In the past year, nearly half of the world’s new shopping malls were built in China – yet many are now struggling to survive. Can a hi-tech retail revolution bring them back to life?
Zhao Jinping sips milk tea from a flask as he surveys his empty shop. The store, on the first floor of the Bainaohui mall in Xujiahui, Shanghai, once sold mobile phones and electrical goods. Now it is definitely closed. The stripped shelves are enclosed by yellow tape, and a sign tells potential shoppers that the rent hasn’t been paid.
“Business has gone downhill over the past year,” Zhao sighs. “Everyone buys things online these days, and there is just too much competition.”
The six-storey mall was once a go-to electronics destination, packed with traders jostling for business. But over the past decade, the success of internet giants in China has heralded a much tougher market for retailers such as Zhao. The mall is plagued with empty stores, stacked boxes and abandoned cables.
Shopping malls are still a relatively new phenomenon in China. Spending was encouraged as the population grew richer, but the rush to buy meant demand quickly outstripped supply. In 2008, China had about 416 stores per million people; the US had 3,620 per million.
As the shopping mall sector began to develop, the popularity of shopping as a pastime for newly urbanised citizens grew, even coining a new phrase, guang jie, which loosely translates as “window shopping”.
In the past decade, retail space in Chinese cities has expanded almost fivefold. But with the country’s economy sluggish, sales growth has begun to slow and shoppers have begun to temper their spend. Retailers have shifted focus from expansion to rationalisation. Some, such as Marks & Spencer, will actively close stores; when Topshop made its entrance into China last year, it was via online-only store Shangpin.
“Retail space has expanded fivefold in the past decade – but with the economy sluggish, sales growth is slowing.”
In the past 12 months, 44% of the world’s new shopping malls were built in China, according to commercial property agency CBRE. But with retailers renting less space, some malls are already struggling.
In the Zhongguancun area of Beijing, “China’s Silicon Valley”, the towering e-World mall closed its doors in February, reportedly to be turned into offices. Two malls nearby had already closed temporarily while the owners considered what to do to boost trade.
And yet the building continues. Some estimates predict another 7,000 new shopping malls will open in China by 2025. The top five most active cities in the world for retail development – all in China – each plan more than 20 new shopping malls. Amid such staggering supply, both new and old malls face huge challenges attracting retailers and shoppers.
But this is only one side of a complex market. Even with swathes of shopping malls teetering on the brink of collapse, entrepreneurial companies are drawing up blueprints for malls of the future: smart, connected complexes, where stores offer dynamic discounts, tills are redundant and real-time mapping traces your movements.
Retailers the world over have struggled to head off challenges from the internet. But in China, the retail market developed in parallel with e-commerce, and the threat looks very different. Enter the smart mall.
“One fundamental driving force that gives China an advantage in the development of ‘smart’ malls is that the fathers of the shopping mall business in China are alive now,” says Melanie Alshab, managing director of Kensington Asset Management. “They are the entrepreneurs, the visionaries – and they exist in the same time as all the things that are happening digitally. It’s a completely different mindset; there’s no block between the bricks and the clicks. It’s all just shopping.”
“There’s no block between the bricks and the clicks. It’s all just shopping.”
China’s smartphone users skipped the PC era, and many use their devices to go shopping: in 2014, total mobile payments in the country reached $965bn.“In the US, e-commerce is just online shopping. In China, e-commerce is a lifestyle,” explains Jack Ma, founder of e-commerce site Alibaba.
But how can online shopping revitalise physical malls? “Chinese consumers are more open to incorporating mobile technology into their physical shopping,” says Janne Haverinen, of technology group Indoor Atlas. “Most Chinese consumers experience online services for the first time through smartphones and mobile apps. This make O2O [online to offline] commerce, where technology is used to drive customers to physical shops, a trillion dollar opportunity.”
In north Beijing, at the headquarters of search giant Baidu, thousands are focused on this opportunity. The office, a sprawling campus dotted with ping-pong tables, a gym and a central lake, is home to one of China’s largest digital pioneers. The youthful company (the average employee age is 26) has moved aggressively into O2O, exploiting its vast mapping and search capabilities. Its web-based app, Baidu Connect, connects users to their physical location digitally, while it’s Groupon-like service, Baidu Nuomi, pushes you digital promotions for offline locations. This means finding your precise place inside China’s immense malls, giving retailers new ways to connect to customers, queuing virtually for restaurants, booking cinema tickets – all through a phone.
Currently, digital services are being rolled out across 200 malls in China, giving Baidu access to precise data about the habits of the 80 million shoppers who visit daily. In the digital future, the holder of data is king.
As it builds its O2O offering, Baidu is partnering with China’s traditional property groups. The technology giant announced a tie-in with real estate developer China Vanke in 2014, to work together on 20 new digitally smart malls.
“In the future, you will go shopping without having to take your wallet,” predicts Daniel Suen, head of business development at Baidu. “The mall will immediately recognise you when you arrive, through your phone. You won’t have to wait for anything, you won’t have to stop and pay for parking, there will be targeted discounts for those stores you like. It will be very convenient, very personalised. This is not an either/or situation; the online aspect makes the offline experience much easier.”
Successful malls in China have already begun to evolve, knowing most visitors go to eat, be entertained and go shopping – in that order. Many complexes have dedicated around half their space to restaurants, cinemas, skating rinks, bowling alleys, spas, playgrounds and even language schools. Many urban communities in China lack adequate public facilities, and malls have become natural meeting places, or destinations for a family day out – because of this, they will always offer elements e-commerce simply can’t deliver.
To cater to the need to be entertained, malls are becoming increasingly specialised. The K11 “art malls” in Hong Kong and Shanghai host exhibitions and events; the popular Claude Monet exhibition attracted 350,000 visitors, who then stayed on to eat or shop. Mall sales increased by a fifth during the exhibition. “Bad malls really can’t compete now,” says Alshab. “The standard is being raised so much higher.”
“Many urban communities lack adequate facilities, and malls have become meeting places and destinations for families.”
Inevitably, some businesses will boom with O2O where others are far more vulnerable.
Back at the Bainaohui mall, Chen Huibin, Zhao’s neighbouring retailer, also saw his business slipping last year. So Chen launched his own website, plus social media accounts where customers can look at his stock, discuss or reserve online, then come in and collect items.
“Customers still like to see electrical goods before they pay,” he says. “They want to see it, feel it and check it’s not fake – many people still don’t trust that what they buy online will be good quality.”
China’s retail market is definitely not a place for the risk-averse. At his closed store, Zhao finishes his tea and muses future plans for his business. A new Weibo account, he considers, a different business partner, a website and a new store location. His business isn’t dead; it’s just in a constant stage of evolution.
This feature originally appeared in The Guardian.