23 July 2012
Urbanisation and retail in the YRD
Second- and third-tier cities moving towards first-tier?
From the perspective of retail and commercial development, second- and third-tier cities on the mainland are described by some as moving towards first-tier. Such a description may sound a bit exaggerated, but not out of the question. At least, it vividly depicts the rapid development of second- and third-tier cities on the mainland. In fact, second- and third-tier cities have been making tremendous progress in upgrading their infrastructure and consumption level in recent years.
The society and economy of the Chinese mainland are changing rapidly at different levels involving different dimensions. Not only is the income level on the rise, its transport infrastructure and urbanisation programme are also making progress through interaction. With the growing expansion of the cities, the well-developed intra-city transportation systems (such as Metro lines) also allow the living and consumption hubs to move away from the traditional city centres and spread outwards. The increasingly convenient and efficient transport links between cities (such as high-speed railways and highways) have also led to the development of “city integration”. Besides, the growing mobility within or between cities is affecting the consumption and living patterns of the residents. Such phenomena of urbanisation are particularly prominent in the Yangtze River Delta (YRD) region where cities are highly concentrated, bringing a profound influence to the local retail development.
Upgrading of retail sector in cities of different levels
Yaohan in Dashikou of
YRD is an economically advanced region and the status of Shanghai as a national first-tier city is beyond doubt. In the two provinces of Jiangsu and Zhejiang, there are many fast-growing cities which are linked up by the well-developed transportation network. As a whole, the combined GDP of the 16 cities within the so-called Greater YRD metropolitan region accounts for 18% of the national total, while their total consumption value constitutes 16% of the national total. The private-sector economy of these cities is well-developed with a large number of private business operators whose consumption power must not be under-estimated.
From Figures 1 and 2 below, it can be seen that there is still disparity among YRD cities in terms of both consumption market size and consumption power. In Jiangsu province, for example, Nanjing and Suzhou are regarded as first-tier cities whereas Changzhou and Nantong are second-tier cities.
But anyone taking a walk in any of the YRD cities will be impressed by the local booming economy, no matter what level of city it is. To satisfy the local consumption demands, every city is striving to develop its commercial sector by building new department stores or shopping malls, and by introducing brand products of greater diversity. The local retail sector is upgrading as a whole, leading to the elevation of second- and third-tier cities to the first tier.
For example, Zhenjiang in Jiangsu has recently drawn in Yaohan Department Store. The positioning of Yaohan is relatively high-end in the city and it has brought in some brands that are quite famous. Yaohan has thus become the highest-end retail channel of Zhenjiang.
The opening of Yaohan has elevated the consumption market of the entire Zhenjiang to another level. New department stores as such have driven existing department stores to adjust their positioning so as to engage in dislocation competition.
But after all, such a development is the result of a rise in the consumption power of second- and third-tier cities. According to an executive of Time Fortune Department Store, a high-end retail enterprise in Changzhou of Jiangsu, some famous brands have found from their analyses that many of their customers in Shanghai and other big cities came from Changzhou. They therefore decided to set up their business in Changzhou. This is also why these brands do not need a long time to build up their business in Changzhou.
Some national or regional business groups have also brought in the operating mode of large-scale modern shopping malls to second- and third-tier cities in association with their property development projects. For example, the development of Wanda Plaza has not only taken place in big cities like Nanjing and Suzhou, but it has also moved into some second- and third-tier cities like Changzhou and Zhenjiang of Jiangsu as well as Shaoxing of Zhejiang. Another trend that reflects the rising consumption level of these cities is their recent introduction of the so-called boutique supermarkets one after another.
Retail sector in second- and third-tier cities satisfying basic to mid-range consumption demands
A department store executive in Changzhou City of Jiangsu proudly points out that in the past, local people always made a special trip to big cities like Shanghai if they wanted to buy some essential goods. But such occasions have become less because in recent years, the local retail sector has been developed and many brands have started to move into the city. Although some consumers still shop at Shanghai, it is supposed to involve higher-end consumption since Shanghai can offer a wider range of choices in terms of product mix and grades.
With the rise in income, different modes of modern retail operation have, in fact, moved into second- and third-tier cities. The first ones are probably large supermarkets and hypermarkets that cater for the basic needs of the residents. In Zhenjiang of Jiangsu, for example, hypermarkets of Wal-Mart, Metro, RT-Mart, Auchan and Tesco have already set up their business earlier on.
|Hangzhou Tower in Hangzhou||Hangzhou Building Keqiao |
Shopping Centre in Shaoxing
Other modern shopping malls followed suit. They moved into second- and third-tier cities, bringing a change to the shopping and leisure patterns of these cities. Originally, Zhenjiang Commercial Building shopping mall is the only higher-end department store in Zhenjiang. But when Yaohan came into operation in 2010, the overall shopping and consumption environment of Zhenjiang has started to upgrade gradually. For cities of different levels, the brand portfolios introduced by shopping malls are different even if the operator is the same. For example, Hangzhou Tower in Hangzhou of Zhejiang has attracted a cluster of first-class international brands whereas the brand mix available at the Hangzhou Building Keqiao Shopping Centre in Shaoxing mainly involves mid-range products.
A local industry player points out that such a development has reduced the outflow of retail business from Zhenjiang. In the past, when local people wanted to buy better quality, higher-end products, they would go to Nanjing. But such a need is diminishing. Yet in some county-level cities like Wenling of Taizhou or Fuyang of Hangzhou, both in Zhejiang, commercial development remains at some basic level, such as hypermarkets and supermarkets. Although Intime Department Store has entered Fuyang, the local consumption power and scale have yet to be built up. On the one hand, its relatively small-sized high-end consumer group has been drawn to Hangzhou. On the other hand, consumers of the lower stratum seldom choose to shop at department stores. Besides, the local economy has not yet brought up a sizable middle class of white collars.
First-tier cities continue to attract inbound consumption
While second- and third-tier cities are developing their retail sectors, the well-established and highly-efficient transport links between cities have greatly increased inter-city mobility in recent years. Apart from the highly accessible inter-city highways and the surge in car ownership by residents, the operation of high-speed trains and bullet trains also facilitates people’s mobility from one city to another. Today, travelling from Shanghai to Nanjing only takes about 80 minutes by train.
The availability of convenient transportation has facilitated outbound travelling and shopping during weekends or holidays. Relatively speaking, consumption in first-tier cities of the provinces remains to be at the higher end, with better shopping environment and a wider range of product choices. Moreover, new diversified shopping complexes have incorporated shopping, entertainment, leisure and catering functions, and can thus attract residents from lower-level cities to come for shopping and entertainment during festival holidays. Take Nanjing as an example, its retail sector not only draws in consumers from smaller-sized cities of Jiangsu, particularly those from the northern part of the province, but also appeals to the cities of Anhui province such as Wuhu, Chuzhou and Ma’anshan. People in county-level cities like Jiangyin may also shop and make consumption in Changzhou.
Today, first-class international brands have started to enter some second- and third-tier cities. Yet in terms of brand concentration, first-tier cities in Zhejiang and Jiangsu such as Hangzhou and Nanjing obviously have absolute advantages. For example, at Xinjiekou in the city centre of Nanjing, shopping malls like Deji Plaza and Golden Eagle International Shopping Centre have already assembled a large number of first-class international brands such as LV, Christian Dior, D&G, Dunhill, Cartier, Hermes and Coach. In Hangzhou, there are also many first-class international brands such as Chanel, Prada, Ferragamo and Zegna.
In attracting international brands, the performance of other second- and third-tier cities varies. In Changzhou of Jiangsu, there are more international brands such as Gucci, Hermes, DKNY and Armani. But in Zhenjiang of Jiangsu which has a smaller economy, even Yaohan Department Store with a higher positioning only has one international brand of Cartier operating inside. For other cities like Taizhou and Shaoxing of Zhejiang, the stationing of first-class brands is quite rare. Modern shopping malls have mainly attracted brands in the mid-range.
Vientiane City in Qianjiang New
Oriental Hualian Shopping
A consumer of Taizhou in Zhejiang pointed out that although the local department stores of Taizhou are upgrading, its overall shopping atmosphere is still inferior to that in Hangzhou. According to the manager of a modern shopping mall in Hangzhou of Zhejiang, many vehicles with licence plates of Taizhou and Wenzhou are found at the carpark of the mall during weekends.
Fast-moving fashion brands enter second- and third-tier cities
Zara at Wanda Plaza of
Although first-class international brands are relatively few in second- and third-tier cities, some mid-range foreign brands such as fast-moving fashion brands of Uniqlo, Zara and Muji are actively making their ways into these cities. Their operations are also well-received by the local consumers.
For example, in Wanda Plaza of Zhenjiang in Jiangsu, which has positioned itself as a mid-range trendy shopping mall, Zara is the major anchor store, and Uniqlo as well as Esprit have also set up shops there. Besides, the Wanda Plaza in Xinbei District of Changzhou has not only attracted the entry of Zara, but also drawn in Marks & Spencer.
These popular brands have even started to enter the new city districts of second- and third-tier cities. For example, Uniqlo and H&M have set up shops in the Injoy Plaza of the newly developed Wujin District in Changzhou, Jiangsu. It can thus be seen that with the expansion of new urban communities, the penetration of brands at this level has already achieved a wider coverage.
With the growth in income level and the gradual rise in expectation of life quality, boutique supermarkets have taken the lead to enter the new city districts of second- and third-tier cities. For example, the high-class foreign bakery brand of Breadtalk is actively making its way into these cities. Some other higher-end trendy catering service operators, such as Honeymoon Dessert and Starbucks, have also moved into the shopping malls of second- and third-tier cities.
New towns “blooming” under urbanisation
Tianyin Plaza in Jiangning
Stepping into Jiangning District on the south side of Nanjing, one will immediately get the impression of a newly-developed district where residential and office buildings are found with supporting commercial facilities such as shopping malls. Most of these shopping malls are targeted at the local residential communities, such as Tianyin Plaza which was just opened in Jiangning District. Although the Plaza has not yet come into full operation, products and services targeting at household needs such as supermarkets, restaurants, home appliance stores and baby stores have already taken the lead to station in the Plaza.
Due to the limited space in the city centres, YRD cities are expanding outward through the development of new city districts. No wonder such a development is described as new cities “blooming” everywhere.
In layout plans, these new city districts are called sub-cities, sub-centres or new districts. Sub-cities or sub-centres mostly refer to new cities further away from the main city districts. New district developments are found in the surrounding of the central cities within the limits of main city districts. In Nanjing, for example, there is the layout plan of “one main and three subs” which is similar to those of many mainland cities. Apart from the main city districts, there are three sub-centres, namely Xianlin, Dongshan and Jiangbei. Within the main city district, there are other new districts such as Hexi (or Aoti New City) and Chengnan New City. No matter what their names are, these sub-centres or new city districts are developing in conjunction with the development of intra- and inter-city transportation systems.
Hunan Road Metro Station,
In Nanjing, for example, the operation of Metro Line 1 and Metro Line 2 has led to the urbanisation of the rural and suburban areas far away from the city centres. Today, it only takes about 30 minutes to travel by metro from Xinjiekou in the city centre of Nanjing to Xianlin sub-city district in the north-eastern side of the city, which is more remote than the scenic area of Purple Mountain.
At the other end, Metro Line 1 has extended to Aoti New City (or Hexi New City) on the south-western side of Nanjing city centre. These new city districts may be different in their functions and positioning. For example, Xianlin District is not only a residential area (with some high-class villa-type residences), but is mainly a centre of higher education. Aoti New City not only has residential development, but also serves the function of a commercial centre with a technology park district in the vicinity. As for Chengnan New District in Nanjing, it is a planned development dependent on the convenient transportation and passenger flow brought about by the Nanjing South High-speed Railway Station.
Suzhou Metro Line 1 which just commenced operation at the end of April 2012 has linked up the east and west sides of the city. It is expected that it will bring about the so-called “Rail-related business opportunities”. On the east, it may increase the visitor flow of the eastern new cities (including the commercial district surrounding Jinji Lake, such as Harmony Times Square) developed around Suzhou Industrial Park. On the west, it will further promote the prosperity of Shishan commercial district, which is one of the sub-centres of Suzhou in the vicinity of its hi-tech development zone. The Japanese Izumiya Department Store and another upmarket department store Metro have been attracted to station in this area and both have just commenced their operation. Apart from transportation, it will also provide more room for retail and commercial development with the support of the strategy of “promoting tertiary industries at the expense of secondary industries”, and a pooling effect will be resulted. Suzhou Metro Line 2 is expected to commence operation in 2014, which will lead to new development in the new city districts and the retail layout of the city.
Nanjing Metro has also brought changes to the commercial environment of the city centre. The underground mall and some department stores at Xinjiekou have already been connected to the Metro station, forming an underground shopping centre. Similarly, Xinghai Life Plaza at the eastern new city of Suzhou is also connected to the Metro station. As passengers always walk past the commercial district when they get on and off the trains and enter or leave the station, some visitor flow will be generated.
For some smaller cities that are outside the Metro network, they are also developing and constructing new city districts, such as Xinbei and Wujin Districts in Changzhou of Jiangsu as well as Nanxu District in Zhenjiang. The functions and positioning of these new districts may vary. While most of them are residential areas, some are government centres or commercial centres. As a result, the features and positioning of the commercial facilities introduced by them are also different.
Golden Eagle Outlet City at
|The new Izumiya Department Store|
beside Suzhou High-tech
Development Zone Metro Station
Commercial facilities of new city districts mostly serving local communities
For new communities basically made up of residential developments, the services provided by their commercial facilities mostly cater for the need of local residents. A glance around Aoti New City District on the west side of Nanjing City will find not only restaurants and supermarkets, but also beauty and hair salons, music or English institutes, household or children specialty stores, as well as fitness and yoga clubs. Shops inside the shopping malls, such as clothing stores, are mainly positioning at the mid-range or lower end to meet general demands. Children areas and play facilities are also available to facilitate family shoppers.
Of course, new city districts also have some higher-end commercial facilities that cater for a wider consumption spectrum, such as the shopping mall beside Suzhou High-tech Development Zone Metro Station with Izumiya Department Store and Metro Department Store that just commenced operation as the anchor stores. In both Changzhou’s Xinbei District and Zhenjiang’s Nanxu District, there is a Wanda Plaza operating with a higher-end positioning.
Another example is the Golden Eagle Outlet City in Xianlin District of Nanjing. The shopping mall not only serve as brand outlets, but also provides supporting consumption facilities such as a beauty and health parlour, cinemas, catering premises and a supermarket.
|Community stores in |
Aoti New City of Nanjing
|Wanda Plaza in Xinbei District|
of Changzhou, Jiangsu
"Splendid transformation" – Impact of new city districts on retail scene
The development of new city districts has inevitably driven some consumption away from the commercial districts of traditional city centres. In particular, some community shopping malls can already satisfy the basic needs of daily life, covering household goods and electrical appliances. For department stores and shopping malls of the old commercial districts in the city centres, such a development has also provided them with some impetus for upgrading and reform. According to a mall executive in Guanqian Street at the traditional commercial district of Suzhou, although the mall has a very solid client base, the development trend of urbanisation has also driven them to repackage the mall with a view to reforming and upgrading its product mix and positioning on a continuous basis.
|The new Senso Place at the|
west side of Shilu commercial
An analysis points out that the growth of retail outlets in the city has outpaced the growth in its overall market size. As a result, the average market share of each retail outlet is diminishing accordingly. But such a development has less impact on the higher-end market because the new retail outlets are mostly positioned at the medium to low ends. On the other hand, the product mix of supermarkets and hypermarkets is also penetrating to department stores. In the circumstances, department stores in the city centres may need to make adjustment to their product mix so as to reduce some product types that rely on sales volume and move to higher-end product mix that brings a higher gross profit.
In the main city district of most cities, many traditional department stores are redeploying their resources to adjust the positioning of their operation for the pursuit of dislocation competition. Efforts are also made to improve and upgrade the shopping environment, such as increasing the parking spaces and catering facilities. In Xinjiekou’s Deji Plaza of Nanjing, for example, there are more than 20 catering facilities. The traditional mid-range Shilu commercial district at Suzhou’s old city district is now expanding to the west to provide additional commercial premises and supporting facilities such as carparks. On the hoarding outside a shopping mall under renovation at Shilu commercial district, it is written “A splendid transformation under way”. This tagline may indeed represent the strategy of many traditional or medium- to low-end shopping malls in response to competition.
Suzhou’s Shilu International Mall
Besides, some large-scale retail enterprises are also moving towards diversification. Take Golden Eagle International of Nanjing as an example. Apart from expanding its Xinjiekou development and upgrading its product mix, it also plans to invest in the construction of modern shopping malls at new districts such as Hexi and Chengnan. But the product positioning of these shopping malls will be in the mid-range and their major target groups will be the local residents.
With its main store set up at Xinjiekou in Nanjing, Grand Ocean Department Store has opened its second Grand Ocean Store at Jiangbei new city district, which integrates with different types of individual stores (including a hypermarket, a furniture town, a children’s town and some catering shops) to form a large-scale shopping complex. As for its product positioning, the Grand Ocean Department Store at Jiangbei targets more at the mass market to cater for the new families of younger age in the local community.
In face of more intense competition, both department stores and shopping malls are bringing in new brands. According to an executive of Nanjing Grand Ocean Department Store, about 20% of its brands are newer ones and some brands will be phased out or replaced every year. The introduction of some brands is for image building. Such a development will undoubtedly generate business opportunities for some new brands that intend to enter the mainland market.
Changes also take place at traditional commercial districts in the central districts. For example, Nanjing’s Hunan Road commercial district that originally adopts mid-range trendy lines also plans to adjust strategy by repositioning itself as a cluster of boutiques and specialty stores. An executive of a traditional department store pointed out that famous traditional department stores also need to work on marketing and promotion, and particularly, to target at the large migrant population of the city.
Differences in commercial development and management of different cities
The development standards of cities of different levels are different. Macro data contained in Figures 1 and 2 provide useful indicators of the development of different cities. For example, the commercial atmosphere of Zhenjiang is rather good, but when one enters the city centre of Changzhou, one will be struck by a more prosperous picture. To a large extent, the operating mode of modern shopping malls has entered first-tier cities, such as Vientiane City in Hangzhou, Aqua City in Nanjing and Harmony Times Square in Suzhou. All of them are large-scale shopping complexes with shopping, entertainment (such as IMAX cinemas), leisure and catering functions.
While the operating mode of these modern shopping malls has begun to enter the second- and third-tier cities of Jiangsu and Zhejiang and many of these cities are moving towards the first tier, it is just a general trend. It is worth noting that there are still differences among cities of the same level in respect of the development and management of commercial projects. Take Keqiao of Zhejiang as an example. Although it is just a sub-centre of Shaoxing City, the impression it gives regarding the atmosphere and scale of commercial development as well as the management of shopping malls is not inferior to the general standard of those in Taizhou of Zhejiang. Even boutique supermarkets that sell food and goods of higher end and become popular in the first-tier cities of the mainland have also entered Keqiao. So for enterprises that intend to develop domestic sales business in these second- and third-tier cities, it is a prerequisite to conduct site visits so as to compare the commercial atmosphere of different cities as well as the positioning and management of different shopping malls.
Wanda Plaza in Keqiao
LSE supermarket in Keqiao
On the other hand, there are also differences in the consumption attitudes of consumers in cities of different levels. According to a source in the department store sector of Zhenjiang, although the local trends are mainly influenced by the coastal regions such as Shanghai and the lag time is obviously shortening, the local consumers tend to be more conservative and cannot accept designs that are too avant garde. While they may have heard of some fast-moving fashion brands that are newly introduced, they still need some nurturing period to appreciate the characteristics of the brands.
However, the consumers of Changzhou tend to be more trendy and open, and they accept new brands and designs more readily. A greater number of fashionable and trendy brands can also be found in the shopping malls of Changzhou, which also carry more unique and stylish products from time to time, such as household specialty stores. As this is the case, local department stores are also interested in bringing new brands to their stores.
Carefully study the operation of individual shopping malls
According to a source in the department store sector on the mainland, new local retail malls often adopt the strategy of expanding the catering section so as to draw in visitor flow. Subsequent adjustment will be made to the tenant mix upon the rise in overall visitor flow. Today, catering sections are very important to new shopping malls. Apart from providing one-stop shopping and entertainment facilities, boosting the visitor rate by the provision of catering service may have to be taken into account. From observation, the busiest facilities of many shopping malls in new city districts are their catering sections.
For example, Jiaye International Shopping Mall at Nanjing’s Aoti New town is attaching great importance to its catering and entertainment facilities, and its catering, leisure and entertainment facilities are now contributing some 60% to its overall sales volume. Harmony Times Square in Suzhou’s Industrial Park has also successfully stimulated its visitor flow by the provision of catering facilities. In the light of this, attention should be paid to the specific strategy of individual malls in attracting visitors when selecting a mall for market entry.
Modern shopping complexes can provide a wide range of consumption and entertainment facilities for consumers. In particular, they can attract family consumers to spend a day or half in the malls during holidays. Yet sources in the department store sector reckon that traditional commercial centres still have their attraction. For example, Xinjiekou of Nanjing is full of department stores and malls where a great choice of shopping facilities is provided within a small area. This is very convenient to consumers who are interested in shopping for different products. In contrast, the layouts of shopping and commercial facilities in new communities are more scattered and the choices are rather homogenous.
As a result, shopping malls in these new districts may need some “nurturing period” to draw in customers on the one hand, and to get more time for the setting up of additional commercial facilities to boost the visitor flow on the other. According to an official of Suzhou Bureau of Commerce, the nurturing periods of some new commercial complexes in the local community span from two to four years. For Wanda Plaza that came into operation last year in Zhenjiang of Jiangsu, there is still room for improvement in terms of visitor flow. It is probably because there is only one shopping mall in the district and many residents are still used to shop at Dashikou commercial district in the city centre. So for those intending to run business at a shopping mall in the new city of a mainland city, they have to find out if the mall is still at its nurturing period, and how long the nurturing period is expected to last.
In recent years, the property market on the mainland is booming, and it is common practice to develop the so-called large-scale city complex project where the superstructures are residential units or commercial offices with a shopping mall at the lower levels. Take Zhenjiang of Jiangsu as an example. Its urban commercial areas have increased by 1 million square metres over the past five years with another 18 city complexes under construction. All these projects are expected to be completed by 2015 and five to seven of them will be completed in 2012. Besides, there are more than 100 commercial projects under construction in Suzhou. The retail facilities of these new development projects may still need time to nurture for success and the performance of some may deviate from the norm, leading to a phenomenon of “running shops without market” as described by some.
However, if a certain brand moves into a department store which subsequently sets up a new store in a new city district, the brand may be requested to station in the new branch as support on account of the long-term strategic co-operation between the department store and the brand. The business of the new store may need a longer period of time to build up and this factor has to be taken into consideration when the brand is striving to enter some national or regional department stores. Some brands may take an expedient measure by positioning the branch at the new city district as a discount store for the sale of products that need to be sold at a lower price for marketing purposes. Repositioning of the branch back to the sale of regular-priced products can be made when its operation becomes mature.