Chinese Malls, Dependent on Restaurants, Face a Bleak Future

Food, whether daily essentials or haute cuisine, has been a people magnet in China’s malls since they started to take off a decade ago. Landlords have welcomed restaurants, which Changjiang Securities estimates account for about a third of mall tenants, safe in the knowledge that e-commerce rivals can’t replicate the experience of dining out with family like they can with buying a sweater.

Yet, even with the lifting of lockdowns, Chinese consumers aren’t flocking back amid concern about incomes, jobs, and the virus itself. Restaurants and retail outlets are shutting locations and pushing for lower rents in those they keep open, because the subdued demand means replacement tenants aren’t lining up.

“This will bring a profound and long-lasting impact to the retail market,” Zhang Ping, an executive director of Citic Capital Holdings Ltd.’s real estate group, wrote in an email. “If some customers face dwindling income due to difficulties of smaller companies, or if people become reliant on online shopping, this may evolve into the most rigorous challenge of the brick-and-mortar retail market.”

China’s retail sector suffered a record collapse in the first three months of 2020. E-commerce sales reported a 5.9% gain, but physical stores saw a decline of more than 20%, according to the National Bureau of Statistics. The category covering restaurants, apparel, and jewelry posted the biggest slump, with a 30% plunge from a year ago.

Malls have evolved differently in China than in the U.S., where they first sprouted about a century ago with the rise of private automobiles and a population shift to the suburbs. In China they’re a more recent phenomenon, booming as the economy opened up and an emerging middle class sought convenience, trusted brands, entertainment, and the ability to shop in any weather.

In 2009 there were only 4,298 shopping centers in China, according to Winshang Data, an online retail market database in China. A decade later there were 41,850 malls as companies including property developers Dalian Wanda Group Co Ltd. and Seazen Group Ltd. expanded aggressively. Although new mall building in the U.S. has slowed in recent years, Cushman & Wakefield Plc estimates mall space in China jumped 53% from 2017 to 2019, to cover 82 million square meters (882 million square feet).

With all the construction, landlords have focused increasingly on food operations as anchor tenants. Winshang Data estimates that in 2016, 50% of tenants in new malls were retail brands, whereas 30% were restaurants. By 2019 traditional shops had fallen to 41%, and eating places had jumped to almost 38%.

The virus outbreak may break that relationship, especially as restaurants have to adjust to social distancing that limits how many people can dine and to new consumer habits developed during the lockdown—such as having food delivered.

Many operators are under pressure, with about 60% of China’s publicly traded restaurant companies at risk of running out of cash within six months, according to data compiled by Bloomberg and company reports. Many small and medium businesses have already shut down, while bigger chains are asking for rent cuts and diversifying businesses to offset losses.

Hot pot chain Xiabuxiabu Catering Management China Holdings Co., which has more than 1,000 eateries, is taking a hard line in its negotiations. While landlords are offering Chief Executive Officer Zhao Yi her choice of locations as other tenants flee, her team is focused on cutting costs. “We won’t open new stores unless we can get a very low rent or a very long rent-free period,” Zhao says. “China is no longer in a rapid-growing economic stage, so we’re unlikely to see a strong consumption rebound coming. In fact, the fear of losing jobs and getting into recession may hit the society more than the virus.”

Less profitable malls may fail because of the pandemic fallout, and new centers could delay their openings, according to an April report by the Shanghai Council of Shopping Centers. “The pandemic is causing great pressure to retail property projects, as the retailers’ pressure won’t disappear overnight,” Citic’s Zhang says. “Landlords will face many requests such as rent holiday and lease extension for free.”

With the challenges facing their restaurant business, Chinese mall operators will need to embrace new ways to lure consumers back. This strategy includes increasing the use of digital pitches for marketing and sales, creating more family-oriented experiences, and embracing retail projects that cater to healthier lifestyles, according to a recent Shanghai Council of Shopping Centers report.

The K11 Art Mall in Guangzhou, for instance, a project of New World Development Co., introduced virtual reality shopping in February. Customers can visit Tory Burch or Emporio Armani stores through their phones, chatting with staff via WeChat. The mall’s online store attracted more than 200,000 visitors within two weeks of its opening, generating millions of yuan in sales.

At the same time, Covid-19 has forced Chinese restaurant chains to reduce their reliance on physical locations, a move that may help their chances of recovery and growth. Yum China Holdings Inc., operator of KFC and Pizza Hut eateries in the country, is experimenting with delivering raw steaks—complete with a recipe with precise frying time—for home cooking. And hot pot restaurant operator Haidilao International Holding Ltd. started supplying customers kung pao shrimp and stewed chicken, along with vegetables and sauces, that can be cooked at home in about five minutes.

The virus outbreak “has stepped up the need to diversify the channels apart from dining in—new areas like takeaway, delivery, or products sold at different channels are all options,” says Anne Ling, a consumer analyst at Jefferies. “I think consumers’ assumption is that this kind of outbreak will come back again and again.”

Xiabuxiabu in Beijing started a fresh-food delivery service to offset the weak traffic in its restaurants, and it limits how many customers can dine in at the same time. It’s selling vegetables, beef, and other fresh food via the WeChat social network as a way to address consumer trends fueled by the coronavirus outbreak.

“We are seeing people coming back to restaurants now, but mostly during weekends to meet friends,” CEO Zhao says. “The traffic during weekdays is still weak, and I don’t think it’s just because of the seating restrictions, but also a mindset change of customers.”

©2020 Bloomberg L.P.