While industry experts say that e-commerce can never replace the retail experience provided by shopping centers, mall operators will nevertheless need to innovate to prevent being left behind

Having a physical store in this digital age may seem like the old school thing to do, but for foreign retailers looking to break into the Chinese market, such a space is a necessity.

The mille crepes of the famous New York patisserie Lady M made their debut in China at the IFC Mall in Shanghai on Sept 3. Likewise, French high-end department store Galeries Lafayette is poised to open its second location in China in 2018. But this time around the brand will be situated in a local shopping mall in Shanghai instead of occupying an entire building.

Galeries Lafayette (China), a joint venture between Societe Anonyme des Galeries Lafayette and Hong Kong's I.T. Ltd, will take up 23,100 square meters in the new Shanghai Lujiazui mall, according to a letter of intent signed by the two parties in August.

"Opening the store inside a shopping mall will lower business costs and risks for Galeries Lafayette," said Qi Xiaozhai, head of the Shanghai Society of Commercial Economy. "But to attain success in a highly competitive shopping mall scene means it also has to find its own positioning amid the fierce competition of Shanghai's numerous shopping centers, department stores, as well as the rampant e-commerce sector, which is not easy either."

Galeries Lafayette first entered the Chinese market in 1997 but its store in Beijing shuttered about one year later. It returned to the country in 2013 with a store in Beijing's major commercial area of Xidan.

History of the retail market

The first generation of China's commercial real estate came in the form of Chinese-style department stores over two decades ago. These facilities featured a standard configuration: make-up and accessories were sold on the first floor, prom dresses on the second, women's clothing on the third, menswear on the fourth, a supermarket in the basement level and a small food and beverage area on the top floor.

Such department stores enjoyed more than a decade of rampant growth starting from the 1990s but they gradually lost their appeal as shopping malls emerged.

"Shopping malls have an advantage over department stores because they have a flexible mix of offerings such as clothes, food, education and entertainment," said Siu Wing Chu, managing director of central China for Savills China.

According to the latest report from Shanghai Business Development Research Center, the commercial complex has become an important destination for consumption, leisure activities, service, cultural and arts exhibitions. Last year, the 189 commercial complexes scattered across the city posted a combined sales revenue of 136 billion yuan ($20.86 billion), up 16.9 percent year-on-year, and the figure is expected to hit 160 billion yuan this year.

Meanwhile, the revenues at China's department stores declined from 1.01 trillion yuan in 2014 to 994 billion yuan last year. Euromonitor International forecast that the figure will further slip to 904 billion yuan by 2021.

Galeries Lafayette's new store comes as China's retail sector experiences a spurt in supply of shopping space.

According to the latest report from the Shanghai Council of Shopping Centers, 11 new commercial projects in the city became operational in the first six months of this year, adding a total of 687,000 sq m to the city's existing 13.75 million sq m.

A study conducted by international commercial real estate service firm CBRE found that there are 19.7 million sq m of retail construction in the country, nearly 60 percent of the global total. The study also found that Shanghai is the world's most active market in terms of retail centers, with 1.12 million sq m of newly completed retail space as of the end of last year.

Staying ahead of the curve

But shopping malls, just like any other retail mode, are subjected to a cycle of growth and decline. Shopping centers in Shanghai's downtown Huangpu district have experienced a 4 percent revenue decline over the past six years, according to the Shanghai Council of Shopping Centers.

"Shopping centers need to consistently innovate in line with its brand, function, position, target customers, and offer more value-added services to customers to improve their shopping experience," said Chen Tiedong, director of Colliers' East China research division.

Over the past few years, many malls have reinvented themselves to become more than just a retail space, introducing elements such as dining, entertainment, education and arts to their premises. Presently, 300,000 sq m of prime retail space in Shanghai - 12 percent of the city's total prime stock - are undergoing refurbishment in order to better attract consumers.

"The scale of refurbishment being done to malls in 2017 has never been seen before in Shanghai's retail market," said James Macdonald, head of Savills China research.

"The new life being breathed into these older developments has the chance to stimulate leasing demand in prime areas in 2018."

Fan Hongjuan, head of CBRE Eastern China advisory and transaction retail, said that society has now entered a post shopping mall era that has compelled new market players to devise innovative market strategies to attract Chinese customers.

One of these methods is to introduce a theme to the mall in order to draw customers beyond its target areas.

"Usually, consumers of a shopping mall are those who live within 3 kilometers, but the introduction of a popular theme could attract people across the city, which is a rather effective boost for business," added Chu.

Located along Huaihai Road, Central Plaza plans to introduce new flagship stores and restaurant brands to attract young and stylish customers. Meanwhile, Sun Hung Kai Properties' IFC mall, a high-end luxury shopping complex, has leveraged Virtual Reality technology to create a more interactive and entertaining mall experience for customers.

"As a matter of fact, we have already seen some eye-opening examples in other countries, such as the Dubai Mall where people can experience the exhilaration of flying the Emirates A380 plane using a cutting-edge flight simulator," said Chen.

Integrated shopping

Looking ahead, Chu suggested that traditional retailers place more emphasis on segmented marketing while expanding their multi-channel offerings.

He added that there are certain retail segments that cannot be effectively replaced by e-commerce because the latter is unable to replicate the actual shopping experience, and that the boundary between online and offline is becoming blurred as the majority of brands offer services in both forms.

"We can hardly draw a clear line between offline and online now, and that is future of all retailers," said Chu.

Fan echoed this sentiment, saying: "I've always thought that online and offline shopping can complement instead of being in conflict with one another. The changing nature of the market requires all retailers to catch up with the trends no matter if it is online or offline."

Lu Haidong from SML Centers pointed out that despite the convenience, lower prices and the wide selection of products provided by e-commerce sites, online retail ultimately lacks the human element which makes shopping fun for certain customers.

He noted that some people looking to buy luxury items would rather shop in a physical store to minimize the risk of getting a counterfeit product. Getting refunds or exchanging a purchase is also easier in a physical store.

"E-commerce helps people to buy things without stepping out of their homes. But humans are social creatures after all, and a visit to physical stores can make up for the absence of social elements," said Lu, noting that unlike Chinese shoppers, Japanese prefer physical stores over e-commerce because they enjoy the high quality of service rendered.

"In addition, shopping is not purely about buying necessities, but sometimes an activity for psychological needs."

The need to be in tune with current trends is also part of human nature. Lu said this is why shopping malls are increasingly featuring brands that are popular among young consumers.

Retail consumption in China reached 17.24 trillion yuan, up 10.4 percent year-on-year, from January to June this year, according to the National Bureau of Statistics. Data by local statistics bureaus revealed that Shanghai had during the same period overtaken Beijing for the first time to become the top city in China in terms of consumption, with retail revenue amounting to 567 billion yuan.

Brisk business

While the revenue of downtown shopping centers have been declining, malls located in suburban areas in Shanghai such as Jinshan, Jiading, Baoshan, Songjiang and Fengxian districts have in contrast posted positive growth over the past six years, according to a Shanghai Council of Shopping Centers report.

In Shanghai's suburban Jiading district, a new shopping mall has even managed to draw up to 20,000 customers daily after just a month of operations.

Launched by Taiwan-funded Sun Moon Light Center, the Jiading SML Center has 40,000 sq m of retail space, with the majority occupied by dining, retail and education businesses.

According to Lu, SML Center's deputy general manager, SML Center would be adding another 190,000 sq m of retail space to the complex in the coming three years to include more cultural and entertainment facilities.

Lu explained that the company decided to launch the shopping center because of the growing number of residents in the Jiading district where the mall is situated.

According to a recent report from the Shanghai Academy of Social Sciences, the population in areas beyond the city's outer ring road increased by 5.3 percent from a year ago. The Jiading area is presently home to more than 3 million people and it is expected to expand to 5 million in the future, added Lu.

"People are moving further and further from the city center. As such, community shopping malls are being built to tap into people's needs for shopping, dining, education, entertainment and leisure activities during the weekend," said Chen.

wang_ying@chinadaily.com.cn

(China Daily 09/08/2017 page8)