Retailers in China face space and rent crunch

Welcome to the space race, China retail style.

Everyone knows Chinese retail sales are climbing, so everyone from homegrown retailers to Hong Kong and international players are counting on mainland revenues to drive growth.

Mainland retail sales rose 14.1 per cent in November from a year earlier to 682.2 billion yuan and the Ministry of Commerce projects that retail sales this year will top 8.6 trillion yuan.

In key cities, especially Beijing and Shanghai, vacant retail space is increasingly rare and rents are escalating.

Foreign investment funds have aggressively corralled space, betting on windfall returns from retail and office leases.

Even in some second-tier cities, Hangzhou, for instance, finding space to open a shop is difficult.

The franchising trend is further adding to demand.

Some tenants say retail rents are rising at a 30 per cent annual clip, double the pace in Hong Kong.

According to a survey of more than 160 international and local retailers by consultants Jones Lang LaSalle in November, 89 per cent said the biggest hurdle to doing business in China was finding new locations.

Ninety-two per cent said they planned to expand their networks this year. Not one talked about reducing store numbers.

Hong Kong-based fashion retailer Bauhaus International has encountered setbacks in its quest to penetrate the Shanghai market where it had aimed to open 20 stores in three years.

Recently it lost out on what it considered an ideal location in Huai Hai Road, Shanghai's busiest shopping district, because the landlord insisted on a high rent.

'We couldn't reach an agreement on rent even though our negotiations were in the final stages,' said George Wong, the Bauhaus chairman.

Huai Hai Road sites are a favourite with foreign investment funds. Not long ago a European fund agreed to buy a shopping centre there for about 700 million yuan, according to sources.

Last year a Morgan Stanley-led consortium paid 970 million yuan for 40,783 square metres of retail space at Shanghai Square on the same street. It plans to spend another 230 million yuan on renovations to make the shopping centre, to be renamed Infiniti, the city's trendiest.

'Rents in Shanghai are now similar to those in Hong Kong, about HK$100 per square foot,' said Mr Wong.

And new competitors just keep rolling in.

The United States consumer electronics retailer Best Buy last month opened an 80,000 square foot outlet - its first store in the mainland under its own name - in Shanghai's Xujiahui district.

'One of our key property strategies is to always seek prime retail locations. Our flagship store in Xujiahui is an obvious choice for us,' said Best Buy China spokeswoman Ellen Wang.

In Beijing, some retailers have been taking up more space than they actually need to avoid the risk of being caught short later.

The Hong Kong fashion retailer I.T has jumped into the market, taking advantage of a rush by property developers to complete construction of commercial developments in the capital, including shopping malls, before the middle of this year, a requirement imposed by the government with a view to making sure the city is ready for the 2008 Olympic Games.

'We have to lease in prime locations for expansion when the opportunity arises. That's why we opened more stores than we planned on in the first half,' said William Lo Wing-yan, I.T's vice-chairman and chief financial officer.

As a result, losses of the company's 50-50 joint venture with Hong Kong-listed apparel firm Glorious Sun widened to HK$8 million in the first half from the previous year's HK$2 million.

The venture added 35 stores or 47,320 sq ft in the mainland between March and August last year, representing 80 per cent of its full-year expansion target of 60,000 sq ft, said Mr Lo. At the end of the first half it had 134 outlets.

Other retailers have found other ways of dealing with soaring rents and dwindling space.

Hong Kong apparel firm Giordano International has teamed up with a local partner to find locations.

Giordano spokesman William Yue said Beijing, Shanghai, Guangzhou and Shenzhen were the hardest places to lease.

'These are markets that everyone wants to enter,' he said.

'Competition is also heating up in up-and-coming cities like Hangzhou.

'In many cases having a good local business partner is a great help in securing locations. Often the partner already has a thriving business and has the local knowledge and access to obtain the best locations.'

Cosmetics retailer Sa Sa International, on the other hand, has opted for smaller shops as a way to control its rental payments.

'We are employing a business model of using smaller stores compared to our shops in Hong Kong,' a Sa Sa spokesman said. 'The issue of rising rents is most acute in major cities like Shanghai and Beijing with some escalating at around 30 per cent a year.

'We are planning to expand to other strategic locations where space is less sought after by international retailers and rents are more attractive.'

But for some retailers the concern is less with availability or price than with the quality of the location.

Peace Mark (Holdings), which sells expensive watch brands such as Rolex and Omega, finds that in traditional shopping areas store layouts and the general atmosphere are just not conducive to the sale of luxury goods.

Peace Mark wanted to enter new high-end shopping centres such as The Place in Beijing, said chief financial officer Kevin Tsang.

A recent KPMG report summed up the problem: 'Commonly developers have adopted easy solutions, either leasing property long term to a department store or hypermarket or selling it in small units to investors and entrepreneurs.

'Although this leads to a satisfactory outcome for the developer, it brings monotony for the shopper and a growing number of ailing retail centres. Chinese developers need to be able to work with retailers to create a much more attractive shopping experience for consumers.'

Convenience Retail Asia, which plans to franchise some of its mainland Circle K outlets this year, said there was no shortage of new malls. 'The problem is the quality - most of them are not properly developed and managed,' said chief executive Richard Yeung Lap-bun. 'Putting a store in the wrong location can be very costly.'

Meanwhile, retailers say the race for talent is as fierce as the race for space.

Giordano said the shortage of senior and middle management talent in the mainland had obliged it to spend more on staff training and management development.

Luxury watch retailer and distributor Xinyu Hengdeli Holdings said it planned to introduce a share option scheme to attract more managerial talent.