China Retail - 2019

SPOTLIGHT Savills Research China 20 Retail Cities

Contents

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6-7

Noise and mixed signals 20 retail cities Brands Mixed performance indicators are The gap between Shanghai, As more brands see their found everywhere in the current Beijing and the other 18 cities is omnichannel platforms evolve, market; can they be explained? narrowing. retailers will need to take a harder look at their brick-and-mortar stores.

10-11 12-13

14-17

New demand Tourism retail Overseas opportunities Future growth will increasingly Tourism retail has been less Chinese retailers are looking to come from more novel and impacted by the growth of explore new markets overseas, innovative brands and those that e-commerce, and is just starting both developed and emerging. target particular segments of to find its feet. society.

China is the second-largest retail market in the world. Global retailers are going to need to pay much more attention to the changes 18-19 in consumption patterns and innovations that are originating in China. The market will likely China 20 Retail Cities become even more competitive as domestic This Publication brands continue to grow and mature and learn from overseas experiences before bringing back This document was published in August 2019 and utilises economic data through to the end of 2018 where possible. Store numbers their new retail know-how and combining it with represent the situation as it was at the end of June 2019. Drivers The retail market is returning their innate China knowledge. Savills China Retail Cities study was first published in 2014, and uses 16 indicators to determine leaders under two categories: the to business fundamentals, with “economic index” is based on a city’s macroeconomic and demographic data, while the “retailer index” is based on the number of stores consumers and products the in the city operated by 50 selected international brands. The indicators are weighted and aggregated to give a final score for each city. defining lynchpins of success.

2 3 Noise and mixed signals Noise and mixed signals

Consumer confidence index and retail sales growth, Jan. 2009-Jun. 2019

Consumer confidence index (LHS) Retail sales growth YoY (RHS) Noise & mixed signals 130 25%

Despite a slowing economy, consumer confidence remains close to an all-time high; luxury consumption continues to recover though purchasing levels of 120 20% some large ticket items have shown signs of weakness. Diverging performance indicators seem to abound in the current market. Let’s have a look at some of the possible reasons. 110 15%

100 10% Lowest growth vs largest market

China became the world’s second-largest economic growth, with final consumption flow of daigou products and generate more 90 5% economy back in 2010. Since then, retail sales expenditure contributing 76% to overall consumption within China’s borders. growth has slowed from 18.4% in 2010 to economic growth in 2018—up from just 45% 80 0% 9.0% in 2018, which is largely explained by an in 2010. Final consumption expenditure now China is an enormous country made up of lots 01/1998 01/2001 01/2004 01/2007 01/2010 01/2013 01/2016 01/2019 increasingly broader base of comparison. accounts for 39.4% of the overall economy. As of markets, with some of them more mature returns from new fixed investments continue than others. The spread of the internet Source People's Bank of China; Savills Research Growth of 9.0%, although close to a ten-year to dwindle and parts of the manufacturing and e-commerce has narrowed the gap to low, is still significantly higher than the other sector relocate to lower-cost Southeast some extent but is hard-pressed to remove Staples vs discretionary major economies. Given its large market Asian countries, domestic consumption all the differences between different areas size and current growth rate, China is set to is increasingly seen as the new engine for in China. Leading cities such as Shanghai There are concerns that discretionary Should overseas expenditure revert to China’s stores while exploring online channels rather overtake the US as the largest retail market sustainable economic growth. and Beijing are much more open and spending will be affected by stock market shores, the domestic luxury market will likely than having too many locations in the same in the near future, with retail sales expected accepting of international concepts, and are volatility or the financial de-risking and be the biggest winner. A weaker currency, market. to hit USD5.3 trillion in 2019. China’s role Starting in 2018, a series of tax cuts (individual therefore often the first port of call for many economic reforms taking place amidst in combination with a reduction in import in the global apparel industry has rapidly income tax and import duties) as well as VAT international brands. Lower-tier cities remain an intensifying trade dispute. However, duties and personal income taxes, as well as The slower retail sales growth figures can be transformed from producer to consumer. In reductions have been rolled out to boost much trickier. Local consumers might be able while overall retail sales recorded slower the reduction of structural price discrepancies attributed largely to declining automobile 2005, 71% of the apparel produced in China the economy and general consumption. At to afford the price point, but retailers will still growth in the first four months of 2019, the between markets will likely lead to more sales since mid-2018. The auto market has was exported. The figure dropped to just 47% the same time, the new e-commerce law, need time to reach reasonable scale. Finding performance of discretionary categories was luxury purchases within China’s borders. been affected by the sluggish economy with in 2017 with more products staying onshore. which came into effect in January 2019, a suitable local partner is indispensable not particularly different from that of staple According to Bain & Company’s estimates, limited consumer credit availability as well should better regulate online cross-border for international retailers wanting to make products. Chinese consumers could make 50% of their as buyers waiting for the release of new Despite its slowing growth rate, consumption transactions and — in combination with inroads in these local markets. luxury purchases domestically by 2025, up emission standards (effective July 2019). is playing an increasingly large role in stricter customs checks — should stem the A slowing economy and the ongoing trade from just 27% in 2018. Nevertheless, the fall in fossil-fuel car sales dispute could pressure the Renminbi to has been partly offset by the rising sales of weaken further against the US dollar. This This trend is becoming more evident in new energy vehicles (NEVs). Overall, auto Retail sales growth rates Consumption expenditure’s contribution to GDP growth scenario might convince Chinese consumers luxury shopping malls. Luxury shopping malls sales fell 12.1% YoY in the first four months of 2018 2023 to stay home and make more purchases in first- and second-tier cities maintained 2019, while NEV sales increased 60% over the 10.0% 100% domestically rather than on overseas trips. annual sales growth of 10-20% over the same period. 9.0% The increased revenue could partially past two years, outperforming the market 8.0% 80% offset the negative impact on discretionary average. In the meantime, luxury brands are Staple categories are also not immune from 7.0% spending, though it could also cause inflation consolidating stores into the best performing the tougher macroeconomic situation. Sales

6.0% of imported goods. projects, focusing on operations at key growth rates of food & beverages and daily 60% necessities were only slightly higher than 5.0% other categories. According to a Kantar 4.0% survey, premium toothpaste brands and 3.0% 40% Size and growth rates of consumer goods, Jun. 2019 healthy juice sales posted strong growth while 2.0% less innovative categories, such as diapers and 15% 1.0% 20% chewing gum, saw sales volumes contract.

0.0% a a s e a a il a y n a ia i m i d ld e r i z m e in s d a s n r t o d a o r n ce a h y n n e la o a ss a r a n p a I t n i t p u n B A m a a C l e o a W S a R a gd o r r J a i h g C n r e F M V d T d n i 0% In e i K u G it S d E 2002 2004 2006 2008 2010 2012 2014 2016 2018 n e U it n Medicine U 10% Source Focus Economics; Savills Research Source National Bureau of Statistics; Savills Research

Consumption vs housing price Cosmetics A variety of factors are at play behind the this does not necessarily mean having from what is still one of the highest rates for Communication appliance slower retail sales growth. Aside from the more discretionary spending money. This any major economy. If interest rates do fall, 5% Food larger base of comparison, many observers dichotomy could also help explain strong it could reduce debt pressure on households Growth Rate Jewellry Sports point to increasing household debt levels, consumer confidence but slowing retail sales and encourage discretionary spending. Clothing Daily goods which could be weighing on household growth. finances. Short-term loans are typically associated Falling house prices seldom help to increase with consumer expenditure, e.g. credit card 0%

While rising residential prices won’t consumption levels. The Chinese government bills, while longer-term loans are typically Furniture necessarily fuel consumer spending, they plans to shore up market confidence by mortgages. In China, growth in long-term Automobile could have a positive impact on homeowners’ stabilising residential prices and buying more loans has been outpacing short-term loans consumer sentiment. The same cannot be time for sustainable housing initiatives, such but gradually stabilised in early 2019, a said for those yet to get on to the housing as long-term rental apartments, to take hold. development that might indicate short-term -5% ladder; those who are saving up and going At the same time, the government is making loans are on an upward trend. As the effects 0 100,000 200,000 300,000 400,000 into debt to buy their first place; or those of tax cuts start to play out, and domestic efforts to boost consumption through tariff Market Size (Million RMB) who want to upgrade their current premises. and VAT cuts as well as individual income demand continues to be encouraged, In recent years, house prices have been tax deductions. There is also speculation that consumer market performance is expected to Source National Bureau of Statistics; Savills Research steadily increasing in many cities, making the People’s Bank of China might consider improve over the second half of 2019. Note The bubble size represents the monthly sales by companies above a designated size. homeowners feel wealthier although lowering interest rates in the near future

4 5 20 retail cities 20 retail cities

Catching up

If Shanghai and Beijing are the two largest and most important strong, coming seventh in terms of GDP ranking. The city is prime retail markets in China, how far behind are the other 18 expected to overtake sixth-placed Tianjin in 2019. cities and how close could they get to the top? In fact, the gap has already narrowed in the last three years. While most international Xiamen, despite coming last in the rankings, also outperformed retailers still prefer Beijing and Shanghai for their first location, most cities for store numbers with an increase of 11% over the last they often have plans to expand to Chengdu, Hangzhou or year. Considering only 31 of the 50 brands tracked have a presence Shenzhen within a year. If a brand has a local partner, it may even in Xiamen, the city still has plenty of potential, and the opening choose a second-tier city that the partner is more familiar with as of the 150,000 sq m Xiamen MixC in late 2018 will continue to its first location. For example, Champion opened its first China attract new brands to the market. store in Hangzhou while Heron Preston chose Xi'an. Neck and neck In 2014, Beijing and Shanghai had roughly five times the number of stores that the other 18 cities had, on average; in 2019, this has Hangzhou vs Guangzhou fallen to four times the number, as retailers have expanded faster ⑤ ⑥ in Guangzhou, Shenzhen and other second-tier cities. While Hangzhou, Zhejiang’s provincial capital, managed to stay ahead of cities such as Chengdu and Nanjing may have all the same brands Guangzhou after overtaking it in 2018, albeit by a narrow margin. that Shanghai and Beijing have (albeit in fewer numbers), many Hangzhou’s market tends to have a discerning consumer base that retailers (40% of those tracked) have yet to establish a presence in helps to attract more international brands from niche apparel, café markets such as Xiamen, Zhengzhou and Ningbo. and beauty sectors. Guangzhou, on the other hand, has recorded strong demand for supermarkets, fast food and affordable clothing, After Shanghai and Beijing, the cities of Hangzhou, Chengdu and reflecting a preference for a more utilitarian lifestyle. Both cities Shenzhen are the pre-eminent markets for the luxury, affordable are expecting a similar amount of new supply in the medium term, luxury and mass fashion categories, respectively, with their store roughly one million sq m over three years, so they are likely to counts in these segments reaching almost half of that seen in remain neck and neck in the retailer rankings for the next few years. Shanghai and Beijing, despite having much smaller populations. Ningbo vs Qingdao Up and down ⑱ ⑰ Ningbo comes last among key retail cities in the Yangtze River Tracked retailers have slowed down their expansion pace in Delta. Its performance seems even more muted against the central and western second-tier cities—the main reason why backdrop of the recent rise of central and western cities. It is worth the retailer index ranking remained largely unchanged. In the 12 noting, however, that the gap between Ningbo and seventeenth- months to June 2019, retailers increased their average store count placed Qingdao has been narrowing. While new stores openings Ranking City Index Ranking City Index in central and western second-tier cities by just 5.8%, compared to in Qingdao have recently outstripped Ningbo, this is primarily a 9.8% for cities in the Yangtze River Delta (YRD). A similar trend factor of available stock. Ningbo has the chance to catch up or even can be seen in the macroeconomic indicators, with central and overtake Qingdao in the coming years as new retail landmarks 1 Shanghai 98 11 Xi'an 25 western second-tier cities growing only 0.6 of a percentage point are launched onto the market—namely developments by China (ppt) faster than cities in the YRD in 2018 compared to 0.9 of ppt Resources Land, New World Group and Hankyu Hanshin. faster in 2017. 2 Beijing 87 12 Suzhou 22 Changsha vs Shenyang Retailers’ pace of expansion in central and western regions is ⑭ ⑬ more discerning than before—Kunming and Chengdu recorded Changsha has been rapidly catching up to Shenyang in the slower growth while Changsha and Xi’an maintained a higher pace rankings as a result of the city’s strong economic growth over the 3 Shenzhen 44 13 Shenyang 20 of growth. Kunming’s new projects are located mostly outside past five years (annual growth rate of GDP at 9.5%), which has 20 the city core, which has helped boost F&B numbers but has done created jobs, migration and wealth. At the same time, northern less for international fashion brands. Meanwhile, Chengdu’s cities, particularly Shenyang, have been coping with a depressed 4 Chengdu 39 14 Changsha 19 market is already fairly mature with a full range of brands present; economy, which has sapped consumer spending and seen a Retail Cities therefore, the impetus for continued growth is weaker. number of retailers give the city the cold shoulder. Savills Retailer Index saw the least movements 5 Hangzhou 35 15 Kunming 17 Several landmark projects opened in Changsha and Xi’an in the in city rankings in the latest five years with only last 12 months and, consequently, luxury brands have upgraded New luxury and affordable luxury openings by city Suzhou and Shenyang swapping positions, while all and consolidated their premises from older developments, which 2H/2018-1H/2019 the other cities retained their previous ranking. Guangzhou Dalian has resulted in an overall decrease in luxury stores. Retailers from 6 34 16 17 other categories, however, remained bullish and pushed overall expansion rates above 10% in both cities.

7 Chongqing 28 17 Qingdao 14 Xi’an remains the fifth-largest luxury market in mainland China by store count despite recent adjustments. Retailers from other categories, such as affordable luxury and F&B, have been very

8 Wuhan 28 18 Ningbo 14 active in opening new stores in the last year, helping to enhance Xiamen Shenzhen the overall retail mix and vibrancy of this ancient-yet-thoroughly- modern city. As the only city that moved up the economic index 9 Nanjing 26 19 Zhengzhou 13 ranking (now 13th), Xi’an has attracted more than one million permanent residents in the past two years, more than any other Xi’an city in the rankings. The expanded workforce should provide a Chongqing 10 Tianjin 26 20 Xiamen 12 solid base for the city’s long-term development. Tianjin Suzhou Second-tier cities in the YRD reaffirmed their appeal over the last Source Savills Research year with Hangzhou and Suzhou seeing average store growth rates Shanghai Note Wuxi has been removed from the rankings while Xiamen has been added. exceed 10% and every retailer category notch store openings. Suzhou is the only city to have ascended the retailer rankings — Hangzhou Zhengzhou Beijing Ningbo while the market is diffuse, Suzhou has always been economically Source Company websites; Savills Research

6 7 Brands Brands

Brands

As more brands see their omnichannel platforms evolve, retailers are going to need to take a harder look at the cost- benefit proposition offered by brick-and-mortar stores and what role they can play in the overall development of brand awareness and engagement. Scale is not everything anymore, and consumers are demanding more from brands.

Store expansion has opened two new multi-brand stores in products and activities. Many international Shanghai. brands are paying attention and have started F&B Grocery The evolving online and digital experiences emphasising their sustainability credentials that consumers have through mobile New entrants are also tapping online while also focusing on health benefits, social Restaurants are updating their menus to include Consumers are more concerned about how payments and mini-programs have bolstered platforms as they make their first tentative welfare and sustainable materials. more fresh produce, innovative recipes and sustainable and organic their produce is. consumer spending. Consequently, steps into the China market. Urban Outfitters healthy ingredients. Some are promoting healthy “Additive-free” and “natural and organic” foods are international brands are allocating more has been operating a Tmall store for over While interest in healthy living is universal, it concepts like in-house produce, organic food becoming more popular. resources to the development of online three years now and has recently started using tends to play out differently across countries supplies, or self-service eateries. platforms to reach a wider range of pop-up stores in preparation for a potential and regions. Chinese cuisines still dominate consumers. Retailers have also invested more first brick-and-mortar location. Macy’s, on the second- and third-tier cities. Consumers may Examples in key flagship stores with better fit-outs, other hand, has decided to leave the China accept the idea of going vegan or cooking with Examples broader product ranges and experienced staff. market after operating a Tmall store for just less oil and salt but are still not on board with Plant-based milk alternatives are gaining The store experience and quality of service two years, though products are still available Western health food concepts. Many salad Hotpot and burger outlets are embracing an popularity. Soy milk sales recorded a faster growth must be improved to create a more gratifying through its official website. bar chains learned this the hard way when upgrade in their food offerings through fresh, than other major fast-moving consumer goods in retail experience. they flocked into the market two or three organic ingredients and better-quality meat. 2018, while oat milk products are also capturing years ago but failed when they were unable to consumers’ attention. In the 12 months to June 2019, the store All about health accommodate local tastes. expansion rate of the eight retail categories tracked slowed 5.2 ppts YoY to 4.3%. Coffee Consumers are becoming increasingly health- The rapidly developing health and wellness store chains were the only category that conscious and aware of their impact on the market has taken on a life of its own and now recorded an expansion rate exceeding 10%. environment. In recent years, the government incorporates new concepts and products has stepped up its campaign of environmental that are shaping consumer lifestyles — Luxury store numbers contracted by 6.2% YoY protection and food safety standards, and from athletic underwear ranges to avocado as retailers relocated and upgraded premises consumers have taken this a step further and chia seed detox smoothies and high- to newly launched malls, consequently by differentiating not just by product safety intensity interval training (HIIT) courses. A shuttering older existing stores in several standards but also by selecting different noteworthy trend has been the rise of cross- second-tier cities last year. As ROPO products and services more conducive to sector or multi-sector retailers that seek to (Research Online, Purchase Offline) becomes a healthier lifestyle. This is especially true tap into increasingly specialised consumer ever more common in the luxury sector, in more affluent cities where consumers groups. brands are increasing their engagement with are willing to spend more on health-related consumers online while still relying on their physical stores in a few select malls to provide a wide range of products and better services.

Western fast food chains tracked in this survey grew at a slower pace in Shanghai and Beijing (1.9%) than in the other 18 cities (8%) for the first time in over four years. Leisure Fashion This, however, overlooks the fact that mid- to high-end burger and pizza restaurants (not Consumers are requiring more out of sports and Socially-conscious consumers welcome natural included in the basket of brands) are most fitness services. The market is fragmenting as materials such as pure cotton and linen. definitely on the rise in Shanghai and Beijing. specialisations such as spinning, yoga and dance Meanwhile, evolving fabric technology is also Mass market fast food chains are eventually studios and CrossFit boxes expand, supported by enhancing comfort and functionality. reaching saturation point in some cities and innovative technologies. areas, and higher-income households are becoming more selective when it comes to Examples their fast food. Examples The incorporation of new technologies in products Fast fashion brands grew store numbers by Social fitness app Keep has opened an offline is expanding, such as Under Armour’s bioceramic 4.8% over the past 12 months, with brands fitness centre called Keepland in both Beijing and underwear and Allbirds’ wool sneakers. trying to be more creative in their product Shanghai. The Beijing outlet also delivers salad offerings and store designs as competition take-outs within a certain radius. intensifies. H&M opened a 2,200 sq m store in Hangzhou Gonglian CC, which also stocks a range of household goods, while Inditex

8 9 Digging up new demand Digging up new demand

Domestic International

01 02 03 04 05 01 02 03 04 05 Insurgent FMCG goes Heritage New brands Clicks to Peripheral Premium F&B Tourists’ Private label Alternative start-ups beyond culture from mature bricks products favourites cosmetic entertainment supermarkets retail groups Digging A strong domestic The ongoing Reinvigorated The drive for new More online brands As beauty, skincare, China's food and You can never go Consumers remain While many retail economy and a transformation traditional Chinese products to satiate are stepping into the and sports and beverage industry wrong by paying enthusiastic about sectors have government push to in the traditional brands have been China’s growing need world of bricks-and- fitness sectors grow is characterised attention to Chinese cosmetics and been impacted up spur creativity and supermarket sector attracting more for diversification and mortar retail. A wide rapidly, retailers by significant tourists’ shopping skincare products, by e-commerce’s entrepreneurship has encouraged attention in recent personalisation has range of businesses are also foraying geographical trends. Brands that particularly the rapid expansion, combined with some FMCG (fast- years. According to convinced domestic are exploring the into peripheral differences and fierce appeal to Chinese higher-end brands. entertainment increased venture moving consumer Alibaba, traditional retail groups to look opportunities that products. Industry competition. The tourists in overseas Nevertheless, many operators have been new capital and private goods) brands to brands that have to overseas markets come with physical leaders, including leading cities, where markets are often brands may be new to largely untouched as equity has created the seek alternative undergone substantial to buy or partner with platforms, whether L'Oreal (beauty) and affluent consumers well-received when consumers, and thus many experiences are right environment channels for growth; makeovers have on new brands. This they be single brands, Johnson & Johnson are more open and they enter the will rely heavily on harder to replicate. demand for start-up brands for example, securing average seen a 30% drive has supported online marketplaces (skincare) have been willing to try new China market. As consumer reviews and New construction to flourish. Food storefronts or pop- increase in online the growth in China’s (NetEase Koala acquiring firms in concepts and brands, outbound tourism social media platforms and space created by & beverage and up stores. Utilising sales. Heritage brands outbound investment. and Xiaohongshu), related sectors, either remain very attractive matures, Chinese (as opposed to direct vacating brands have At all levels, the government is fashion have received creative design have an incredible According to a report workout and fitness to enhance their to foreign brands. nationals have a marketing), which handed entertainment looking at how to stimulate domestic significant interest elements, brands can opportunity to tap by Deloitte, wholesale apps (Keep), or online foothold in existing However, it is still better understanding give niche products operators a golden consumption and economic growth. both online and generate buzz and into consumers’ fond and retail segments video platforms brand categories or important to find the of brands and a better opportunity opportunity to secure Beijing, Shanghai and Chengdu have offline while new, elevate their image childhood memories accounted for about (iQiyi). The brands tap into new market right local partner to products available. to gain a consumer great new venues all recently introduced measures, high-quality brands in while also attracting of brands while also 20.8% of outbound are looking to increase sub-segments. A help with supply chain International brands following. on favorable terms. including subsidies and rewards, to health-related sectors, a new generation of resonating with investment in 2017. user stickiness and growing number management and with some rapport E-sports and other attract new retailers. Nevertheless, such as sports, fitness consumers. young consumers by loyalty by creating an of new brands are product localisation, and understanding of sports-related tenants most mainstream products and and personal care, enhancing their retro enhanced member emerging that offer amongst other Chinese consumers are particularly hot at brands are already well established, have also appeared on image and integrating experience and deeper beauty aids, digital considerations. will also be better the moment, enjoying and future growth will increasingly investors’ radar. with popular culture. engagement. accessories or prepared. a groundswell have to come from more novel and specialised products. of interest from innovative brands and those that consumers. target particular niches of society.

Wang Lao Ji Little Red Canada magmode White Rabbit Ahava ReFa Shake Shack Diptyque B-monster / Wong Lo Book Goose Kat

A designer clothing This Chinese herbal White Rabbit, an Israeli skincare brand Social e-commerce ReFa, a beauty device Shake Shack, in Canada Goose has Diptyque is one of Boxing studio brand established in tea brand, which used iconic candy brand Ahava was acquired app Little Red brand from Japan, partnership with always been popular the pioneering niche B-monster has 2016, Magmode closed to sell in supermarkets from Bright Food by Fosun Group in Book has over 150 opened its first store Maxim’s from Hong with Chinese tourists perfume brands in opened two stores Series C funding in and restaurants, has Group, opened a 2016 and, two years million users and in mainland China Kong, opened its and has built a mainland China. Since in Shanghai, while 2018. The new capital opened a chain of milk tea pop-up store later, opened stores 85 million MAU. In in 2017. Aiming to first mainland store remarkable reputation its mainland debut in its home market of is to be used to expand “1828 Wang Lao Ji” in collaboration in major Chinese its official offline provide a better at Xintiandi in via celebrities and 2014, the company now Japan has a total of its network in China stores in Guangzhou with Happy Lemon. cities including store, Red Home, consumer experience downtown Shanghai. social media. It operates eight stores — just eight. They offer a and explore overseas to offer fresh-brewed White Rabbit has Shanghai and Beijing. the 400 sq m space (with experiences Higher-end burger opened its first three in Beijing, two in distinctive experience markets. herbal teas and also partnered with Investment in not only introduces like skin tests), it now restaurants in the mainland store at Shanghai, and one each from your normal desserts. HeyTea on a limited- overseas retail brands the platform’s best- runs stores in Beijing, vicinity, such as Beef TaiKoo Li Sanlitun in in Chengdu, Chongqing gym, focusing solely edition milk-candy- has become such an selling products but Shanghai, Hangzhou & Liberty, charge an Beijing, along with an and Nanjing. on high-intensity flavoured ice cream important part of also boasts a café and and Nanjing. average RMB80 yuan e-commerce business boxing workouts and bubble tea. the group’s business home goods area to or more for a burger. on Alibaba's Tmall. and featuring unique that they established establish the brand’s décor and a nightclub- Fosun Fashion Group lifestyle credentials. like atmosphere. in 2018.

10 11 Tourism retail

Duty-free stores Duty-free stores are an important channel for Chinese consumers when it comes to Chinese overseas consumption by shopping channel overseas purchases with two-thirds of overseas luxury expenditure taking place in urban or airport duty-free stores, according to McKinsey.

Others There are three typical types of duty-free stores in China: 1) Duty-free stores at sea 9% and airport terminals, which are the most common. Shanghai and Beijing airports account for nearly 80% of total revenue; 2) Island duty-free stores, typically found Free-standing in Hainan. Sanya Haitang Bay International Shopping Mall has revenues comparable brand stores to that of prime malls in key cities; and 3) Downtown duty-free stores, which are far 9% from maturity. Downtown duty- free stores 41% Tourism retail Duty-free stores are highly regulated in China with only a handful of companies Department stores 15% licensed to operate stores. China Duty Free (CDF) Group is the largest operator in mainland China with approximately 80% market share. The group runs the airport Tourism revenue for the 20 cities tracked in this report increased 93% in the five years to 2018. duty-free stores in the four first-tier cities, and in early 2019 they announced plans to Tourism has become one of the fastest-growing sectors of the Chinese economy, and tourism open downtown duty-free stores in Beijing, Shanghai and Xiamen. retail has benefited from that strong growth. With a different design and makeup from typical Airport duty-free urban retail centres, tourism retail has been less affected by e-commerce. While traditional Further expansion of downtown duty-free stores is expected in the future amid stores retail is having to reinvent itself with new concepts, tourism retail is just starting to find its efforts to boost consumption. Nevertheless, downtown stores are likely to remain 26% feet. low key and present a limited range, so as not to distract too much from airport duty- free stores or luxury stores in the core retail areas.

Airport retail Source McKinsey; Savills Research In 2018, 800 million passengers passed through the airports of the 20 tracked cities, up 7% from a year earlier. As airport margins are squeezed and competition from high-speed rail travel intensifies, more airports are focusing their attention on non- aviation revenue sources. Internationally, airport retail has gone beyond meeting Expansion of key airports, 2018 to 2030 the basic needs of travellers with many airports offering a wide variety of quality products and services that can make layovers and check-ins much more bearable 1,600,000 while loosening tourists’ purse strings. Well-designed and provisioned spaces can also enhance the attractiveness and competitiveness of the airports as international 1,400,000 hubs and create a positive first impression of the city or country. 1,200,000 Only two Chinese airports saw non-aviation revenue exceed aviation-related

revenues, namely Shanghai Pudong International Airport (PVG) and Beijing Capital 1,000,000 International Airport (PEK). Two-thirds of PVG’s non-aviation revenue came from

duty-free shops, while PEK’s share was 45%. These airports are still highly dependent 800,000

on duty-free stores, but there remains significant potential for other retail options. sq m

600,000 Airport interior design in China has tended to be conventional and utilitarian—failing

to create anything close to the consumer environments seen in international airports 400,000 like Singapore’s Changi or city-centre malls in Shanghai and Beijing. Mainland

airports tend to be dominated by general retail and a handful of F&B tenants that are 200,000 often unappealing to travellers, and pop-up stores and concept stores, while gaining

popularity in city centre locations, rarely make an appearance either. There is also a 0 distinct lack of leisure or entertainment options. One of the first and easiest steps Shanghai Beijing Guangzhou Shenzhen would be to upgrade the F&B options and airline lounges.

Additionally, design and planning flaws carried over from earlier phases of airport Source Savills Research construction mean that subsequent expansions or renovations must address serious service and retail issues. Challenging as that might be, progress is starting to be made. For example, Muji’s public area at Shenzhen Bao’an International Airport (SZX) T3 includes a rest area, a business area and a MUJI to GO store. The planned expansions at major airports in Beijing, Shanghai, Guangzhou and Shenzhen—totalling as much Average size of outlet malls as 4.3 million sq m—represent a tremendous opportunity in the not too distant future to reshape Chinese perceptions and expectations of airport retail across the whole country. 100,000

Outlets 90,000 From 2016 to 2018, 7.5 million sq m of outlet developments were completed; of those, just 30% were classified as tourism outlet centres — typically 50,000 to 150,000 sq m outlets in the suburbs near highways or key tourist sites. Generally, outlets have 80,000 been evolving in recent years. The average size of an outlet mall has shrunk by 30% as sites have crept closer to city centres in the form of repurposed underperforming sq m 70,000 department stores. This type of retail format seems to be unique to China.

Successful tourism outlet malls in China include Bailian Outlets Plaza in Qingpu 60,000 District (Shanghai), Florentia Village in Wuqing District (Tianjin), and Capital Outlets in Fangshan District (Beijing). They have become popular destinations for travellers

on short breaks and weekend getaways with the catchment area limited to respective 50,000 cities and neighbouring provinces. Brand selection, product range and pricing remain 2016 2017 2018 the biggest challenges for outlet operators whose target consumers are understandably more price-conscious than those who frequent downtown luxury malls. Source OutletsCN; Savills Research

12 13 Overseas opportunities Overseas opportunities

Key Overseas stores by Chinese brands

Brand City Location / Project

MO & Co. London, UK South Molton Street Miniso Urban Revivo Kiev, Ukraine London, UK Skymall Store Westfield London

Haidilao DJI London, UK Seoul, South Korea Piccdilly Circus 140 Eoulmadang Street Haidilao Los Angeles, USA Hi Panda Westfield Santa Anita Balabala Tokyo, Japan Dubai, United Arab Emirates Omotesando Dragon Mall Semir Riyadh, Saudi Arabia MO & Co. Garden Shopping Mall HLA Hong Kong, China Overseas Bangkok, Thailand Fashion Walk Mi Central World Mumbai, India opportunities Seawoods Central Mall HLA Urban Revivo HLA Singapore Singapore Miniso Kuala Lumpur, Malaysia In the past decade, overseas investment has been an Raffles City Suntec City Mall Lagos, Nigeria MyTOWN emerging trend for a number of Chinese companies Festival Mall seeking potential growth. China’s outbound direct HeyTea investment has recorded an average annual growth EP Singapore of 6.0% for the past five years, despite a reversal in Kuala Lumpur, Malaysia Ion Orchard this trend since 2016. The wholesale and retail sector Suria Klcc has been particularly active over the past five years, 361° contributing an accumulated total of US$96.1 billion and Jakarta, Indonesia accounting for 12.8% on average per year. Matahari Dept Store

Direct acquisitions of reputable brands is a key strategy for some leading domestic retailers, such as the €4.6 billion acquisition of Finland’s Amer Sports by a consortium led by Anta. In most cases, the acquired brands already have domestic and international reputation and store network. This, combined with the Miniso buying company’s existing business network in China, La Florida, Chile JNBY will hopefully boost overall sales growth of the company. Mall Florida Center Melbourne, Australia 2 Flavia Court, Mount Waverley Besides acquisition in overseas markets, opening stores in local market is becoming another trend. The transition from exporting “Made in China” products to exporting “Chinese brands” is not only an inevitable “The wholesale and retail path for companies faced with the decline in OEM (original equipment manufacturer) model. In fact, sector has been particularly many mature, established retailers are attracted by the potential growth in emerging overseas markets — at active over the past five years, a time when the domestic physical market has been contributing an accumulated adequately served and the benefits of doing business online are starting to fade. total of US$96.1 billion.” A presence in top global cities may also help them gain access to the world’s prime retail destinations and enhance their brand profile.

14 15 Overseas opportunities Overseas opportunities

RMB 500,000

How much space can be leased for RMB500,000 per month?

Digital and fashion brands lead the way

The global consumer market remains hotpot chain Haidilao each operate over expansion efforts given the advantages dominated by US and European brands, 20 overseas stores while emerging F&B Chinese brands have in these sectors. especially in the FMCG and traditional brands HeyTea and Mellower Coffee are retail categories. Chinese companies, taking their first steps beyond the border. For example, while the global fashion How much space can a retailer Prime retail areas of major world cities however, are climbing up the rankings. supply chain is shifting its focus to secure in a prime retail area Chinese brands, including Moutai, Of the 100 Chinese brands tracked by Southeast Asia, China is still the world's or high street for a budget of Huawei, Tencent and Alibaba, took 15 Savills, 20 have so far already opened largest producer of apparel, accounting RMB500,000 per month? Savills SHOP SIZE RETAIL AREA spots in BrandZ’s Top 100 Most Valuable stores outside mainland China, while for 47% of global production as of the data shows that average rent for (sq m) Global Brands list for 2019. another 45 have expressed an intention end of 2017. In the smartphone market, China’s most expensive high street to expand overseas in the near future. A three Chinese brands are ranked in the is equivalent to that of prime high streets in Europe’s second-tier Fifth Avenue (between 49th - 60th), Chinese brands made their first quick store count shows that Southeast top five producers in the world, with a 25 international forays back in the 1990s Asia is the most favoured destination combined market share of 33% : Huawei cities, such as Preciados in Madrid � New York with home appliance brands such as for Chinese brands, accounting for 33% (3rd), Xiaomi (4th) and OPPO (5th). or Zeil in Frankfurt. There is still Haier. Recent years have witnessed of existing stores, followed by East In the NEV sector, Chinese electric a long way to go, however, when an increasing number and variety of Asia (including Hong Kong, Macao and car manufacturers are also growing compared with the world’s leading Central, Hong Kong 50 Chinese brands try their luck outside Taiwan) with 21%. aggressively — four models from BAIC retail streets. � their home market. Miniso now runs Motor, JAC Motor and BYD Auto were about 200 stores (including franchises) Digital, apparel and NEV brands appear among the top ten car models in the In areas such as West Nanjing outside China; apparel brand HLA and to be the most aggressive in their world by sales volume . Road in Shanghai and Sanlitun in � Ginza, Tokyo 70 Beijing, a retailer should be able to find a 200 sq m unit for roughly RMB500,000 per month, though available units might be even � Collins Street, Melbourne 80 smaller in the most highly sought after projects. In the Bell Tower area in Xi'an, where rents are less expensive, the same budget � Myeong-dong, Seoul 125 would likely stretch to a 1,000 sq m flagship store. In Tokyo’s Ginza or Hong Kong’s Central district, however, RMB500,000 might only � Oxford Street, London 135 cover the rent for a 50-70 sq m street store, and on New York's Fifth Avenue you would struggle Sanlitun, Beijing 200 to find a 25 sq m location — the � size of a milk tea store — at that price. West Nanjing Road, Shanghai 230 Southeast Asia markets, on the � other hand, offer very competitive rents and have proved very popular with Chinese brands. The � Pavilion, Kuala Lumpur 250 rental rates at Singapore's Orchard Road and Kuala Lumpur's Parkway Plaza are comparable to some of the top high streets in China, while � Orchard Road, Singapore 320 more cost-efficient alternatives can be found in Bangkok, Jakarta and Ho Chi Minh City. Source Savills Research Note Based on first-floor apparel and accessories store, net area basis. Exchange rate of USD1: RMB6.8.

16 17

Research Central Management Retail James Macdonald Robert McKellar Aileen Zhong Yingbo Huang Senior Director, China Executive Chairman, Asia Pacific Senior Director, Shanghai Senior Director, Wuhan +8621 6391 6688 +8621 6391 6688 +8621 6391 6688 +8627 5930 5566

[email protected] [email protected] [email protected] [email protected]

Chester Zhang Siu Wing Chu Joey Chio Lesley Wang Director, Central China Managing Director, Central China Senior Director, Shanghai Director, Beijing Drivers +8621 6391 6688 +8621 6391 6688 +8621 6391 6688 +8610 5925 2086 [email protected] [email protected] [email protected] [email protected]

Aside from the economic challenges, the 1. Economic uncertainty – Never a dull productivity through the efficient allocation and Carlby Xie Anthony McQuade Bryan Tsoi Iris Lin enthusiasm over the past few years for moment sharing of resources. These larger population Director, Southern China Managing Director, Northern China Director, Shanghai Director, Chengdu “New Retail” and online platforms appears Uncertainties surrounding the China-US bases, namely the southern Greater Bay Area, +8620 3665 4874 +8610 5925 2002 +8621 6391 6688 +8628 8658 7111 to be waning, and the market is once again trade dispute continue to weigh on China’s the Yangtze River Delta and the Beijing-Tianjin- [email protected] [email protected] [email protected] [email protected] returning to fundamentals, with consumers manufacturing and export sectors. The Hebei region, will become incubators and and products the defining lynchpins of government has recently been taking steps to testing grounds for new retail concepts. Vincent Li Woody Lam Elaine Chan Jimmy He success. shore up the economy by transforming and Associate Director, Northern China Managing Director, Southern China Director, Shanghai Director, Guangzhou enhancing its financial markets and encouraging 3. Fierce competition – Reinvent or perish +8610 5925 2044 +8620 3665 4777 +8621 6391 6688 +8620 3665 4800 consumers to keep on shopping. Import tariff Future retail supply is expected to be significant [email protected] [email protected] [email protected] [email protected] cuts on a variety of consumer goods have helped and will undoubtedly increase market to buoy certain segments of the market while competition. Older projects will find it hard to Eric Wo Nicky Zhu Dorian Zhi personal income tax cuts and VAT reform stay competitive without renovating current Managing Director, Western China Director, Shanghai Director, Shenzhen should continue to bolster consumer confidence premises and continually innovating. Retailers +8628 8658 7828 +8621 6391 6688 +8675 8436 7000 and take-home pay. should pay attention to larger shopping malls in [email protected] [email protected] [email protected] emerging areas, as well as renovated boutique While the short-term performance of the projects in central locations. economy may be in question, the bigger picture of a transformed and revitalised economy will 4. Demanding consumers – Innovation, bolster retailers’ longer-term confidence in the customisation and digitisation market. Market demand for quality retail brands remains robust, supported by a growing middle class and 2. Regional integration – Better together the rising influence of a younger generation of Regional integration is a national-level consumers. Effectively reaching and engaging Savills plc strategy to boost business investment, further with these consumers will require brands to urbanisation and, in doing so, generate greater create innovative concepts, customise products Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled and digitise the retail experience. growth. It is a company that leads rather than follows, and now has over 600 o±ces and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every e³ort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.

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