International brands shun shops and build China presence online

Trend towards e-commerce makes it harder for landlords to find international retail tenants

PUBLISHED : Wednesday, 18 March, 2015, 6:00am
UPDATED : Wednesday, 18 March, 2015, 6:00am

Landlords of retail centres in China will find it more difficult to secure quality international tenants to fill their shopping centres as these companies are becoming cautious in opening new stores, given changes in business format.

"Some international retailers used to adopt very aggressive expansion strategies to boost brand visibility. But after a few years' operation in China, they found that such ambitious business expansion faced problems such as high costs," said Regina Yang, director and head of research and consultancy at Knight Frank Shanghai.

Yang said a number of brand owners had started to close unprofitable stores and focus on improving core competencies. "E-commerce may be a new development direction for most retailers as they see big gains from this sector," she said.

Yang noticed an increasing number of international brands willing to link up with third-party online platforms such as Tmall because marketing their goods online provided access to "customers nationwide without location constraints".

One example is Marks & Spencer of Britain. The retailer recently announced the decision to close five of its supporting stores in the greater Shanghai region by August. It has also reviewed its head office resource structure in line with growth plans.

After a few years' operation in China, they found that such ambitious business expansion faced problems such as high costs
Regina Yang, Knight Frank Shanghai director

Marks & Spencer did not say if those shops were unprofitable, but the company wrote in an emailed reply to the South China Morning Post that "closing these stores frees up resources that we will invest in other stores". That includes focusing resources on its flagship store on West Nanjing Road in Shanghai and future plans to enter the Guangzhou and Beijing markets.

Yang said Marks & Spencer did not position itself well when it first came to the China market. However, its businesses improved through e-commerce.

In 2012, Marks & Spencer signed up with Tmall, China's largest third-party platform, to leverage e-commerce to strengthen brand awareness and reach out across the country. It saw its last-quarter sales on Tmall increase by 200 per cent compared with 2013.

"The impact of e-commerce for the retail developers is that the space required by retailers is shrinking and the vacancy rates of retail malls will increase," Yang said.

"Furthermore, as retailers are cautious in opening new stores, they are inclined to pay turnover rent instead of the previous base plus turnover rent model to reduce their risks."

However, Hui Xian Real Estate Investment Trust chief executive Tom Cheung Ling-fung said such changes had not had a significant impact on well-established shopping centres in key locations. "We have a long list of more than 200 clients waiting to secure space in shopping centres," said Cheung.

The reit is not keen to lease space to retailers that would ask to pay purely turnover rents, according to Cheung. Turnover rent only accounts for a single digit in the base-rent-plus-turnover-rent model.