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George Hongchoy is the CEO of Link Asset Management Limited, which includes the Hong Kong listed Link Real Estate Investment Trust — the first REIT in Hong Kong and the largest in Asia. The experience of his company acquiring a large number of retail properties from the government, then upgrading them, gives him a unique view of how the retail sector in Hong Kong and China is evolving. In this Knowledge@Wharton interview, he offers his views on online-to-offline retail, the differences between the retail sectors of China, Hong Kong and the U.S., and what lies ahead.
Hongchoy is also chairman of the supervisory committee of the Tracker Fund of Hong Kong, an exchange traded fund that follows the performance of the Hang Seng Index. He was named Business Person of the Year in Hong Kong as part of the DHL/SCMP Hong Kong Business Awards in 2015, and he received the Asian Corporate Director Award from Corporate Governance Asia. He was also named the Best CEO by FinanceAsia’s poll of Asia’s best companies in 2012-2015.
An edited transcript of the conversation follows.
Knowledge@Wharton: Please tell us about your company.
George Hongchoy: The Link Real Estate Investment Trust — or Link REIT, as we refer to it — was listed in 2005. It was the first real estate investment trust in Hong Kong. It acquired a portfolio of community shopping centers from the Hong Kong government. The government had been building these shopping centers as part of low-cost housing real estate, and the properties were put into the REIT…. We have since been transforming these assets, improving the retail space.
Over time we have also expanded beyond Hong Kong to China, with assets now in Beijing, Shanghai and Guangzhou. We have also expanded into new property types. Beyond the retail properties we also have offices, office buildings and car parks. The market cap of Link REIT is now roughly $18 billion.
Knowledge@Wharton: How do REITs in Hong Kong differ from those in U.S.?
Hongchoy: To a large extent, how [REITs are] operated is very similar. The income, at least 90% of the income, needs to be distributed. We do not have the tax advantages of REITs in the U.S. … [which is] the only major difference, but by and large the main features are similar with gearing limits and with the minimum payout. The history obviously is that the REIT market really started in the U.S. in the 1960s and there are now over 1,000 REITs in the U.S. In Hong Kong there are only about a dozen, so it is a new market; it’s a new investment vehicle. But we have a lot of interest from investors all around the world and also retail investors in Hong Kong.
“The Chinese consumer market has been growing rapidly, although it has seen some slowdown.”
Knowledge@Wharton: We know that in the U.S., bricks-and-mortar stores are suffering — not only the stores but whole chains have been going out of business at a pace we haven’t seen for years, even as the U.S. economy seems to be improving. One result: A lot of malls have vacancies, a lot of malls are closing, or they are trying to repurpose their space and put in health clubs, office space and other uses. The culprits usually cited are the fact that there are too many stores in the U.S. and so there is a shakeout underway. The other big cause cited is competition from online sales, notably Amazon, often through the use of mobile. How does the retail experience for brick-and-mortar properties in Hong Kong and China differ from the U.S.?
Hongchoy: The history of the development of consumer sectors overseas is very different, yet we have seen a somewhat similar sort of trend growth of online retail. But the experience of having only started building shopping centers in the last 10 to 15 years means that there are not a lot of properties that were here 20 or 30 years ago, which don’t fit a current purpose as in the U.S., where some of them really have to change the layouts, and the type of services and products they are offering in the mall.
The Chinese consumer market has been growing rapidly, although it has seen some slowdown, but it still far exceeds the global average growth. We’ve seen double-digit growth in the early parts of 2010-2014. More recently, in 2016, it was still growing by 7%. So we have very strong growth in consumer spending, and the government policy is also shifting towards the consumer-driven rather than export-driven, which has helped consumer growth. And, wage levels have increased quite a lot in the last 10 years.
Online has indeed grown very fast. It now accounts for 13.5% of total retail sales compared to only 7.7% in the U.S. [A big part of the reason for that] is ownership of smartphones, especially in the last few years – there are very well-developed mobile payment solutions, and very easy and inexpensive delivery services. A lot of Chinese shoppers like to compare prices, and so online allows them to do that more easily than walking from shop to shop.
A combination of these factors has helped. I know [Wharton] professor David Bell has written a lot about what sort of products should be online or offline. We also are seeing, similar to other countries, that the online companies are also moving to have an offline presence and building a physical presence, or investing in physical retail chains. Over time it’s really a merger of the two experiences, to serve the consumers wherever they want to shop.
“Online has indeed grown very fast. It now accounts for 13.5% of total retail sales compared to only 7.7% in the U.S.”
Knowledge@Wharton: In the U.S., you’ve got Bonobos and Warby Parker, and now Amazon has some physical stores. They are working to create a more seamless experience between the physical store and the online experience. What do you see in Hong Kong and China that relates to this approach? Are there lessons for the West?
Hongchoy: We have to realize firstly that a lot of people in China have never owned a PC, have never had a fixed line. So when mobile comes along, that’s the first thing that they have. What happened to drive the whole change is that the barrier to entry is a lot easier when you’re thinking about only building a business on mobile. So, skipping that technology legacy has helped China and a lot of the businesses to grow a lot faster.
And in the consumer mindset — every shopper is really just thinking about, “Okay, I want to buy something. How fast can I do that? What is my journey?” And during that journey, whether it is through the app or through the experience, they can actually gain some pleasure out of it. So there’s a lot of talk about that experience-based business model rather than the transactional — how we can actually make this fun for people. Even buying weekly groceries, why should that be a chore? Can’t it be fun?
Those are some of the things that I think a lot of businesses in China have been trying to come up with — new models for doing it. And maybe this is a part of globalization, but a lot of U.S. companies are trying to learn how China is doing it, and a lot of Chinese companies are going to the U.S. to learn.
I think there are a few advantages, though, in China. One is the payment solution. Most of the consumers in China either use Alipay or WeChat Pay. And having only one or two, or very few payment solutions will help the shoppers because they don’t have to open their wallet and choose from 10 different ones, and think “which one should I use this time?” On the flipside, merchants also do not have to install that many options — they wouldn’t know which shopper uses which [payment method] and so they would have to install ten different machines on the countertop [if there were many payment solutions].
So, having fewer payment solutions [helps]. I see that in the U.S., Amazon and eBay don’t really have a payment system well-embedded in their own platforms — relying on, I guess, other payment platforms. That is one issue. The other is this incumbent problem. If some of the retailers already have “X” number of stores, the incentive to move towards online becomes more difficult because every time the decision is, first, about how to strengthen the current physical presence. It makes the decision a lot more challenging. But if you don’t do it, I guess someone else will be eating your pie — you have to react.
“In Hong Kong or any compact city with high density, a good transport network does help because then it’s easy to get to the shops.”
The other thing I have noticed is that the consumer does want to go online to do a lot of research, but at the end of the day they want that physical touch and feel in the store, and so that cannot be replaced. In the end, I think one thing that is important is the social aspect of being with other people — whether it’s family, friends or classmates — in a physical location. That is something that [will continue]. But it has to be fun.
So how can you make it easy [for consumers]? Make sure they know how to find what they want — whether there’s a parking app to find their car or an e-directory. And [retailers need] the sort of data analytics to understand the type of customer coming into the mall. There is a lot of research being done on both sides, both in the U.S. and Asia. And I think retailers are less worried than five years ago when everybody was sort of scared that it could be the end of physical retail. Now I think people have understood it more, and O2O [online to offline] has become the buzz word these days.
Knowledge@Wharton: In Hong Kong, e-commerce and mobile shopping haven’t caught on as much as in China, partly because of Hong Kong’s unique geography. It’s compact; it’s easy to get around. Can you talk about that difference, and also, I’m wondering if what you see in Hong Kong would also apply to places in the U.S. like New York City, for example? That’s also island.
Hongchoy: In Hong Kong or any compact city with high density, a good transport network does help because then it’s easy to get to the shops. And shop hours: Hong Kong shopping centers and shops tend to remain open very late into the night hours. Some people work until very late; in a lot of cities you can’t find anywhere to pick up your food [when it’s late], and there are other things that you want, but in Hong Kong the hours that shops remain open helps.
And then we have very small apartments [in Hong Kong]. When you have small apartments, the consequence is that it is very hard to entertain your friends and relatives at home. Shopping centers provide a place [and become] a much bigger part of your social life – it is not just for shopping but also for dining and entertaining. So, it’s not too different in New York – there are a lot of restaurants, and they do very well.
And [another] trend seems to be the case in a lot of places in the last couple of years where people have moved away from this heavy consumerism. How many shirts and pairs of trousers can you buy? The past recession also made people [conscious of owning so much], and so now there is not a revolution — but certainly people are saying, “We actually want the experience; we actually want the entertainment, the gathering of people” and all that. In a compact city, that’s even more so than in a more spread out country.
In Hong Kong, the number of people shopping online has still gone up a lot — from 7% in 2004 to about 23% in 2014. The number is still behind China, but it is indeed rising, and people are trying it. And I think that is certainly the experience for any similar city, whether it’s New York or London.
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Anumakonda Jagadeesh
Outstanding.
Retail markets and shops have a very ancient history, dating back to antiquity. Retailing involves the process of selling consumer goods or services to customers through multiple channels of distribution to earn a profit. Retailers satisfy demand identified through a supply chain. Some of the earliest retailers were itinerant peddlers.
Modern retailers typically make a variety of strategic level decisions including the type of store, the market to be served, the optimal product assortment, customer service, supporting services and the store’s overall market positioning. Once the strategic retail plan is in place, retailers devise the retail mix which includes product, price, place, promotion, personnel and presentation. In the digital age, an increasing number of retailers are seeking to reach broader markets by selling through multiple channels, including both bricks and mortar and online retailing. Digital technologies are also changing the way that consumers pay for goods and services. Retailing support services may also include the provision of credit, delivery services, advisory services, stylist services and a range of other supporting services.
The term “retailer” is typically applied where a service provider fills the small orders of a large number of individuals, who are end-users, rather than large orders of a small number of wholesale, corporate or government clientele. Shopping generally refers to the act of buying products. Sometimes this is done to obtain final goods, including necessities such as food and clothing; sometimes it takes place as a recreational activity. Recreational shopping often involves window shopping (just looking, not buying) and browsing: it does not always result in a purchase.
Retail shops occur in a diverse range of types and in many different contexts – from strip shopping centres in residential streets through to large, indoor shopping malls. Shopping streets may restrict traffic to pedestrians only. Sometimes a shopping street has a partial or full roof to create a more comfortable shopping environment – protecting customers from various types of weather conditions such as extreme temperatures, winds orprecipitation. Forms of non-shop retailing include online retailing (a type of electronic-commerce used for business-to-consumer (B2C) transactions) and mail order.
China is currently the largest retail market in the world.
The distinction between “strategic” and “managerial” decision-making is commonly used to distinguish “two phases having different goals and based on different conceptual tools. Strategic planning concerns the choice of policies aiming at improving the competitive position of the firm, taking account of challenges and opportunities proposed by the competitive environment. On the other hand, managerial decision-making is focused on the implementation of specific targets.”
In retailing, the strategic plan is designed to set out the vision and provide guidance for retail decision-makers and provide an outline of how the product and service mix will optimize customer satisfaction. As part of the strategic planning process, it is customary for strategic planners to carry out a detailed environmental scan which seeks to identify trends and opportunities in the competitive environment, market environment, economic environment and statutory-political environment. The retail strategy is normally devised every 3– 5 years by the chief executive officer(Wikipedia).
The strategic retail analysis typically includes following elements:[
* Market analysis
Market size, stage of market, market competitiveness, market attractiveness, market trends
* Customer analysis
Market segmentation, demographic, geographic and psychographic profile, values and attitudes, shopping habits, brand preferences, analysis of needs and wants, media habits
* Internal analysis
Human resource capability, technological capability, financial capability, ability to generate scale economies or economies of scope, trade relations, reputation, positioning, past performance
* Competition analysis
Availability of substitutes, competitor’s strengths and weaknesses, perceptual mapping, competitive trends
* Review of product mix
Sales per square foot, stock-turnover rates, profitability per product line
* Review of distribution channels
Lead-times between placing order and delivery, cost of distribution, cost efficiency of intermediaries
* Evaluation of the economics of the strategy
Cost-benefit analysis of planned activities
The retail strategy, including service quality, has a significant and positive association on customer loyalty. A marketing strategy effectively outlines all key aspects of firms’ targeted audience, demographic and preference. In a highly competitive market, the retail strategy sets up long-term sustainability. It focuses on customer relationships, stressing the importance of added value and customer satisfaction.
Challenges
To achieve and maintain a foothold in an existing market, a prospective retail establishment must overcome the following hurdles:
• Regulatory barriers including
• Restrictions on real estate purchases, especially as imposed by local governments and against “big-box” chain retailers;
• Restrictions on foreign investment in retailers, in terms of both absolute amount of financing provided and percentage share of voting stock (e.g., common stock) purchased;
• Unfavorable taxation structures, especially those designed to penalize or keep out “big box” retailers (see “Regulatory” above);
• Absence of developed supply chain and integrated IT management;
• High competitiveness among existing market participants and resulting low profit margins, caused in part by
• Constant advances in product design resulting in constant threat of product obsolescence and price declines for existing inventory; and
• Lack of properly educated and/or trained work force, often including management, caused in part by loss in Business.
• Lack of educational infrastructure enabling prospective market entrants to respond to the above challenges.
Statistics for national retail sales
United States
The United States retail sector features the largest number of large, lucrative retailers in the world. A 2012 Deloitte report published in STORES magazine indicated that of the world’s top 250 largest retailers by retail sales revenue in fiscal year 2010, 32% of those retailers were based in the United States, and those 32% accounted for 41% of the total retail sales revenue of the top 250
Since 1951, the U.S. Census Bureau has published the Retail Sales report every month. It is a measure of consumer spending, an important indicator of the US GDP. Retail firms provide data on the dollar value of their retail sales and inventories. A sample of 12,000 firms is included in the final survey and 5,000 in the advanced one. The advanced estimated data is based on a subsample from the US CB complete retail & food services sample
Central Europe
In 2011, the grocery market in six countries of Central Europe was worth nearly €107bn, 2.8% more than the previous year when expressed in local currencies. The increase was generated foremost by the discount stores and supermarket segments, and was driven by the skyrocketing prices of foodstuffs. This information is based on the latest PMR report entitled Grocery retail in Central Europe 2012
World
National accounts show a combined total of retail and wholesale trade, with hotels and restaurants. in 2012 the sector provides over a fifth of GDP in tourist-oriented island economies, as well as in other major countries such as Brazil, Pakistan, Russia, and Spain. In all four of the latter countries, this fraction is an increase over 1970, but there are other countries where the sector has declined since 1970, sometimes in absolute terms, where other sectors have replaced its role in the economy. In the United States the sector has declined from 19% of GDP to 14%, though it has risen in absolute terms from $4,500 to $7,400 per capita per year. In China the sector has grown from 7.3% to 11.5%, and in India even more, from 8.4% to 18.7%. Emarketer predicts China will have the largest retail market in the world in 2016.
Dr.A.Jagaedeesh Nellore(AP),India