---
title: "Physical Retail Faces a 'Wave of Store Closures'? A Math Teacher Would Disagree"
description: "Recent reports of a 'store closure wave' in physical retail may seem alarming, but the numbers tell a different story. With annual new commercial property construction at 190 million square meters, the 600,000 square meters of closures in the first half of 2016 represent less than 0.64% of new supply, indicating that the sector is still growing."
author: "小睿"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2016-12-02"
language: "en"
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---

# Physical Retail Faces a 'Wave of Store Closures'? A Math Teacher Would Disagree

> Recent reports of a 'store closure wave' in physical retail may seem alarming, but the numbers tell a different story. With annual new commercial property construction at 190 million square meters, the 600,000 square meters of closures in the first half of 2016 represent less than 0.64% of new supply, indicating that the sector is still growing.

Recently, a message has been circulating in Xiaorui's social circle: physical stores are facing another 'wave of closures.' And there are numbers to prove it: in the first half of 2016, in the categories of department stores, shopping centers, and hypermarkets, 22 companies closed 41 stores, with a total closed area exceeding 600,000 square meters.

Looking at this number alone, it is indeed somewhat alarming. But if you place it in the context of the entire Chinese market, it is far less frightening: according to RET Realty, in recent years, the average annual construction area of commercial real estate in China is 190 million square meters. Even if calculated annually, multiplying the 600,000 square meters by 2 gives 1.2 million square meters. That is, the area closed due to bankruptcy in a year is less than 0.64% of the newly constructed area.

Can this be called a 'wave of store closures'?

According to incomplete statistics, in the first half of 2016, 174 new commercial real estate projects opened nationwide. Among them, January had the most openings with 56; February had the fewest with 5; March, April, May, and June saw 15, 25, 39, and 34 openings respectively, with more in the second half of the year. In other words, the number of physical projects that closed in half a year is roughly equivalent to the number of new projects opened in one month. China's physical retail is still on an upward trajectory, and we should not underestimate it.

**Large-Scale Store Closures? Not Yet**

To judge future trends, we first need data. The 'White Paper on the Development of China's Commercial Real Estate Service Industry' released by RET Realty this year shows that from 2007 to 2016, China's commercial real estate experienced three growth periods, and inertial growth remains the main theme for the next few years. Moreover, in the rapid urbanization process, commercial land area has maintained a year-on-year increasing trend until 2015, when it reached 225.3 million square meters, showing a slight decline for the first time. From the supply side, commercial real estate development is still in a peak supply stage, with astonishing annual increments.

At the same time, China's consumer demand is far from being fully released. The per capita shopping center area in China is only 0.2 square meters, compared to 2.2 square meters in the United States, indicating huge development potential. Shopping center sales account for 47% of total retail sales in the U.S., while in China it is only 13%. Additionally, China's savings rate is much higher than other countries. In 2014, Chinese residents' disposable income exceeded 63 trillion yuan, with total savings exceeding 30 trillion yuan, and a savings rate of 48%, higher than South Korea's 34%, Japan's 22%, and the U.S.'s 18%. The rise of the emerging middle class and the post-90s generation, with higher income levels and stronger consumption willingness, also leaves more room for imagination for the future of commerce.

Furthermore, China's urbanization level still lags far behind that of European and American countries. Every 1% increase in urbanization means 20 million people participate in urban social division of labor, creating a consumer base of 20 million, which is a huge dividend for commercial development. As of 2015, China's urbanization rate was 56.1%, while Japan's was 91.3%, so the dividend period still exists.

Looking at the development trends of shopping centers in developed countries: when per capita GDP exceeds $5,000, shopping centers experience rapid development; supermarkets and department stores are still the mainstay, but their market share begins to decline. When per capita GDP exceeds $8,000, shopping centers begin to boom. When per capita GDP exceeds $10,000, shopping centers begin to differentiate. Undoubtedly, we are in a transition period from $8,000 to $10,000.

**What Kind of Stores Are Closing?**

Although the dividend period is still present, it is undeniable that some physical retailers are indeed closing stores. Let's examine which malls are closing.

This is a record of some department store closures this year compiled by the media based on financial reports and public reports:

- August 2016: Parkson Group will close its Chongqing Wanxiang store; in the first half of the year, it had already closed two stores: Xi'an East Street and Chongqing Daping.
- June 2016: Hualian Department Store closed its Chengdu store after 22 years of operation.
- May 2016: Nanjing Isetan ceased operations.
- April 2016: Friendship Store closed its Guangzhou Nanning store.
- April 2016: Century Golden Flower closed its Yinchuan store.
- March 2016: Laiya Department Store closed its Quanzhou Zhongjun World City store.
- March 2016: Xiledi Shopping Center closed its Changsha Wanjiali Road store.
- February 2016: Moore Department Store closed its Chengdu Tianfu store.
- February 2016: Xinhua Department Store closed its Yinchuan Dongfanghong store.
- February 2016: NOVO Department Store closed its Chongqing Darongcheng store.
- February 2016: Tianhong Department Store closed its Shenzhen Shennan Junshang store.
- January 2016: New World Department Store closed its Beijing Fashion store.
- ...

We can see that department stores and supermarkets are the hardest hit by closures, which exactly conforms to the objective law observed in the commercial development of many Western countries: 'when per capita GDP exceeds $5,000, shopping centers develop rapidly, and the market share of supermarkets and department stores begins to decline.'

In terms of cities, among the 41 closed stores, 7 were in first-tier cities (17.07%), 15 in new first-tier cities (36.59%), 11 in second-tier cities (26.83%), and 8 in third-tier and below cities (19.51%). Since many first-tier and quasi-first-tier cities have already crossed the $10,000 per capita GDP threshold and entered the differentiation period for shopping centers, it is natural for a batch of stores to close. This is precisely the market mechanism at work.

The volatility in the real estate market also had an impact on physical retail in the first half of the year. The booming residential market in first- and second-tier cities in the first half of 2016 reduced developers' enthusiasm for using shopping centers to drive residential sales.

After the Shenzhen real estate bubble burst, second-tier cities like Nanjing took over, and the population continued to flow into first- and second-tier cities. As sellable resources decreased, prices soared. Third- and fourth-tier cities became the hardest hit by inventory. To boost sales and alleviate population outflow, developers' motivation to use shopping centers for inventory reduction kept escalating. Some small and medium-sized developers invested heavily to ensure shopping centers opened early, causing debt ratios to rise, which invisibly increased future operational risks.

A bigger concern is high inventory. Currently, Beijing, Shanghai, Guangzhou, Shenzhen, and Hangzhou are the only major cities where mall rents are still acceptable. Some second-tier cities, although their commercial atmosphere is far inferior to these cities, still supply a large amount of mall land. In 2015, retail projects in second-tier cities accounted for 65% of total retail project stock, and 73% of newly completed retail projects that year. Some projects have even advertised three years of free rent to attract tenants, which raises concerns about their future profitability.

As for the 'barbarian' invasion of the internet, there is no need to worry too much. The window for online transactions has passed, and physical stores, as natural traffic entrances and flow barriers, are presenting new market opportunities. In fact, many e-commerce brands and even e-commerce platforms are becoming the new 'money bags' for physical retail. Alibaba's series of investments or acquisitions in physical retailers this year is clear evidence.

**Who Is Growing?**

Compared to store closures, the commercial projects that are opening stores represent the true future of the industry.

Currently, the new increment of commercial real estate nationwide remains considerable. Over the past five years, the number of shopping centers has grown at an annual rate of 15-20%, far exceeding the growth of total retail sales; over the past seven years, the growth rate of new commercial construction has been on par with residential, with a compound annual growth rate of nearly 20%, and annual completed area exceeding 120 million square meters. A large amount of commercial space enters the stock market in the form of physical stores.

Among the many projects opened in the first half of the year, the development of large-scale high-end commercial lines in second-tier cities was a highlight. The most typical example is Wanda. In the first five months, Wanda opened only one shopping center—Chengdu Shudu Wanda Plaza. In June, Wanda Plaza openings exploded, with Wanda Plazas opening in seven cities: Jingmen, Xiangtan, Taizhou, Ziyang, Jinan, Wuhai, and Zhanjiang. According to data previously released by the Wanda Group, Wanda plans to open 50 Wanda Plazas and 2 Wanda Cultural Tourism Cities in 2016.

From a macro perspective, the shopping center opening data for the first half of 2016 basically conforms to the development path of developed countries in Europe and America. In cities with per capita GDP of $8,000, the number of shopping centers is increasing rapidly, especially with some shopping centers led by Wanda actively making early layouts; in cities with lower GDP, including most county-level cities, although many developers have entered, the number of shopping centers that can actually open is relatively small due to merchants' willingness to expand and local consumption capacity.

Since most shopping centers in China were transformed from developers, the overall concentration is poor, and operations vary. With the rapid expansion and gradual asset-light transformation of a batch of shopping centers such as Wanda and Red Star, the shopping center industry will enter an era of giants, and small, single shopping centers will face greater survival pressure.

Looking at the shopping centers that have opened, they are actively introducing various brands to enhance market appeal. In terms of business formats, the proportion of dining and children's projects is increasing, and new formats such as bookstores are being re-explored by shopping centers. Due to the strength of the RMB in previous years, cross-border commodity malls have become a new growth point for shopping centers.

This has also made the projects opening in the second half of 2016 appear more upscale. Compared to the projects opened in the first half, more foreign elements will be introduced into shopping centers, such as American elements and Japanese elements, as Chinese consumers' upgrading is having a substantial impact.

China's population is shifting from third- and fourth-tier cities to first- and second-tier cities, and from low-end consumption to mid-to-high-end consumption. This will put significant pressure on the operations of many small, low-end shopping centers. How to compete for high-quality customer traffic is the key to future development.

**From Transaction to Service**

Perhaps we can discover some deeper issues from the store closures of some physical retailers.

China's physical commercial projects are mostly built by real estate developers, who prefer to view the development of commercial projects as a transaction rather than a service. They focus on the front end of the industry chain, using major IP anchor tenants as endorsement, telling stories with hot IPs like cross-border commodities, and then launching advertising campaigns.

This easily leads to a phenomenon of a rush at opening followed by a rapid cooling. Excessive commercial resources are invested in the front end of the industry chain, leading to a top-heavy resource allocation. This is evident in daily operations: the salaries of operations staff are significantly lower than those of leasing staff; in terms of positions, operations is usually a manager-level department, while leasing is a director-level department. Because the institutional design has made the operations department a weak department within the system, it often fails to attract suitable talent, making the overall company's operational capability a chronic weakness. The operational shortfall also means weak merchant coordination and management capabilities, weak customer service capabilities, and even weaker supply chain construction, data collection, and analysis capabilities at the back end of the industry chain. The external manifestation is poor merchant performance and low foot traffic. As the saying goes, 'The tears shed during operations are the water that entered the brain during leasing and positioning.'

**Future Landscape of the Commercial Real Estate Service Market**

In fact, unlike residential projects, commercial projects should be understood as a system with complex structures and diverse functions that are interrelated and interactive. Development is a systematic control process, a coordination of complex relationships and interests among owners, merchants, and operators. It is more of a political process and should never be a simple transaction. If we can decompose the services at each stage of the entire life cycle of commercial real estate, we can develop more value.

Currently, the adjustment of physical retail is the natural law of survival of the fittest. In the long run, the market landscape will continue to change, but the upward trend has not changed. Instead of looking at the world with gray eyes, it is better to proactively adjust ourselves.

'Beside the sunken boat, a thousand sails pass; before the sick tree, ten thousand trees spring.'

-END-

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