Many shopping malls, after reaching saturation in first- and second-tier cities, are moving to lower-tier markets, believing there is still huge consumer demand.
01 The 'Decline' of Traditional Shopping Malls
Among Beijing's many core business districts, Xidan is arguably the most representative. It borders Chang'an Avenue to the south and is adjacent to Beijing's CBD financial district to the west, giving it significant locational and crowd-gathering advantages. Here, Xidan Department Store, which for years ranked first in sales among Beijing retailers, now only retains the label of a 'landmark building.' Abandoned by consumers, the interior of Xidan Department Store is extremely desolate, filled with outdated brands, with many brands pulling out and a high vacancy rate. As a result, it was forced to start renovations in March this year, with the 'new' Xidan Department Store expected to reopen at the end of next year or the year after. The situation at Xidan Department Store is not unique in the department store industry, which is already showing signs of aging. In recent years, the transformation of traditional department stores has faced a 'major test.' The renovation of Xidan Department Store is just a microcosm of the plight of traditional department stores, with many shopping centers repeatedly reporting closures or directly 'cutting losses' by shutting down, directly reflecting a widespread survival crisis.
Beichen Shopping Center's Asian Games Village store, the largest and most profitable shopping center in northern Beijing, closed in 2018. It once had annual revenues of up to 1.2 billion yuan, but its performance began to decline in 2012, and by 2017, the vast shopping center's revenue for half a year was only over 80 million yuan. The demise of Beichen Shopping Center is lamentable, but it was just the beginning of the decline of Beijing's old core business districts. In 2020, Scitech Shopping Center on Chang'an Avenue announced closure for renovation. This mall, also with decades of history, became a memory for a generation. In the past, 'I bought this at Scitech' was a label, a symbol of a consumption style. In recent years, the number of closed shopping centers has been countless. Wangfujing Department Store in Guangzhou, which operated for 25 years, closed; Modern Department Store (formerly Haizhu Shopping Center), which operated for 15 years, closed; in the first half of this year, old shopping centers accelerated their demise, with New World Department Store in Chengdu closing after 16 years; and Luohe Kaiyuan Dawailai Shopping Center will officially close on November 15, 2022. Even Wu Xiaobo, in his 2021 'Forecast' year-end speech, declared that shopping centers are about to die. He supported this view from two aspects: First, why do young people in their 80s and 90s go to shopping centers? Research found that 81% go for dining, 75% for parent-child activities, 42% to meet friends, 35% to watch movies, 33% for fitness, 20% say they don't know why, just to check in, 19% for shopping, and 9% for exhibitions or lectures. Second, traditional shopping centers are monotonous. The first floor is for gold and jewelry, mobile phones, and cosmetics; the second floor for men's and women's clothing; the third floor for children and sports; the fourth floor for dining and cinemas; and the basement for supermarkets. Most shopping centers have similar layouts, which hardly meet current consumption changes. Few consumers go to shopping centers to shop or browse; they go to buy a specific item they've already decided on, rather than treating the mall as a destination. At the same time, the homogeneity of shopping centers, the sameness of malls, and the inability to update content to keep up with consumer demand mean they lack outstanding advantages and competitiveness.
02 High Vacancy Rates
In recent days, several news items have been startling: In August 2022, shopping centers in Shanghai were in crisis, with many unable to operate. Super Giant Shopping Center in Lujiazui, Pudong, in a prime location, had a vacancy rate of 34%. Shimao Plaza on East Nanjing Road, in the top bustling business district, had a vacancy rate of 22.4%, and Baoshan Sun Moon Light Plaza ranked third with a vacancy rate of 16.4%. As the most economically vibrant city, Shanghai's overall mall vacancy rate rose to 14.1% in the first half of this year, with a large number of shops idle. If Shanghai's malls are in such a state, one can imagine the dire situation in other cities.
The surge in vacancy rates quickly reflects in the occupancy rates reported in parent companies' financial reports. According to Longfor Group's 2022 interim report, among the 45 Paradise Walk malls nationwide where occupancy rates could be compared with the same period last year, 37 saw a decline. Although the decline was limited, the trend is evident. Wanda Plaza, which has spread across the country, is also the same. There are posts revealing that the vacancy rate of Wanda street shops in Wuhan has reached 70%. Guilin Gaoxin Wanda also officially stated that the vacancy rate is about 20% and is actively attracting investment.
According to NetEase News, in the first half of 2022, the average vacancy rate in 12 key cities nationwide was 13.4%, an increase of 22.9% quarter-on-quarter, while the open-to-close ratio fell to 0.86 (about 6,400 openings and 7,400 closures), far below the 1.21 in the first half of 2021 and 1.43 in the second half (the smaller the ratio, the more closures relative to openings). Specifically, the average vacancy rate in Suzhou's city-level business districts was as high as 29.7%, ranking first among the 12 key cities; the open-to-close ratio also plummeted from 2.14 to 0.7, with more and more closures. Vacancy rate is a quantitative reflection of a city's commercial fundamentals. The open-to-close ratio reflects the entry and exit of brands in various malls.
There are four main reasons for high vacancy rates in shopping centers: First, oversupply. A large number of commercial complexes have been developed, and the overall market is saturated, especially in first- and second-tier cities, where supply is excessive. Shopping center clusters within a few kilometers compete for limited foot traffic. Second, commercial planning is monotonous, with nearly identical brand layouts, as one mall after another occupies residents' consumption areas. When new consumer brands emerged, such as tea drinks, dining, or bakeries, shopping centers briefly saw queues, but over time, brand appeal weakened, and consumers no longer flocked. Malls still fail to provide differentiated consumption experiences and innovation, so they naturally cannot attract customers. Third, a large number of international fast-fashion brands have withdrawn from China. Brands like ZARA and H&M typically occupy prime locations, such as the first floor, which best defines a mall's character. After their mass exit, no brands have been found to take over. A person in charge of a commercial complex told Lingshou that the brands entering malls are of two types: one is 'traffic-driven,' usually placed in the best locations to attract crowds; the other is 'rent-driven,' which are the 'big contributors' to mall revenue, such as beauty, gold stores, and well-known clothing brands, which have high premiums and profits and can afford high rents. But the current high vacancy rate is also because brands cannot accept the high rental costs of shopping centers, and foot traffic is not large, with new consumer brands not focusing on offline mall channels. Fourth, there are macroeconomic factors. With repeated epidemics, the economy is in a downturn, especially unemployment. Relevant data shows that in April-May this year, youth unemployment was above 18%, greatly affecting residents' income. The main target customers of shopping centers are precisely this group, and employment issues trigger a series of consumption and social problems.
03 Going Down to Lower-Tier Cities?
Perhaps the conclusion that 'shopping centers are about to die' is too hasty; it needs a premise: old shopping centers that have not followed consumer changes are about to 'disappear.' Because opposite Xidan Department Store is still one of the gathering places for young shoppers. A long pedestrian bridge connects two products of different eras on the century-old Xidan commercial street: on one side is the 92-year-old Xidan Department Store, and on the other is the 15-year-old Xidan Joy City, facing each other across the street. Another mall in the same Xidan business district, Hanguang Department Store, has also experienced e-commerce impact, homogeneous competition, and rents near the warning line, but after actively adding experiential consumption and introducing light luxury brands, Hanguang has seen a significant increase in sales in the past two years.
According to statistics, in 2021, the total sales of the 'store king' malls under 52 retail enterprises nationwide exceeded 300 billion yuan, with 35 malls achieving double-digit growth. Beijing SKP, Beijing Guomao Mall, and Nanjing Deji Plaza each had annual sales exceeding 20 billion yuan, with Beijing SKP ranking first with nearly 24 billion yuan in sales.
'Out with the old, in with the new' is an eternal business rule; the alternation of old and new is what brings life to stagnant water. Data shows that in 2022, Shanghai is expected to open 37 new shopping centers; Beijing has opened or will open 17 shopping centers of various sizes in the second half of this year; Suzhou has opened or will open 16 in the second half of 2022; and Hangzhou, under the halo of the Asian Games, plans to open 8 shopping centers. In the second half of this year, more than 280 shopping centers will open nationwide. At the end of October, Wuhan Mengshi Times Square, with a total investment of 12 billion yuan, a construction area of about 800,000 square meters, and the largest mall in the world, is expected to open its doors.
Shopping centers seem to be gradually recovering. The above-mentioned industry insider told Lingshou that despite weak consumption, so many shopping centers are opening intensively. One reason is that many projects were delayed due to the epidemic, and as social and economic order recovers, commercial real estate is slowly warming up, so they are concentrated in this period. Additionally, many shopping centers, after reaching saturation in first- and second-tier cities, are moving to lower-tier markets, believing there is still huge consumer demand. However, the question is: do lower-tier markets need so many shopping centers? Now, weak income is becoming a fact. With residents' income in first- and second-tier cities significantly affected, consumers in third- and fourth-tier cities will not fare better. Uncertainty about future expectations increases, and the consumer price index continues to rise, leading to shrinking consumption. Statistics Bureau data shows that from January to August, total retail sales of consumer goods were 28.256 trillion yuan, a year-on-year increase of 0.5%. Among them, retail sales excluding automobiles were 25.3662 trillion yuan, an increase of 0.7%. By location of business units, in August, urban retail sales were 3.1593 trillion yuan, a year-on-year increase of 5.5%; rural retail sales were 466.5 billion yuan, an increase of 5.0%. From January to August, urban retail sales were 24.5504 trillion yuan, a year-on-year increase of 0.4%; rural retail sales were 3.7056 trillion yuan, an increase of 0.7%. By retail format, from January to August, retail sales of supermarkets, convenience stores, and specialty stores above designated size increased by 4.1%, 4.8%, and 4.6% year-on-year, respectively, while department stores and exclusive stores decreased by 6.6% and 0.5%, respectively. This is still based on the fact that prices this year are higher than last year, because many items have risen in price, so the actual decline in total consumption is much larger than these figures suggest. However, neither the overall environment of the department store industry nor the strength of rural consumption can fulfill the dream of shopping centers going down-market; weak demand is causing insufficient demand.
Therefore, the predicament of shopping centers stems from both internal and external factors. On one hand, if consumption power is insufficient, foot traffic in shopping centers will decrease, and brands in the malls cannot afford rental costs, so they pull out, causing vacancy rates, creating a chain reaction. On the other hand, old shopping centers, like the hypermarket format, cannot transform themselves. In fierce competition, they cannot compete with the internet, and they have not found a harmonious way to coexist with the big environment, so they can only hold on to their former glory and slowly decline. More critically, there are also shopping centers that have entered lower-tier markets or hope to succeed through transformation, seeking to adjust and change their business formats. Clearly, this path is long and arduous.
Source: Lingshou (lingshouke) Author: Shili
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