More than two and a half years ago I wrote about the inevitable collapse of China’s luxury malls. A brief reminder:
Anyone who’s walked around Shanghai’s more prosperous areas (and Beijing’s as well) is well familiar with the glut of luxury stores, with Bulgari and Gucci boutiques everywhere you look. This always fascinated me – the sheer number of such places in areas where I knew there couldn’t possibly be enough customers to ensure sustainable long-term profitability. I would sometimes stand outside the shops and watch for as long as half an hour (I didn’t have much better to do on the weekends). I remember seeing the shopkeepers going to fantastic lengths to look busy. One of them kept dusting the shelves obsessively. Another kept a book (or maybe a magazine) discreetly under the counter, at an angle where she could read while keeping an eye on the front door. One kept rearranging her hair. Another must have had the best-filed fingernails in all of Asia. This wasn’t a scientific study, of course, but based on what I saw with my own eyes I was convinced the high-end luxury goods stores had been overbuilt, and that eventually they’d either have to pack up and leave or keep eating what had to be painful losses.
Today I visited Beijing’s most stunningly dysfunctional, catastrophic mall, called The Place, and all I could think about was what I wrote back in 2006. Made to look kind of like Versailles on the outside, The Place is an irrational maze of stores and eateries that seems to have been designed to turn off and turn away customers. It has stairways that lead nowhere, unmarked elevators that take you to surprising places, not to mention a generally chintzy feeling created by all the faux marble and Grecian columns; it always looked pompous, but now it’s looking seedy and run-down as well.
The Place is around the corner from my office, and this was my first trip back in about two months, I was shocked at what I saw. Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. The two good restaurants there, Ganges and Master Kong Chef’s, were still thriving. The few others that remained seemed to be just hanging on.
That same night I went by The Village, which seemed so cool when it first arrived and now seems so unnecessary aside from the Apple store and a couple of restaurants. Same thing as The Place: lonely clerks looking plaintively out the store windows, eyes begging you to come in and buy something. But no one does. There is simply too much stuff, too many stores, and no buyers. Do you have to be a rocket scientist to conclude this is unsustainable? And to top it off, they are now finishing the second Village mall down the street, across from the Poppa Bear of all disaster malls, 3.3. All I can say is, WTF??
I’m predicting The Place and many of its sister ghost malls, shunned by customers overwhelmed by so many malls to choose from, each selling the same crap that no one can afford nowadays, are going to experience a catastrophe, if they haven’t already, and will ultimately become burnt-out, boarded-up shells. In turn, this is going to throw a lot of fuel on China’s current financial crisis. Real estate will be further cheapened, and the general misery unique to times of deflation will set in. Brother, can you spare a dime?
All I want to know is how we got here. I told them this was coming 2.5 years ago and no one listened. The day of reckoning, the moment of truth is here. Even if things pick up, these malls are hopeless. Like the Mandarin Oriental, they will need to be razed and replaced with something useful, like affordable middle class housing (wishful thinking on my part). If not, Beijing could become a city pockmarked with looming dinosaurs, huge husks of once breathtaking buildings, now vacant and decaying, like so many of the Olympic structures.
I kind of understand why this overbuilding happened, as the economy became a vicious inflationary circle. Now we are experiencing the down wave, and it’s just starting. As we crash, The Place and many other useless mega-malls like it will serve only as reminders of the excesses of good times that we fooled ourselves into believing would last forever. Their time has now come. In fact, their demise is long overdue.
1
By gregorylent
with china leading the world, can america’s malls be far behind? 🙂 … i personally cannot wait, do my best to stay out of malls, wherever i go … and i have an agenda, for sure abandoned malls will be the new artist studios, wino hangouts, homeless shelters, just like all the old parts of cities, that are now yuppie lofts, after the artists who made them cool got priced out ..
think about it, utilities, high ceilings, sometimes natural light .. 🙂
March 4, 2009 @ 1:47 am | Comment
2
By Richard
America’s malls tend to be more cost effective, if imperfect and similarly too ubiquitous. When the stores don’t perform, they’ll close far more quickly than they will over here. A lot of the American malls will go under too. But most have been planned with the local population demographics in mind, and they then have to sink or swim based on actual profits. The fiasco of the Place wouldn’t have happened in most US cities. It was clear from the beginning it was a lose-lose proposal and it went ahead anyway, probably because of government involvement. There was always something downright insane about it.
March 4, 2009 @ 2:05 am | Comment
3
By Laura
The BEST thing about The Place is the playground for kids on the top floor, but it’s not cheap or easy to get to. We wandered in there on a rainy Sunday afternoon last April and the playground was the busiest place in The Place. I wondered how it could possibly stay in business and I guess you’ve answered that.
March 4, 2009 @ 2:21 am | Comment
4
By fatbrick
ThRichard, the right places of the luxury malls in China you described should be the luxury shops in NYC. The luxury brands tend to take the costs of these stores as marketing expenses I thought. The revenue of these stores certainly cannot support the stores on their own.
Anyway, I agree with you that they are overbuilt. Luckily they are contrained in a few big cities and can be absorbed at losses.
March 4, 2009 @ 2:58 am | Comment
5
By Thomas
It’s all your fault Richard: You could have taken out consumer finance loans and shopped until you dropped. You personally could have saved a handful of stores from bancruptcy! But you failed to do your consumerist duty, shame on you!
On a more serious note: Real-estate disasters happen everywhere. Must be human nature (or maybe it’s the kind of people going into real estate…). Even allegedly sober-minded Germany is not immune: We had extreme overbuilding in East Germany after reunification, for instance. And there is a rather infamous giant shopping mall in the mid-sized Northern German city of Bremen which never found a single tenant when it opened for business a few years ago. Not sure what the developers were thinking. Apparently, they hadn’t bothered to sign up a single tenant before they started building. Not sure what happened to it eventually. Probably still sits there as an empty shell.
But I do agree that China’s overinvestment is in a class of its own…
March 4, 2009 @ 3:07 am | Comment
6
By Don Tai
I thought the same thing when visiting Beijing just before the Olympics last year. Too many shopping plazas that sell high end products, no customers in sight, sales people milling around doing nothing. I wondered who was bank rolling these stores.
Then there is JiaLeFu (Carrefour), packed to the gills with customers, decidedly affordable with low brow merchandising.
Whomever financed these shopping plazas will certainly take a beating, and they should. Or was this all for good “face” during the Olympics, to show the world how advanced China has become?
March 4, 2009 @ 4:54 am | Comment
7
By Richard
You’re right, Carrefour and Wal-Mart both seem to be packed all the time, and that’s simply because they offer value to their customers. I go there when I need something practical, like a backpack or an alarm clock, and I know I’ll be getting enough value to justify the cost. At the luxury malls, everything is, well, a luxury. Just about nothing is essential; it’s all vanity stuff that reminds yourself or your neighbors how rich you are. And right now, vanity shopping is is not a top priority for most people. Yes, those tiny few at the tippy-top will keep buying Patek Philippe watches and $150-an-ounce facial moisturizers. But chances are they’re buying them in Milan and Paris, not in Beijing.
I, too, am curious about who’s financing these monstrosities. They have to have at least half a brain if they came up with the billions required to build, staff and maintain them. How could they then have been so collectively stupid? And why are they still building them?
The one other observation I want to make is about the supermarkets in the basements of these malls. They are all “Western” style – you don’t get hit with the pungent aroma of unwrapped fish and meat the way you do at the local markets. They’re bright and antiseptic and overpriced to the point of criminality. (The “Ole” chain is particularly evil.) I went to one recently and couldn’t believe that two oranges I could buy on the street for 8 kuai were 41 kuai. Two sickly oranges. A jar of Blue Diamond almonds was 64 kuai. I can buy the same bottle at the little convenience store at Central Park for 37 kuai, and they already charge a big mark-up. Can you imagine the kind of margins these supermarkets are making – if indeed anyone is idiotic enough to actually buy the stuff? One of these Ole’s, in East Gate Plaza, is filled with service people but never with customers. Ordinary Chinese people, even those in what’s known as China’s middle class, would never pay such obscene prices. Again, how on earth can they survive, let alone make a profit and thrive?
March 4, 2009 @ 9:31 am | Comment
8
By MichaelTurton
Carrefour and the other volume retailers are taking a beating here — we just went to RT Mart today where we always shop, it was like a ghost town, and the clerks were saying no one was buying anything.
Richard, I suspect those supermarkets have to follow the same model they do here: wet markets rule. Despite what many people think, in Taiwan at least, and I bet China is the same, wet markets are by far the preferred food source by a lopsided 3-4:1 margin. People who shop at supermarkets have absorbed the values that the supermarket is somehow better and are willing to pay the markup. So the supermarkets charge it.
Michael
March 4, 2009 @ 11:50 am | Comment
9
By Richard
Michael, the thing is, these pricey supermarkets have next to no customers. No one seems willing to pay the mark-up. God knows, I certainly won’t. There are much better prices at our popular expat market chain, Jenny Lou’s – even though their prices are sky-high, they’re well below the mall supermarkets’. It’s totally insane. The WalMart supermarket, on the other hand, is reasonable, and is packed with customers. The clear message: there is not a significant market here for people who want to needlessly throw away big chunks of change for the same stuff they can get for half the price down the street. I am dumbfounded that someone ever thought there was such a market. These stores are so f***ed.
March 4, 2009 @ 12:38 pm | Comment
10 Posted at blogs.wsj.com
[…] recent years Beijing has gone all out building fancy shopping centers for China’s rising class of luxury consumers. But now, amid a worsening economic downturn, […]
March 4, 2009 @ 1:17 pm | Pingback
11
By Thang Long
“…are going to experience a catastrophe, if they haven’t already, and will ultimately become burnt-out, boarded-up shells. In turn, this is going to throw a lot of fuel on China’s current financial crisis. Real estate will be further cheapened, and the general misery unique to times of deflation will set in.”
http://www.youtube.com/watch?v=m06AsB1Zxek&feature=related
March 4, 2009 @ 1:27 pm | Comment
12
By Paul Denlinger
I expect to see a lot of fires in these overbuilt malls to collect insurance money.
If you were the developer, what would you do?
March 4, 2009 @ 1:38 pm | Comment
13
By Richard
Paul, that makes sense. Talk about a “fire-sale.”
I just remembered Swire is the force behind the Village, and wonder how many of the others are owned by HK and perhaps Taiwanese property giants. Again, what are they thinking? Why do they keep building their own road to hell?
March 4, 2009 @ 1:44 pm | Comment
14
By neil
This is the result of an absence of proper town planning – a story repeated again and again in China, unfortunately.
March 4, 2009 @ 3:40 pm | Comment
15
By Thang Long
http://jimrogers-investments.blogspot.com/
Social Unrest in China
There is no question that already is some social unrest in China am I am sure you are going to see more going forward because these are peril times economically around the world.
Any part of the chinese economy that deals with the west, specially retail, knows that something is wrong right now. Some parts of the chinese economy and some parts of the indian economy are going to do extremely well going forward. But for the most part you are going to have problems.
China has huge reserves, they are the largest creditor nation in the world right now. Will that prevent problems? Off course not. They are going to have problems too.
But think about where the money is. The largest creditor nations in the world are China, Japan, Korea, Taiwan, Hong Kong, Singapore. The money is in Asia now.
And through out history the center of things has moved to where the money is. It is pretty simple stuff. This is not ideological, this is the way history has always worked.
March 4, 2009 @ 6:26 pm | Comment
16
By boyce
Re the malls: On top of the capacity issues, the vendors have all kinds of quality issues. Take Sanlitun Village: Blue Frog, Element Fresh, Union Bar & Grille, and others have had problems with leaks. I understand that Jack Jones was damaged by water that came from two floors above, while Element Fresh delayed opening until after the Olympics due to water damage.
Cheers, Boyce
March 4, 2009 @ 7:35 pm | Comment
17
By Michael Something
I can only assume that the unrealistic overbuilding of luxury outlet malls is part of the same herd mentality in buisness I see on a smaller scale among my Chinese firends and distant relations. About three years ago my wife was approached by old college friends with an invitation to invest in a particular brand name operation. When I questioned how anyone in their provincial city could afford to buy such items, the reply was ‘everyone else is making money in this kind of business, you’re crazy to miss out.’Thankfully we passed on that, just as we passed on the offer of investing in some Chinese real estate when everyone else was predicting big windfalls – the apartments in question are now looking shabby and mostly unoccupied only a year after completion.
March 4, 2009 @ 8:54 pm | Comment
18
By Bill
Have you taken a look at the mother of all diasters, Solana?
March 5, 2009 @ 12:25 am | Comment
19
By Richard
Doesn’t Solana at least have the advantage of being adjacent to all the new embassy development? I heard that would keep the mega-mall afloat. Famous last words…?
March 5, 2009 @ 12:34 am | Comment
20
By Bill
Solana is bigger than “The Place” and “Sanlitun Village” combined. The last time I went there, around 5:00 on a Friday afternoon, it was deserted and only about half of the spaces had tenants. The new embassies might help a little. Then again, The Place is pretty much adjacent to the ritan/guanghua lu embassy area, and the Sanlitun Village is adjacent to the Sanlitun, Dongzhimenwai embassy areas, for whatever that’s worth.
March 5, 2009 @ 2:00 am | Comment
21
By lensovet
out of curiosity, how is the apple store doing? mirroring the success of the malls, or at least having some customers, even if they aren’t necessarily buying anything?
March 5, 2009 @ 11:29 am | Comment
22
By Richard
The Apple store seems to draw a good crowd at the peak times, like weekends and lunchtime and after work. In general, it sees more traffic than anywhere else in the lonely mall. Whether anyone actually ever buys anything there, I can’t say. Everyone I know says they buy their Apple products in Hong Kong or the US.
March 5, 2009 @ 11:50 am | Comment
23
By G. Lira
Sorry to sound the superficial note, but would it be possible to see some pictures of this mall? Thanks!
March 5, 2009 @ 11:08 pm | Comment
24 Posted at tgs.nationalinterest.in
[…] wanted to check out Naked Capitalism before I went to bed this Thursday evening. Followed a link that appeared interesting. I read that comment which was interesting and faithfully checked out the […]
March 5, 2009 @ 11:34 pm | Pingback
25
By Richard
G. Lira, I don’t take a lot of pictures. You can find some jazzy photos over here of the mall in its prime. It’s too depressing for me to go back and take photos of the boarded up restaurants.
March 5, 2009 @ 11:47 pm | Comment
26
By Aaron
I think most people who have spent any time in China have been struck by this phenomenon. Surely they must be govt. financed and exist mainly for ‘face’ value. There is an interesting article on overbuilding in Beijing at the link below:
http://www.rgemonitor.com/asia-monitor/255…headlines_again
March 6, 2009 @ 3:21 am | Comment
27
By Aaron
Sorry link should be:
http://www.rgemonitor.com/asia-monitor/255707/chinese_real_estate_is_in_the_headlines_again
March 6, 2009 @ 3:25 am | Comment
28
By Not_a_Sinophile
The primary reason most of these buildings exist has to do with loose credit. Speculators would borrow huge sums of cash, use some of it to build buildings (quite often at substandard quality) and pocket most of the cash. When tenants can’t be found and the payments can’t be made in many cases bank accept the finished buildings in place of the loan. If entrepreneurs can’t run these places does anyone think a bank can? So what’s left is shell, empty, decaying and real estate tycoons rolling in cash with no consequences for their blatant fraud. The lack of consequences is a result of the huge payoffs they made in order to acquire the land usage rights from the corrupt government in the first place. The big losers: the Chinese people. They lose places to live, the empty shells of buildings become untenable eyesores, the overbuilding leads to unemployment for the migrant construction worker class.
These phenomena are discussed at length in Phillip Pans book, in “The Last Days of Beijing” by Michael Meyer and in “Factory Girls” by Leslie Chang.
On a side note, even American malls are dying. Many of them have stores with merchandise that the average American can (used to be able to) afford. In Shanghai and Beijing even the less than “top tier” malls sell products that out of reach for anyone accept corrupt government officials and “businessmen.” The average outfit of shirt/blouse, trousers/skirt, shoes costs more than a white collar worker makes in one month. It’s no wonder there isn’t any business.
Finally, there is about 30% premium on Apple products purchased in China vs. Hong Kong. Also, the highest capacity/fastest/latest gadgets are usually not officially available in China.
March 6, 2009 @ 12:31 pm | Comment
29
By Sam
I also always wondered how the luxury stores in Shanghai could run without any visible customers. There were plenty to be seen off Huai Huai Road in the past few years, the prices were outrageous by any standards and the worst part was that the goods did not seem to warrant the high prices.
Regarding the massive real estate bubble, I met a few Brits who had a real estate mutual fund, they used to buy up entire apartment buildings with 10% of their own money, balance from some banks and then coolly collect lease rentals. I suppose it was risk free for the brits as the London banks would now be carrying the bags after the prices have fallen.
This “Foreign Investment” really fed the bubble and priced out housing from the middle class. Same thing is happening in India.
March 6, 2009 @ 5:34 pm | Comment
30 Posted at etl-news.com
[…] Asian exports, which travel great distances, are often consumer durables and such purchases are especially easy to postpone. Services are often more […]
March 6, 2009 @ 9:28 pm | Pingback
31
By Bao
This video report from MSNBC just came out and gives an overview of the situation.
Beijing’s Olympic boom goes bust
March 7, 2009 @ 12:50 am | Comment
32
By Bob
At The Place, glad to hear that Ganges is still doing well. It offers genuine value. Bricks and mortar retail of just about any kind, but especially at the luxury level, is an awfully tough business at the moment.
March 10, 2009 @ 4:48 am | Comment
33 Posted at www.pekingduck.org
[…] stations waiting to go back to their hometowns. I’ve seen the half-finished buildings and the ghost malls. I’ve read some debates on whether the Chinese characters for “economic crisis” […]
March 27, 2009 @ 5:53 pm | Pingback
34
By Avery
I felt a shiver just from seeing your mention of 3.3 — I remember being overwhelmed by the eerie, cold deadness of that place the first time I went there ca. 2006. I can only imagine how bad it is now. The only reason I ever went back was to visit Lisa tailors.
April 2, 2009 @ 2:37 am | Comment
35
By Richard
3.3 is now one scary place. The instant you walk in, young ladies rush up and nearly tackle you, asking whether you want a massage. That place is deader than a door nail, and the last thing it needs is yet another mall directly across the street. This kind of reminds me of China’s dollar-buying binge. It doesn’t make sense, it doesn’t benefit the country, it has no strategy, yet they keep on doing it, building more and more empty, profit-free malls. Kind of like the South Park underpants gnomes.
April 5, 2009 @ 10:43 am | Comment
36 Posted at dontai.com
[…] Beijing’s skyline in 2008-2009 will reveal that commercial buildings such as general office, retail space and hotels have been sprouting up like weeds. As the Olympics wound down and the Global Financial […]
April 10, 2009 @ 5:08 am | Pingback
37
By Don Tai
A very interesting article published today by Chan Akya of the Asia Times Online puts forth a very plausible theory on the overbuilding of commercial real estate in Beijing (this article is long). I’ve prechewed it for you.
Here’s the gist:
1. The world buys lots of cheap Chinese goods, pays China in foreign currency
2. China’s money is pegged to the US dollar. China accumulated a whack load of US dollars. Huge inflows of foreign money start to burn a hole in Chinese pockets
3. Idle Chinese money compete for investment opportunities, exhaust them, and then start buying up and building commercial real estate
4. Reality hits home that there are too many new buildings chasing too few companies. Chinese business get nervous
5. Chinese business sells these “prime real estate” opportunities to foreigners or other Chinese companies, walking away with large profits.
Sometime soon, these high rollers, be they foreign or Chinese, need to realize their losses. Such large sums of money are not easy to hide on your books. not legally, anyway.
April 10, 2009 @ 5:30 am | Comment
38
By Ivan R.
There is another major flaw in the Chinese economic system which prevents national consumers from spending their hard-earned currency in their own country. The government-imposed wage policy, which equalizes pay among most professions, forces industrious professionals either to hoard their extra gains beneath their matresses or to deposit their money in ghost accounts outside of China. This money, rarely makes it back into China.
I recently spoke to a Chinese cardiologist who told me this wealth transfer is endemic to modern Chinese society. Clearly, China’s centrally-planned economy is failing before our eyes. Until the government unshackles the earning potential of its own citizens, the collosal panda will continue to go hungry.
November 10, 2009 @ 11:02 pm | Comment
39 Posted at tomkopacz.wordpress.com
[…] Peking Duck, an expatriate living in China who may have one of the oldest blogs on the Internet, mentioned similar sightings last March at two of Beijing’s more ostentatious shopping malls.)Javers also sums up the problems the […]
November 11, 2009 @ 9:38 am | Pingback
40
By George K
Wow. Congratulations Richard, great blog. It was quoted in an article that had a comment from noted short seller Jim Chanos saying the China collapse is coming, how their GDP numbers are cooked and how he’s shoring the Chinese economy. As a frequent visitor to Beijing I also saw this in January-February when I was last there but blamed it on the New Year’s festival. Looks like I was wrong. Anyone up for a Vacheron Constantine for Christmas?
http://www.politico.com/news/stories/1109/29330.html
November 13, 2009 @ 12:54 pm | Comment
41 Posted at thereformedbroker.com
[…] China’s Luxury Mall Calamity (PekingDuck) […]
November 15, 2009 @ 8:29 pm | Pingback
42
By bolsaespanola
Ha Ha.This is funny. Look at the date. March 4th. (I am writing on Nov 15th)
If you listened to this anecdotal evidence and started shorting the Chinese stocks, you would have lost tones of money. I am personally tired of these Chinese bears.
adding another point,I visited The Village last week. There were many people, contrary to what he saw in March. You always should take these “smart” advice based on anecdotal evidence with a grain of salt!
November 15, 2009 @ 9:28 pm | Comment
43
By Richard
The Village is doing okay in some places – upstairs it is dead, and most of the shops have put up outside signage to draw in customers, to little avail. The Apple store, Starbucks and the restaurants are doing very well, as noted earlier, and the place is packed all the time thanks to live entertainment. It’s probably doing better than any other mall in town.
The others – Solana, Gemdale, Xin Kong, 3.3 – are all doing much worse, and I not only stand by the points of the original post but maintain the situation is considerably worse.
November 16, 2009 @ 11:27 am | Comment
44
By Richard
Just a quick note to the troll who keeps spamming my site with very ugly comments saying I am hypocritical because there are lots of dead malls in the US. This person, known to some readers as “Wayne,” has a long history here and usually I wouldn’t respond, so I’ll just say this once:
The US has many dead malls. More than China. And that is the point. Our malls close down. The people working lose their jobs and the malls are shut. In China, many malls SHOULD be shut but for some inexplicable reason they continue pretending they are functioning, profitable malls. Often one mall is built directly across the street from a mall that everyone knows has no customers and cannot possibly be profitable. So now we have two ghost malls facing one another. Factor in rent and utilities and staff and you have an utter disaster. And even now, in the middle of the downturn, new malls are opening up all over Beijing, and probably elsewhere in China, mainly because the construction keeps people employed. If the unprofitable malls were to die like those in America I’d be congratulating China for having the brains to pull the plug on a wasteful operation (though you do have to wonder why they built these malls to begin with). But this post isn’t about dead or failed malls in America. it’s about failed malls in China that pretend to be real, functional malls that are selling stuff, when they are in fact losing money hand over fist. That they were built in the first place, and that they continue to operate at huge losses, underscores the irrationality of at least a portion of China’s economy, where so much that at first looks like success is actually rotten right to the core, existing only for show. A lot of China’s economic performance is extraordinary. This aspect, however, is plain crazy and has got to catch up with them.
December 1, 2009 @ 7:39 am | Comment
45 Posted at www.pekingduck.org
[…] from a post on canings in Singapore, the most linked-to and visited post I ever wrote was about the inevitable collapse of China’s luxury malls. Some will do fine, like the Village (the stores on the street level and the restaurants, at […]
December 15, 2009 @ 12:19 pm | Pingback