Attitude towards adversity
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.
November 08, 2008
Notes from Shaanxi
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.
July 27, 2008
Gone Fishing
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
July 05, 2008
Mall Management 101: Don't confuse your customers!
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
June 16, 2008
Ghost Malls
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.
May 23, 2008
So what's really happening in Changsha?
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:
April 29, 2008
Papa John's competing with Yum for the pizza market
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.
April 21, 2008
Ningbo Wal-Mart and other observations
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.
April 14, 2008
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