consumers as can be seen by looking at the luxury-car-showroom-like parking space below.

These Hong Kong developers’ are not however, immune to the common problem of Mainland Chinese consumers purchasing overseas, having been the biggest issue for luxury brands to solve for the last few years. It’s just that Hong Kong developers appear to understand well the importance an attractive destination to consumers and that it is all about the retail experience. And so they continue to maintain and perfect it.


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