Retail needs more than just size to survive

IS retail an art or a science?

To most, it may be more art than science but to property consultancy Savills (Malaysia) managing director Allan Soo, it is both. Creating desire and aspiration is all about art while the science bit comes in the form of numbers, catchment area and household income.

Considering that technology is based on which retail – as with other economic sectors – thrives today, the intrepid traveller and shopper who has just returned from a spree in Italy says: “There is the hardware – which is the sq ft – and there is the software, which are the tenants, merchandise and demand from shoppers. You need to look at both,” says Soo.

Soo believes that instead of thumping our chests on the sq ft (or burgeoning retail space), it is important to paint a more wholesome picture of how retail can evolutionise amid the space and technology against the maturity backdrop of the Malaysian retail.

“It may be hard to see the good news, but there are good news,” Soo says.

The millennial generation, those between 20 years and 35 years old, will dominate. “Young people are good at swiping (cards) which will impact retail, and which they already have,” says Soo.

Online transactions are rising. So retail today is in a sort of flux; as in the banking industry because of fintech, and in the property sector, because of proptech, says Soo. An online property website may have 100,000 visitors in a day, but does the bricks and mortar property consultancy have that?

“Online is big today and it will become bigger,” says Soo.

A case in point. Chinese e-commerce group Alibaba Singles Day last year reached a record US$14.3bil in one day, Reuters reported.

That is more than 25 years of Suria KLCC annual sales of RM2.5bil for 2016. It took 20 years to get RM2.5bil but Alibaba did it in one day, says Soo.

These are the challenges facing the retail sector, not only in Malaysia, but globally.

“So what I am trying to say is, this goes beyond sq ft and how much space we have. In the midst of all these, there will be winners and losers.”

Why they are winners

If one were to take a ratings poll, there are five malls which constantly come up tops. They are Suria KLCC, KL Pavilion, Sunway Pyramid, 1Utama in Petaling Jaya and Mid Valley Megamall, which is half-way between Petaling Jaya and KL city.

Each of these malls have a net lettable area of more than 1 million sq ft, which gives rise to the term megamalls.

That being the case, there are three other malls that fit that bracket – Sunway Velocity and MyTown, both in Cheras and IOI City Mall in Putrajaya. By the end of this year, there will be Mall No. 9, with 2.4 million sq ft at Empire City in Damansara Perdana, Petaling Jaya.

Soo says IOI City Mall, although isolated according to some, attracts visitors as far as Seremban. It has a catchment area within a 20-minute drive compared with some malls in Petaling Jaya within a five-minute drive.

Put simply, the longer the drive time, the larger the catchment area because there are no competing malls close by.

But what makes the Top 5 always the Top 5?

Tenant mix is one factor. Tenant mix is different from trade mix, which refers to fashion, food, services. Within the fashion mix, there is Zara, which is priced higher than H&M, says Soo. A mall’s tenant and trade mix draws a particular group of audience.

Location, the mall’s catchment area, is another boom or bust factor and the Top 5 malls are located in what may be considered as prime area in the catchment that they serve, he says.

Soo says a mall with a net lettable area of 1 million sq ft will need about 300 tenants, while 2.4 million sq ft, about 700 tenants.

When there is more than 2 million sq ft, the mall owner may need a Louis Vuitton (LV) but does the catchment area within which the mall is located have household incomes that fit the LV bracket?

Two of the Top 5 does not have a LV. In the whole of Malaysia, there are only three LV stores, compared to Tokyo where a single destination can have three LVs. So size does not determine that LV, or some other top luxury brand, will take up tenancy in a mega mall, important though it may be.

LV and other top end luxury brands want access to consumers, and if the median household income of that catchment is not there, space becomes a secondary factor.

“So generally speaking, a mega mall of 1 million sq ft may not need a luxury line. Suburban malls are all about convenience, households, family and entertainment. City malls are about fashion, entertainment and food. And here is where the luxury market comes in.

“The luxury market is important because it provides a benchmark for the retail industry and although it (the luxury market) is softening, city malls need them because it has that aspirational pull,” Soo says.

The luxury market

Luxury brands expanded because of the rise of China, says Soo. After the 2008 global financial crisis, some of the world’s largest luxury goods producers over-expanded in China. LVMH or Louis Vuitton Moet Hennessy, the world’s largest luxury goods maker with over 50 brands, including LV, expanded at breakneck speed in China. Incidentally, that included Chinese property developers.

Top of the range branded goods and property were the darlings of the burgeoning middle class and both sectors – retail and property – fell over themselves to cash in on their propensity to spend. When the Chinese administration threw down the gauntlet on corruption, under the current leadership, and the “gifting” stopped, and the luxury market was impacted. The global economy is still seeing the effects of that today under China’s capital controls.

Some may ask, how does that affect Malaysia? With regard to the property sector, one can monitor the scene in certain parts of the country. As for retail, when MH370 was lost in 2014, it affected retail sales and tourism.

Tourism and retail, particularly at the higher end of the luxury market, are best buddies. In Malaysia, as in other parts of the world, the retail sector is tourism-dependent.

“On many counts, Malaysia is priced lower than most of our neighbours but yet there is this softness in the retail scene. So that is how every shopping centre owner and operator looks at the market. The retail industry goes beyond sq ft and supply of space,” says Soo. New malls need to differentiate themselves.

“If I were to generalise, it is difficult to get a 10% differentiation for a new mall. You can only have differentiating factor for a short time. By next year, they would have lost it. The challenge is today.

Twenty to 30 years ago, that differentiating factor could last longer because things were not moving so fast as today. Another factor is the lack of depth and breath of our retail sector. Unlike Bangkok and some Chinese cities which have a lot of homegrown brands, Kuala Lumpur lacks that.

“Our breath and depth of retail is not established or explored. In Bangkok, in just shoes alone they have so many brands,” says Soo.

How many of the 300 shops in the 1 million sq ft mall will be local or homegrown brands? Hardly any. So how do you fill that 300 shops? Which explains the high degree of cannibalism when malls are located too close to each other, and so the smaller malls of about 700,000 sq ft suffer because whatever they have, their bigger neighbouring malls also have.

Which means retailers need to change their merchandise, their design and/or their target market, says Soo. Do they want to be classic or new and young? Today, the Chinese prefer the smaller brands. So there is a shift.

The intrepid traveller puts it thus: “Retail is about fashion, and fashion is about changes and lifestyle. We have brands which just arrived in Kuala Lumpur which are doing better than some of our older brands because the latter did not change.

The Ralph Lauren flagship store in Hong Kong closed late last year. It was not because the brand lacks quality.

It did not change with the current. Women used to swoon over floras and prints 20 years ago. The baby boomers who like prints are gone. Now the 25 and 30 year-olds are swooning about something else.

– THE STAR

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