Chinese consumer demand has not been affected by the gloomy global economic situation – it is still blooming and boosting the retail sector in Hong Kong and China. Retailers are competing with each other to open their shops first in both markets and are facing many new challenges that they have not experienced before. Retail in Asia recently caught up with retail expert, Jonathan Moore, head of property- Asia from EC Harris, to learn about the current retail challenges – from property issues to consumer behaviour. He also revealed his top tips for success in the two markets.
RIA: What are the major challenges that Hong Kong retailers are facing?
JM: Hong Kong is an attractive and mature market. Hong Kong’s challenge is about dealing with the increasing and expensive cost of rental shops. The challenge for the retailers here is about the competition in an international market with international brands who want to come here to make a statement as opposed to trading here for the long term. In addition to the high cost of rents, the high costs of doing business here is also a major concern. Therefore, the challenge here is all about cost conservation – how to get the right format and how to be flexible in your format to meet your consumers’ demands. Retailers, whether they are from the international, local or middle tier, need to understand their market so that they can align their costs and revenue appropriately. It’s about balancing all these elements to make a positive business model.
RIA: Amid the high retail rent in the Hong Kong market, many mid-range local retailers have to move to more remote locations. Can you comment of this?
JM:Economically speaking, retailers can’t continue to pay higher rents if they want to sustain their revenue. Many international retailers may find the location very important to them when they come to Hong Kong. They would pay a rent at a level exceeding their store turnover. They do that deliberately because they want to create a very large impact in the area. Abercrombie & Fitch are an example in this regard; they are about to open a shop in a prime location with a very high rent. These retailers may never make a turnover that can cover the rent, but what they will have is a huge billboard and the brand representation of that location.
The rent is boosted by Hong Kong retail characteristics: the huge demand from the Hong Kong consumers as well as from the Chinese visitors. And as a result, the local retailers are forced away from the highest rent area.
RIA: For these local retailers, what challenges will they see in the store relocation? What is your advice to them?
JM: Retail is always about knowing your customers – knowing what your customers want, and knowing exactly what they would buy from you. When the store was in a prime retail location, customers would go to it because it was there, so retailers didn’t have to work so hard on the store’s image and the type of the environment, and they didn’t have to make the store as much as the destination as it would be when they are in a more remote location. But when they have to move to a different area, I believe that the whole retail pitch will be different. Now at a new, more remote location, retailers have to work harder on knowing the customers, ensuring that they are selling the right products. They also have to spend more on advertising, communications and promotions, in order to get the customers to come to the new location. They should ensure they are operating at the right retail pitch so shoppers will come in to the store rather than walking by. In addition, they need to look at their store environment and check if it is in the right format and delivering the customer revenue they desire.
RIA: What should these retailers consider in terms of the store environment?
JM: Retailers need to look at the store environment from the point of view of "how big that store should be" to deliver the amount of customer revenue that they desire. Quite often, in retail design, the size of the store isn’t looked at accurately in terms of the customer revenue profile. What EC Harris tries to do is to help retailers to make the store work from a smaller footprint and get the same revenue by working hard on how the internal environment feels for the customers.
In the days when the cost of rent was lower, retailers would take stores that were available in the market. They would fill a store up with all of the merchandise categories and customers would come in and buy things. What’s becoming very prevalent in Europe is that store costs are becoming higher and retailers realise the size of their store relative to the rest – because in the past the store size was presented through whatever the retail development companies got in a location and they would fill it with all their categories and they haven’t really thought about what they’ve got. For example, a retailer has got 10-15 categories of women’s apparel to sell. He might be able to trade off for a store size of 1,000 square metres, however, they’ve done it on an area of 2,000 square metres and they’ve put double the amount of merchandise in it. It is just not efficient. Therefore, looking at the format, space and design is the key driver to reduce your overall cost.
RIA: Have Hong Kong retailers looked at this issue enough?
JM:I don’t think HK retailers are looking at this enough. In Europe and in the UK, the cost of trading and the cost of the revenue for retailers have created the need in this area. Hong Kong still enjoys a great demand in retail and retailers don’t have the revenue dropping the way it is in Europe and UK, but the rising cost of rent in the city is making retail business unsustainable. I don’t think Hong Kong’s middle tier retailers have understood this issue yet. However, I think they have to be aware that the best way to optimise their business is to look at smaller formats, to look at different store environments, to work hard at their consumer analysis and communications to the market. They should make their store more of a destination than a store that shoppers will walk by because it’s in the same retail pitch as everyone else.
RIA: What are the retail challenges that retailers in China are facing?
JM: China is a totally different story. Historically the retailers are focused on tier one and two cities which are reasonably mature and now the third tier cities are demanding a similar retail experience than that of the tier one and two cities. This demand presents a different challenge – How should retailers understand the retail demand in tire three cities in China? What would work in a third tier city? What are the right size, right model and right standard variations? China has a less mature construction industry so can you produce the same brand standard as in London and Milan? The challenge in China is about understanding the third tier cities, consumer demand and how that drives the product matrix. Retailers have to learn that the elements to create the best retail experience in China will not be the same as those they used to produce the same retail experience as in London, Hong Kong and Paris.
For instance, in women’s apparel, one of the largest categories in Asia, they have one or two sizes, however, China has a very different set of variables for this because people in northern China are taller and bigger than people elsewhere in China. Therefore, many retailers have failed in China because they have tried to go with a standard model and they found that that does not fit.
Also retailers have to consider Chinese people’s shopping habits – Do they like to shop in local shops or malls? There is not a lot of information available about shopping and retail in China. Going into these locations is therefore more of a challenge because they do not have the data to understand the consumer.
To summarise, the China challenges are about understanding consumer demand. China has a strong regulatory matrix so finding land is more difficult. You need the right mix. In some Chinese cities you sometimes see 10 coffee shops in a row so the mix of retail isn’t there sometimes.
RIA: How can international retailers make sure that they spend their investment efficiently in China?
JM: My advice for them is that they should invest money in understanding consumer behavior. Retailers can perhaps work with partners such as companies with Chinese experiences, the landlords, etc. However, they should look at the procurement side of their retail investment – don’t just rely on Chinese investment market to provide you with all of the key brand elements. They should take control of the procurement elements so they can reduce costs and improve quality.
To start, retailers should discuss the impact their brand wants to make on the market and then place advertisements in the right channel so that their consumers will get the right idea about the products. What’s next is that they should look at advertising and pilot prototype stores and then observe the market and measure the consumer reactions. The results of the observations are the key for determining their retail strategy going forward.
Too often retailers go rushing into China but they don’t understand enough about the Chinese consumers’ demands. So invest in it, do the research and make sure you know your consumer and match your products to them – these are the key elements for success in China.
Jonathan Moore is head of property- Asia, EC Harris specialising in the corporate occupier and retail sectors. He has over 20 years of experience delivering built asset solutions to international clients including Deutsche Bank, Toyota, Nissan and Citibank.
EC Harris is a leading global Built Asset Consultancy. As an ARCADIS company, EC Harris has access to circa 19,000 professionals worldwide operating in over 70 countries, 300 offices and generating in excess of EUR2.3 billion in revenue. Working across a wide range of market sectors, the company helps clients make the most from the money they spend on built assets.
Taking Stock is Retail in Asia’s column dedicated to showcasing opinions and providing advice from experts in the retail industry.
(Source: Retail in Asia)