[Top 15: Wanda] What Keeps Wang Jianlin, China's Richest Man, Up at Night?

The important matters, and the urgent ones, on Wang Jianlin's mind right now.

Losing the title of China's richest man, watching his son become more famous than he is, the 100-million-yuan bet with Jack Ma: none of these may matter much to Wang Jianlin. What worries him is that Wanda's business may be in trouble.

The asset-heavy model that Wanda Plazas represent has run into problems. Their existing mix of businesses has grown dated, and brands no longer flock to them. Because housing prices in smaller cities are low, Wanda can no longer keep growing, as it did in past years, by opening more Wanda Plazas in lower-tier cities. The plazas are Wanda Group's most important product, and bigger troubles may lie ahead for them.

The bad news has followed. In early January this year, Wanda decided to close 10 department stores that were losing heavily, 10% of its total, and to cut floor space at another 25 poorly run ones.

Wanda's department store business has given Wang Jianlin headaches for several years. After years of losses, in 2013 it became the only division to miss its growth target, dragging down Wanda Commercial Properties, which was then working hard to go public. Although it met the group's target in 2014, Wang Jianlin still decided to restructure it and stop the losses.

Wanda's department stores face the problems of the whole department store industry. Slower economic growth has hurt consumer confidence: in 2012, China's GDP growth fell below 8% for the first time. More shopping channels have drawn foot traffic away: according to CBRE's report The Evolving Landscape of China's Retail Industry, published in the second half of 2013, department stores' share of all chain-store outlets fell from 5.7% in 2002 to 2.3% in 2012. In their place came new formats such as convenience stores, discount stores, hypermarkets and warehouse membership clubs. And then there is online shopping: online spending rose from 1.1% of China's total retail sales of consumer goods in 2008 to 7.8% in 2013.

While the wider economy keeps producing threats from outside, Wanda's department stores also face plenty of trouble from within. “Wanda Plazas and Wanda department stores overlap a lot in the tenants they recruit. More than 60% are clothing, which is hard to change. And the further you go into lower-tier cities, the harder it is to recruit tenants. Some international fast-fashion brands won't necessarily follow you, because they have to consider local spending power and whether the local fashion sense suits them. Without brands like ZARA and H&M, Wanda is no different from anyone else,” Cheng Weixiong, a former vice president of Metersbonwe and now general manager of Shanghai Liangqi Brand Management Co., Ltd., told QDaily.

Fast-fashion brands such as ZARA are no longer chasing store expansion at all costs

The stores being closed or shrunk are concentrated in second- and third-tier cities such as Ningbo, Dongguan, Yixing and Wuhu, and most opened after 2012. The plan is to cut clothing and add experience-based businesses. “Wanda's department stores, including the Wanqian department stores in third- and fourth-tier markets, all have to be adjusted. A store that used to have more than 30,000 square meters may, after the overhaul, keep only part of the first floor plus the Dagexing karaoke on the second. Wanda is in talks with us now and hopes we'll move into all of them,” Jiang Yong, vice president of Suning Commerce Group and executive president of its development management headquarters, said in an earlier media interview.

The rapid growth of e-commerce is another reason Wanda Plazas have had to change. Sales during Tmall's Singles' Day (“Double 11”) shopping festival, a bellwether for the industry, grew 700-fold over the past five years. In 2014 they reached 57.1 billion yuan: one day's sales exceeded a third of Wanda Commercial Properties' revenue for the whole of last year.

The brands that followed Wanda into cities across the country feel this change most directly. They have begun to reweigh their online and offline businesses. For some new projects in remote areas without enough foot traffic, some brands have chosen to skip offline channels like Wanda and rely on their Tmall flagship stores instead.

Some faster-moving brands, which are also Wanda tenants, have already tasted the benefits of e-commerce over the past few years. Jack & Jones's Singles' Day sales grew from 5 million yuan in 2009 to 180 million yuan in 2014, and Uniqlo's Singles' Day sales last year topped 120 million yuan. International fast-fashion brands including ZARA and H&M also announced last year that they would open Tmall stores, unwilling to miss this new market.

Hypermarkets such as Walmart have also been hit by online shopping. Thanks to its brand and its ability to draw crowds, Walmart has long been an anchor tenant of Wanda Plazas. But online supermarkets such as Yihaodian have succeeded, and platforms such as JD.com and Tmall have moved into Walmart's territory of 3C electronics, packaged food and fresh produce. The multinational supermarket giant has begun to change its pace in China.

As it kept raising its stake in Yihaodian until it took control, and relied more and more on online channels, Walmart closed six stores at once last March, and a month later reshuffled its China leadership team. At the same time, it began to rethink its relationships with partners such as Wanda and stopped following them blindly into new stores.

“Before 2011, some multinational chains followed us: they'd open as many stores as we offered, and several chains would even fight over one storefront. This year many chains have sharply cut their plans and can't follow us everywhere. Even the 50% that do keep up with our expansion look a little strained,” Wang Jianlin has said. He noticed this shift two years ago and listed it in the group's annual work plan as one of the main problems to tackle.

For now, restaurants and cinemas are doing fairly well. According to the prospectus Wanda Commercial Properties published earlier, as of June 30, 2014, Wanda's pool of brands numbered more than 2,000, of which food and beverage made up a large share, 23%. Wang Jianlin has said plainly that Wanda Plazas will raise the share of food and beverage next.

The film business, led by Wanda Cinema Line, is Wang Jianlin's favorite topic whenever he appears in public. Last year Wanda Cinema Line's box-office revenue reached 4.21 billion yuan, nearly 2 billion yuan more than the runner-up. After it listed in January this year, its market value passed 136.7 billion yuan on annual profit of just 800 million yuan. That is more than half the value of Wanda Commercial Properties, whose profit last year reached 24.8 billion yuan.

“At first people inside Wanda, especially colleagues in commercial real estate, didn't get it. Wanda Cinema Line makes only 800 million yuan in net profit, a rounding error for us, so why is it worth half as much as we are? I told them they have to understand that this is the future, and what capital likes is the future,” Wang Jianlin said last week in a speech at the Xinhuanet Thinker Lecture Hall.

Yet even popular businesses like film and dining are losing customers and sales to online services.

More and more moviegoers, for example, book showtimes and seats in advance on platforms such as Maoyan and Gewara, which saves them time in line and often turns up cheap promotional tickets. Dianping, for its part, offers group buying and a pay-the-bill service settled directly online.

In film and dining, the two areas that are still doing well, these online companies, which have spent years digging deep into their industries, are more competitive than Wanda. Wanda Plazas seem to be turning into nothing more than the last stop where the service is delivered. The money moves online, and so do people's spending habits and the data they generate. That is the bigger worry.

Wang Jianlin must have seen this long ago, which is why he began “upgrading” Wanda Plazas several years back.

Wanda has cut the share of clothing and department stores while adding experience-based businesses: training centers, children's venues, sports venues such as skating rinks and gyms, and beauty spas. In the second half of last year, for instance, Wanda launched its first in-house children's brand, “Wanda Baby King,” whose first batch of new parent-child play centers will open in nine cities including Dongguan, Ma'anshan and Kunming.

These larger complexes, built around experiences rather than goods, are no longer called “Wanda Plazas.” They have a stranger name: Wanda Mall. The first Wanda Mall broke ground in Nanning last year, and the recent Wanda Mall in Qingpu, Shanghai, claims that experience-based businesses fill as much as 70% of it. Wang Jianlin says 10 more such projects will break ground, and that how readily consumers take to the new format will decide whether the shift succeeds.

He also wants to make Wanda Plazas smarter: shoppers could reserve parking spaces, restaurant tables and movie tickets, have their measurements taken to pick a clothing size, and pay with their phones and walk out. Just as he would build a model for a real estate project, he even had a demo video made of a smart plaza. In it, a woman driving a red Tesla is guided by Wanda's smart system as she slowly pulls into a Wanda Plaza. The system finds the parking space she reserved. Inside, she uses the system to find what she wants and buy it. Finally she drives out of the garage, and the system settles the bill automatically.

Wang Jianlin hopes Wanda Plaza shoppers will follow a reverse O2O path, from offline to online and back to offline. But this is far more complicated than “building a Wanda Plaza in 18 months.” It requires developing complex technical systems, mining vast amounts of data, and studying and engaging with consumers in much greater depth, none of which is this property developer's strength.

At the same time, Wanda has begun to invest more in newer areas such as film, cultural tourism and sports, trying to catch better opportunities that may arise outside commercial real estate.

Acquisitions are how Wanda has quickly built influence in these fields. In film, Wanda bought AMC, the second-largest theater chain in North America, three years ago, and recently spent 1 billion yuan to buy the 15 cinemas owned by Chongqing Shimao. In sports, Wang Jianlin took a stake in the La Liga club Atlético Madrid and bought Infront Sports & Media, which runs sports events and brands. In tourism, Wanda has bought nearly 20 travel agencies in recent years and recently made clear it intends to invest in the online travel site LY.com (Tongcheng).

Wanda took a stake in the Atlético Madrid football club this year

Another field Wang Jianlin mentions often, and where new moves keep coming, is finance. As he imagines it, this should be a company that has “banking, insurance, securities, a payment company, asset management and so on,” one “completely different from traditional financial groups.” Buying a 68.7% stake in the third-party payment company 99Bill for US$315 million in January this year was only the first step. After the financial group's launch had been postponed twice, Wang Jianlin said it would be announced within the next month or two, with registered capital of 10 billion yuan, and that it would buy one or two more companies within the year.

“By 2020, we will reach US$200 billion in assets, a US$200 billion market value, US$100 billion in revenue and US$10 billion in profit, and complete a more thorough transformation,” Wang Jianlin said in his latest speech. In this speech, which laid out a blueprint for the next five years (to 2020), Wang Jianlin showed a strong urge to go all out.

His latest line is that he wants to strip the “real estate” label from Wanda and turn it “into a commercial development company or a commercial services company.” But he has less time than he thinks.

In December 2014, Wanda Commercial Properties listed on the Hong Kong Stock Exchange. Many industry insiders thought this was not the best moment for Wanda to list, and the scaled-down IPO was seen as driven by an urgent need for cash.

From 2010 and 2011, Wanda opened plazas faster and faster. The number of new Wanda Plazas built each year rose from 17 in 2011 to 19 in 2013 and to 22 in 2014, and after 2014 Wanda plans to keep expanding by at least 20 Wanda Plazas and 14-15 Wanda hotels a year.

More than half of these projects are in second- and third-tier cities and smaller places. Under Wanda's traditional “sell to fund rentals” model, Wanda builds fast to create a new commercial district in a city, which raises the prices of nearby housing; it then sells homes to bring in cash and subsidize the commercial property. But the strict property controls of recent years have hit this model hard.

“The land already supplied and the unsold housing stock mean projects in many places can't be sold. On top of that, local government debt has kept growing over the past two years, and local governments mainly sell land to repay it. That pushes the supply of land and housing even higher. Never mind third- and fourth-tier cities with unsold homes; now even second-tier cities such as Dalian and Qingdao can't sell their homes,” Wang Jianlin said in an earlier public speech.

Slower sales mean tight cash flow and more reliance on outside money, mainly bank loans, to fund projects. So Wanda's bank loans and liabilities have risen rapidly every year since 2011, and going public to raise money became Wang Jianlin's only choice.

Because it builds fast and its strong pull with tenants gives it brand power, Wanda could always count on favors from local officials eager to show “results” during their terms, and it usually got land far more cheaply than its competitors. But such perks are disappearing in the anti-corruption campaign.

Local governments are more cautious about approving land, and some do nothing at all. “A few years ago officials put GDP above everything. They sold you land cheaply with subsidies and were delighted when you came to build them a new town. Now, with property controls plus the anti-corruption drive, everything has changed, and doing nothing has become the safe way to do your job,” said an analyst who has long studied the property industry. “You see the same thing in bank financing. Even if you're Wanda, there's nothing you can do.”

These troubles add a great deal of uncertainty to the future of this huge company.

At the end of March this year, a website called Feifan.com quietly went live. With the slogan “smart new life,” it looks at first glance like an unfinished mall directory page, with a few scattered functions for restaurant group buying and movie tickets. The “Feifan O2O” app, built by the same company, went live as early as June 2013. After its latest update it does much the same as the website, plus a mall map, and it has a meager 15 reviews in the App Store.

If not for the words “Wanda Plaza” everywhere in the app, you would hardly guess who is behind it. The developer field reads “Wanda Information Technology Co., Ltd,” a key part of the 5-billion-yuan e-commerce venture Wanda formed with Baidu and Tencent. Its predecessor was Wanhui.com, on which Wang Jianlin pinned high hopes: 100 million users in three years, serving more than a billion people, and becoming the smart engine of hundreds of Wanda Plazas.

Wang Jianlin believes that, compared with internet companies that also want to do O2O, Wanda's biggest advantage is its offline platform. “Our biggest offline resource is our tenants. We now have more than 100,000 of them, and if we hit our targets, Wanda will have at least 500,000 tenants by 2020,” he said. “People who shop at Wanda Plazas come 20 to 30 times a year on average. We can reach 600 to 700 million people in China.” Wang Jianlin wants Wanda to track and analyze the tenants it has built up over the years and the more than one billion purchases made at its plazas each year. For example, he wants all merchants to plug into Wanda's unified POS payment system, giving Wanda more say there and, through that, more sway online.

Looking back now, 2012 may have been a turning point for Wanda.

That year, Wanda bought AMC, the second-largest theater chain in the United States, set up Wanda Film and Television, and signed several cultural tourism projects, loudly playing the culture card. The same year, Wanda E-commerce was founded and went “looking for e-commerce talent at 2 million yuan a year,” with a focus on using big data to win more members; Wanda began to think about how to combine online and offline better. That year, too, Wanda Commercial Properties' sales topped 100 billion yuan for the first time, and Wang Jianlin was named CCTV's Economic Figure of the Year again, seven years after he first won.

But everything Wanda did that year was overshadowed by that famous bet. At the CCTV China Economic Figures of the Year awards gala in December 2012, Jack Ma claimed that “e-commerce will basically replace physical retail,” and Wang Jianlin shot back on the spot: “In 2022, 10 years from now, if e-commerce reaches 50% of China's retail market, I'll give Jack Ma 100 million yuan. If it doesn't, he gives me 100 million yuan.”

At the time, Wanda's grasp of e-commerce went no further than a few fashionable buzzwords, with no clear plan, and the bet with Jack Ma was partly a publicity stunt. But in substance, Wang Jianlin had already begun to realize that the market was changing and Wanda had to change with it.

At the end of 2013, Wanhui.com went live. It was the first product Wanda launched after setting up its e-commerce division the year before: a website that turned Wanda Plaza foot traffic into members through lotteries and rebates. “Strive to pass 100 million members within three years, five at most.” That was the target Wang Jianlin set at the time.

In China's e-commerce market, getting 100 million members (users) in three to five years is an aggressive plan. JD.com took six years to reach 100 million users, and Taobao, which now has 370 million registered users, took more than five years to hit that mark.

Judging by the results so far, it is nowhere near a product that can bear such hopes. Turning the 1.6 billion visits Wanda Plazas receive each year into real users of the site still looks like the harder task.

On June 5, Vanke Group's Yu Liang arrived at Wanda Group's Beijing headquarters with a 59-person delegation. It was the largest meeting in recent years between the senior executives of China's two biggest property companies, and what they discussed bears on the future of both.

Twenty days earlier, in the same place, Yu Liang and Wang Jianlin had appeared before the national press as partners and, without warning, signed a “big deal” whose importance was hard to judge. The two sides announced a multi-year cooperation agreement under which they will acquire land and develop projects together through project joint ventures and share the proceeds.

Outsiders saw the deal as a sign that the two property giants are changing course in a new environment. Both companies face a transformation, so this is at least an urgent matter.

For Vanke, the benefit is obvious: it fills its gap in commercial real estate. For Wanda, there seems to be no significant benefit. It is the best-known commercial property company, yet its biggest source of income is still selling apartments. So a move that outsiders suspect is just “huddling together for warmth” may actually help keep the company running.

The most direct benefit is that Wanda may be able to get more projects with less money. That fits the “asset-light” and “de-real-estate” goals it has stressed over the past year.

Under the new “asset-light model,” outside investors put up the money for projects, and Wanda handles site selection, construction, naming, tenant recruitment and operations. The investor owns the property, and Wanda and the investor split the net rental income in a set ratio. In effect, Wanda goes from “owner” to “steward,” giving up sales in pursuit of higher rental income.

“I don't want development profit. What I'm after is higher commercial rent. We take 30% of the rent and I manage the property for others. Three 30%s make 90%, and I carry hardly any risk,” Wang Jianlin said.

This model lets Wanda reach many places it could not reach before, such as county-level cities where housing prices are low. Under Wang Jianlin's plan, Wanda Plaza openings will also speed up sharply, from 26 this year to 55 next year.

You can probably see Wang Jianlin's plan: acquire land through themes such as culture, sports and tourism; raise development money for these projects through partnerships with Vanke and other financial institutions and through internet crowdfunding; use cinemas, children's entertainment, KTV and the like, plus internet technology and data analysis, to improve the shopping experience and draw crowds; and finally reach “10 to 15 billion consumer visits in 2020,” which in turn would drive new businesses such as e-commerce and internet finance.

How to use the internet and which direction to take e-commerce lie at the heart of all this, and they are the most important and most urgent matters Wang Jianlin has to deal with. But just last month he fired Wanda E-commerce's second CEO. These fine visions, along with the new story for the internet age he has long been searching for, now carry a heavy question mark.