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.

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."

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

Imagine the work involved in copying an entire IKEA store - the furniture, the layout, the colors, even the blue and yellow bags and little pencils! That's exactly what 11 Furniture (十一家具) has done in Kunming.

Will IKEA cry foul, spend a few years in court to maybe get $20,000 in settlement, or will they figure out a way to get a store open there fast and hire over all the employees?

What would you do? What can you do?

Source: Reuters

I work a lot with foreign companies either already doing business in China or preparing to come to China and get a piece of the action. I learn a lot about each client's business model, operations, management, etc in these discussions, and eventually the topic will turn to the possibility of making a lot of money here, and the equal possibility of losing a lot of money. Hopefully they will learn something from me as well about what the fine print really says on their "Welcome to China" contract. I'm not a lawyer, but I always tell them the same things below:

- you got to do your homework
- you can't know what's really happening so don't assume you do
- beware of people who say they have friends in high places
- don't trust the numbers

I think these are fairly common sense rules for doing business anywhere, right? Well, you'd be surprised.

Today I'm reading a great article in SFGate titled, "China shell firms take Wall Street for a ride" which is a textbook case study in all of the above.

After raising upwards of $125 million through a back door listing, the question comes up, "Hey, where's all the money?" The punchline quote from the Chairman's wife is "What I can tell you is that our company is doing well and the operation has been very normal."

What she should've said was, "I still can't believe you guys were dumb enough to actually give us $125 million in the first place."


China shell firms take Wall Street for a ride
Azam Ahmed, David Barboza, New York Times
Sunday, July 31, 2011

Dalian, China

It was the hot new thing on Wall Street - one of those exotic investments that seem to promise untold riches for the lucky few.

And, like so many hot new things, it went cold fast.

Such was the fabulous stock-market flameout of a company called Rino International, an untested enterprise that, until recently, would have raised nary an eyebrow in the United States.

But over the past few years, Rino International and scores of other young Chinese companies slipped into the U.S. stock market through the back door. Rino's U.S. stockholders later lost hundreds of millions of dollars when accusations surfaced that the company had fudged its books. All told, investors' losses on these Chinese ventures have stretched into the billions.

How companies like Rino wormed their way into the temples of U.S. capitalism is a story for these financial times. Even amid the wreckage of the 2007 to 2008 financial collapse, an ecosystem of Wall Street enablers - bankers, lawyers, entrepreneurs, auditors - spirited Chinese companies to the United States. With some deft financial maneuvers, these businesses essentially went public while sidestepping the usual rules. Before long, many were trading on the Nasdaq stock market, alongside the likes of Google.

It was all perfectly legal. With bankers' help, the Chinese companies executed what are known as reverse mergers. They bought U.S. companies that were merely shells and assumed those companies' stock tickers - sort of the Wall Street equivalent of "Invasion of the Body Snatchers." The strategy let them avoid reviews with state and federal regulators that are normally required for initial public stock offerings.

At issue now is who should bear responsibility for the bursting of yet another Wall Street bubble. Should it be the Chinese executives and their bankers, who engineered the deals and celebrated these companies? Or should it be the investors, who bought these stocks when, in hindsight, the risks seemed clear enough? The lawsuits are flying.

Next to Bernard Madoff and the sins of the subprime era, the supposed shenanigans of a few Chinese companies might seem like small beer. But the developments underscore fundamental questions that came to the fore in the financial crisis: What do the people who create and sell investments owe to those who buy the investments? And where, if anywhere, are the regulators?

Dozens of Chinese companies that, like Rino, entered the U.S. market via reverse mergers have since been accused of fraud or shoddy accounting. The shares of at least 19 of them have been suspended or delisted by Nasdaq, wiping out billions of dollars in stock market value. Shares of Rino, which were flying high at $35 in 2009, have been removed from the exchange.

Laurence M. Rosen, whose law firm has filed a class-action suit against Rino International, says Rino's bankers failed investors. Wall Street didn't do its homework, he says.

"This is egregious," Rosen says. "They said they did due diligence but were fooled - but they weren't doing any solid due diligence."

Rino has been accused of creating phony business contracts and wildly inflating its sales, among other things. Executives at Rino International, which is based here in Dalian and makes industrial pollution control systems, declined to comment, beyond saying that it is conducting business as usual.

There is not much to see outside the headquarters of Rino International. The company resides in a bland corporate park that is home to a number of other Chinese businesses. A guard stands watch at the gated entrance. Inside, workers load steel beams onto trucks. The bang and hum of factory work rises from workshops.

Dalian, a seaport city in northeastern China with a population of about 6 million, in recent years has developed into a fast-growing hub of machine manufacturing, petrochemicals, oil refining and electronics. Driving this growth have been companies like Rino, whose name means "green promise" in Chinese.

For international investors, Rino was an alluring equation: "China" plus "environment" equals profit. Like many other Chinese companies, Rino faced obstacles in borrowing money from the state-owned banks that dominate the country's economic life. It also confronted hurdles in going public on stock markets in Shanghai or Shenzhen, where share prices have gyrated wildly.

And so the entrepreneurs behind Rino - Zou Dejun and his wife, Qiu Jianping - turned to Wall Street.

The matchmaker in this transcontinental deal was an American, Chris Bickel, who earned handsome finder's fees for bringing Chinese companies to the attention of investment bankers and lawyers back in New York. Working from China with a small New York financial advisory firm, Douglas Financial, Bickel helped package Rino International for its Wall Street debut.

"We determined at the time that this was a significant market and they had the technology," Bickel recalls, adding that any possible improprieties arose later.

As part of the plan, Rino got new handlers in New York: a law firm, an investor relations firm, a new auditor. To complete the package, the company named as its chief financial officer Bruce Richardson, a U.S. businessman who had spent more than a decade in Shanghai. Richardson declined to comment.

To gain entry to a U.S. stock market without an IPO, Rino needed to find a U.S. shell. Enter Glenn A. Little, a Texas entrepreneur who specialized in buying defunct companies and selling them in reverse mergers.

In 2002, Little paid about $100,000 to buy Jade Mountain, a failed medical devices company that had once been publicly traded. Jade Mountain, based in Nevada, had no business operations, no debt, no liabilities. What it had was a current stock registration.

Little himself was so enamored with Rino that rather than take payment in cash, he asked for shares in Rino. The bankers' pitch seemed irresistible, he recalls, all the more because several big institutions, including Bank of America, were investing in Rino, too.

"They gave me a book and it had the two most exciting words you could hear: 'China' and 'pollution,' " Little says. "They had audited financials, big-name lawyers and Bank of America."

In October 2007, soon after Rino acquired Jade Mountain, Bank of America and about a dozen other investors, including Alder Capital, a hedge fund, bought Rino shares in what is known as a private placement. That sale raised $25 million. Before long, Rino stock was trading on the over-the-counter market for about $4.50 a share.

Over the next several years, Rino reported ever-higher quarterly profits. It expanded its business and its product line. Word spread on Wall Street: Rino was a company to watch.

David N. Feldman, a New York lawyer and the author of "Reverse Mergers and Other Alternatives to Traditional IPOs," says that such reverse mergers reflected a confluence of two powerful forces. One the one hand, Chinese companies were desperate to raise capital. On the other, U.S. investors were desperate to tap into China's fast-growing economy. "A lot of this is about access to capital," Feldman says.

Alan Greenspan and Diana Ross were headliners at a September 2009 investment conference held by an investment bank that is little known outside financial circles: Rodman & Renshaw.

Founded in 2002, Rodman has carved a niche for itself as the Goldman Sachs of private placements - sales of new stocks or bonds that circumvent the public markets. The hurdles for these private sales are lower than for public offerings, the theory being that the buyers - large, supposedly sophisticated investors - can do their own homework.

Like many investors, Rodman smelled opportunity in China, and in 2009, when Rino wanted to raise more money in the United States, the bank gave the Chinese company a prominent place at its gala. The presentation served as Rino's splashy debut before thousands of investors.

A few months later, Rodman helped Rino raise $100 million in a deal that valued the Chinese company at nearly $1 billion. From there, however, Rino's stock price began to decline. In November 2010, it fell off a cliff.

That month, Muddy Waters Research, a firm that has grabbed Wall Street attention by digging up dirt on Chinese companies, released a scathing report on Rino. It said Rino had vastly overstated its revenue, fabricated contracts and diverted tens of millions of dollars to its own executives.

Rino later owned up to some of the findings and cautioned that its financial statements from 2008, 2009 and early 2010 "should no longer be relied upon." Eventually, the Securities and Exchange Commission suspended trading in its stock.

Representatives of Rodman & Renshaw, which itself went public by assuming the ticker of a defunct company, declined to comment.

When it comes to China, the question on many investors' minds is how fast its economy can keep growing. Beijing has been trying to head off a new surge in inflation.

Back in the United States, there has been an explosion of class-action lawsuits, many of which are aimed at auditors and investment banks that brought Chinese companies to U.S. markets. Everyone is pointing fingers at everyone else: Lawyers are blaming the bankers, and the bankers are blaming the auditors, and the auditors are blaming executives in China.

Fanning the flames is an army of private investigators, bloggers and Wall Street short-sellers that hope to profit from the stock-market implosions, like Muddy Waters.

In the aftermath of the China meltdown, reverse mergers have slowed sharply, and the SEC has warned investors of risks associated with such deals. SEC officials met Chinese regulators two weeks ago in Beijing to discuss auditing rules for such companies.

Chinese regulators are worried.

"I hate these scandals; everybody hates them," Liu Qingsong, deputy director of the research center of the China Securities Regulatory Commission, said this month at a conference in Singapore, as reported by Reuters. "The scandals are very damaging to the reputation of all Chinese companies in the U.S."

Yet, for many, China seems irresistible, with money to be made and, invariably, lost. Since 1990, the benchmark stock index on the Shanghai exchange has soared 27-fold, despite a crash in 2008 and a lot of ups and downs in between.

One question that won't go away is whether investors can really trust the numbers in China. Even investors like John A. Paulson, the hedge fund manager who made a killing on the subprime collapse, have lost big in China.

Michael Licosati, a founder of Alder Capital, bought shares in Rino. Today, convinced that fraud is rampant in China, he is betting against such stocks.

"You cannot compare the capitalist system in the U.S. with the capitalist system in China," he says. Bank of America, another early Rino investor, declined to comment.

In Dalian, Qiu, Rino's chairwoman and the wife of its CEO, says only that it is business as usual at the company.

"What I can tell you is that our company is doing well and the operation has been very normal," she says.

Inside the gated compound, workers in tarred jerseys and goggles weld and drive screws. Back in New York, Rino's shares are frozen at 40 cents.

Sun Art Retail is a joint venture between the most profitable hypermarket operator in China, the Taiwanese run RT-Mart, and the French hypermarket operator Groupe Auchan. They plan to IPO in HK in about a week for an estimated $1.1 billion and will be the largest operator in China.

I'm a prospectus geek, and am always interested in reading what the risk factors are. These are usually the key business drivers.

Sun Art Retail's risk factors pretty much cover all the bases for any large retailer trying to do business in China. Just replace "hypermarket" with the name of your retail operation.

Here they are:

• If we are not able to maintain an optimal level of inventory, our business, working capital and operations may be materially and adversely affected.
• If we fail to obtain or renew the regulatory licences, approvals and permits we need in order to operate, our existing operations may be interrupted and our expansion plans may be materially and adversely affected.
• We depend on our senior management and other key employees and our ability to attract and retain talented employees.
• Our business relies on the satisfactory performance of our information technology systems and any malfunction for an extended period or loss of data could materially and adversely affect our ability to operate.
• The land use right certificates for certain parcels of land on which we operate or will operate our hypermarkets may be defective or non-compliant with the relevant PRC laws and regulations.
• We may not be able to renew any of our existing leases for our hypermarkets on terms commercially acceptable to us and our leases may be terminated prior to their expiration.
• Some of our leased properties may lack requisite building ownership certificates or lease registrations, or may be subject to mortgages.
• Major remodelling or renovations of our existing hypermarkets may affect our business, financial condition and results of operations.
• We may fail to anticipate and provide the appropriate mix of merchandise to satisfy customer tastes and demands.
• We may be subject to product liability claims relating to defective products.
• Real or perceived quality or health issues with the products offered at our hypermarket complexes could have a material and adverse effect on our results of operations.
• Our business depends on our trademarks and tradenames, which we may not be able to protect against infringement.
• Adverse claims, media speculation and other public statements relating to us, our Shareholders and their respective businesses or the retail industry may have a material adverse effect on our results of operations.
• The merchandise sold in our hypermarkets may be subject to third party intellectual property rights.
• Any disagreement or dispute between our Controlling Shareholders may materially and adversely affect our business.
• We had net current liabilities as of 31December 2008, 2009 and 2010 and 31 March 2011, and if we are unable to meet our liabilities as they become due, we will be in default of our liabilities and our financial condition and results of operations will be materially and adversely affected.
• Our insurance coverage may not cover all losses, which may increase our operational costs.
• Our business may be harmed by power shortages in the PRC.
• Our historical dividends and Special Distribution may not be indicative of our future dividend policy.
• Our equity interest in our principal operating subsidiaries in the PRC, namely ACI and CIC, will be diluted in the future by the issuance of equity interests pursuant to our Employee Trust Benefit Schemes.
• PRC policies, laws and regulations prohibiting the issuance of pre-paid cards may have a material and adverse impact on our operations.

This very scary brand and window display were in the back of a large mall complex in Wuxi. The adjacencies were a row of garbage dumpsters and an empty employee parking lot.

It was dark and I half expected a horde of zombies to come crashing out the doors and chase us down the street.

Here's something that you don't see very often in China - a smiling service person.

Jess was working at the McCafe and had the biggest, happiest smile I've seen in a long time. She made a perfect cappuccino, had a great positive attitude, and obviously loved her job! Wow. This McCafe (Nanshan Blvd and Guimiao Rd) in Shenzhen has won my business any day over Starbucks. Thanks Jess for making our morning great.

Spending as much time as I do in shopping centers, especially in smaller cities around China, you begin to appreciate the creativity that goes into copying. Isn't that an oxymoron you ask? How can copying be creative? Actually it is, and oftentimes very funny. Here's some brands I've noticed recently based on the E-trend.

What is the E-trend you ask? Good question. In order to understand the E-trend you would first have to be in China, a woman shopper or in fashion, and understand who E-Land is. Google "E-Land" and learn a little about this Korean family of brands who is simply just kicking butt here. They are fantastic operators - from expansion to distribution to storefronts, even down to buttons and zippers. Many of the larger brands can only look at them and think "How are they doing it?" I know how but unfortunately can't tell you : )

The last one is a nice double entrende as it also plays off of E-Land, G-Star Raw, and is particularly funny or creative (depending on how you look at it) since you can almost follow the train of thought:

"We need a name for our brand. Let's copy G-Star Raw. They're pretty famous. Let's call ourselves G-Spot Raw."
"But isn't G-spot too sexy? People might think we're a sex shop. And then adding raw after it?"
"Yeah, maybe you're right. Wait a sec, I got it, let's call ourselves E-Spot Raw."
"Ooh, I like that. And it's like E-Land as well. They sell a lot of clothes. We'll sell more clothes than both of them
now!"

Note: All these brands were in the same shopping center.

Following up on the Oh My God! coffee shop which we loved so much in Yangzhou, I recently discovered Oh My Fish!

I've never had the pleasure of shouting out "Oh My Fish!" in English before, but I have heard it uttered a few times. Once was when my Taiwanese friend Andy came home to discover his beloved salt water fish were all floating at the top of his new tank. Another time my wife was cooking something and went to answer the phone, and I heard a shriek and a shout colored with a few strong adjectives, as she burnt the mackerel beyond recognition. "Holy mackerel!" would have been the perfect line, but we were too busy dealing with the smoke to be that clever.

If you are squinting and wondering where the Oh My Fish! is, it's here...

This was in Shenzhen, and unfortunately I didn't have time to eat there. Next time.

I noticed these Forever 21-ish brands recently popping up in 3rd tier cities...

Here's another example of an up and coming 3rd tier city franchise that I hope will come to the big city. So far we've only seen it in Yangzhou.

Baby Bear (宝宝熊). Baobaoxiong offers a nice environment resembling a KFC, a good Chinese food menu, and QSR efficiency. I also astonished the counter girl by winning three receipt lottery numbers in a row!

I looked at this for a long time before I could figure out what it was. People before me tore open the box to see what a clothes-horse looked like. All we have to go on is the celebrity sponsor - and the Chinese of course which says "digital remote control liang yi ji", which means clothes drying machine. It's obviously not a clothes drying machine like the kind you open the door and stuff your clothes into. So my guess is that it's a rack of some kind. And if it's a rack, with digital remote control (in big letters), it's probably the kind you hang outside your window so you don't have to use a stick. Otherwise why would you need a digital remote control to control the rack on the ground? But what about the horse? Is the pretty girl the clothes-horse? Is there an inside joke here? Am I missing something? Sure a lot of questions to ask to figure out what the heck this thing is. A case study in how not to promote your product.

Having spent a week recently in Yangzhou, I had a chance to wander about and get a feel for the city while our staff were doing their thing. One of my favorite finds was this coffee chain called Oh My God! The name is funny enough, but what makes it even better is when you look at the Chinese which says 我买咖 (wo mai ka) or "I buy coffee." interestingly enough Oh My God! is apparently a Yangzhou brand as none of us had seen it in other cities - even in nearby Nanjing. Yangzhou is what most would consider a 3rd tier city, and it's great to see a creative successful concept starting here.

We liked Oh My God! enough that it beat out the only Starbucks in town as our temporary office of choice.

You have to admire the stamina of these retailers. I took this shot in Nanjing. The whole neighborhood is being razed, and these were the only remaining tenants on the entire block.

Zoom in and the sign says "Last 2 days". This is really an everything must go sale.

Having worked with these companies, and knowing their real estate placement rules, it's funny to see this happen.

This was at a large intersection in a nice little town called Yangzhou. Is this a sudden truce between two fierce competitors or does the distributor have both licenses for the city? Or are the both knockoffs?

These are some of the things you have to be on top of here. Imagine what HQ would think if this happened on your watch.

I'm always intrigued by new brands. On this recent trip to Changsha I ran across a couple of interesting ones.

Here's a piano brand - the world famous Sterinborgh. It's not a Steinway, nor a Steinberg, it's a Sterinborgh! I took a look at the Sterinborgh & Sons website out of curiosity, and there actually is a .de site, but what ruins it is the "Germany Sterinborgh Pianos" logo, and the "YourCompany.Com ◎ 2005" in the header. But you have to hand it to them for at least setting up a site in German. Too bad the site is owned by the Xiamen Zhuoyue Trading Co.,Ltd. and was set up in 2009.

Here's a fun KFC style place called CSC. In Chinese it's 乡村基 (xiangcunji), or country chicken. I love the blue and green hair on the smiling cartoon faces.

And finally, not to be out done, there's my favorite, Pussie Gatto. I don't think the brand owners watched Loony Tunes as a kid, but I did, and as any cartoon fed kid from the 70's will know, Pussy Gato was what Sylvester J. Pussycat Sr, aka Sylvester the Cat, was called by his arch-nemesis Speedy Gonzales - the fastest mouse in Mexico, who ran around yelling "Arriba! Arriba!" and frustrating Sylvester to no end.

And to think all this can be found while poking around in Mao's hometown.

Here's something to ponder...

Imagine you were partnering - not just an investor - in a Chinese business like Soufun, which recently had a very successful IPO of about $125 million recently. For Q1 and Q2 of this year, the company made $5.3 million net on $68.2 million gross.

Take a look at their share structure and tell me if you can follow where a dollar comes in and where it goes out. I certainly can't.

The reason I bring this up is here's an example of a company that has been scrubbed and prepped in order to go public on Nasdaq. In other words, they are about as transparent as you can get for a Chinese company. Even after all this, it's hard to follow the money.

Now think about partnering with a company that hasn't been scrubbed clean, and you have some idea of why so many ventures here fail.

Reading a recent NYT interview of Paul Maritz, president and C.E.O. of the software firm VMware, I was left thinking how many teams actually have all these attributes. It's very difficult for a company in such a fast moving market like China to fill out the team correctly, putting even more stress on the bottom line.

Very interesting insights, and something worth thinking about when looking at staff and yourself.

"At the risk of oversimplifying, I think that in any great leadership team, you find at least four personalities, and you never find all four of those personalities in a single person.

You need to have somebody who is a strategist or visionary, who sets the goals for where the organization needs to go.

You need to have somebody who is the classic manager -- somebody who takes care of the organization, in terms of making sure that everybody knows what they need to do and making sure that tasks are broken up into manageable actions and how they're going to be measured.

You need a champion for the customer, because you are trying to translate your product into something that customers are going to pay for. So it's important to have somebody who empathizes and understands how customers will see it. I've seen many endeavors fail because people weren't able to connect the strategy to the way the customers would see the issue.

Then, lastly, you need the enforcer. You need somebody who says: "We've stared at this issue long enough. We're not going to stare at it anymore. We're going to do something about it. We're going to make a decision. We're going to deal with whatever conflict we have."

You very rarely find more than two of those personalities in one person. I've never seen it. And really great teams are where you have a group of people who provide those functions and who respect each other and, equally importantly, both know who they are and who they are not. Often, I've seen people get into trouble when they think they're the strategist and they're not, or they think they're the decision maker and they're not."

You will often hear that Chinese prefer to eat pork over beef. Yes, this is true, but how do we really know? Here's a couple of pictures to drive the point home.

Pivot left 20 degrees...

Pivot right 20 degrees...

Passing through People's Square in Shanghai the other day, I couldn't help but notice the neck in neck competition between the two drink shops featuring pointy headed cartoon blobs. A lot of mixed messages going on.

On the left you have Luya Yogurt Shop. The Luya logo is in English but what does it mean? In Chinese the name says "Yogurt Shop", so it's a 50/50 English/Chinese branding mix. For a Chinese reader it's pretty obvious the place can't just be called "Yogurt Shop," so it must be called Luya - but that's unclear and you're kind of stuck looking at the cartoon for identity.

On the right you have Coco in English, and in English it says "Fresh Drinks," but the Chinese name says "Du Ke Tea Drinks". But which one is it? Du Ke or Coco? Hard to say. If it's hard to say, then it's unclear, so once again you are probably looking at the cartoon for identity.

But what does the pointy headed cartoon blob have to do with either?

I'm having issues here trying to figure out which one is better than the other in terms of brand placement. Luya seems easier to grasp since there's no conflicting Chinese name, but Coco is definitely bigger and clearer, but still you have the whole Du Ke Chinese conflicting name thing going on.

As you can tell, branding a retail chain well in dual languages can get confusing.

Final decision? See which one is still there in three months.

I was sitting in one of my favorite cafes the other day between meetings when a group of business-like foreigners sat down at a nearby table and were being, well, for lack of a better term - loud foreigners. They were bouncing between business-like topics like imports, economy, domestic consumption, corruption, relationships, government, RMB, etc, and then I overheard three complaints which rang out like a mantra for foreigners doing business here.

"They lie"
"They cheat"
"Everyone's on the take"

I hear this mantra a lot. There's a lot of reality to those complaints, and not just between foreigners and Chinese, but I hear this from Chinese business people all the time as well. But as we are taught in the great books and also in expensive Hollywood movies where they blow stuff up, we need to constantly remember - reality is just perception.

With this in mind, here's what I tell people when they chant this mantra.

Lie
Our common definition is...
To speak untruthfully with intent to mislead or deceive;
to convey a false impression or practice deception

So...
Don't get stuck on the "wrongness" of it. Get used to hearing things that are not true and not getting upset by them.

Working definition:
Words spoken as a way to get from point A to point B, usually involving money or something valuable as a final destination.

Cheat
Our common definition is...
To act dishonestly; practice fraud. To violate the rules.

So...
Being cheated is a result of assuming something will happen the way you think it "should" happen. Don't assume, and chances are you won't feel cheated.

Working definition:
An unpleasant surprise like turning on the hot shower and getting cold water. It's still your fault because you didn't check the water heater before you got in.

On the take
Our common definition is...
Taking or seeking to take bribes or illegal income

So...
Yes, get used to it. It happens. A lot. Have strong internal policies and hire honest people.

Working definition:
Watch everything, and always make sure to leave enough money on the gas card that's left in the Gucci man bag that's forgotten at the customs official's office.

One thing all successful retailers here figure out pretty quickly is that they need to localize. This often makes for interesting product selection.

Your type are not welcome at the Charter Mall in Changchun - unless maybe if you are a Tibetan Mastiff, or the owner of one of the fastest growing car companies in the world.

Source: 我的世界

In all the years I've spoken English, I've never thought of using these two words together. Maybe that's the recipe for a good brand name?

On a recent property visit to Xian where we looked at over a hundred residential and commercial sites, I was getting a bit blurry eyed and cranky until I saw a little speck of white on yet another expanse of blue steel construction lot fence. It looked like a bus map - and this is way out in the sticks - with some familiar English on it. Tromping through the mud to get close enough to read it I was surprised to discover an LL Bean branded poster of, yes, a bus map, in The Middle of Nowhere, Xian.

I grew up wearing LL Bean, their jacket, their boots. One of my LL Bean college book bags even made it all around China on the hard seat. (A friend asked to borrow it for a 6-month long train hopping journey through China back in 1988. It was the only bag he took.)

I asked my young Chinese team if anyone had ever heard of LL Bean? Nope.
Any idea why this advert was stuck to this particular wall? Nope.
Any idea where we were? Nope.
Did I seem crazy standing in the mud pointing at a poster on a fence? Yup.

I remember reading a couple years ago something about LL Bean teaming up with a Korean company, Youngone Corp., with talk about opening up a lot of stores in China. Then they opened their first store at Solana in Beijing, a mall which just wasn't making it, and I had doubts if LL Bean would be popping up in other places around China, much as my bag did in 1988.

Anyway, the bizarre juxtaposition of an empty construction site, a bus map branded by a brand no one knew, in The Middle of Nowhere, Xian did achieve an amazing consumer communication connection (ACCC?). As I stood in the mud scratching my head and taking the picture, I really did wish I had on a pair of these:

As part of my practice, I work a lot with shopping mall developers to help them figure out how much money their mall can make (or lose), then go to a second or third tier city, visit the site, kick some dirt, meet local officials, send my analysts out to collect market data, meet with retailers and distributors, and eventually collect enough information to drill down deep enough to figure out how much my client should actually spend on the project.

Projects are usually mixed use, meaning part residential and part commercial, and typically pretty big. The past few years there's been a lot of interest in Outlet Centers, and whether this is a trend, a blip, a land grab - I don't know, but I know I spend a lot of time in discussions about Outlets, and look at who is doing what in the industry. It's a new industry, and as such, there are a lot of new entrants. Here's one I just have to share with everyone. Eventually they might read this blog and hate me, or maybe even hire me to fix the English on their company site.

Here's a clip directly from their "About Us" section:

"In the management, Central Asia Otter Rice has used the innovation business model, the shopping park while to move into coordinated process service and so on business necessary shopping, leisure, entertainment, diet, industry and commerce, tax affairs, finance, fire public security, insurance, but also lets all factories, the merchants by zero approach expense admission, and exempts the rent, does not need to handle the business license, transfers adopts "the market to deduct a percentage according to the sales volume partition buckles the spot, does not need to guarantee a minimum, the reality sells the solid buckle" the joint management way management, lets the business reduce the selling costs, reduces the pressure, raises the benefit, the long-term development, realizes altogether wins.

Centralized positioning:

Makes South China first scale biggest genuine Otter the Rice shopping park, international, domestic brand and foreign trade high-quality goods general merchandise factory straight camp discount center.

Management idea:

Central Asia Otter Rice "the long-term development, seeks altogether wins, shares successfully" the management idea, the store without the approach expense, zero rent, adopts "the market to deduct a percentage according to the sales volume partition buckles the spot", and does not need the management strategy which guarantees a minimum."

The giant market opportunity, the superior geographical environment will add the low cost, the more superior service market business model, Central Asia Otter Rice will become the first choice which without doubt the domestic and foreign expense brand will struggle enters and is stationed.

The Chinese, in all fairness, makes complete sense:

"在经营上，中亚奥特莱斯采用了创新的经营模式，购物公园在为入驻商家配套购物、休闲、娱乐、饮食、工商、税务、金融、消防公安、保险等一条龙服务的同时，还让所有厂家、商户都以零进场费用入场，并免租金，无需办理营业执照，转而采取"商场按销售额分段提成扣点，无需保底，实卖实扣"的联营方式经营，让商家降低销售成本，减轻压力，提高效益，长期发展，实现共赢。

中心定位：
打造华南首家规模最大的真正奥特莱斯购物公园，国际，国内品牌及外贸精品百货厂家直营折扣中心。

经营理念:
中亚奥特莱斯"长期发展、谋求共赢、分享成功"的经营理念，商铺无进场费、零租金，采取"商场按销售额分段提成扣点"。

巨大的市场商机、优越的地理环境加之更低成本、更优服务的商场经营模式，中亚奥特莱斯无疑将成为国内外一线消费品牌争相进驻的首选。"

This piqued my interest and tickled my funny bone as well, so I was curious about the team - especially marketing person - running South China's "first scale biggest genuine Otter the Rice shopping park."

Their "Team" section listed some respectable looking people until I scrolled down to the Senior Marketing and Project Manager who is - I'm not kidding - "Manna Woman."

Manna Woman's duties include:

Current position manager, senior market marketing personnel
Central Asia Otter Rice project manager
Gathers marketing marketing plan Limited company manager brightly

So, the question is - If you are a major international brand who prides themselves on quality communication with their customers, would you place your precious brand in the hands of Otter Rice?
　　
PS: For those who don't live here and get it, "Outlets" in Chinese is "奥特莱斯" (ào tè lái sī), which funny enough sounds pretty close to Otter Rice.

I noticed today that Cartier (wink wink) is opening up a new luxury flagship hair salon out in Minhang District.

While picking up my Chinese medicine yesterday I saw this interesting Centrum vitamin poster. Back to the glorious days of Chairman Mao?

It seems the very same 60-year-olds jumping in joy at their Great Wall reunion could be the same determined young comrades "advancing courageously along the glorious path of Chairman Mao's May 7th Directive" forty years ago.

Anyway, I thought it was an extremely clever way of tickling an old person's heart to buy some vitamins.

There's been a lot of talk here recently of Gap's "entry" into China. What's interesting to note is that most people don't know they entered here before in a big way and failed. What's even more interesting is that there's nothing I could find discussing why they failed in China.

In a presentation I made to some PPR directors a few months ago, I discussed 5 retail case studies and gave them titles befitting their circumstances:

1) Lost in space
2) Hey, we're _______
3) What an attitude
4) People will get it
5) Channel stuffing

Gap's case study was titled - "Hey, we're ________"

Here are the bullet points...

Entering the market in the late 1990s, Gap was an early entry retailer. With their strong local distribution partner, China Resources, Gap established stores in all available department stores in Shanghai and Beijing, as well as Duty Free Shops in HK. Within 2-3 years Gap quickly shut down it's China operations and withdrew.

Weak Brand Identity

Gap was perceived as too basic. People were used to flashier more complicated fashion. As China was still a developing country, it was too early for "basic wear."

Price Point

Consumer price points at that time were much lower than Gap anticipated.

Market Analysis

There was no clear product differentiation or marketing strategy to inform consumers what Gap was. Gap assumed their brand was better known than it was. They had not done a thorough enough market analysis, nor spent time to fully understand consumer needs

No Flagship

Gap underestimated the importance of setting up and investing in a flagship store to anchor it's brand and take advantage of available prime real estate. All their stores were smaller 45sqm store-in-stores

Strong Local Competition

Several similar concepts already existed and had established a stronger presence - Bossini and Hang Ten offered similar product at a lower price point. There was no clear value add to the consumer.

Now for some blatant self promotion - These are the type of common issues I deal with all the time when discussing with retailers, large and small. You'll hear it again and again, and guess what it's true - China is a new market. When entering a new market, you need to do your homework. You don't make too many assumptions. You don't croon Frank Sinatra and talk about how you did it "your way". You take a look at the current landscape, you learn from other retailer's mistakes, you get good ground information, you spend a lot of time understanding your customer, and you prepare for battle - on someone else's territory.

I think Gap will get it right this time. If they don't, H&M and Zara will be eating their lunch.

For anyone who has struggled through IKEA in Beijing on a weekend can relate to this article. It's a madhouse packed with thousands of people. People sauntering, sitting in chairs, taking photos, eating, sleeping under covers, each display - packed with people. They even cover the toilet bowl displays with plexiglass.

I found this article in the LA TImes intriguing because from a retailer perspective IKEA is doing everything right - they are drawing people in from a wide trade area, offering an attractive product, providing convenience - but how do they get people to buy?

Actually people are buying. A lot. IKEA knows this which is why they are developing IKEA all across China. IKEA also closely tracks what people are buying which gives them insights into consumer behavior unrivaled by many foreign retailers. Chances are there is something from IKEA in most Western styled Chinese homes in Beijing. Taking this type of data and modeling it into consumer behavior patterns is one of the things we do. Unfortunately we don't provide amusement park crowd control security - yet.

LA TImes: Beijing loves IKEA -- but not for shopping

This has been a very busy summer here in China. Someone turned the switch on in June and we've been running fast to keep up. Retailers are retailing again, developers are developing again, and analyst are analyzing again.

With all the questions I've fielded recently from the several recent "China visits" by major brands entering this market, I found this excellent Wharton article about luxury brands in China to be a good primer. It's accurate, informative, but unfortunately doesn't go into details about how difficult it is to find the right property - but there is no secret formula for that. That's based on retail experience, property wits, and local knowledge, ie: What I do.

Here's the whole article from www.knowledgeatwharton.com.cn

Even as luxury goods consumption has fallen worldwide, China's appetite for high-end retail has shown a strong upward momentum. Italian men's brand Ermenegildo Zegna continues to see a steady flow of new customers through the doors of its 60 retail outlets in China. "More than I expected," says Ken Kress, head of Zegna's China operations. "The bottom line is that the overall economy and diversification of wealth have continued to grow."

Zegna isn't alone. Even while Wall Street was still reeling last November, LVMH (the French luxury group with products ranging from accessories to spirits) reported double-digit sales growth during the third quarter of last year, according to LVMH's 2008 Annual Report. The company has seen "dynamic" growth in China, led by high-end leather goods brand Louis Vuitton (LV). And, while wine and spirit connoisseurs around the world are showing restraint in purchasing pricey bottles, in China LVMH has reported "exceptional" sales of Hennessy cognac, and the country was the largest market for the luxury spirit in 2008.

LV also made news this past July when it dropped product prices between 2% and 7% at all 29 of its China locations, saying it was not offering a discount or special promotion, but rather was reacting to changing rates of currency exchange between the reniminbi and the euro. On July 17th the company opened its fourth flagship store in Shenzhen and has announced plans to open stores in Inner Mongolia, in the north of the country, later this year.

In general, offering discounts on luxury products is a bad strategy, says John Zhang, a Wharton School marketing professor. "[It] can affect customer confidence in the integrity of the brand's pricing, and devalue the brand." Customers who want to treat themselves with an expensive luxury bag aren't likely to be looking for such a small discount, he says, which means it's likely LV is telling the truth about its discount.

LV and Zegna aren't the only luxury companies to expand in China recently. On July 24, Giorgio Armani cosmetics formally launched its own counter in Mei Long Zheng Isetan, a high-end department store in downtown Shanghai, to target the fast-growing number of women consumers in the city.

German luxury carmaker BMW saw sales in China jump by 44% in June of this year, while U.S. sales fell by more than 20%. General Motors sold and exported 3,363 units of its luxury Cadillac-branded vehicles to Chinese buyers in the first half of the year, up from 3,227 units a year earlier. Sales of the recently released Mercedes S600, a vehicle that sells for roughly US$200,000, have increased between 50% and 60% over the last year in China.

And while some sit behind the wheels of their new luxury automobiles, others are taking to the seas. According to global wealth management industry monitor Wealth-Bulletin.com, super-yacht builder Oyster Marine opened an office in Hong Kong earlier this year, and expects sales in China and Hong Kong to grow from less than 10% last year to 30% over the coming few years.

Catching up with China's Fast-growing Wealth

Consumers in China spend well over US$6 billion a year on designer bags, cars, clothes, accessories and cosmetics, with the country recently leapfrogging fashion-conscious Japan to come in second behind the U.S. in consumption of luxury goods, according to World Luxury Association data.

And the fourth-largest population of the world's wealthy will live in China by the year 2015, says a mid-July report by McKinsey, titled, "Understanding China's Wealthy." According to the report, as of 2008, there were 1.6 million families in China with household incomes of over US$80,000. By 2015, it estimates that number will jump to 4.4 million, growing by up to 16% per year over the next five to seven years. "The luxury sector will benefit most if this trend continues," says Jeremy Cheung, managing director (HK) of China luxury consultancy Impact Asia Limited.

In response to continued and growing sales, luxury brands are investing in China. French fashion brand Hermès announced plans late last year to open three to four new stores across the country during the next three years. Italian fashion house Versace is investing more than US$56 million to increase its presence in Asia, with a specific focus on China, and is slated to open 11 new stores across the region this year, according to statements by former chief executive Giancarlo Di Risio. The company gave its first fashion show in mainland China in November last year, at Beijing's Legation Quarter, the former residence of the American ambassador that has been turned into one of Beijing's trendiest venues.

A year earlier, celebrities turned out en masse for Fendi's four-day party on the Great Wall, where part of the former defense shield was fashioned into a catwalk. And between November 2008 and January 2009, more than 60,000 patrons lined up to see Christian Dior's art exhibition at UCCA Beijing, entitled, "Dior and Chinese Contemporary Artists."

"All luxury brands are putting money into promotions and PR," says Cheung. "They know that whoever invests now will get a better market share in the future."

Understanding China's Wealthy

Unlike the singular group often portrayed in media reports, China's newly rich are a varied bunch, but they can be broken down into three general demographics, according to Shaun Rein, managing director of China Market Research, a Shanghai-based consulting firm.

The first are the super-wealthy. With incomes of US$10 million or more, China's super-rich have been buffered from the worst of the current financial storm.

The second group, composed mainly of upper-middle management and white-collar workers making between US$200,000 to US$300,000 per year, are the aspiring rich, and are the apple of the mass luxury market's eye. But this category was the worst hit by company restructuring and downsizing, and these consumers are now more cautious about spending cash on wear-only-once Versace dresses or purchasing expensive Starbucks lattes during office lunch breaks.

Luxury buyers in the third group have salaries that belie their combined purchasing power and are mainly office workers making roughly US$600 or more a month. According to a recent survey conducted by China Market Research, more than 70% of respondents in this demographic said they will open their wallets more in the coming six months versus the last six, according to Rein. The survey's results also indicate at least a 20% increase in market consumption in this demographic, especially in cosmetics.

The majority of China's wealthy are young, with 80% below 45 years old, compared to 30% in the U.S. and 19% in Japan, according to McKinsey. Chinese consumers are also more focused on the functional value of luxury goods, and hesitate to spend on items not suitable for daily use.

The past decade has seen an evolution in both the types of consumers in China and in consumer sentiment, says Kress. When money first began to flow into the country, a handful of Chinese got very rich, very quickly. New to the market, this group was hungry for a chance to display their wealth, but lacked sophistication and knowledge of luxury brands. Assuming that the most expensive meant the best quality, they searched for the highest price tag.

As recently as five years ago, many companies saw China as a dumping ground for last season's styles, says Kress. But as the Chinese started to travel, they quickly learned there was a difference between what they saw on shelves at home and what was on offer in boutiques abroad. Their growing economic power forced luxury brands to take notice. Now, accounting for slight adjustments to suit local tastes, Chinese shoppers in Beijing will find the same clothes hanging on the rack as in designer boutiques in Tokyo.

As the market opened, general knowledge of brands increased and tastes became more sophisticated, Kress notes. People developed an affinity for customized personal items at an impressively fast pace, and luxury brands have had to adjust accordingly. Major designers, such as Chanel, whose recent show in Beijing featured clothing inspired by traditional Chinese dresses, or qipaos, are gearing new lines towards Chinese tastes.

The Chinese market of the future may very well resemble the current market of Japan, which has developed a more individualist, Western way of consumption, Kress adds. Previously brand slaves, Japanese consumers are now mixing and matching Uniqlo and Hermes garments in any way they see fit, an evolution that is indicative of an economy that has developed enough that a significant portion of people make their living from creative industries. These consumers will want to express their individuality through their consumer choices, he says.

The urban sprawls of Beijing, Shanghai, Shenzhen and Guangzhou house about 30% of the country's wealthy as of today, but by 2015, 75% will inhabit cities like Chengdu and Wenzhou and others in non-coastal regions, as money is redirected into China's interior, says the McKinsey report.

Brands also need to understand the significance of Shanghai and Beijing as cultural reference points for the rest of China, says Kress. Some companies have made the mistake of skipping these cities and heading straight for the potentially lucrative second-, third- and fourth-tier city markets, without realizing these markets take their cues on style and consumption from China's major urban centers.

Other brands have bypassed the rest of China completely, focusing only on the Shanghai and Beijing markets and missing lucrative sales in lower-tier cities. These companies forget that to garner loyal customers out of China's fabled one billion, exposure and access to products is essential, says Kress.

Integrated Marketing Strategies

According to Kress, "A wave of new entrants into the luxury brand market three years ago held the belief that if you build it, [consumersE] will come." Jumping in feet first, they neglected to take the necessary time to adequately train staff, or educate consumers. To the detriment of sales, they underestimated the strength of the Chinese need for comfort and functionality in products.

But selling to any consumer base is rarely that simple. Although Chinese consumers may have some distinctive characteristics, certain principles for marketing luxury brands are universal, experts say. Ye Jian, general manager of ING International AD, an advertisement company for luxury brands, says that successful marketing strategies of luxury jewelry brands like Cartier, Piaget and Tiffany include four key points.

First, he says, the brands play up their often centuries-long histories through advertising that highlights connections with royalty and celebrities. Second, they invest in continually creating innovative designs that secure their roles as world leaders in fashion and luxury. Third, these brands use unified visual images to communicate with their intended audience.

Fourth, these jewelry brands are involved in socially responsible projects. In China, Cartier donated generously to charitable activities in Sichuan after the devastating earthquake last May. The company also initiated Cartier Woman's Initiative Award, an international business plan competition awarding women entrepreneurs who lead creative, sustainable and socially responsible companies, and it created a non-profit art fund to sponsor artists and art events worldwide.

These luxury jewelry brands are also constantly on tour in different cities in China, organize online customer clubs and communicate with them regularly by sending art magazines and newsletters -- all effective marketing strategies that other companies can learn from, says Ye.

It certainly takes more than price strategies to win the hearts of China's wealthy. "Luxury brands belong to an exclusive few in any society, and it is especially so in China," says Zhang of Wharton. "Chinese consumers of luxury products are very conscious of their social status and class, and they consume those goods to feel different and sophisticated. They surely can afford to pay for those feelings -- meaning a low price strategy is not the way to go."

We work all the time with retailers, and trade area is a basic assumption that is taken for granted in most analysis. We actually spend a lot of time to define this as it's the common denominator for most higher level analysis such as buying behavior, preferences, branding, price points, etc. If you get the initial denominator wrong, the rest of the analysis is exponentially wrong!

Recently with some of the mall work we've done, I've heard statements from developers and government officials such as, "Our trade area is 500km. People will come here from the next province." Now you can start to understand why there are so many non-performing assets creating heartburn for asset management companies and banks across China. How do you define wild expectations? A 500km trade area comes to mind.

The link below is a very interesting, though somewhat dry, explanation of how to define trade areas. Do understand that this is geared completely towards an American style retail environment, and it's not the same as China, but the logic is the same. It becomes more entertaining if you imagine the speaker is actually George Castanzas from the Seinfeld TV series.

Video: Creating retail trade areas...

Here's a great article available for download (fee) on the Harvard Business Review site. The reason I say it's a great article is because it touches upon common themes faced by all retailers - from the US to China. In our dealings with developers, retailers, and brand owners here in Asia, we deal with these 5 rules all the time, and I suggest spending the $6.50 and downloading the article if you don't already subscribe to HBR.

"In tough times, managers instinctively rush to unleash a host of new programs and initiatives—they extend store hours (or cut them back), implement a new staffing system, reallocate store space, introduce or extend loyalty programs, offer “triple point days” and special promotions for big spenders, reorganize store operations or the merchandise or marketing department—even tinker with the parking lot..."

I was recently asked by the LA TImes to talk about retail and QSR in China. Here's their article below:

February 12, 2009
By Don Lee

Reporting from Shanghai — Down an alley from a KFC, McDonald's and Pizza Hut in Shanghai, Li Hong sat inside a dingy little storefront that serves full-course dinners for a dollar.

Her tray was filled with cabbage, carrots, potatoes, a chicken leg and rice, plus soup. A Western fast-food meal would have cost her three times that much, said the young woman, who works as a sales clerk. "Why should I go there?" she said.

In the U.S., fast-food chains often thrive in tough times. But not so in China, where Western quick-service food isn't the cheapest stuff in town and, in target markets like Shanghai, there's too much competition. Plus, a growing number of consumers see it as unhealthful.

"Western fast food is still not cheap enough," said Yee Mei Chan, a group-account director at Millward Brown's office in Beijing.

In a recent survey, the marketing research firm found that 78% of Chinese consumers were feeling some effect from the global financial crisis. About half said they were likely to cut down on eating at Western fast-food restaurants.

That might help explain why Yum Brands Inc., China's largest restaurant chain with nearly 2,500 KFCs and 416 Pizza Huts, said same-store sales in the country were up just 1% in the fourth quarter compared with year-earlier growth of 17%.

In the U.S., Yum's same-store sales, an industry measure of branches open at least a year, rose 2% in the latest quarter, ended Dec. 27.

McDonald's Corp. doesn't report such figures for China, where it has about 1,050 stores. But Jeff Schwartz, head of China operations, said, "We had some softening at the latter part of 2008." He noted that sales rebounded in January, rising higher than a year before, but that also reflected an earlier Chinese New Year holiday.

Like many retailers in China, including Wal-Mart, McDonald's cut prices recently, saying it wanted to do its part to keep China's economy growing. Its new "value meals" cost $2.42, a saving of up to one-third for combos such as a double cheeseburger, medium-size French fries (or cup of corn) and a Coke.

Schwartz said he remained "very bullish" on China. McDonald's is on its way to opening 175 stores in China this year, he said, more than anywhere else.

Yum is also planning for another year of high growth in China, which has been increasingly driving the corporation's profits. And other food and beverage retailers, including Burger King, Dunkin' Donuts, Starbucks and Cold Stone Creamery, are bulking up in China as well.

With rising affluence and changes in lifestyle, the pace of China's spending on eating out has been growing by double digits year after year. The China Cuisine Assn. estimates that sales surged 24% last year to $225 billion at the nation's 4 million eating and drinking establishments.

If Western fast-food diners are slipping a bit, it could be that they've "lost some of their freshness," said Xu Yunfei, the association's industry development director.

KFC, which opened its first store in China in 1987 and has since penetrated deep into the nation's heartland, still has a lot of cachet in rural areas, where its restaurants are often packed. But most foreign retailers in China have yet to enter such smaller markets inland, tending to focus instead on young consumers and the middle class in China's urban centers.

Yet once-booming coastal cities such as Guangzhou and Shenzhen are now reeling from a falloff in exports and industrial production. Even in Shanghai, with its large service economy, it isn't hard to find people who are battening down the hatches.

On a recent Friday evening, Wu Lei, 40, and her 11-year-old son were having dinner at a McDonald's in a northeast Shanghai neighborhood. Most of the seats in this two-story restaurant were taken, though plenty of students had only books and papers spread out on the tables.

Wu said she and her husband, both architectural designers, saw a 20% cut in pay between them in the last year because of a lack of work.

"I might come more if it's cheaper," she said, adding that she takes her son to McDonald's and KFC each once a week. On this evening the total tab was about $5.

Other customers at this branch and several others said lower prices wouldn't change their eating-out routine.

"It's fast food; it's not good for you," said a 30-year-old tech worker who identified himself by his English name, Alex Lu.

KFC in particular met with early success in China in part because consumers viewed it as cleaner and offering more-hygienic foods. In recent ads and promotional materials, KFC and McDonald's have been stressing good value, high quality and healthful lifestyles.

Still, more Chinese are showing interest in nutritional and dietary considerations, which could prove a challenge for purveyors of fast food. "I suspect it's more of a long-term trend," said Warren Liu, author of "KFC in China: Secret Recipe for Success."

In many other cases, consumers said they simply preferred Chinese food, including quick-service establishments, of which there's no shortage.

In Shanghai's northeast Yangpu District, an area of 23 square miles, research firm GeoPro counted 4,990 eating and drinking places. About 40% were quick-service, take-out eateries or shops.

"There's immense saturation," said Corbett Wall, GeoPro's China director.

And as the economy has weakened, Chinese fast-food operators too have been engaging in price wars, trying to undercut rivals.

Real Kungfu, a chain of 309 restaurants that uses an image of Bruce Lee in its logo, has introduced a lineup of "extra value meals" that includes rice, meat and vegetables, steamed egg, soybean milk and green-bean soup for about $2.58. Real Kungfu's president, Cai Dabiao, insisted it was a better deal than a Western alternative.

"Rice suits Chinese people better," he said.

don.lee@latimes.com
Click here for article

Marks & Spencer Chairman Sir Stuart Rose said in a recent (2/10/09) interview with the Financial Times that the retailer had made several "basic shopkeeping" mistakes when launching its first store on the Chinese mainland. "We had a screw up," he said, which had led to the supply shortages of both food and smaller sized clothes during the first few months of trading. M&S said food stocks had since returned to 90% of normal leading to higher footfall. Rose said M&S had misunderstood the local market, assuming that its expertise in Hong Kong would easily translate to the mainland. "We need to get the A to Z of sizing right and we need better market research," said Rose. "That's what I call basic shopkeeping," he added. Despite the problems in China, Rose said M&S was committed to opening more stores in China and doubling the proportion of group revenues coming through its international business, from less than 10% now to between 15 to 20%. Rose added that M&S would sit it out in China until the store returned a profit, which he expected in three years.

I thought this headline today said a lot about the past and the future...of the US.

LA-Z-BOY TO CUT 850 JOBS, CLOSE UP TO 20 STORES

"Furniture maker La-Z-Boy Inc. said Thursday it will cut jobs and close stores as orders plunge in response to the economic turmoil."

There's lots of ways to read meaning into that statement. I guess it comes down to less plush seating for plush butts. Think what that will do for TV sales.

And on the other side of the world: I was in a development meeting with a client yesterday (they are the largest retailer at what they do with 1300 stores) and they are in emergency change mode in response to the current domestic consumption drop which they say is about 10-15% across the board for all of their stores.

What struck me the most was their attitude to adversity. They are seeing this as a huge opportunity to grab market share and grow, not reduce workforce and shrink. They estimate that China is in a three year U-shaped down cycle, and that we are not yet to the first corner of the U. Given that their Chairman is one of the richest men in China, they can probably afford to be bold. Besides a complete rebranding, store redistribution, product mix revamp, and operational changes, they want even bigger stores "because when things get bad, people will trust large stores, not small ones."

I think this also says a lot about the past and future...of China.

I've been asked by HQ to summarize in as few words as possible the implications of the current mess in the US on our business here in China. Believe me, I was thinking, Hmm, now let me get out my crystal ball. After talking to my various colleagues - all doing business in different sectors - I realized I needed to avoid focusing on any one sector and try to understand the big picture key drivers.

Here's a summary of my understanding of the most obvious drivers, which will go to HQ in hopefully less than 5 pages. (I've taken out sensitive internal commentary, but you can still get the drift.)

1) Foreign Exchange Reserves

China's cash reserves, now estimated at 1.8 trillion, have grown in large part due to the central government's policy of boosting exports by fixing the value of the yuan to the U.S. dollar. The central bank does this by buying up the dollars brought to China by foreign investors and Chinese exporters. Keeping the yuan cheap has been an important part of China's export oriented policy. If left to market forces, the yuan would be more expensive. The common rationale for a cheaper yuan, is that if the yuan rises too much, China will lose business to other cheaper territories such as Vietnam, India, and Eastern Europe.

With it's monopoly on currency exchange, the Chinese government has kept the value of the yuan from going to where it should be, providing continuing cheaper exports and more factory jobs, fueling the world's biggest manufacturing machine.

Western governments have diplomatically pressed China to stop buying up so much counterweight dollars, and allow the yuan to float, but China doesn't want to do this, and instead buys foreign bonds, mainly US Treasury and mortgage backed bonds.

2) Credit

For the past year it has been difficult for developers to get loans as Beijing has implemented strict restrictions to ease the impending property bubble and slow down speculation. Those measures worked, too well, and now local developers are scrambling for funds. This credit crunch has humbled many developers, who are now forced to look elsewhere for capital, and foreigners are getting more deal action. But strict foreign investment restrictions for real estate make it more and more difficult for foreign money to reach developer's pockets. Still, it is possible for foreign investors to buy a stake in an existing project requiring capital, which is not yet restricted.

I've assembled some recent news briefs as a snap shot of the current credit situation, likely to change again at the next National Congress in November.

A) Xinhua recently reported that there was a slowdown in real estate loans during the first half of 2008. "Chinese bankers held loans totaling 5.2 trillion yuan (about 580 billion U.S. dollars) to real estate developers and housing buyers by the end of June, up 22.5 percent year-on-year, the People's Bank of China (PBoC) said Friday. The central bank said the growth rate was two percentage points lower than the same period last year, representing a decline for seven consecutive months since last December. Loans to real estate development stood at 1.9 trillion yuan by June, up 17.7 percent year on year. The growth rate was eight percentage points lower than the same period last year. The country's lenders granted 3.3 trillion yuan to housing buyers buy June, representing an increase of 25.6 percent year on year. The growth rate was 1.8 percentage points higher than the same period last year. Real estate developers and housing buyers received 398.84 billion yuan in loans between January and June, which was 170.66 billion yuan less than the same period last year, said the PBoC. "

B) In an unexpected move, the central bank just this week cut the benchmark lending rate by 0.27 of a percentage point to 7.2 percent, the first time it has reduced the rate since 2002.

C) The most recent (9/17/08) Asian Development Bank report expects bank lending controls to ease beginning in the second half of 2008 to assist small firms and avoid downsizing. Fiscal policy is projected to remain slightly expansionary.

On 9/15/08 PBoC announced it would reduce the benchmark loan interest rate and the reserve requirement ratio for commercial banks to ensure a steady and rapid economic growth. In addition, the ratio of deposit lenders are required to set aside will be down 1 percentage point from Sept. 25. After adjustment, the interest rate for one-year loans in the Chinese currency will be 7.20 percent. The overall reserve requirement ratio will be 16.5 percent, down from a record 17.5 percent after five consecutive increases this year.

The move reflected the government's concern over the slowing economy and was a result of long-time consideration, said Zhuang Jian, a senior economist with the Asian Development Bank Resident Mission in China. "It showed the government was eager to maintain the economic growth as enterprises faced difficulties, especially funding strain. The eased inflationary pressure also provided more room and time for the adjustment."

3) Inflation

Where does China's inflation come from? It comes via all the dollars from exports needing conversion into RMB. As demand for the yuan increases, Beijing prints new money rather than let the value of the yuan rise too quickly. Even with bonds, China's monetary system cannot mop up all the extra cash, so prices have risen as a result and the stock and real estate markets have become inflated.

There is a see-saw relationship between inflation and RMB appreciation. The balance hinges on exports. On one side is the Bank of China (PBoC), who argue for RMB appreciation and have made the case that RMB appreciation is important in fighting inflation. On the other side is the Ministry of Commerce (MoFCom), who are strongly pro-export, who argue that RMB appreciation hurts exports. MoFCom has strong allies in the cabinet, including the National Development and Reform Committee (NDRC), the Ministry of Finance (MoF), and the Customs Authority.

However the see-saw tilts, it is generally agreed by economic experts outside of China that the RMB needs to rise in order to slow the inflow of hot money, otherwise domestic monetary expansion will continue.

4) Domestic Consumption and Monetary Expansion

What is monetary expansion? China's large trade surpluses and capital inflows (mainly hot money) lead to domestic monetary expansion as the excess capital is reinvested into industrial production. This results in over-expansion and over-investment. As production outpaces domestic consumption, the trade surplus continues to increase, feeding further monetary expansion, and the cycle repeats itself, over and over. This cycle works as long as a strong economy (which has mainly been the US) can continue buying all these Chinese products. But as the US buys less and less, due to it's own financial woes, there is the strong possibility of excess production in China. The slowing global economy means that Chinese manufacturers will be forced to turn towards the pre-nascent domestic consumer market, which currently cannot consume nearly as much as the West.

The most recent government figures show that industrial output grew by 12.8% year on year in August, versus 14.7% in July, and 17.5% last August. Nearly all sectors slowed, meaning there will be more pressure on domestic consumption to keep the economy strong.

We already know that the retail market is crowded in China, and getting more crowded every day. Pumping exports fell strongly in line with the old political narrative of "Feed the People." Now that this golden goose is cooked, will the "People Feed Themselves"? If exports drop, millions of jobs will be lost, and if inflation continues, food, clothing, housing will be out of reach for millions.

5) US/China economic coupling

As the Fannie and Freddie fallout has made very clear, China has clearly bankrolled much of the US debt. By supporting the US debt, the Chinese are supporting the US appetite for more Chinese goods, which in turn provides more jobs and a better future for people in China. So in many ways US and China are just different sides of the same coin. One side produces, the other buys. The buy side spends more money, which goes over to the produce side, which in turn sends more money back over to the buy side. It's a relationship that has been working for many years to both countries' advantage until Fannie and Freddie, and the more recent Wall Street meltdown. It turns out that this tag team affair was heavily leveraged on something called derivatives - typically collateralised debt obligations and credit default swaps - which are essentially calculus-esque financial products created by an unregulated Wall Street to make money on product "derived" from actual market indices, but don't really have a shape or form - and are carried OBS, or off balance sheet. Things like loan commitments, futures, forwards, etc. One can think of these derivatives as kind of like selling shares in products called "promises" and "wishful thinking."

6) Out of Control Money Growth

Many economists and world think tanks feel that China will soon have to have a major adjustment - either a sharp rise in inflation or a sudden debt deflation.

For an interesting historical reference, equally valid today, here are Irving Fisher's 9 steps that occur in Debt Deflation, from his "Debt-Deflation Theory of Great Depressions" (1933).
1) Debt liquidation leads to distress selling, and to
2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of the velocity of circulation. This contraction of deposits and their velocity, precipitated by distress selling, causes
3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
4) A greater fall in the net worth of business, precipitating bankruptcies, and
5) A like fall in profits, which in a "capitalistic," that is private-profit society, leads the concerns which are running at a loss to make
6) A reduction in output, in trade, and in employment of labor. These losses, bankruptcies, and unemployment, lead to
7) Pessimism and loss of confidence, which in turns lead to
8) Hoarding and slowing down still more the velocity of circulation.
The above eight changes cause:
9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

Japan is currently dealing with 13 years of this situation, and has an enormous stockpile of NPLs to show for it. The same situation could occur in China if the property bubble continues, exports drop, monetary expansion goes unchecked, and policy continues to see-saw.

7) Implications for foreign property investment in China

Residential
Chinese consumers, banks and corporates are far more heavily invested in real estate than in stocks, and falling prices are already starting to show from Shenzhen up to Shanghai. This momentum coupled with a general slow down fear (stocks, prices, US markets) can potentially create a negative snowball effect in pricing. This is already happening as homeowners are waiting to see what happens, and developers are getting choked, reducing prices dramatically. September/October is the peak home-buying season, and we can expect a slowdown to effect developers dramatically as the sky is falling sentiment grows. It usually takes about 6-12mo for cause to turn into effect, so any potential effect will probably be seen by next summer.

Retail
As the Chinese stock market is still small relative to GDP, it's rapid fall will more than likely only give people the shivers, without seriously impact spending. If things get messy, which is quite possible, and people start having trouble paying their mortgages (people are more invested in property than the stock market), there will be an impact in spending, which will impact retail, and an impact in retail will logically spill over to retail real estate. Yields will become more difficult to achieve as tenants will argue that people are not spending, and there will be too much available stock in the market, as is evident already in Beijing.

Commercial
China is clearly on the world's stage, even more so after the recent Olympics, and businesses will continue to come here, and they will all need offices. The market in 2nd tier cities will more than likely be soft.

In The News
A recent South China Morning Post article reports: "Mainland property developers have resorted to steep price discounting to lure buyers back to the market this month and next, the traditional peak home-buying season....However, the tactic has so far shown no sign of reversing the decline in property sales and analysts do not expect lower prices alone will be enough to restore buyer confidence."

Wang Qing, chief economist for Greater China of Morgan Stanley, said in a report released recently that he's in favor of China's real estate market, and predicted that China would loose its policy on the industry in the first quarter next year, then in a later report released on September 12, he said that since the housing price in big Chinese cities dropped sharply, China's real estate industry is very likely to crush, and may cause significant impact on profit performance of banking industry. MS have now begun unloading properties in Shanghai. Hmm...

To add to the pile, Goldman Sachs said that "the worst time that weak Chinese real estate market striking banking industry has not come yet, and risks induced by the industry's bad loans will emerge in the fourth quarter this year and the first half of 2009."

Today's (9/19/08 ) China Daily reports on a financial forum just held in Beijing, "It is time to lift excessive regulatory restrictions on private sector financing, which could help boost the dynamics of enterprises as well as improve the capital efficiency of the financial industry as a whole," said Wu Xiaoling, vice-chairwoman of the Financial and Economic Committee of the National People's Congress. Wu said encouraging private companies to raise money directly from investors could also help reduce pressure on the government to relax its monetary policy, which is central to the fight against inflation. Wu Xiaoling and other officials agreed that fiscal policies should be further relaxed to help stimulate domestic demand and encourage domestic consumption to offset declining external demand triggered by global economic uncertainties.

The policy winds seem to be blowing towards the domestic consumption side of the see-saw which potentially means less control in the hands of MoFCom and MOF and their allies, and potentially more power in the hands of the PBoC. PBoC by nature wants to stoke domestic consumption, which would require some further softening of the current credit restrictions. Whether a softening will include property developers is another story, as real estate exposure in the banks is a huge worry for the PBoC in case of a slowdown in economic growth, which looks likely to occur.

NOTE: This summary is compiled from many of Michael Pettis' very informative writings, current news articles in IHT, WSJ, Financial Times, etc, and a wide variety of economic reports and white papers from banks, consultants, and real estate firms.

I've spent most of the week in Shaanxi province looking at retail development opportunities. My first stop was Hanzhong, a small working city in a pretty green basin surrounded by mountains. Small, meaning only about 4 million people. I asked the taxi driver waiting under the hot sun how many flights were coming in today. "Only you," he said.

Hanzhong is definitely out in the sticks. A couple flights in and out a week, and if you're in a hurry, there's a winding four hour bus ride north to Xian.

What I saw there really surprised me. I was expecting a lot of dust, thick pollution, and a scream of motorbikes and peasants. What I saw instead was a comfortable easy going city powered by a strong aviation industry, clear blue skies, and fast retail expansion. Within 500 meters of the city center there were a half dozen or more malls and department stores (current or under construction), a busy pedestrian street, and a dozen or more mobile phone retailers selling the latest Motorola or Nokia handsets. I didn't see any other foreign brands except for sport shoes, the ubiquitous KFC (which was busy), and an empty Starbucks knockoff.

If you wanted to settle down in Hanzhong you could pick up a newly fitted out apartment for less than RMB3000psm, but a pair of Adidas would still cost you RMB650.

It was obvious Hanzhong was on the to-do list of some major developers. Four new malls were sprouting up within shouting distance of each other, strata titled of course to ensure quick returns for the developer but long term chaos for the retailers. Good luck there guys.

My next stop was Xian, historically known as one of the ancient capitals of China for over thirteen dynasties, dating back to 1122BC. Everything in Xian was moving fast, and the pollution was worse than I've seen in Beijing. This was a city overflowing with Chinese tourists and way too many places to spend that slippery tourist money. There were even dueling multi story KFCs right across the street from each other. Along the main strip, you found malls on each corner, along the corridor, and even underground. One hi-end Plaza 66 style mall even parked their customer's BMWs, Mercedes, and Audis out front in a row, luring you in with ostentatiousness. This was all within a 1km radius.

At night it was another form of consumerism. There was an intoxicating giddiness in the air at local clubs, where the under thirty crowd were definitely out to party. This was the kind of partying where people were almost gushing "We're in the money!" No worrying about inflation or the price of oil here. Bartender, open another bottle of Chivas and green tea!

So what does this mean to someone wanting to get in on the action? If you are a foreign retailer entering Xian, you need to ask yourself, isn't it too late already? You could start focusing on defining local sub-markets, building brand loyalty, and really start thinking about getting into the smaller cities now. You also need to tell yourself, HQ, and anyone involved in the decision making process, that Western China is developing faster than you can even plan your China entry or expansion.

In my line of business I'm learning something new everyday - thanks to our group's clients. They always come up with interesting problems to wrangle with. Recently I was examining a large amount of China city data for an international customer who required insights on how to build up their network. I was looking at different ways of modeling potential target customers for retail development. What does that mean? Well, say you are a fast food chain, or QSR as they prefer to be called, and you are thinking of expanding into China at 100 stores/year. What are you going to do? Start playing Monopoly with real money? More likely you will try to map what has worked for you in other territories into the one you are entering. You will make assumptions about customers, preferences, spending, take into account what you can learn locally, and create a profile for what the average customer is and how much they might be willing to spend.

Internally it actually works more like this: your operations will probably begin a discussion with international, then bounce over to the data people, then bounce over to finance, then up to management, then back to international. You get the picture. Lots of bounce. By the time the ball has stopped bouncing, the landscape you are looking at has completely changed. But has the target customer changed? Most likely not. They just have more choices, and you as the QSR have to deal with more competition.

In Econ 101 we were taught that competition is a good thing for all the standard reasons - lower prices, better product, more selection, etc. But actually, I'm learning that competition is good because you can actually count it. If you can count it, then you can map it. If you can map it, then you can make predictions. If you can make predictions, then you can model it, and if you can model it, you can build a financial analysis.

So, I was thinking about all this while looking at target customers in terms of how banks, car dealerships, QSRs, appliance stores, sports outlets, etc, were spreading out in different cities to try to reel them in, like fish in a net. Retail naturally follows the movements of the target customer, and in China, as cities expand so quickly, people are really moving around. By following the growing shape of the competitive landscape, you can gain some insight into the way city areas are developing, and most importantly - where the fish are.

After spending all day looking at all these little consumer fishies swimming around my excel sheet, I started playing with different data layers, or sticking with the fishing analogy - trying out different line and lures. I also had access to different types of boats with interesting names. One was Brand Recognition. Another was Social Development. A third was Lifestyle Indicators.

So for my particular experiment, here's how the fishing stacks up around different smaller cities in China. Sorry, I can't tell you what kind of fish or the exact lure I was using. That would be cheating! But we are available for chartered tours.

Small boat, faster lure, light line:

1. Fuzhou
2. Kunming
3. Zhengzhou
4. Wuxi
5. Ningbo
6. Fushan
7. Changsha
8. Qingdao
9. Suzhou

Big boat, slower lure, heavy line:

1. Xiamen
2. Changchun
3. Changsha
4. Ningbo
5. Zhengzhou
6. Qingdao
7. Fushan
8. Xian
9. Wuxi

Medium sized boat, flashy lure, mid-weight line:

1. Qingdao
2. Shijiazhuang
3. Changsha
4. Wuxi
5. Yangzhou
6. Xiamen
7. Dalian
8. Ningbo
9. Changchun

I was in Taipei for a week and dropped by the Core Pacific City (京華城) Mall to watch a movie. Core Pacific, or the Living Mall, as it's also referred to - yes it can be complicated, better to just refer to it as jin hua cheng since no Taiwanese know it's English name(s) - is a giant 200,000+ square meter 24 hour mall with a huge soccer ball as it's main feature. I've heard it called the Death Star, the Bon Bon, the Ball, and about ten other names. It's the default favorite of mine since it's 3 minutes from my office, has tons of parking, and sells corn dogs and this unusual cup-o-corn snack on B1, right in front of the movie theater. They also have VIP theaters, which have a sort of business class reclining chair, and you have to wear a sweater in the summertime to deal with the aircon.

It's a very complicated structure, and you can easily get lost trying to get out, or to your car, or to the third floor, or to the parking pay machine, or to the clubs on the top floor.

I snapped this photo of the sign in front of elevator #6, which read like an IQ test, and was a good lesson in bad mall management.

Can you figure it out?

Quick hint mini-translation:
- Weekdays
- Weekends
- After Hours A
- After Hours B

I've spent the past week in Las Vegas at the annual RECON convention. It's the world's largest gathering of retail real estate professionals, and every year is a dizzying array of specialized retail services, sectors, and technology. People here are serious about the business of retail, and this business clearly revolves around the customer.

In the US, with intense competition and fickle shoppers, most retailers, developers, and investors have figured out that in order to be successful, they need to understand their customer. There are so many shopping centers scattered around neighborhoods in the US that the focus is on what the customer wants rather than what the property developer wants.

Now on the other side of the world where I live, it's amazing to me that this equation is turned on it's head. So many investors and developers are building huge hundred million dollar properties across China thinking "I built it, now they will come." This is sort of the retail version of Descartes' "I think therefore I am." I don't know if these local developers understand Descartes, but they definitely understand Louis Vuitton. But do they understand their customers? From what I've seen, it doesn't look like it.

If they did, wouldn't they think about customer experience, tenant improvements, and merchandising mixes? Wouldn't they want to know where these customers were, how often they are likely to shop, how much they are willing to spend, and what kinds of things they are interested in buying? By not paying attention to these things, and fully analyzing their market (ie: understand their customer) these developers are now creating what we call "gui gouwu zhongxin" - or ghost malls.

Out of curiosity I did a quick search for "gui gouwu" and to my surprise found a fantastic article in Time that discusses every issue of why I'm in business. I highly recommend this article to anyone interested in Chinese shopping malls.

Retail: Aspirational Hazard
By KATHLEEN KINGSBURY/BEIJING

Beijing's golden resources mall ought to be a shopper's paradise. Built on the city's outskirts in 2004, the Art Deco-style center boasts a staggering 6 million sq. ft. (560,000 sq m) of retail space, making it the world's second largest mall, 30% bigger than Minnesota's famed Mall of America, once the largest. Golden Resources accommodates more than 1,000 shops, dozens of restaurants, 230 escalators and an ice-skating rink. On its five floors, you can buy everything from fur coats to exercise equipment to pet supplies.

There's something missing, though: shoppers. On a recent Monday afternoon, despite blazing temperatures outside, the only crowd to be found in the air-conditioned expanse of Golden Resources is a gaggle of shopgirls on their breaks. The few customers loitering around appear to be just window-shopping. Nearly half of the mall's original restaurants shut down in the first year after opening. The parking garage's 10,000 spaces host a handful of cars. Xiao Chen, a shoe salesman, states the obvious: business stinks. "Monthly sales here are not as much as a weekly sales in other stores located in those shopping centers downtown," Xiao says. "But what can we do? No traffic."

Golden Resources' barren parquets are less the exception than the rule in China these days. Rampant overdevelopment of retail space and too-optimistic expectations about the spending power of the country's growing middle class have produced a plethora of gui gouwu zhongxin (ghost malls) in the nation's metropolises--megacenters like Golden Resources that are struggling to attract shops and consumers. Although retail sales throughout China have been growing at 12% a year and in 2006 totaled $800 billion, during China's recent construction boom far more retail space has been added than the market can absorb. More than 500 new malls have been built since 2002 and at least 100 more are expected to open this year, adding a total of about 320 million sq. ft. (30 million sq m) of new retail space--16 times Manhattan's total. "It's a huge supply in any market," says Morgan Parker, the Hong Kong-based president of Taubman Asia, a subsidiary of U.S. real estate developer Taubman Centers.

China, home of the Great Wall, is a crowded country where bigger is usually viewed as better, so it's no surprise that retail-property developers seem to be trying to outdo each other with giant construction projects. The mainland already hosts the world's largest shopping center, the 7 million sq. ft. (650,000 sq m) South China Mall in the southern manufacturing city of Dongguan. Like Golden Resources, South China Mall suffers from a dearth of stores and shoppers. Yet more megamalls are on the way. By 2010, China expects to be home to seven of the world's 10 largest shopping centers.

What developers didn't count on, though, was stingy consumers. Despite the country's rapid economic gains, the average citizen has little to spend on frills. Per capita annual income remains below $2,000. The average household saves more than 25% of its pay, in contrast to Americans, who in recent years have tended to spend more than they make. Just 4% of Chinese have credit cards, and purchases using plastic average less than $1,000 a year per cardholder. By Western standards, Chinese consumers simply have not yet begun to spend. As a result, "less than a handful of these new [malls] will meet expectations," Parker says. "China's most important cities are literally littered with spaces that are dark and underperforming." Statistics detailing nationwide vacancy rates for retail centers are hard to find, but in the economic powerhouses of Beijing and Shanghai, rates hover around 8%, according to real estate firm Jones Lang LaSalle. That's twice as high as rates in the strongest U.S. markets; in Singapore, less than 2% of retail space lacks tenants.

China's mall woes stem from a bubble-forming combination of inexperience, exuberance and excess capital. Local mall developers are often first-generation capitalists looking to reinvest riches reaped from the booming residential sector, Parker says, and many lack expertise in running successful commercial projects. Local governments push through new mall projects because they hope to enhance infrastructure and increase commerce. Meanwhile bankers, eager to expand their loan portfolios, become too-willing accomplices to overbuilding. Parker calls it a recipe for "the perfect storm." Banks in a mature market "provide the sanity check to a developer, but in China, there are no checks and balances," he says. "Just because you can build doesn't mean you should."

None of the Chinese developers contacted by TIME for this story would agree to an interview. But real estate consultants and market observers say developers too frequently adopt a "build it and they will come" mind-set. Feasibility reports or market surveys are rare. Plans often stress sheer size over appropriate locations. "A lot of [China's] wealth remains concentrated in the metropolitan bases, such as Beijing, Shanghai and Shenzhen," says Arthur Kroeber, director of the market-research firm Dragonomics. "But that doesn't mean that those areas can support an infinite number of malls."

Moreover, the business model followed by many Chinese developers is geared for making a quick buck, not for long-term profits. In the West, many developers build, own and manage their malls. In China, retail projects are "condominium-ized." That means the developer builds the space and then sells off individual shops to retailers. Because this strategy offers almost instant profits for investors, builders have little incentive to pick tenants carefully--and no incentive to ensure the facility is properly managed for the long haul. "If there's any empty stall when it comes close to time to open, all planning goes out the window," says David Hand, head of Jones Lang LaSalle's Beijing office, who estimates 95% of malls opened in China over the next five years will fail.

There's also scant attention to populating malls with the right mix of shops. Alan Liu, Shanghai-based managing director of Colliers International's North Asia practice, says most try to attract upscale brands. "Everyone thinks they need Prada, Gucci, Fendi in every project, even smaller ones," Liu says. "Well, the vast majority of customers won't spend their money on upmarket products like that." Indeed, at Beijing's Shin Kong Place recently, office worker Zhang Ting, 28, called the center's many high-end international brands "prohibitively expensive." While hundreds of local office workers like Zhang crowded the downtown mall's basement food court, few ventured upstairs to buy anything. The mall was so quiet that the whirring of escalators could be heard. "Business has been slow since the mall opened in April," says Zhang Zihua, a saleswoman at menswear shop Notting Hill. "Most of the big shopping malls in Beijing are like this," says Zhang's fellow shopgirl Lu Miao. "Have you seen a shopping mall filled with customers?"

In fact, there are success stories. Shanghai's Raffles City and the MIXc, a mall in the city of Shenzhen, which borders Hong Kong, have good locations and a profitable tenant mix, says Bryn Davies, executive director of retail services for CB Richard Ellis in Greater China. And, despite the glut of space, the mainland's retail sector remains in bull-market mode. Economists expect as the country's consumer culture continues to develop, demand will continue to increase. China today accounts for 5% of global consumption, but investment bank Credit Suisse predicts that number will rise to 14% by 2015, making the country the world's second largest buyer of consumer goods behind the U.S. That potential will lure more and more foreign retailers and investors, Hand says. For example, CapitaLand, a Singapore-based real estate investment company, aims to add 100 Chinese malls to its portfolio, which would more than double its current assets, according to the company's annual report. "Foreign firms will pass along good management practices and experience to local developers," Hand says.

But much of this optimism rests on unknowns, such as whether China's economy can keep up its annual double-digit growth rate. David Simon, president of Simon Property, the U.S.'s largest public real estate company, may have summed up the market best during a meeting with analysts in February: "China is lots of ups and downs," Simon said. His company has four malls under construction on the mainland and has plans to build another eight. But after that, Simon said he foresees "no further activity in China until we get some more experience under our belt."

Meanwhile, retailers at Golden Resources say they have little choice but to hang on in hopes that customers will eventually discover the megamall. Xiao, the shoe salesman, is upbeat. "The store manager always tells us we should persevere, it will be getting better," he says. It's hard to imagine things getting worse. As a mall security guard dryly observes: "On weekdays we have so few cars, this must be the best parking lot in Beijing." Unfortunately for the builders, it's a parking lot attached to 6 million sq. ft. of unloved retail space.

Source: Time

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Changsha, in Hunan Province, is the kind of place that doesn't get much attention until something big happens in the news - like the anti-Carrefour mob that gathered in neighboring Zhuzhou recently, to protest the French and their handling of the Olympic torch events. If you aren't up to date on this, Jin Jing, a young wheelchair-bound athlete tried to protect the Olympic torch while being pelted with debris thrown by French protestors. This triggered a rash of nationalism against the French, and a top French envoy arrived a few days later to deliver a personal letter of apology from President Sarkozy to Jin Jing.

Beyond this burst of attention, Changsha is usually in the top 20 list for 2nd tier cities in terms of economic development, consumer spending, and real estate development. One of our group's clients, a major sportswear brand, has 33 retail outlets there. Their competitors have even more. There are also 26 KFCs and 132 ICBC bank branches. So with 6 million residents, Changsha isn't really a sleepy cow town.

When investors complain that they aren't hitting their IRR anymore in Shanghai and Beijing, they have a couple of options. One, reduce their IRR expectations, or two, take the Wanda/Capitaland litmus test. What's this test all about? Pretty simple. If there's already a Wanda or CapitaLand mall in a city you've never heard of or been to, then you should probably get out there and take a look. You might be surprised, even if you can't order a cappuccino.

Some Changsha news that's come across my desk recently:

Changsha's "high end" sector moves still higher

After more than six months of refurbishment, the Friendship Store in Changsha has just opened for business. The opening of this high-end flagship store after its recent Rmb300 million facelift has plunged the city's competitive retail scene into another cut-throat round of re-fitting and re-pricing.

"Sales of leading brands at Golden Family [the group's parent company] have been growing at an annual rate of between 30% and 40%," said the store's assistant general manager, Li Wenli.

This suggests that luxury items are not without buyers in Changsha despite the fact that many people complained about prices as they finished a shopping run in the newly-re-opened store.

Changsha's pre-existing high-end stores are not busy every day and the Friendship Store was relatively full.

Luxury market has potential

The signs are still more pronounced that "luxury" is the sector to enter. Hong Kong's New World Department Store sold seven luxury mobile phones with a hefty unit price of Rmb43,200 each within one month. Major chain Bailian Dongfang managed to sell several expensive watches with price tags of tens of thousands of yuan every day during the Golden Week holiday.

Hunan's total retail sales of consumer goods were estimated at Rmb335.5 billion in 2007, a year-on-year increase of 18.2%. Worthy of attention is a newly-emerging consumption structure, with sales of jewellery, expensive cars, luxury watches and high-end clothing accounting for an increasing share of retail sales.

This huge market is pulling in increasing numbers of luxury brands and stores. Chanel is very careful as to who it chooses to carry its stock and it has identified Changsha as the location for setting up one of its counters away from the capital's Wangfujing Department Store.

Hennessy also opened its first liquor store near Xiaowumen last August. Major department stores such as Seibu and Maison Mode started preliminary investment studies in Changsha.

Competitive environment

The opening of the renovated Friendship Store seemed to represent a move by the Friendship Apollo Group to tap business opportunities. But there are plenty of competitive hurdles to negotiate.

"There's limited demand for upmarket department stores in a small place like Changsha, but high-end stores are opening one after another in spite of this," says Li Wenli, revealing the pressure of having to survive the competition.

Professor Zhu Guowei of the Business Management School, Hunan University also has his doubts. "The possibility that there is a glut of luxury consumer goods in Changsha is a grim issue facing high-end stores."

"How to identify its clientele, bring brand effect into play and optimise operation are issues the Friendship Store must carefully ponder," says Zhu. Compared with Wuyi Square, with its prime location and range of businesses, the Friendship Store seems to have limited supporting facilities.

However, as many luxury goods are purely a matter of personal taste, buyers are after uniqueness and exotic options. It seems the Friendship Store needs to do is to make the best of its advantages and allow consumers to shop in a hassle-free environment.

"Competition between high-end stores boils down to service and software," adds Zhu. Price aside, luxury goods also sell concepts and the finer things in life.

Li Wenli is convinced that upmarket stores must always put their customers first and provide consumers with personalised services of a high standard.

Rational spending

Luxury items are not necessities, but their existence is still necessary. Luxury is not wasteful, rationalists say. To the contrary, it's creative.

That's not the same thing as uncontrolled buying of luxury goods, which can send spending out of control.

In Professor Zhu's opinion: "these [shoppers] are not 'positive' luxury consumers and are not long-term consumers to be desired. Business operators should take the nurturing of rational consumers of luxury goods as their strategy for sustainable development."

Zhu reckons that the number of luxury consumers will grow as the middle-income sector expands.

Source: HKTDC

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Papa John's, the Louisville, KY pizza chain with over 3200 stores in 28 countries around the world, recently announced plans to open 500 stores in China over the next 5 years. This will make China it's most important international market. They currently have 100 stores throughout China now and are closing their gap with Yum Brands, who have 350 Pizza Huts and over 2000 KFCs now in China.

It's interesting to note the way Papa John's are positioning themselves clearly mid-level. They've chosen a lot of 2nd floor street locations a block away from the major action. They are often in clusters with local and Taiwanese franchises. This makes them easy to find and family style. Just look for the Baodao eyeglass store, and chances are Papa John's is upstairs. I rarely see them on an expensive ground floor corner spot like Pizza Hut, who've gone decidedly upscale. When you eat at a Pizza Hut in China you feel like you are on a date and going to get prime rib. When you eat a Papa John's, you're definitely at the strip mall.

In China, we don't have strip malls - yet, but usually the first floor of most buildings along the street are smaller retailers, giving the same effect. For non-New Yorker's it might seem a bit intense. Here's what's on the street outside my window in Beijing now: the cigarette and liquor shop, a half dozen restaurants, a pharmacy, two massage parlors, a hair salon, a DVD shop, a pipe store, a sink and toilet store, a convenience store, an eyeglass store, a pink light place (that's where three women in nighties sit on a couch watching TV and knitting until a customer walks in), a few boutiques, a shoe store, a couple of real estate brokers, a kitchen supplies store, a fruit shop, a locksmith, and that's just looking to the east.

I'm back in Ningbo today surveying properties for an investment partner that is developing mid-sized neighborhood retail and hypermarkets. We're finalizing their location selection, and my team is here for a week doing micro analysis studies. The last time I was in Ningbo the paint was still drying on the new Wanda Plaza a little south of the city center. It's a huge complex, with Wal-Mart as an anchor, so I spent a few hours walking around, shopping, eating, talking to people, and being a 2nd tier kind of consumer. I think I can now define the difference between 1st tier and 2nd tier retail in a way most people haven't thought of. You can call it "2nd tier retail" when outside the bathrooms of a fancy new restaurant chain, there is one communal roll of toilet paper dangling from a plastic hook before you get to the squatty potty which doesn't flush properly. The communal roll of tp - for those 1st tier kind of people - is so you can grab a wad in front of everyone before you enter the stall which of course will not have paper, or a hook to hang your bag, purse, whatever, but will have an ashtray and a hi-tech infrared flush sensor built into the wall.

Walking through the mall I was impressed how the lifestyle consumer blend felt right. Kids on rollerblades, families with strollers, students, young couples, and guess what - no lao wai - except for me looking at the giant photo of Sam Walton at the entry way to Wal-Mart with the whole history of their entry into China mapped out stage by stage. I was standing there thinking what a bizarre concept, to put a giant black and white photo of an old guy in a baseball hat who no one in China knows right at the front door. The whole thing felt rather like a bizarre museum piece, a thing of the past, and believe me Chinese don't really like to think about the past too much - especially in black and white. This is a look forward in color culture, and those photos felt more like something out of a war memorial than the new cool Western place to shop in town.

People readily accept the white plasticized image of the Colonel, as in KFC, as a kind of an iconic brand without the history lesson, so I'm wondering why Wal-Mart doesn't do something similarly iconic rather than the weird "we are now invading your country bringing low cost capitalistic products - the same products you see everywhere else in town which are made right down the street - probably by someone you know, but branded by an old white guy in a baseball hat" message at the front door. You don't get to see any pictures of smiling Chinese people buying product until you start going up to the second floor.

Ningbo is happening. The area around this particular complex is filling up fast with new residential high rises, and the people here are all buying. I've seen property prices increase 40% this past year. Whether this means this particular mall location will hit it's desired yield, it's hard to say. I mean why are there six locally branded sports shops lined up next to each other all selling essentially the same product with the same display in the same layout for the same price with similar logos? Go figure.

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