Opportunistic New Faces in the Opportunistic Mall | 2018's Big Business Stories ④

When "whoever's hot gets in" outweighs the logic of business itself, unknown risks follow. For now, though, everyone is still caught up in the chase for opportunity.

Some of these are the product of continuous change — change that will go on reshaping our lives. Some are the intrusion of less controllable forces into commercial life, which forces market participants to keep adjusting their strategies. And some come from the companies themselves: once a company reaches a certain size, how does it square itself with the public, with consumers, with state power and with everything else around it?

The kind of country you have decides the kind of companies you get. In 2018, as always, the business world changed a great deal. The year's biggest business stories only confirm it.

On the fifth floor of Shimao Plaza on Nanjing East Road in Shanghai, in the Cat's Kitchen experience store, COO Chen Zhuyu went down a spreadsheet on her computer, item by item, listing the problems she had to solve:

"How do we cut the wait for customers eating at the noodle counter? How do we set the cooking process and the standards? How do we train the floor staff? It's all very small stuff."

Cat's Kitchen, which makes short food videos, opened its first physical store in October 2018: 380 square meters, 4 million yuan of upfront investment, four zones — a drinks bar, a noodle counter, retail, and an event space. The store manager used to work at MUJI; some of the staff came from Uniqlo.

"The team was put together this year, all new hires," Chen told QDaily. In the month or so since the soft opening, the retail side has run into plenty of problems. The store is still filed on Dianping under "snacks and fast food," for instance, when the dining area has only five seats.

The same misunderstanding surrounds Wutai, a project that opened in June 2018 on level B1 of Chaoyang Joy City in Beijing. Online commentators called it "a sci-fi Food Republic where you can eat at 27 places in one go"; its own account of itself is far more elaborate: "a boundary-crossing, content-driven new kind of commerce," "a consumption venue for the young of the future," "a lifestyle magazine flowing through the mall"...

Wutai covers 1,400 square meters, on the site of what used to be Chaoyang Joy City's cluster of children's and family businesses. Three hundred square meters are now let to food and retail tenants, most of them brands famous on the Beijing internet, with an expected turnover of three to six months; the rest is exhibition space, a theater and a lounge. At the entrance, a poster lists the week's events.

Zheng Zheng, assistant general manager of Chaoyang Joy City, had been watching Wutai's operator, Woodstock of Eating — a team that runs food markets — for three years, because it is "extremely good at live events and experiences". The space is still changing fast. Early in 2019 it is said to be due for another rework, giving over a small corner to "urban culture."

"If you owned a mall, you ought to hate the word 'experience.' But now it's the other way around — everyone wears it as a badge of honor." In 2017 Ronnie Chan, chairman of Hang Lung Properties, delivered that verdict on the fashion that had swept through shopping centers, in an interview with Winshang. Anything that sells experience, he argued at the time, is bound to do so at the expense of sales per square meter of floor space.

Experience did not slow down in 2018. In May, Lujiazui Group's new complex Jingyao Qiantan announced a deal with the sports platform Hupu, handing it a 200-square-meter space to run. The fitness app Keep opened gyms at China Central Place and the Mofang mall in Beijing. In September the WeChat official account Yitiao opened three Shanghai stores at once. And a batch of brand flagships were upgraded with experience as the selling point, the showpiece being Nike's four-floor "Shanghai 001" in Shimao Plaza.

As supply and demand in consumption flipped, and e-commerce took over the functions of a physical retail trade that had spent years selling the same things in the same way, malls whose standard anchors were luxury and fast fashion urgently needed an IP, a set of new faces.

A new face has to be distinctive first ("hot, but not the kind of hot you see on every street corner"), hot within one particular crowd (no introduction needed, sales assured), and bring its own traffic (its own social-media marketing budget)... And one more thing, usually left unsaid — Ronnie Chan's point: "experience is another word for cheap rent."

More than one brand told us that its store-opening schedule over the past year had been sped up by malls' hunger for new names.

The reasons these new tenants open stores are more varied still. Ordinary expansion; a flagship upgrade; online revenue hitting a ceiling; adding a bricks-and-mortar concept to help raise money; a new investor pushing for it; or simply the sense that a shop is a billboard with a better conversion rate... any of them can lead to a quick negotiation, a fit-out, and then a much grander expansion plan.

Each side gets what it wants; they close in one meeting.

1.

The reporter Joan Didion wrote in 1979 that American malls had become "cities where no one lives but everyone consumes." China's shopping centers have gone a step further: they want to be communities where you can both consume and live, and government planning, developer money and new subway lines are all pushing them that way.

The only problem is that there are already too many malls.

Shanghai's shopping-center business has grown faster than any other city's in the country; it has more than 230 urban commercial complexes. Over a decade, Shanghai's retail floor space per resident went from roughly Tokyo's level to three times Tokyo's, and the ratio of commercial floor space to resident population, far above the usual international range of (0.7–1.2):1, reached 3.5:1.

New supply of retail property in Shanghai has still been growing by more than 20% a year for the past three years. As of November, 43 projects had opened in the city in 2018 and 20 existing ones had been renovated, with total floor area of more than 2.9 million square meters.

Filling that much space takes enough brands to move in — are there still enough tenants? The question became a common worry in retail property in 2018.

"There aren't that many traditional anchor tenants left," said Zhou Changqing, general manager of strategy consulting at RET. "Traditional high-end luxury and the more standard brands are vacating space now, so malls are doing some tentative, experimental leasing. Some of it goes to new brands, some becomes themed blocks, the way Joy City does it. Some space even goes to co-working or cultural uses."

"First store" — a term getting looser all the time — became a keyword in the marketing of many mall projects this year. A report by Zhongshang Data counted 602 first stores opened in Shanghai in 2018: "the number and quality of first stores rise and fall with those of newly opened malls."

An unprecedented flagship, a newly imported international brand, an internet company's first offline shop, a new brand or format incubated by a big company — all of them count as first stores.

On November 26, HKRI Taikoo Hui, on Nanjing West Road in Shanghai, held a party for its first anniversary and unveiled a new Champion streetwear store on the ground floor. For the previous two years the brand had lived on Taobao, sold by personal-shopper resellers. Zhou Ying, the mall's chief executive, said she was "completely confident" about Champion because it was "a brand people already love." On the first day, the store roped off a queue outside the door.

"HKRI Taikoo Hui has actually opened more than 40 'first stores' since it started," Zhou said. Her example was the Starbucks Reserve Roastery that opened in December 2017.

This Champion is not the first in Shanghai, let alone in China. The brand's Chinese agent opened its first physical store at Hangzhou Tower in September 2017, then went into Shenzhen, Xi'an, Harbin and other cities, and opened its first Shanghai store at K11 in April 2018. HKRI Taikoo Hui is the third in the city.

International brands usually expand into first-tier cities first; Champion is a counterexample from the past two years, produced by the interplay of rents and the distribution channels its Chinese agent controls. In fact, on HKRI Taikoo Hui's earliest plan, a streetwear label selling a few-hundred-yuan sweatshirt would probably never have got in at all.

Developed jointly by Swire Properties and HKR International at a cost of 17 billion yuan, the project stands in the Nanjing West Road district on the last large commercial plot to come up in downtown Shanghai in the past decade, surrounded by fierce competition. When planning began in September 2014, it was meant to sit between the top-end luxury of Plaza 66 and the lighter luxury of Jing An Kerry Centre.

The giant logos of luxury and fast fashion used to take the anchor spots on a mall's ground floor. Now they are either moving down into lower-tier markets or growing cautious about new stores, and the core districts were close to saturated on brands to begin with. To fill the space the old anchors left, new malls have had to think of something else.

"Historically we would open three stores in one mall: one adidas Originals, one adidas neo, one adidas Performance. In future we will put two or three of the brands together," James Grigsby, adidas's senior director of retail expansion strategy, told QDaily. From then on, "a mall may have only one adidas store. In that case the average store size may go from 100–120 square meters to around 200–250."

In November, adidas opened its Asia-Pacific Brand Center on Nanjing East Road in Shanghai, its highlights a huge video-game screen and a sports trial area. Across the pedestrian street sit Nike's global flagship in Shimao Plaza, "Shanghai 001," and another Champion.

"Sportswear brands are very active — they are becoming the highlight of almost every new project," said Yao Yao, head of research at JLL. By the trend of consumption, fast fashion is not expanding the way sportswear is.

As long as a sportswear brand is willing to spend heavily on a flagship, it can have a ground-floor spot rather than the traditional sporting-goods floors, usually the fourth or fifth. But the street-facing Champion on the ground floor of Shimao Plaza is just an ordinary shop.

"The spot K11 gave it, on B1, is a bit more sensible," said a former leasing manager. "Professionally speaking it's a sports streetwear label; if a mall has a streetwear zone, that's where it should go. Not privileges just because it's hot. But supply and demand being what they are, it gets to open on the ground floor of Nanjing East Road."

"These days it doesn't help to be friendly with Zara's expansion manager," said one person who has worked on several renovations of existing retail properties in the past two years. "This is what 30 years of golden-age Chinese commercial property built on crude Ctrl-C, Ctrl-V gets you."

Li Deming's sense of it falls into stages. After 2013, luxury spending was hit by the government's "eight rules" on official extravagance, and malls began visibly adding restaurants, a format the internet could not easily replace. Around 2015, "children's zones" spread through neighborhood malls, and the share of leisure and entertainment rose. From the second half of 2017, a wave of so-called experience stores and internet companies' physical stores began to appear.

The point, of course, is to draw customers, keep the brands alive and let the mall collect rent for years. Unlike fast fashion, or even sportswear, in their day, the "first stores" arriving under all these banners are not necessarily stores that make money. Every combination is still an experiment.

Grand Gateway 66 in Shanghai, which for three years running collected more rent than any other mall on the Chinese mainland, spent the past year rebuilding nearly 30% of its commercial space and replacing about 100 retail and dining brands. Two things stand out: a larger share of sportswear, and restaurants swapped for internet-famous names with a higher average check — Lady M, the Hokkaido dessert shop LeTAO (its first store in China), Oriental House, a popular street-front restaurant from the old French Concession.

Shimao Plaza's approach is closer to the current fashion: bigger anchors (53% of its retail is a collection of flagship stores from various big names), more choice in food (total dining area shrank, but the number of outlets went from 15 to 33), and a separate 21% of the floor area set aside for "experience."

"We hope the foot traffic and the sales after reopening will be twice what they were," Xiao Tao, general manager of Shimao Commercial Investment in Shanghai, said at a leasing press conference in June.

2.

In the second half of 2017 Cat's Kitchen decided to open a physical store. The first thought was to test the water with a pop-up for one to three months, and the company approached Jing'an Joy City, reputedly the best in the business at working with IP. "Joy City was adjusting its own positioning then, and its anime block was still leasing," Chen said. The spot on offer wasn't good enough, so they dropped it.

Before long, leasing managers from malls all over central Shanghai were at the door; but of the options, only Shimao Plaza could offer the right size and rent.

"Some malls even want to talk about sales per square meter: 'How much revenue do you think you can do a month once you open?' At that point I felt that even if I described my ideas about the offline experience, we were never going to match. If you're going to measure me that way, I can't promise you a number, because I've never run a store. What would I base a sales forecast on?"

But the malls' enthusiasm sped up Cat's Kitchen's plan. The pop-up was skipped and the store opened outright.

Chen now judges the store on two things: revenue, which is the hard measure, and how often events are held in it — the traffic and the effect they produce.

Not long ago Cat's Kitchen brought 20 fans into the store for a livestream sponsored by the cookware brand Shangni, "streamed to Bilibili, Taobao and the client's Tmall store at the same time"; on Bilibili it peaked at 120,000 viewers. "They [Shimao] often ask what events we have and what we've promoted online."

To a mall partner, numbers like that carry a halo; the novelty itself is persuasive.

Hupu's deal with Jingyao Qiantan runs on the same logic. Jingyao Qiantan sits next to the Oriental Sports Center in Shanghai, and its planners had a vague sense that they needed a better content maker to build the mall's sporting atmosphere.

The two started talking in 2016. The preliminary plan gives Hupu a 200-square-meter open space on the mall's second floor. The design isn't finished and the place is still a shell, but the thinking has already reached details like "spend this much and you can exchange it for Hupu coins and buy Hupu merchandise."

NFL exhibitions, sports-themed pop-ups, game-watching parties — all of it, in theory, can be packed into the space; how often has not been decided. Each side treats the other as a marketing expense, or a line of business. Hupu will set up a project team next year, some ten people, to marshal the company's sports and athlete relationships and fill the venue as often as it can.

"A property brand ties up with a culture brand like us — it obviously can't expect us to bring a certain number of fans over; that's not realistic, right? The point is that I build a sporting atmosphere and serve the people who live and work nearby. And we get some real income out of it," Hupu said. Bookstores seem to be standard equipment in malls now; why not sports spaces next?

Treat a mall as a brand and it can no longer afford the cost of making social content at that pace. Handing the space to a third party that supplies experience, or a wider choice, has become one answer.

"This is a fundamental change in reality," Scott Malkin, founder and chairman of Value Retail, said of Asia's shopping malls in an interview with The New York Times. "The retail war is over. Alibaba won. It means physical retail is no longer about distributing goods; it is about building brand equity."

But grafting a marketing method built around internet fame onto a mall produces something much more complicated. A mall has to assemble hundreds of different brands — how is it supposed to give off a character of its own? And it doesn't actually own any of those brands: in passing on the risk, it also gives up control. That makes leasing today enormously hard.

Under the new thinking, buyer's stores and multi-brand stores are multiplying too — I.T at CapitaLand's LuOne in Shanghai, the bálancing from Bailian Group. Wutai at Chaoyang Joy City is a buyer of another kind: it "buys" clothes, and it "buys" food and events as well.

Chaoyang Joy City, Beijing's most typical neighborhood mall, has 49 shopping centers within a 20-minute drive and more than 200,000 square meters of commercial space within two kilometers. It opened positioned as a "family city," with an Aeon supermarket and department store and a Jinyi cinema.

In 2011 it cleared out some of the neighborhood brands and brought in fast fashion — Zara, Gap (that Gap was a "China first store" at the time). In 2012 word came that the Aeon department store was leaving, and its space went to a hundred-odd fashion brands.

Just as the many new malls built in Shanghai's Minhang district siphon shoppers away from Xujiahui, neighborhood malls, with a dense subway network, have to compete with the shopping centers of the core districts too.

In October, Zhongsheng World Mall in Xinzhuang, Minhang, opened a store for the lifestyle media brand Yitiao — the first step in founder Xu Husheng's "all in on physical stores." At the three stores open so far, suppliers still carry the inventory and do the shipping; Yitiao owns no goods itself.

Interviewed by Newrank, Xu explained the appeal in marketing terms: "Put in a few hundred million yuan, get 100 stores, and they last you six or ten years. Spend a few hundred million on advertising and it's gone in six months, and what it did is anyone's guess." The remark puts its finger on the inefficiency of buying traffic with ads, but it exposes other problems. Each Yitiao store is at least about 700 square meters, so "a few hundred million yuan, 100 stores" works out to roughly a million yuan of fixed investment per store — before any further spending, and it has to last several years. It is hard to call that a rigorous claim.

The companies we interviewed, malls and brands alike, treat profit, sales per square meter and similar numbers as trade secrets when the subject is experience — or say the numbers aren't worth discussing. What matters is that "people come, and word spreads."

New brands don't do the sums the way traditional retail does. They compare the cost of a physical store with the cost of their own online business.

"Advertisers have a threshold in mind for a new-media brand's follower count. Tell them 10 million impressions and they're already quite pleased. Say 20 or 30 million and they would rather put the budget into other vertical media," Chen said. Growth in Cat's Kitchen's online advertising revenue hit a ceiling last year; 800,000 to 1.2 million yuan for an all-channel video ad is hard to beat. A physical store both lifts the brand's premium and its reach and, if business is good, brings in new revenue from retail.

In fact, retail is the harder job for most people.

"We're still finding our way; right now we'd give ourselves a bare pass." Liang Chao founded YOHO!, a Nanjing company that began as a street-fashion media outlet, went into e-commerce in 2008 and into physical retail in 2018. On October 13 it opened YOHO!BLU, a streetwear multi-brand store, in Shimao Plaza on Nanjing East Road in Shanghai — only 400 square meters, and the company's second store format after the YOHO!STORE flagship it opened in Nanjing last year.

Liang said the Shimao YOHO!BLU is mainly a test of an all-channel brand-incubation model; the company is still talking to every mainstream Chinese property developer, and the store plan keeps changing.

In October YOHO! announced a US$25 million E+ round led by C Ventures, the fund founded by Adrian Cheng, the creator of K11 at Hong Kong's New World. The same property-backed fund invested last year in the food-video platform DayDayCook. Unlike Cat's Kitchen, DayDayCook's physical store takes the form of a teaching kitchen with 99-yuan classes; it opened in K11 in Shanghai in early 2018 — and a "DayDayCook food and lifestyle experience center" appears on the list of "first anchor tenants" Jingyao Qiantan has announced.

A report from CBRE found that of 285 venture deals in retail and entertainment in 2017, 86 put all or part of the money into building physical stores; capital most favored restaurants, sports facilities, lifestyle and other formats that follow the consumption-upgrade trend and depend heavily on the offline experience.

And for a mall leasing manager today, even Xiaohongshu can be the place to look for the next brand.

When "whoever's hot gets in" outweighs the logic of business itself, unknown risks follow. Zhou Changqing of RET said that, watching the first-store numbers, he found the time it takes a "first store" to move from first-tier cities down to second-tier ones has shrunk from one or two years to three to six months — and that they are being weeded out faster too.

3.

On October 28, 2018, the first store in the world of Yousheng Pinjian — 1,000 square meters on the fourth floor of Qibao Vanke Plaza in Shanghai — shut down, six months after opening in April.

Like most new-retail ventures, Yousheng Pinjian had a complicated set of backers, and the headlines at its opening were lively: "Is Xiaomi's strength offline? Look at its new species, Yousheng Pinjian!"

Yousheng Pinjian is generally taken for a Xiaomi new-retail format. In fact it has nothing to do with Xiaomi Youpin. It is a retail company backed jointly by Korrun — the luggage supplier that belongs to Xiaomi's ecosystem chain — and Hongzhang Capital.

The first store reportedly cost more than 10 million yuan, and soon after it opened reports complained that it didn't carry enough kinds of product to fill a space that size, or to make anyone want to buy.

Meanwhile more property projects are coming. The Hongqiao business district in Shanghai, 86 square kilometers and designated a city-level commercial center, has announced more than 35 commercial projects, all said to be opening within eight years. Two have opened so far. One of them, Shui On's The Hub, opened at the end of 2015, more than a year late, according to press reports.

In May 2018 the Shanghai Municipal Commission of Commerce drew up a three-year plan to "make Shanghai Shopping a brand." It noted that Nanjing West Road, the city's most international shopping district, has less than a fifth of the spending per person of Fifth Avenue in New York and less than a seventh of the share of foreign tourists of Ginza in Tokyo. The policy is meant to help close that gap — the relaxations and case-by-case approvals granted to the Starbucks Reserve Roastery are one sign of it. Another figure: at the end of 2017 Shanghai's resident population was 24.1833 million, 13,700 fewer than a year earlier.

Against that background, if shopping centers want to become "cities where everyone lives and consumes," the competition to be different has entered a slightly feverish phase — and it is also the moment for doing business in the most solid, unglamorous way.

American department stores have already been through this once. Sears, which went bankrupt in 2018, was where the American middle class lived and shopped in the industry's glory years in the 1990s, adding big cinemas and amusement rides; the giant Snoopy and Mickey Mouse in the mall atrium — doesn't that look familiar?

The property research firm CoStar's latest figures say American department stores and shopping centers have closed more than 146 million square feet of retail space since the start of 2018. What makes Chinese physical retail more complicated is that on top of an enormous amount of floor space, it took the blow from the internet at the same time. That is why 2018 brought more and more offline experience stores from internet companies.

"It feels like we're being carried forward, step by step," Li Deming said. "The moment arrived just as e-commerce hit its own bottleneck."

Whether the fashion can solve both sides' problems at once is still unknown. The question may come back to the people actually making the products and the brands: are there enough of them to fill all this urban space? And do you have enough spending power to take part in this new city life?

Graphics: Shuya Zheng; cover image from Unsplash

Next: the street shops being pulled into shopping malls — what problems do they have to solve?