Research - APRIL 7, 2017

China’s retail market is growing

by Andrea Waitrovich

China’s retail market is experiencing changing consumer behavior, diverging retailer strategies and competition between cities, according to Savills.

Consumption as a percentage of GDP has increased by 9.6 percentage points since bottoming out in 2007, standing at 44.7 percent of GDP in 2016. China is now undergoing an economic transition, featuring a slowing down of investment and export growth. Since 2015, rising residential prices in key cities and slowing economic growth have made consumers more conservative in spending than before, notes Savills.

Shanghai and Beijing, the top two metropolitan cities in China, remain well ahead of other cities in terms of retailer penetration scores, reports Savills. However, their economic lead has narrowed due to slower growth and the higher cost of doing business. Larger second-tier cities also have benefited from central government plans aiming to develop more leading cities, especially in the country’s central and western regions, helping to maintain investment and economic growth.

Central cities are up-and-coming retail markets, with notable regional hubs recording strong economic activity and retailer penetration. Changsha, the capital of the Hunan province, is one such central city that improved strongly in both these areas, reports Savills.

The fast pace of development in China has resulted in an abundance of shopping malls and retail centers. While the depth of China’s retail market is huge, it is not bottomless. An immense pipeline of new supply will see the market face greater competition in coming years, causing a greater divergence in performance among different submarkets and projects.

The long-term outlook for China’s retail market remains positive, underpinned by rising incomes, continued urbanization and sustainable economic growth. However, brick-and-mortar landlords will encounter difficulties capitalizing on rising sales in a changing market. The development of the e-commerce market, mobile technology and cross-border buying, consumers are now able to buy products at globally competitive prices, putting pressure on physical stores in all segments.

Growth in the big-box segment appears to have plateaued, with store expansions increasing 50 basis points year-on-year to 1.6 percent in first half 2016. The fastest growth for this segment occurred in less developed third- and fourth-tier city markets, as supermarket brands have scaled back expansion plans in larger cities, resulting in fewer openings and smaller store sizes.

While department stores used to dominate China’s retail market, they have struggled to attract traffic due to aged facilities, outdated management strategies and a lack of leisure and food and beverage options catering to younger consumers. As a result, 17 of the 20 cities in Savills’ report saw department store closings.

The luxury market has been the hardest hit by the economic slowdown. However, demand for luxury goods seems to be returning to China. According to a report by Bain & Co. and Altagamma, domestic luxury consumption in China increased 4 percent year-on-year in 2016. Annual reports by a few brands, such as Jimmy Choo and Coach, also indicate strong growth of mainland China sales. Nonetheless, it is still too early to say the market has fully recovered, reports Savills. However, new stores are now offering a higher standard of design and concept to attract consumers.

Mass and mid-end fashion and apparel brands continue to see healthy levels of growth, with the segment recording a store expansion rate of 17.9 percent and 5.2 percent year-on-year, respectively, in first half 2016, reports Savills. The expansion of leading coffee and fast food retailers across China has slowed, with growth in these segments falling from 18.6 percent to 15.7 percent, and 7.8 percent to 4.5 percent, respectively. This slowdown can be explained by an influx of food and beverage options in leading cities, causing market oversaturation.

Property owners are searching for new strategies to differentiate their projects from competitors in order to generate and sustain traffic, notes Savills. One method that has recently gained traction among developers and landlords is the inclusion of small-scale entertainment facilities and attractions that cater to children, young adults, and families.

The expansion of entertainment offerings is just a part of a larger trend of tenant mix changes occurring in many cities. Landlords are spending money to renovate older facilities, reconfiguring unit layouts and becoming more creative with promotions and advertising campaigns. In addition, landlords are increasingly welcoming retailers who can bring fresh elements to their properties.

Some hot sectors include theme parks, due to the launch of Disney’s Shanghai theme park and Wanda City in Nanchang launched by Chinese conglomerate Wanda in May 2016. These two high-profile parks are the latest examples of the accelerated development of the Chinese theme park market over the last few years. According to Aecom, Chinese amusement parks drew approximately 120 million visitors in 2015, making China one of the most developed theme park markets in the world in terms of total attendance. However, these numbers are relatively small when compared to the vast size of China’s population, meaning there is huge potential for the country’s theme park sector, reports Savills.

Another hot sector in the retail market is “athleisure,” the combination of athletic and leisure wear. Growing interest in an active lifestyle, combined with rising incomes and a strengthening consumer mentality, has generated huge demand for health and fitness products, especially among millennials, who have been quicker than older generations in embracing sports activity and the higher performance levels provided by athletic apparel. Other trending markets include more online stores, healthy eateries and co-working, as mall owners are beginning to open their doors for office space.

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