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The risks behind jumping aboard the retail bandwagon
By Steven McCord |
December 31, 2012, Monday
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Print Edition
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AS China's developers join the retail bandwagon and complete shopping malls in greater numbers, we hear more voices of concern about shopping mall oversupply in China. A key question is: "Are some cities at greater risk of oversupply than others?"
First, we have to define what we mean by a "city." The administrative area of Suzhou, for example, has more than six million urban residents. But the contiguous urban area of Suzhou itself, ignoring all of the sub-cities, is only about two million. This is referred to as the "metropolitan population" by the Economist Intelligence Unit.
The next question is how to quantify the shopping mall space in the market. The stock figure we use is based on our own data, collected through detailed fieldwork and on-site investigation across 20 cities in China. We focus on real shopping malls above a minimum size that have their own common area and a diverse set of tenants. Freestanding department stores, hypermarkets, furniture malls and big box stores are not included.
Based on these two indicators, the highest-ranking tier two cities for shopping mall stock per metropolitan person are Shenyang, Xi'an, Ningbo and Wuhan.
However, this simple analysis does not take into account income levels. Comparing the retail stock and supply relative to the size of the addressable consumer base in a given city is a more meaningful exercise. We can roughly estimate relevant consumers by looking at the number of people earning more than a minimum level of income, in the case of China, of 30,000 yuan (US$4,800) per person a year. It is reasonable to exclude the lowest income earners, allowing us to focus on "potential" mall consumers. At this income level, discretionary spending, beyond the basics, starts to become significant.
Shenyang case
By dividing shopping mall stock by the metropolitan consumer base, we arrive at a shopping mall stock per consumer figure. Shenyang stands out as a clear outlier, exceeding all of the other 20 markets we track in China. Next in line are Chongqing, Wuhan and Zhengzhou.
Another way to look at this is metropolitan retail sales compared with shopping mall supply. The cities with the lowest amount of retail sales per square meter of shopping mall space are potentially oversupplied. Again, Xi'an, Shenyang, Wuhan and Zhengzhou top the list. But, these are all provincial capitals serving as regional economic hubs for a broad surrounding area and the key retail centers for their regions. We can get a sense of that by seeing the high percentage of provincial economy generated in these hub cities, as well as the even higher share of their province's retail sales.
Shenyang is a classic example - surrounded by small and mid-sized manufacturing and mining towns, and satellite cities that do not have the scale to support their own significant shopping malls. They provide Shenyang with essentially a 100-kilometer trade area with a population of nearly 25 million people. Therefore, we cannot immediately conclude which of these hub cities are truly over-supplied.
The same analysis can be done using a higher income cutoff of, say, 60,000 yuan per person per annum. Shenyang is still an outlier, but Chongqing and Zhengzhou are close seconds.
Finally, vacancy rate is another important indicator. Shopping mall vacancy is highest in Shenyang, Zhengzhou, and Chengdu, but this has more to do with the large percentage of stock recently completed, meaning most malls have not had much time to stabilize. Over time, as these malls stabilize, we expect the vacancy rate to trend downward.
City-level supply and demand balance is only part of the story. While it is certainly important, we would not rank it as the most important factor to a mall's success. More important are micro factors, such as the project's management, mall design, positioning relative to the immediate catchment area, tenant mix and promotional activities. What is happening in the surrounding three to five kilometer radius? Who are the residents of the trade area and what do they want in a shopping destination? We believe that every city can support a handful of very well managed shopping malls, regardless of the total level of supply in the city.
The importance of good retail asset management cannot be understated. The standards for retail asset management are still relatively low in China and an asset manager well equipped to put the right tenants in the right location has a much higher likelihood of success.
Steven McCord is director of China retail research for Jones Lang LaSalle.
First, we have to define what we mean by a "city." The administrative area of Suzhou, for example, has more than six million urban residents. But the contiguous urban area of Suzhou itself, ignoring all of the sub-cities, is only about two million. This is referred to as the "metropolitan population" by the Economist Intelligence Unit.
The next question is how to quantify the shopping mall space in the market. The stock figure we use is based on our own data, collected through detailed fieldwork and on-site investigation across 20 cities in China. We focus on real shopping malls above a minimum size that have their own common area and a diverse set of tenants. Freestanding department stores, hypermarkets, furniture malls and big box stores are not included.
Based on these two indicators, the highest-ranking tier two cities for shopping mall stock per metropolitan person are Shenyang, Xi'an, Ningbo and Wuhan.
However, this simple analysis does not take into account income levels. Comparing the retail stock and supply relative to the size of the addressable consumer base in a given city is a more meaningful exercise. We can roughly estimate relevant consumers by looking at the number of people earning more than a minimum level of income, in the case of China, of 30,000 yuan (US$4,800) per person a year. It is reasonable to exclude the lowest income earners, allowing us to focus on "potential" mall consumers. At this income level, discretionary spending, beyond the basics, starts to become significant.
Shenyang case
By dividing shopping mall stock by the metropolitan consumer base, we arrive at a shopping mall stock per consumer figure. Shenyang stands out as a clear outlier, exceeding all of the other 20 markets we track in China. Next in line are Chongqing, Wuhan and Zhengzhou.
Another way to look at this is metropolitan retail sales compared with shopping mall supply. The cities with the lowest amount of retail sales per square meter of shopping mall space are potentially oversupplied. Again, Xi'an, Shenyang, Wuhan and Zhengzhou top the list. But, these are all provincial capitals serving as regional economic hubs for a broad surrounding area and the key retail centers for their regions. We can get a sense of that by seeing the high percentage of provincial economy generated in these hub cities, as well as the even higher share of their province's retail sales.
Shenyang is a classic example - surrounded by small and mid-sized manufacturing and mining towns, and satellite cities that do not have the scale to support their own significant shopping malls. They provide Shenyang with essentially a 100-kilometer trade area with a population of nearly 25 million people. Therefore, we cannot immediately conclude which of these hub cities are truly over-supplied.
The same analysis can be done using a higher income cutoff of, say, 60,000 yuan per person per annum. Shenyang is still an outlier, but Chongqing and Zhengzhou are close seconds.
Finally, vacancy rate is another important indicator. Shopping mall vacancy is highest in Shenyang, Zhengzhou, and Chengdu, but this has more to do with the large percentage of stock recently completed, meaning most malls have not had much time to stabilize. Over time, as these malls stabilize, we expect the vacancy rate to trend downward.
City-level supply and demand balance is only part of the story. While it is certainly important, we would not rank it as the most important factor to a mall's success. More important are micro factors, such as the project's management, mall design, positioning relative to the immediate catchment area, tenant mix and promotional activities. What is happening in the surrounding three to five kilometer radius? Who are the residents of the trade area and what do they want in a shopping destination? We believe that every city can support a handful of very well managed shopping malls, regardless of the total level of supply in the city.
The importance of good retail asset management cannot be understated. The standards for retail asset management are still relatively low in China and an asset manager well equipped to put the right tenants in the right location has a much higher likelihood of success.
Steven McCord is director of China retail research for Jones Lang LaSalle.
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