Time for realism. The future of retail trade
|
City |
Population, per thousand people |
Saturation point for trade space in shopping centres (square metre per 1000 people) in August 2008 |
Saturation point by 2011 including shopping centres being built and projects which have over 50% likelihood of being finished |
Saturation point by 2011 including all proposed projects |
---|---|---|---|---|
Noversibersk |
1391.9 |
488/427 |
830/679 |
1025/872 |
Volgograd |
1017.4 |
254/172 |
743/478 |
963/636 |
Idjevsk |
632.1 |
285/216 |
497/394 |
622/486 |
Tyumen |
592.0 |
482/364 |
578/437 |
789/606 |
Smolensk |
317.7 |
68/55 |
316/231 |
684/505 |
Petrozavodsk |
266.3 |
127/102 |
520/416 |
707/596 |
Source – Research carried out by “Union Standard Consulting” (Moscow) and “The Instrat Group” (Novosibersk).
Comments:
The estimates for saturation point in the future shown in the table were made in August 2008 and the picture may now change. However the figures clearly illustrate that before building it is necessary to seriously consider if a city can sustain the amount of space in its shopping centres. It is now clear if you take into account the high street shops and separately situated shops (from pavilion shops to hypermarkets and DIY) there will be more than one square metre of trade outlet per person in the cities. In the future very much depends on the second factor in the formula – the increase in the population’s income. In multi-functional complexes housing is the more stable function and the more vulnerable areas are those connected with an increase in prosperity or business activity – for example business centres, hotels and amusements.
Whether or not there will be a reduction in rents is a big question. We examine why. On the one hand the cost of rents and sale of commercial space is very high and in a number of outlets it has been clear for a long time that the price does not correspond to the “quality” of the space. However the real estate market still remains a seller’s market and property owners dictate the conditions. Many remember the time when there was an acute deficit of space and tenants had no choice and agreed to a thirteen month rental year, rented passages and areas with tables in different parts for a food court, extra payment for everything except the walls (marketing, advertisements and everything else) and no long term rental contracts. If a tenant started to stand up for his rights he was simply shown the door or reminded there was a queue of people waiting to rent his space. At first in the provinces the owners’ appetites could not be fully satisfied because of the limited means of local businessmen however the national chains arrived and occupied the space pushing up the rental prices. Rents steadily increased and took up a larger share of the expenses of retail businesses. The retailers solved this problem “simply”. They passed the expenses onto the customer and increased their prices. For a while the customers in the large cities agreed to pay for the “rent demands” of the property owners and in general agreed to buy goods at a high price. However several people had already begun to compare our prices to prices on the same goods abroad. For example fashionable items from well known brands could be twice as cheap abroad as in Moscow. A new “Suburu” car in the United States was two times cheaper. We heard one account that said if you sold a one bedroom flat in a cheap block of flats in Moscow it would be possible to buy: An inexpensive villa on the coast of Spain, a more expensive villa in Croatia or Montenegro and a very big and expensive one in Honduras. The “ideal” tenant for the high rents were fashion clothes shops where the mark-up could be 600% or more because of cheap materials and the fact that the collections were made in countries with cheap labour. The main expenses for these chains were the promotion of their brands and rent.
Above we examined the saturation point index. If it reaches 1000 square metres per 1000 people, that means that the average Russian family has to sustain 3.1 square metres of commercial real estate (3.1 people is the average number in a Russian family). We will solve the problem with concrete figures. For example in Tyumen in the first half of 2008 the average monthly salary for one person working in a large or medium size business was 23 080 roubles. In the best scenario two people in a family work which makes 46 160 roubles. The average rent in trade centres for this period was 1 701 roubles a month per square metre (1 701 x 3.1 = 5 273 roubles a month). Correspondingly every month 5 273 roubles out of the budget of a statistically average Tyumen family should go to pay for the shops’ rent, which makes up 11.42% of the family’s income. Another simple mathematical problem. Question: what can an increase in trade space without a reduction in rent lead to? Answer: a. the standard of living coming down, b. vacancies appearing in commercial space. Wolves can be full and sheep safe only if there is economic growth, whose rate exceeds the increase in commercial space.
One can say that credit has created a bewitched circle: Taking into account the interest on loans, developers counted on high profitability and the project paying for itself and this led to an increase in rents, which raised expenses for the retailer and provoked price rises. Next: Customers agreed to pay those prices for the goods however they often used credit to purchase the items. The other way round the process could go like a collapsing house of cards: The customers are not prepared to buy at such prices and cannot make the purchases from their available funds and the retailer cannot pay his rent. What would happen – would the shopping centre go on working with over half its space empty?
The expectations of the majority of tenants and buyers are connected with a fall in prices and it is very hard to restrain a dam artificially. We wrote about how demand for housing had in part moved from Moscow to nearby areas (“Trade Management”, No 4 2008) and this process continues to gather strength. In 2007 the volume of commercial space introduced in the Moscow region exceeded Moscow’s index by 1.5 times and according to data from official sources in the period January – September 2008 there was 3.6 million square metres of housing built in areas near Moscow. Out of this about 1.5 million square metres of the housing was in high rise buildings which was a 103.6% increase on 2007. The demand for commercial real estate differs from the housing market in that for the present it has nowhere to go until an adequate number of modern centres have been built. It is possible to live near Moscow, in Croatia or Honduras, but business has to be done in Russia. Also there are many interested parties in the real estate market and they are determined to maintain the rent prices at any cost. The problem is that a lowering of prices and rents could provoke a domino effect, similar to the effect of the mortgage crisis in the United States on the whole world. In September in the three weeks before the so called “black” Mondays and Wednesdays Russian developers already had unofficial information about the drop in real estate deals in Europe and a number of properties for sale at significantly lower prices. In Russia the buyers and sellers are waiting. For example the office space and elite housing market has clearly appeared to not react to the market, has not lowered its rents and does not intend to (although in private conversations you can hear fears that the crisis will provoke a catastrophic drop in rents of half or more). In a regular elite block of flats “the three last flats” are being sold for the third year running and office space is waiting to be rented. In September 2008 several estate agencies raised their commission on transactions by 1.5-2% but did not lower the selling prices. One can say that a postponing of demand can be observed in Russia. The situation is favourable for new developers to enter the market, who are in a position to offer essential space at realistic prices. For example possibly cooperative shopping centres will appear which will be jointly built by several chain operators to protect their own interests. And several commercial properties will simply change hands.
On the whole the situation on the commercial real estate market can be characterized as a crisis of money out of thin air and the opportunities are only for high-quality projects, which are in demand as before. We remember the words of the American President Franklin Delano Roosevelt, who managed to overcome the Great Depression at the end of the twenties and thirties in the USA: “We do not need to fear anything, except our own fear”. Today cuts have been made in several businesses and construction sites and some projects have been stopped from fear of the crisis. The events of 2008 have indeed had very serious consequences on the economies of many countries and the situation is fundamentally different from 1998, when the crisis mainly affected Russia. It is the first time in the memory of today’s generation that a crisis has really touched the whole world and affected the main branches of the economy: Finance, the construction and car industry and retail trade.
However the current crisis is not connected with a serious war, mass destruction or death of people, there have not been any epidemics or grandiose catastrophes. The traditional finance system has been paralysed, but the factories and industrial plants, the bridges and main roads are in place as before. And the needs of billions of people all around the globe have not disappeared and consumers like before are thinking how to turn the consequences of the crisis to their own and their families’ advantage.
The boom in consumerism which has captured Russia in the last several years was not only provoked by an increase in consumer credit. Retail trade was called upon to meet people’s needs and buyers from Russia, China, India and many other countries of the world have had a taste of the good life. That is why it is impossible to go backwards: The desire to dress well, eat well, treat your loved ones, go on holiday, have a good time and travel, relax with one’s friends, have a career, buy a house and paint it will grow. The desire to impress one’s colleagues and neighbours, live a well rounded life, read books, watch films and play sport will remain. People want to live better and will find ways to do it. And when there is demand, there will always be opportunities for retail trade. The most dangerous thing for retail trade is the phenomenon of thriftiness, when people do not want to spend their money preferring to save it. The task of commerce is to turn customers’ attention to the goods and make them spend their money. In this case the economy begins to improve and the whole of society becomes richer as a result.
The governments of many countries have given state support to the banking system and if the “money clots” do not appear then very soon the question of investment will again be high on the agenda. One of the ways of investing funds is in technology and innovation in order to make use of the temporary respite and prepare for a move ahead. Let us remember that the 1998 crisis helped develop national brands and goods and gave rise to the modern retail trade. Until the banks recover, construction work may slow down, but it will not stop altogether. That is why those who are not making plans for new high-quality shops and shopping centres are running the risk of landing overboard. It is essential to do the research and draw up plans now in order to be ahead of the game, especially dealing with commercial space. One of the estimate factors for a commercial building is the option of setting it up in stages. It is important to bear this in mind. Another aspect is the way in which building costs are coming down. This could essentially change the situation for space in commercial centres. In construction everywhere in the world there is the temptation to push prices up, especially for unique and individual buildings which have no rivals. A review of the plans should be looked at from this point of view: Is it expensive exteriors and interiors which create a high standard shopping centre one or can this effect be achieved by the unique modern architecture or structure technology of the shopping centre or multi-functional complex. And this of course would mean a reduction in money spent on materials and the building work itself. Opportunities for clients have improved: Because some developers were not up to standard there is reduced demand for architecture and building services and the best architectural companies have become available, which previously you had to book long in advance. The current situation is a competence test for all suppliers of materials and services to the commercial real estate market. As they say “Less is more”…
In development the crisis will most likely lead to a departure of the non-professionals and amateurs of easy gain, leaving the serious players in the market, who intend to create the buildings and even cities of tomorrow. However state support affects the results of natural selection in the construction industry and retail trade. At the moment it is not clear which retailers and to what degree the state and financial structures will help and whether this help will play a role in the competitive fight. This most of all concerns the large chains. However there is a more urgent task for the medium size and small chains – to stand their ground. And for that they need to put aside their large scale plans, make best use of their resources and cut back on expenses and unsuccessful lines of business.
For the past one and a half years the number of projects in our company connected with finding the best format for chain shops has markedly increased. High rents to a certain degree have influenced the development of retail business and made people think about the best size for commercial space and where it should be situated. This has particularly affected the non food chains, which account for a large number of commercial shops (everything for the home and presents, home entertainment, digital technology, fashion items, shoes, accessories, perfumes and cosmetics). For example in Moscow the rate for selling non-food items in a successful shopping centre or central shopping mall begins at 1100 dollars a square metre a year and goes up to 5000 – 6000 dollars. Such conditions lead to very clear questions: Is there any surplus space and how to make the best use of the existing space and lay-out to get the maximum return from every metre. We must estimate the value of the different areas which are not being used for displaying goods – for example, a play area, a maintenance area, a service centre, a place for demonstrations and testing goods and special displays – and find how to turn them from beautiful “gems” on the shop floor into real working space which could influence sales.
Very many chains linked their plans to the development of shopping centres, but unfortunately in Russia and Ukraine there were many disappointments. The shopping centre itself cannot give a shop advantages if it is built with mistakes (in conception and lay-out) and it is only possible to work well in good shopping centres or at least in shopping centres on very good sites. Research on how chain shops work has shown that there are two equally profitable strategies. The first is to put the shops in places where there are many people passing by and therefore a large number of customers and higher proceeds but very high rent. And the second is working in bigger and cheaper areas, the number of people and turnover are lower but the profit is the same because the costs are lower. For example these sites could be in a block in a commuter district on the outskirts or in the suburbs. The best size for the space could differ by 2-4 times in the first and second example. The assortment of goods in the second should be different and include new goods’ groups with a very large choice in each category. In large cities in Russia the high competition and limited good places in shopping centres and high street shops has made the chains look at the smaller cities in the region and develop suitable formats for cities with a population of 100, 50 and 30 thousand people. It is quite possible that the decline in bank lending for business development could lead to a change in attitude to commercial space – in a strategic plan for a change in format and further development of business in more outlying areas.
The problems for chains, whose shops are now being forced to close, did not begin in September-October 2008 but much earlier. Someone simply could not cope with the mass expansion or did not solve the problems of developing brands, the assortment of goods, personnel and competitive choice in time. Plans from loans were at times not well thought-out and in a number of cases the planned expansion was not aimed at increasing the company’s profit, but to increase the influence (and income) of a certain manager. In Kyrgyzstan there was a case when a local chain was quickly organized and “packaged” for sale: They increased the number of shops for no good reason, painted them in the company style and introduced the basic retail technology. Some chains which opened many new shops did not pay close attention to the criteria needed in choosing a location which resulted in several shops being opened at random. They worked a bit, had a look see and closed…
What events in retail can be expected in the near future? Most likely many chains will not give up their development plans, but these plans will become more realistic. Unprofitable and unsuccessful lines of business will be stopped. The crisis could provide a good opportunity to limit the influence of foreign retail chains, but for that very effective, clever and aggressive PR is needed. The regional chains could work more with local producers to keep money in the area. Short-sighted behaviour during the crisis is to concentrate on one’s own problems and not think about the opportunities. All retailers have to remember that the basic task in business is to tempt the customers with their goods, to make them earn money so they can spend it, further production work and economic growth in general. Even fashion is no more than something thought up to regularly renew demand on light industry goods (with a bit of creativity). Research by NIELSEN in 2007 showed that around a fourth of consumers in the world, fearing a global recession were in no rush to spend their spare funds. In Russia customers had only just got a taste of spending, that is why good work in the retail industry might be able to improve the situation. The psychology of the Russian buyer is that shops and shopping centres are a special place of support and hope and the customer should get a boost of optimism and not a shock from inaccessible prices like for example in January 1992 and October 1998.
Of course it is more difficult for those who are selling goods which are not essential but have a high mark-up (luxury items, accessories, fashion items and fashionable underwear). In the service industry it is realistic to expect that people will go less to the more expensive restaurants and entertainments. Consumers will become more demanding as regards “price and quality” and when talking about quality we do not just mean the physical characteristic but also getting pleasure from something. For example the atmosphere in a themed restaurant, the size of the portions and the ingredients in a café or food court, the time allowed for skating at an ice-rink or the length of an amusement ride and the size of the studios or swimming pool in a fitness centre. A significant example is the situation in the cinema business. In the first half of 2008 in Russia for the first time the income from the sale of DVDs was higher than the income from the cinema industry. This is also connected with an understanding of “price and quality”, since conditions for home watching are constantly improving and prices on good quality home entertainment are coming down but the price for a visit to the cinema is still high.
The two main valuables of a shop are the customers and the personnel and this is the right time to think about how to improve working with them. When there was huge demand it was not critical to think about service levels and to fight for customers. For example one of the most “non client friendly” retail trade businesses were the car salesrooms where they were selling average priced and expensive imported cars. Now one could use the temporary respite to think about standards, reconstructions and re-conceptions, how to make the best use of the assortment of goods and lay-out, the quality in projects, the design of new shops and about everything which could improve what is on offer to the customers. As part of this one must be prepared for a possible fall in profit (absolute indexes and growth rate) and determine the lines of business which were a “burden” for the company and finally get rid of them but not rush into cutting back on expenses for promising lines of business without due thought.
The labour market provides good opportunities and some effort should be directed at working intensively with personnel. Let us remember that at the time of the Great Depression the USSR carried out a successful modernization of their economy and established heavy industry by taking advantage of the favourable conditions and hiring qualified technical specialists. And a huge number of competent specialists and new ideas appeared in Russia after 1998, when the period of recession was used for self-development and professional growth of managers. If a retail company manages to maintain a stable salary and good employees, it will be attractive to personnel and in the future work very effectively. Free time, linked to the mass opening of new shops, could be used to improve employees’ qualifications in areas where there is an acute need for specialists: For example, shop managers and in-house technologists in supermarkets. Correspondingly a company could prepare itself for a new period of development and competitive fight.
One can say that negative emotional feelings towards any large development project are a temporary phenomenon. However control over the quality of projects (marketing, architecture and the quality of the building work) will be much more serious than before. Priority will be given to the most serious projects and the professionalism of the projects will bring down the risk.
© Kira and Ruben Kanayan,
Authors of the book “Planning shops and shopping centres” and the book “Merchandising”
Leading consultants for the company “Union-Standard Consulting”, Moscow
Informational partners – "Shop-Academy", "Mall-Academy" and "Stratomedia Inc."