With all it's convenience, quirkiness, and college town laid backed-ness, Taipei has always been one of my favorite cities to live in Asia. People in China are always asking me what is it about Taipei, and it's hard to put into specifics. But here's an article that came out recently in Next Magazine that compares the various take out coffee options in town. This is something you might read in Portland, Oregon, but in Asia - with enough attention to garner a three page spread in a major publication? Here's one more reason I like Taipei.

USA Today recently came out with a good article on Chinese luxury gift giving. They were originally going to run the story around Christmas, but opted to run it before the Chinese New Year - which makes more sense as it's about Chinese gift giving. The article gives a good idea of business gifting and how important it is culturally. We're quoted a couple times as well. Happy Dragon Year!

Luxury sales boom in China, where giving gifts is an art

This article I wrote for the China Economic Review was recently published. I talk a bit about middle class Chinese brands and how their future looks bright.

I had a recent chat with China Luxury Network about luxury retailing in lower tier cities, and the interview was printed on their blog. Our firm is part of their Advisor Network.

Here's the transcript:

We caught up with CLN advisor Corbett Wall to discuss retail location strategy in China for luxury brands. Corbett runs +CW Associates, a firm that advises brands on retail location strategy and other key issues related to running retail in China. Corbett spends much of his time travelling to second, third and fourth tier cities walking malls and talking with retail landlords and operators, and has countless stories of brand successes and failures in both first and lower tier markets.

Q: Given the competitive retail landscape and high operating costs in Shanghai and Beijing, do you recommend that luxury brands enter the market in the first tier cities, or should they just go straight to second tier cities?

A: Entering Beijing and Shanghai is really a branding and marketing decision. It is almost a given that brands will not make money on stores in Beijing and Shanghai. There are so few good retail locations in each market, and every luxury brand is lining up to get the same few spots. On top of that, rents are high and most consumers in Beijing and Shanghai are relatively spoiled for choice. It's really difficult to build brand loyalty in Shanghai and Beijing -- all the same people go to all the parties, but once your event is over, they don't really care anymore. However, from a branding standpoint, brands may feel that they need to be in Shanghai and Beijing.

More creative approaches to retail location for market entry are starting to take hold. We are seeing many luxury brands first locate in Hong Kong as their initial entry point to Mainland China, particularly given the difference in luxury taxes between Hong Kong and the Mainland.

I think luxury brands going straight to second tier markets for their entry to Mainland China is a great idea. If you were to go to a prominent retail location in a second tier city and tell them "I don't like Shanghai and Beijing. I would rather locate here first", they would love you and would give you an amazing location.

In general, it always takes much longer to open stores in China than expected. It typically takes at least a year to open a store, sometimes even longer if you are waiting for the perfect spot in Shanghai and Beijing. It may make sense to go to a second tier city first, demonstrate the performance of your store and then go back to Shanghai and Beijing to renegotiate with more leverage.

Q: Do brands that are part of a group (like a Richemont, LVMH, etc..) typically get better retail locations than stand alone brands?
A: Many of the brand groups retail location strategy is being driven by their Hong Kong offices, and they typically negotiate a block of retail space that they divide among their brands. This is both good and bad for them. Due to the large block of space and range of brands, groups have more negotiating leverage than a single brand would have. However, retail landlords will often bundle the best locations with the worst locations, so the brands with the biggest China business get great locations, and the ones that are newer to the market typically get saddled with the less than optimal locations.

Q: What is the biggest challenge for brands operating retail in second and third tier cities?

A: Next to retail location, service is the single biggest issue that retailers face in China, especially in second and third tier cities. There is no retail tradition in China and no veterans to train the young group of service professionals. Many brands are sending foreigners to train and run stores, but there are issues around language and local customs. The hardest thing to teach is the intangibles. Kentucky Fried Chicken has done the best job at training staff in China - they have set up Universities and invested heavily in training.

Retailers are paying high salaries for retail staff in second tier cities (often up to 8,000 to 10,000 RMB per month - on par with corporate staff in large cities), but just paying higher salaries doesn't necessarily translate to better service.

Q: What trends are you seeing for luxury brands running their own China operations versus working with a national distributor or partner to operate for them?

A: We are seeing many of the luxury brands taking their business back from distributors and opting to run it themselves. There are still a number of distributors running brands in the market though - ranging from large scale operators to smaller, more niche players. In general, we are seeing the distributors acting like venture capitalists - they pick ten brands to represent, knowing that only one may make it big. They are hedging their bets and taking a portfolio approach for the most part.

An issue for both self-run operations and distributor run is the choice of local franchise partners in second and third tier cities. Due to the high cost of product to fill a luxury store, the nature of most local partners is that they are "connected in complicated ways", so if you enter into an agreement with a partner that later turns sour, things can get very messy.

Q: Which luxury brands have the best retail location strategy?

A: Each of the brands is following a slightly different strategy, depending upon their customer base and brand positioning. Luis Vuitton for example has spread out very wide across China, and is in most tier 2 cities and a few tier 3 cities. Cartier, on the other hand, has gone to a smaller number of cities, but has gone deep into tier 3 and tier 4 cities. Many of the luxury brands are seeing a single store in a second or third tier city being their best performing store in the world.

In general, I tell brands to go where the money is, so long as you can handle it.

Corbett is part is CLN's Advisor network and is available to provide consultation to CLN members as part of CLN membership. He is also available for in depth projects and advisory.

News

HK New World Department Store Announces Yantai Store

Hong Kong New World Department Store recently announced an agreement with Xianglong Wanxiang Plaza in Yantai's Laishan District to open a 55,000 sqm department store and manage an additional 46,000 sqm of shopping mall. The 101,000 sqm project is expected to open in 2014, making it one of New World's largest to date. Total investment is estimated at $250 million. The entire Xianglong Wanxiang Plaza complex will be approximately 1.63 million sqm in size, with a retail area of 350,000 sqm, and a total investment of $1.28 billion.

+CW Analysis:

NWDS is really on a roll. Last year's revenues increased 46.8%. They now have 37 stores under the "New World" and "Ba Li Chun Tian" brands across 17 cities in China, a total GFA of 1.27 million sqm, zero debt, and $540 million in cash. If any mall owners out there are listening - department stores are killing it.

NWDS is smart and serious. They've quickly expanded from 1st and 2nd tier cities to where the action is - lower tier cities. They see what's happening in the LTCs and are making a move to increase market share by adding another 25 self-owned stores by 2016.

A quick revenue analysis shows some interesting things. NWDS tenant's gross sales are up 66.2%, and rental income is up 77.6%. So while the brands are really selling, NWDS is still making another 11% on top of that bump. This is most likely due to their deliberate rebranding and renovation activities. They've brought in newer brands, improved their F&B and entertainment offerings, and focused more attention on female services, all of which keep people in their stores longer. In store traffic is up 8% as a result.

On top of all this, what we find most impressive is what NWDS has done with their loyalty programs. VIP club members have grown 118%. NWDS now has 2.16 million VIP members. These members contributed to an astounding 46% of their sales.

So maybe NWDS is onto something, that the customer is king.

Five-Star Public Toilets For Karamay

The sanitation bureau of Karamay, Xinjiang recently announced that twelve 5-star mobile public toilets are being installed around the city, including Black Oil Hill, and in crowded downtown areas. The 5-star toilets come equipped with a mirror, coat hook, paper towels, ashtray, diaper changing area, exhaust fan, emergency button, and stainless steel sink and countertop. Soothing music will be played while the door is closed, and all lighting, exhaust, and flushing are automated.

According to Karamay sanitation bureau director Ms. Zhang Huixia, "People's happiness is not measured only by food, clothing, and shelter, but also convenience and a sense of dignity."

+CW Analysis:

First, we had to actually look this place up on the map. Sorry, but we haven't done any retail analysis here yet. From what we know, there are around 300k people, and a hill that oozes oil.

Second, we have to marvel at how the fiscal stimulus money from a few years ago has now trickled down to even the sanitation bureau of Karamay. The fact that there's any money left is remarkable let alone that it's being spent on toilets. As any informed corporate or socialist bureaucrat knows, you need to use it or lose it when it comes to your annual budget.

Third, "crowded downtown areas?"

Dongguan Gets Italian Luxury Mattresses

Italian mattress brand Dorelan recently entered the China market, selecting Dongguan for their first store. CEO Cristian Bergamaschi indicated the importance of the China market at a press conference held in the first floor lobby of Xinghe Furniture City.

+CW Analysis:

We had to giggle when we heard this because selling mattresses in a city with the highest concentration of brothels in China is kind of funny. Selling luxury mattresses is even funnier because we have to assume there is also a huge ernai population in Dongguan requiring that suitors provide the best mattresses money can buy for their mistresses.

Entering China is a complicated affair. A brand needs to decide on the right city, the right partners, and fully understand the local market in order to be successful. Many foreign brand entry stories begin in Shanghai or Beijing and result in an unhappy ending. In this particular China entry case, we think Dorelan has chosen the perfect market - a city that appreciates a good mattress, with the high probability of a happy ending.

News

Water Water Everywhere

Legend Holdings Group, along with three major real estate developers, Dalian Wanda, China Asia Standard, and Dalian Yifang, have announced that they will jointly invest RMB 11 billion ($1.7 billion) into China's largest high-end mineral water project. The project will be located in the Changbai mountain region of Jilin province bordering North Korea. The investment is expected to generate over 10 million tons of high quality mineral water per year by the time the project is completed in 2020.

+CW Analysis:

This is an interesting deal. First of all, Legend is the mother company of Lenovo. Their chairman, Liu Chuanzhi, has already said he wants to make investments into food and agriculture, and they've already ventured into liquor distilling in Hunan and Hebei. Imagine Apple coming out and saying they're launching iWater.

If you don't know who Liu is, now's the time. There's been all this talk about the next Steve Jobs coming from China. Liu already owns that story. In 1984, with a RMB200,000 ($31,000) loan, Liu started Legend out of a one room office in Beijing, and turned it into the second largest PC manufacturer in the world. That's pretty cool for a guy who doesn't wear black turtlenecks, but does probably dye his hair black.

Then there's the other guys, or should I say other really rich guys? Wanda's chairman Wang Jianlin last year gave away RMB1.28 billion ($200 million). Asia Standard Group's chairman Lu Zhiqiang is worth an estimated RMB 16 billion ($2.5 billion), and Yifang's Sun Xishuang rounds out the gang with RMB 3.7 billion ($585 million).
This sounds like it's going to be some expensive water. What happened to the glorious days when comrades just carried around an old Nestle coffee jar filled with boiled tap water?

How's this for a killer sales pitch? "Around 70 percent of the rivers have been polluted. And the pollution isn't getting any better. Water sources that haven't been contaminated are very scarce, which are usually located in remote areas," says Liao Lei, the secretary-general of the natural mineral water committee.

Yes, the people need Changbai Mountain Spring Water! But let's look at this a little closer. These investors, three of them major real estate players, are going to set up China's largest mineral water project in an area that already has seven brands selling Changbai Mountain Spring Water: Quanyangquan, Nongfu Spring, Kangshifu, Xinglongquan, Jiyuan, Tianchishui, and Sanjiang Changbaishan.

Will Wanda water taste better?

Keep in mind that a plain old bottle of water costs about RMB 1.50 on the streets of Shanghai while a premium bottled water can cost upwards of RMB 60 in a restaurant.

Sounds like they'll need to create some serious brand image in order to get that luxury margin.

So why are four really rich guys jumping into the water all at once? Well, this past June the high-end mineral water company Tibet 5100 raised $170 million in their HK IPO. That will make you thirsty. Tibet 5100's profits are also up 232% YoY, selling 28,000 tons of water the first half of this year. With growth like this, establishing a brand and building some market share before it's too late sounds like a good idea, especially with companies like Kunlun Mountain Spring Water and Aershan Mineral Water from Inner Mongolia also entering the market.

Currently, the majority of the China premium bottled water market (defined by Euromonitor as having a retail price higher than RMB 5 per 500ml bottle) is still held by Western companies. As of 2010, Groupe Danone, who sells Evian, Volvic, and Badoit, led the market with a 26.9% share, and Nestle S.A., who sells Perrier, San Pelligrino, Vittel, Acqua Panna, and Contrex had a 4.9% share. Tibet 5100 states in their prospectus that they are the market leaders with a 28.5% share, but when you look closely at the fine print you learn that "Sales volume in 2008, 2009 and 2010 includes volume provided to CRE, its largest customer, for free under a buy-one-get-one-free arrangement entered into in 2008. CRE is a logistics company and an enterprise subordinate to and acting as a procurement agent on behalf of the Ministry of Railways (MOR) in purchasing bottled mineral water from Tibet 5100 Spring. The volume of bottled water provided for free to CRE is in turn distributed by CRE to train operators under the MOR, who serve the bottled water to ticketed passengers on high-speed trains, inter-provincial CRH trains and certain other CRH trains. The volume of bottled water delivered to CRE accounted for approximately 90.9%, 89.7% and 89.5% of Tibet 5100 Spring's sales volume in 2008, 2009 and 2010."

Still, regardless of how much water Tibet 5100 actually gave away (89.5%), or how quickly the premium bottled water market has grown since 2005 (21.2%), or what percentage this segment accounts for of the total retail value of the bottled water market (45.3%) - this still sounds like a real estate play. Why?

Back in 2009, a consortium which included the Dalian Wanda, China Asia Standard, and Dalian Yifang agreed to build China's largest tourist investment project, a ski resort in, you guessed it, the Changbai mountains. With an investment of RMB 20 billion, the Changbai International Tourist Resort will have 43 ski runs covering an area of 30 square kilometers, making it the largest ski resort in Asia.

Women Hold Up Half The Sky Except After Divorce

The first lawsuit following the implementation of China's new Marriage Law was announced in Shijiazhuang, Hebei. The new marriage law has changed the way property disputes are handled after a divorce. A disgruntled Mrs. Sun handed a petition to the court asking for a divorce from her estranged husband. Mrs. Sun asked that the court split 50% ownership of their house between them. However, according to the judicial interpretation of the new marriage law announced in August, their house was purchased before the marriage and paid for by their parents, therefore Mrs. Sun is not entitled to any ownership claim on the property.

+CW Analysis:

It's fairly common practice in Chinese marriages that the groom's family provide a house for the bride, and the bride's family buys the home appliances or a car. This gets the newlyweds started with their life. The husband and the wife raises the family and takes care of the home. The house typically belongs to both of them. If things go south, the wife still has part of the house as leverage.

Now, with the new interpretation of China's marriage laws, a house purchased by parents and registered under their child's name remains the personal property of the child (traditionally the groom) after the child gets married. A house purchased by a mortgage prior to marriage, is considered the personal property of the registered owner, rather than the joint estate of the couple.

This means that after a divorce, the wife, typically not the breadwinner, and therefore typically not the registered owner, has zero rights to the house. Think of the chaos this will create. Property offices across China are filled with wives demanding that they be added to the deed, families are bickering over ownership, and brides are upping the ante for their jump into domestication by demanding cash up front.

We thought that under socialism everyone got a place to live. This new marriage law sure turns that concept upside down.

Brand

I'Happy Celebrates Opening Of 1000th Store

Leisure fashion brand I'Happy (海贝服饰) recently invited Taiwanese singer Wu Pei Ci to commemorate the opening of their 1000th store in Zhengzhou.

I'Happy focuses mainly on female fashion, combining Korean styling with young office chic. Price points range from RMB 150 - 400 and customers are typically in their twenties. The brand has also recently launched a stylish children's line. I'Happy encourages customers to bring home an "extraordinary quality of life, fashion, love, and happiness" with every purchase.

I'Happy is the brainchild of Fang Le Ming, a serial entrepreneur with humble beginnings. Fang comes from a small village in Jiangxi, one of China's poorest provinces, and was orphaned at the age of eight. Attending university wasn't an option for Fang who nonetheless has started two successful businesses - I'Happy, and a high-tech integrated circuit design company called Chipjet which develops and manufactures chips for printers.

+CW Analysis:

This is just another example of the amazing initiative you see in so many Chinese entrepreneurs. It's also a huge wake up call for any brand entering China. Most likely you've never heard of I'Happy, yet they have 1000 shops throughout China. Most likely you don't know who Wu Pei Ci is either (she's not the great of a singer), but she is quite popular. So here's a brand you haven't heard of flying a singer you haven't heard of to a place you haven't heard of. Sounds a bit like that philosophical tree in the forest, but in China there's no time to sit around and think about it.

How is a new Western brand going to compete in a market where there are so many brands already out there? Think about how few Western fashion brands have 1000 stores in China, who they are, how long it took, and what it cost. Then think again about Fang Le Ming and his achievement. As always we're blown away when we look at the scope and size of the China retail market - and all the things we don't know.

This new USA Today article talks about Wal-Mart's recent issues in China, and we are quoted. It doesn't go into the political issues which are always layers of intrigue but it does paint a picture that foreign companies find business increasingly more difficult here. Whether Wal-Mart's troubles are a message to the US, operational issues internally, a one off regional problem, or a growing trend, it's hard to say. One thing for sure, the timing of their troubles is hard to deny, and the escalation and bad press received in worrisome.

China's Wal-Mart sanctions: A trend against foreign firms?

I got a call from the writer asking very intelligent questions about mall developers, retail, and Chinese consumers. This is exactly our sweet spot...

From the October 2011 issue of Shopping Centers Today

By Curt Hazlett

Foreigners in Beijing often turn to the Internet for practical answers to that city's mysteries, such as where to find the best bars and nightlife, or which malls offer the most bang for the yuan. Sometimes, though, their questions are rhetorical. As one newcomer wrote on a local blog in rather fractured prose, using slang for the Chinese capital: I just arrived to bj and I'm curious. Why beijing malls are empty? A few of shopper!

This is a question that could be asked of malls all over China, and India too, for that matter. These two powerhouses of retail development -- where shopping centers have sprung up like cabbages over the past decade -- have seen some reversal of fortune. Many of their shiny new luxury malls are devoid of both shoppers and tenants -- sometimes remarkably so.

In New Delhi six malls opened in the first quarter of this year. Five of them were nearly empty, with occupancy rates of only 7 to 10 percent, according to Jones Lang LaSalle Meghraj. Nationwide, some 17.3 million square feet of mall space opened in 2010, but only 9.3 million square feet of that would wind up leased, according to a Jones Lang LaSalle Meghraj estimate. So bad is the leasing environment that the two-year-old Mallum Mall, in Mumbai, was demolished in June to make way for a residential and office project. The small center's owners had failed to find a single tenant.

"As of now there are close to 225 shopping centers existing across the country," said Amanpreet Singh Banga, manager of retail agency for the Knight Frank India brokerage, in Delhi. "There are just a dozen or 15 which are actually surviving well."

In China stories abound of luxury malls being built in a frenzy, only to open to an indifferent public. At 6 million square feet, the Golden Resources Mall was the world's largest when it opened seven years ago in a Beijing suburb, and yet it has never drawn more than a trickle of shoppers. Still, it has performed better than the New South China Mall, in Dongguan, which succeeded Golden Resources as the world's largest mall in 2005. Designed for 2,350 tenants, New South China Mall now has about a dozen.

"There are empty malls all over China," said Vernon Martin, the principal of American Property Research, a Los Angeles appraisal firm with clients in the U.S. and Asia. "We are dealing with a country whose median income is about 10 percent of the United States. But the developers give them malls full of Sephora cosmetics stores. It doesn't seem rational."

To be fair, successful malls can be found. Sophisticated developers like Singapore's CapitaLand and New Delhi's DLF Group have done well through their careful planning and sound management. But many less-experienced companies have lost uncounted millions. Following we present just a few of the more common problems -- the seven deadly sins, as it were, of emerging-market development.

Overconfidence: How hard could developing be?

There is no lack of self-esteem in China and India. The economic rise of those two countries generated a wave of entrepreneurialism that brought riches to those with the best ideas and the most pluck. And once someone has built a fortune in fast foods or the import-export business, how hard could it be to build a shopping center?

"I recently had a discussion with a potential developer who made a fortune importing lumber," said Corbett Wall, head of CW Associates, a Shanghai firm that works with developers and retailers to expand in China. That entrepreneur had in mind to build a mall, Wall recalls. "More than likely that mall would be a disaster," he said. "His company is a group of people who have never done this before and have no idea what they are doing. You have a lot of those projects -- the independent developer who is convinced that Louis Vuitton and Cartier will come to their mall."

In India excessively confident developers have given short shrift to the desires of both consumers and tenants, says Banga. "This country is new to organized retail," Banga said. "Mom-and-pop is the predominant factor, and these developers don't understand that. They treat shopping centers as they would commercial or residential projects. They are not."

Overbuilding: Bigger is not always better

Life in China and India takes place on a grand scale. Why should their shopping centers not be grand too? In China, where the government owns all the land, those companies granted permission to build have often been so eager to maximize space -- and hence profits -- that they have lost sight of their markets, says Richard Poulos, a partner and executive vice president of The Jerde Partnership, a Los Angeles-based architecture firm with extensive Asian experience. When the government approves a project, it determines the maximum floor space that can be built, Poulos says.

"Say you can build a building with six times the land area," said Poulos. "By the time you get done with setbacks and open areas, it might be something like 3 million square feet. The Chinese say, 'We've been given that FAR [floor area ratio], so we can build that.' But we say that's not market research, it's maximizing what you can build. It creates the problem of building way too much. You can't get the tenants."

Government involvement is one of the differences between developing in China and India, says Poulos. "In China, if the government decides to do something, it just goes and does it. In India ... they struggle with going and doing it."

And yet such relative inefficiency has not prevented overbuilding in India. Jones Lang LaSalle notes that over the past decade, Indian retail development expanded from first-tier cities, such as Mumbai and Delhi, to second-tier ones, such as Bangalore, Calcutta, Hyderabad and Pune -- each of which saw the completion of between seven and 10 malls by the end of 2007. Retail development since then has been marked by "considerable rightsizing," according to Jones Lang LaSalle, but the building boom has not gone bust. The firm predicted last year that 37 million square feet of retail space would be added in India's top seven markets between the fourth quarter of 2010 and the end of 2012.

Getting bad advice -- or none at all

Unfettered expansion raises a question: Why does market analysis not dissuade developers from risky projects? "What 'market analysis'? " quipped Wall. Many of China's inexperienced developers shunned outside expertise during the hottest years of the boom, he says. "When the economy is on fire, people aren't going around trying to measure things," Wall said. "When people have made a lot of money, it is incomprehensible to them that they aren't going to make more money." Moreover, he adds, "this is a discount culture. They would have to pay for it. Services are very low on the totem pole, and nobody wants to admit they don't know something. Nobody wants to hear that their grand idea isn't going to work."

Even when consultants are hired, their advice is not always sound. The developer of the New South China Mall, who made his fortune in the instant-noodle business, engaged a Chinese research firm to analyze the market in Dongguan, an industrial city. "I read the feasibility study," said appraiser Martin, who also visited the mall. "Their attitude was that if you built the biggest mall in Dongguan, people would come. They completely overestimated the trade area, thinking that everyone would drive to it. There was no consideration of spending power. It didn't make sense."

Trading quality for speed

As is often the case in booming economies, mall developers in China and India learned quickly that moving fast meant bigger profits. In China two things are driving that hurry-up-and-get-it-done attitude, Poulos says. "First, they are impatient entrepreneurs and they want to get it finished," he said. "The other is that the government wants things done as well. It has anti-speculation policies in place. It doesn't want people holding onto land. So there is a very tight time frame before they pull the land back. That hurry-up mode causes mistakes to be made."

Wall notes that many Chinese developers have no experience in the business and neither have they any desire to stay in it. He describes their attitude as: "We'll do the best we can and then get out of it." Such malls usually are sold off in pieces to local retailers with the result that the property is in effect unmanaged. "Who is going to manage something they can't collect fees from?" he asked. "You have this mall that no one takes care of or manages, and eventually it deteriorates and becomes a ghost mall."

The desire for quick profits has hurt Indian malls as well, says Banga. "Many developers will capitalize the value of a center by selling it," he said. When that happens, "you have practically lost management control over the shopping center. It is a big, big reason for failure."

Indeed, the pressure to reap profits was so great that until recently almost 95 percent of India's malls had multiple owners, sometimes hundreds of them, Anshuman Magazine, chairman of CB Richard Ellis South Asia, told the Indian business press. "If a mall doesn't have single ownership, it loses direction," he said.

Leasing left for last

Given the haste with which many properties have been developed, it may come as little surprise that the hard work of finding quality retail tenants has often been put off until the end, with disastrous results. Many Chinese developers did not even think about tenants at the start, says Poulos, who has had long experience in China. "You'd ask how leasing was going and they'd say, 'What do you mean leasing?' The feeling was, build and they will come."

Banga echoes that. If an Indian mall is 60 or 70 percent leased, its operator is very happy, he says. "That's the reality," Banga said. "The lesson is that pre-leasing has to be done before the project goes up."

Lack of a strategy

Retail development has a steep learning curve, and developers in China and India are quickly discovering what works and what does not. In current Chinese centers "we are now seeing much more sophistication," said Poulos, but early malls "were just stacked up like a bunch of donuts, and the merchandizing was random. Wherever someone wanted to go, they just put them there." Many of them lacked any tenant or merchandising strategy, "meaning that there isn't a road map of the types of tenants that should go where within the project."

Wall, who has spent much of his life in Asia and has lived in China for 20 years, says the retail concept most familiar to the Chinese is the department store. "We know that department stores and malls are completely different animals," he said. But in China the department store model has been widely applied to malls. "The merchandise is all crammed in -- that's the mentality. There is really no merchandising. The people who used to run department stores are the people they are hiring to run malls. You can't find an experienced mall manager. The ones who have experience are imported from Hong Kong or Taiwan."

Location, location, dislocation

It should go without saying that the key to successful retail, whether in a developing market or an established one, is to be in the right place to serve a chosen market. A center's tenant lineup needs to mesh with consumers' needs and spending ability, and shoppers need to be able to get to the center with a minimum of hassle.

Yet industry observers say poor location is among the biggest reasons for the rash of failed malls in China and India. A good example is New South China Mall, which is connected to neither train nor subway lines and is in a pedestrian-unfriendly neighborhood, according to Martin. "The successful Chinese retail districts are near train stations," he said.

Said Wall: "There are malls that are very well built but in the wrong place. They got the opportunity to build a mall, they got a good architect, it's beautiful -- but it's in the wrong place." One such is Beijing's massive Golden Resources Mall, built in a difficult-to-reach area of the city. How difficult? As one blogger advised a prospective visitor traveling from the city's main rail station:

Take subway line 2 to Xizhimen station, then transfer to subway line 4 to Renming Daxue (Peoples University). Walk about 200 meters to Sitongqiaoxizhan, take bus 365 or 355 to Yuandaludong and walk about 300 meters to Golden Resources Mall.

Such inconvenience has registered in the mall's results.

There are, of course, many other reasons malls can falter, ranging from ineffective design to poor management, and newcomers can be expected to make such mistakes. But those who have worked with developers in both China and India make it clear that this emerging wave of developers is learning quickly.

Indian developers have embarked on a more cautious course, says Banga, and new projects "are being delivered on a global standard. They are much better in terms of location, design and accessibility." Among these are Select City Walk, in New Delhi, and Inorbit Mall, in Mumbai.

And in China, savvy developers are catching on to the interconnected nature of the retail business. "There are groups here now that understand that retailing is an ecosystem," said Wall. "At the end of the day, the tenants you have and the mix of those tenants determine what type of people comes in and spend money. They are starting to get that."

Said Poulos: "The Chinese are really smart. They are watching things and learning quickly."

News

Move Over Phantom, Chairman Mao Hits The Stage

Chairman Mao's hometown in Hunan province recently announced plans that they will invest RMB 500 million into a world class theater production entitled "China Has Mao Zedong."

The city of Xiangtan plans to promote "red revolution tourism" by depicting the thirty some years of history from 1921, when the Communist Party of China was founded, to 1949, when the New China was established. The production will be held in the Shaoshan Mountain scenic area in cooperation with three companies jointly investing 500 million into the project - the first stage of a bid to build a new town with cultural and historic sites and destinations.

Xiangtan Radio and Television Secretary, Xiong Xing Bao, said that Hollywood film director James Cameron of Titanic and Avatar fame, along with a number of famous Chinese directors will be invited to contribute to the show. The city though is still trying to reach Cameron, and just last month posted a request on weibo.com asking for his contact information.

+CW Analysis:

A bit of a ripple effect going on here with this red revolution theme. There was some global press a few months ago when Bo Xilai had residents in Chongqing gather and sing revolutionary songs. TV and radio broadcast the songs, newspapers printed the lyrics, and people gathered in large groups to sing songs such as Love of the Red Flag and Good Men Should Become Soldiers.

With Mao meets Avatar, it might be a bandwagon effect, but we think that whatever happens, whether Cameron is ever contacted via weibo, whether the show is ever produced, whether 500 million is ever invested, in the end, somehow, this will most likely be a real estate play. Property in Changsha and neighboring Xiangtan is booming, and with the new high speed rail line now linking Guangzhou to Changsha/Xiangtan in a little over two hours, people from Guangzhou can enjoy a nice weekend in a town filled with spicy food, raucous night life, and continue the party in a spacious villa purchased for about RMB 12,000 psm. Oh yes, and catch a showing of Mao meets Avatar too.

But back to Bo. We think Bo is the main character here. He's the brand maker. He certainly understands positioning and how to get his brand message across.

Take this quote for example from a Beijing political analyst Russell Leigh Moses: "Bo's campaign is multidimensional, but its primary objective seems to be trying to redefine local affairs as mass politics. [It] is not about policy as much as it is about a new communist theology that is nostalgic and not like anyone else's."

Replace "affairs" with "style", "politics" with "media", and "policy" with "fashion" and you have a well crafted branding statement that could have been written by any top ad agency for any global fashion brand.

Pass The Popcorn In Linyi

Six-hundred seat Dongfanghong Theater is the only place to watch a movie in Linyi, a southern Shandong town of approximately 1.8 million people. But that's all about to change. Following Linyi's fast paced development, five national theater chains are now under construction. A year from now moviegoers will have more than thirty screens to choose from.

Poly International Studios, Happiness Blue Ocean Studios, Wanda International Cinema, Jinyi Cinema, and Xingmei Theater are all 5-star theaters bringing a new movie going experience to Linyi's audiences.

With movie tickets costing RMB 50-60, many people choose to watch on Tuesdays - 50% discount night. Still, theater revenues have exceeded RMB 1 million.

+CW Analysis:

If you haven't been to the movies recently, you're in for a surprise. The China movie theater business is on fire. China currently has approximately 1,800 cinemas with about 6,200 screens. Compare that to the North American market, which has around 5,400 cinemas with 39,000 screens. Think 100+ new multiplexes being built each year. That equates to 10,000 screens in five years and 15,000 screens in ten years. Every new mall we visit seems to have a movie theater anchor on the top floor.

There's plenty of room for growth here as well which is why cities such as Linyi are building five new theaters. It's not that one billion Chinese suddenly decided to go see a movie, it's more about giving people new options to spend their extra pocket money. If you've got RMB 100 in your pocket and you're on a date in Linyi - where do you go?

This amazing growth has turned the heads of movie executives everywhere. Last year's box office in China grew by 61% making it the third-largest box-office market in the world, behind Japan and the U.S. In dollars that a cool $1.5 billion. These numbers are impressive, but for Hollywood there's still a strict quota on foreign movies. Chinese theaters are required to devote two-thirds of screen time to domestic films, and only 20 foreign films a year can share in domestic box office. Of this, the foreign studios receive about 15% of gross receipts. So even though the market is booming, Hollywood isn't cashing in just yet.

Aokang Shoes Planning IPO to Not Make Shoes

The China Securities Regulatory Commission is examining Aokang Shoes recent IPO application. Aokang, based in Wenzhou, and one of China's largest shoe manufacturers, plans to use the IPO proceeds to purchase prime retail locations in major cities throughout China. According to their analysts, investing in real estate will produce higher returns than investing in the brand.

Aokang is a major leather shoes producer and retailer in China with three production bases, two research centers and over 3,000 retail stores. The brand is estimated to be worth RMB 8 billion.

The IPO issuance is for 81 million new shares, increasing Aokang's total outstanding shares to 401 million.

+CW Analysis:

Looking through the Aokang prospectus, it outlines that Aokang plans to invest RMB 870 million for property. This includes 12 new flagship stores, 38 concept stores, 120 stand alone stores, and 180 shop-in-shops. RMB 96 million will be invested in IT upgrades, and RMB 50 million will go into R&D.

This is a bit like Nike issuing a statement that says, "Dear Investors, We don't really believe in the value of our brand, but we know that if we buy a lot of property, we will make more money."

Let's look at the boardroom logic behind this.

As of the end of 2010, Aokang had a total of 3869 retail shoe shops, with about 10% directly operated, the rest being franchisees. Although two thirds of their revenue comes from the franchisees, the average income of their directly operated stores was RMB 1.2 million per store. With a gross margin of 44%, the average direct store has a profit of RMB 530,000. Franchises on the other hand bring a gross margin of 32%, with an average profit of RMB132,000 per store. Since self operated stores obviously make more money, why not invest in more self operated stores?

So Aokang's thinking goes like this: "Dear Investors, We will focus our resources on the 10% of our sales network that makes up 30% of our revenue, and forget about the 90% that makes all the rest."

Kathy Chu from USA Today writes an informative article about Western brands looking further into China for expansion.
As this is what our business is focused on, and since we're quoted, I highly suggest reading the article.

U.S. brands open 2nd phase in China expansion

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