Small Shops and Pop-Ups: Will Shanghai's HKRI Taikoo Hui Become Commercial Real Estate's Trendiest Template?

Commercial real estate keeps getting harder, and "fast" has become a new requirement.

For five years running, no country has been keener on building big shopping malls than China, where floor space under construction has stayed above 50% of supply every year. In 2016 alone, 551 large and mid-sized malls went up in China, with a combined floor area of more than 46 million square meters.

At first glance this looks like boom time. But the offline retail market these malls depend on shows no sign of recovering. How do you pull people back into a physical mall, get them to spend a few willing hours shopping on top of a movie and a meal, and get them to come back again and again to spend more? Every shopping mall now has to answer that question.

Most of the answers the industry already has have stopped working on the increasingly picky young consumers of tier-one and tier-two cities. Wanda Plaza is probably the clearest example: the combination it offers — fast-fashion brands, a department store, chain restaurants and a cinema — now counts as the "basic model" of a shopping mall. As we argued in our 2017 annual outlook, the malls with more room to survive are the ones that take the shopping experience seriously, offer more choice, and can adjust as consumption trends shift.

Several commercial real estate projects are due to open in Shanghai in 2017. Thanks to its labels — "downtown Shanghai" (a commercial hub of national importance), "Nanjing West Road" (the most expensive retail street on the mainland), "developed and managed by Swire Properties" (a Hong Kong developer with several hits in Guangzhou, Beijing and Chengdu) — HKRI Taikoo Hui is the one the industry is most impatient to grade.

In late December 2016, QDaily interviewed Li Zhenhui, the general manager in charge of leasing and management at HKRI Taikoo Hui, and Du Yili, its deputy general manager, and came away with a summary: commercial real estate is turning into fast fashion (there is a fuller analysis at the end of this article). If that turns out to be an effective way to make commercial real estate younger, expect it to be copied quickly.

Renovating an older complex is much harder. Their buildings are smaller and tied up in long-term brand leases, which makes it hard for them to bring in many new brands — and even a large-scale overhaul leaves a very visible mark on their sales.

But HKRI Taikoo Hui still has plenty of competitors: Hong Kong-developed projects such as Xintiandi, K11, the IFC and the Kerry Centre family, and mainland flagships such as MixC and Joy City. Their tenant mixes differ, but the gaps between them are narrowing.

Their advantage is speed. From the land auction in 2002 until now, HKRI Taikoo Hui has been 15 years in the making, a span that included a long demolition and relocation process, a switch from a residential community to a commercial complex, and Swire Properties buying into the joint venture.

HKRI Taikoo Hui is not a small piece of business. Converted at the exchange rate of the time, HKR International's land cost in 2002 came to just 18,300 yuan per square meter, but demolition and relocation on the site were not finished until 2009. The sheer cost is what led HKR International to invite Swire Properties into a joint venture, and to arrange an 8-billion-yuan bank loan for the project.

More to the point, over those 15 years commercial real estate and shopping habits went through several rounds of change: household spending power shot up, luxury brands peaked and began to slide, the department-store business collapsed, the "O2O" bubble deflated, big companies pulled out of the CBD, design hotels moved into the market.

The mall opens in the first half of 2017. Which industry trends does it point to, and where does it still fall short? Here is what we saw.

1. Both shoppers and companies are moving to the suburbs, but business in a satellite town is no easier than downtown

As cities spread outward and land kept appreciating, cheaper suburban housing became almost the only option for young buyers. The "satellite towns" that resulted, and the neighborhood retail demand that came with them, became a development strategy of their own during China's retail property boom.

For companies, the rents in core business district office towers have also become hard to bear. A JLL survey in Shanghai shows that this pattern of core-area tenants moving out already has plenty of big-company examples: drugmakers such as Roche and MSD, once in the core business district, have moved to Caohejing and Minhang respectively; Carrefour moved to Putuo; and even an advertising company like WPP, which used to insist on staying close to its clients, has moved from downtown Jing'an to the "new Jing'an" near the railway station.

But building a well-equipped, appealing CBD from scratch in the inner suburbs is far harder than doing it downtown, where transport links and shops are already in place.

In Shanghai, the Hongqiao Tiandi project near the airport and the railway station earned its developer, Shui On Land, only 4.7 billion Hong Kong dollars in rental income in 2015, the year it opened — less than 16% of what the company's best-known project, Shanghai Xintiandi, brings in. We have also written about the luxury-heavy but thinly trafficked "LV Tower" nearby. As Du Bin puts it: "Even in a first-tier city like Shanghai, Plaza 66 in Puxi plus the IFC in Pudong are already enough to meet demand."

Still, once a developer on a street like Nanjing West Road can undercut its competitors on rent and go out of its way to meet fine-grained demands on fit-out, mechanical and electrical systems and the rest, big companies have a reason to move back in from the suburbs.

2. A more open layout: shopping has to go from "inside a big box" back to "strolling past street-front shops"

The other thing to know about the HKRI Taikoo Hui mall is that it is long. It sits on a rectangular, north-south plot, so walking from Nanjing West Road at the north end of the complex to Weihai Road at the south end covers 500 meters in a straight line. In a conventional big-box mall, one lap like that would wear you out.

The mall handles this in several ways. It has put more of the experience-driven, youth-oriented brands at the north end and brands with a more mature style at the south, so you can treat the mall as two halves and shop them separately.

The shopping route through the whole mall also traces a long, flattened "S," which keeps your sightlines from closing in: you can see the big stores at both ends and still make out the small shops across the way.

Finally, the design lets in more daylight, so instead of the stifling feeling of not knowing which way is north, you get something closer to strolling outdoors.

3. Luxury brands are all pulling back in China, and what malls lose is more than a pretty facade

Plaza 66 sets the tone. What is most striking about the Nanjing West Road district today is the sheer density of luxury and upper-mid-range brands. Walk from Jing'an Kerry Centre, near Jing'an Temple, all the way to CITIC Square, near Wujiang Road, and the facades of these malls will give you the complete set: Burberry, Armani, Dior, Gucci, LV, Cartier, Prada, Montblanc.

But the chance to pack luxury and affordable-luxury brands in this tightly is now rare even in tier-one and tier-two cities. According to data from the research firm Euromonitor International, a slowing economy, the anti-corruption campaign and a weaker yuan left China's luxury market with three straight years of negative growth. Many luxury brands are cutting prices and shrinking their store networks at the same time, and have started to consider keeping only one or two flagships in a given city.

The shrinking business at the top end has knocked on to the affordable-luxury brands common in big malls. Du Bin gave QDaily the example of Plaza 66, the heavy-luxury landmark in the middle stretch of Nanjing West Road, and Jing'an Kerry Centre, packed with affordable-luxury labels in the western stretch:

"Affordable luxury doesn't want to stand alone. These brands like to cluster too, ideally right beside heavy luxury, because the price advantage only shows up when shoppers can compare within a short walk. Plaza 66 and Kerry Centre are actually a bit far apart, so bringing those affordable-luxury brands into HKRI Taikoo Hui would have been a good move — but in the end Kerry Centre, which opened earlier, took that chance away."

4. Tastes change faster and faster, and reaction speed and turnover have to keep up

Li Zhenhui told QDaily that there is a gap in the positioning of the various complexes on Nanjing West Road: the roughly 200,000 office workers in the surrounding area keep changing what they want. They are young, they have lived different kinds of lives, and they already look at the world globally.

So HKRI Taikoo Hui has given up the traditional leasing playbook — hand a thousand-plus square meters to one high-end brand and carve up the whole project fast — in favor of mid-sized shops of 150 to 200 square meters, in the hope of keeping pace with shifting trends and tastes. That way, even a bad bet on a trend leaves room to adjust.

A few units of more than a thousand square meters have been kept back, for the gourmet supermarket City Super, the English-language bookstore Page One, and Space Cycle, a Taiwanese yoga and spin studio.

"Consumers are picky and very good at mixing and matching, so we won't overweight any one category. We spread the mix evenly. The advantage of small shops is that we can adjust them faster later; if in three years' time [note: in shopping malls, leases between brand stores and the landlord usually run three years] people are spending differently, we can move faster to meet what they want."

5. Concept stores and "first stores" are only the first step toward changing how people shop

Fourteen brands entering China for the first time, 12 opening their first Shanghai store, 12 themed concept stores — put all of that into a slightly smaller mall and it would have no trouble drawing a crowd on opening day. Just look at SOHO Fuxing Plaza, home of the country's first Line Cafe.

Among the "first in China" stores at HKRI Taikoo Hui are flagships for big names including PUMA, McQ and Zwilling, alongside small brands such as the popcorn maker Garrett Popcorn. The most famous first store and concept store disclosed so far, of course, is the 2,700-square-meter Starbucks Reserve Roastery, where you can watch the beans being roasted.

More new brands need space to show themselves off, and all of them are hunting for a slot in a top-tier mall. A new brand making its debut, or an old brand looking for new openings through a concept store or a niche line — either can pull in shoppers who want to try something first. What matters is who can sign the brands and open the doors sooner.

Lululemon, the yoga-pants brand HKRI Taikoo Hui has brought in, is a case in point: the IFC in Lujiazui beat it to the brand's first store on the mainland, and its store at Jing'an Kerry Centre, in the same district, will open before the HKRI Taikoo Hui one does.

All of this costs the mall some of the shoppers who prize novelty — or vanity.

6. More high-end cosmetics brands are opening standalone stores, and they are a new draw

This was one highlight we found in HKRI Taikoo Hui's leasing plan: more of the upper-mid-range cosmetics brands you know, including La Mer, Jo Malone, Sulwhasoo and YSL, will open standalone brand stores here rather than take a department-store counter or a spot in a beauty retailer like Sephora.

According to Li Zhenhui, 70% of the office workers in this district are women, and demand for cosmetics has always been there. But no complex in the district has fully met it. The case for a standalone store is easy to follow: a fuller range of products, better service, a stronger sense of the brand.

Bain & Company's 2016 China Shopper Report confirms that among fast-moving consumer goods, color cosmetics and imported skincare are indeed among the fastest-growing categories. They used to sit at counters on the ground floor of department stores, where sales came not only from cash and cards but from all kinds of brand prepaid cards. A standalone store means higher rent and a greater need to communicate the brand on your own. Whether it ends up earning more than before is another matter.

7. Bigger event space, and ideally a dedicated spot for pop-up stores

Next to long-term tenants on three-year leases, pop-up stores on leases of two to four months or less are another way to keep shoppers feeling something is new. On every floor of HKRI Taikoo Hui, a bit of retail space has been set aside for brands to run pop-ups, or for themed shops tied to the mall's seasonal events — "that way we can keep rotating things."

But for most malls, giving up the income from a few units takes some resolve. So the standard fix is to use the atrium or the plaza to set up a shop that is temporary in the literal sense.

And when the goal is buzz and foot traffic, the more common method is to sell IP — from the permanent exhibition space in K11's basement, which has hosted Van Gogh and Monet shows, to the character exhibitions Joy City has run, from Line to One Piece to Kumamon.

8. But on linking online and offline, offline still has little to offer

On the question that troubles every mall operator — how to do online business well — HKRI Taikoo Hui has no more original answer either.

In the interview, Li Zhenhui and Du Yili said the mall markets itself through online channels and runs an online membership club. Through its official Weibo and WeChat accounts, members can redeem points for perks such as parking vouchers or advance table reservations.

All of that uses only the resources the mall itself controls. In practice, if the offline shopping is good enough, plenty of people will not care about a thin points scheme, or about anything the mall sends them beyond notices of promotions.

The trend they ought to be watching is this: content that travels online and holds people's attention on its own, and the social networks behind it, has become an important way for brands to gather customers. Beyond serving the brands, learning faster how shoppers feel and which trends they buy into may be exactly what the mall should be using its own online channels to solve.

9. Raising how often people spend: only a mall where money changes hands from morning to night has a future

Hao Jilin, who worked on the design of Guangzhou Taikoo Hui, once put forward the idea of "four kinds of foot traffic": a competitive mall should be able to draw enough shoppers in four different time slots — morning (before work), evening (after work), weekdays (office workers in the district) and weekends (families shopping together, tourists).

That is why the "office tower plus shopping mall" complex is relatively popular right now: the white-collar workers upstairs, with more money to spend, are the most dependable customers you can get. Stuffing so many mid-priced restaurants, shops and clothing brands into the HKRI Taikoo Hui mall is, above all, meant to give them more everyday reasons to spend money here.

But it can also make shoppers tire of a mall faster. And because the mall has stuck with traditional hours, 10 a.m. to 10 p.m., breakfast or anything resembling late-night life looks unlikely to survive here.

10. Is "fast fashion" really the solution for shopping malls, or the gimmick behind another round of expansion?

Du Bin, general manager of the leasing services department at the commercial real estate consultancy RET Retail Consulting, told QDaily that had HKRI Taikoo Hui come to market three years earlier, it would have stood a good chance of matching iAPM — Sun Hung Kai's project in the Huaihai Road district — both on how easy the leasing would have been and on how it would be run afterward.

"iAPM happened to hit every key moment for the industry: luxury spending was still high, lifestyle brands were just becoming widely known, people were just starting to pay for concept stores and designer labels, and you didn't need to give restaurants too big a share. HKRI Taikoo Hui missed all of those chances."

But both iAPM, which arrived at the right time and got its tenant mix right, and HKRI Taikoo Hui, which is built around mid-sized shops that bring it closer to its customers, stand a good chance of becoming models more malls draw on in future.

And for a developer, one expensive, successful project can cut the cost of buying land and reproducing something similar at scale in other cities later. Xintiandi, now rolling out across the country, and Shanghai K11, which spent 500 million yuan on a renovation, are the textbook cases. In Shanghai alone, Sun Hung Kai and Swire Properties each hold large undeveloped sites, Xujiahui Center and the Qiantan project respectively.

This is a sum that has to be worked out from every angle.

Cover image credit: GUCCI