Today I received a phone call from Mr. Bruce Rockowitz, Chairman of Pure Group in response to my letter of last week.
I was impressed by the fact he chose to call me rather than respond in writing. Moreover, his manner and responsiveness to my critique was extraordinary, he is a class act. It was clear the contents of my assessment had been taken seriously and were being actioned with a sense of purpose and urgency. He had already conducted several discussions with his senior management and has subsequently organised a meeting for me with the Group's CEO to discuss some of my comments and suggestions.
It is a rare quality for a business and its leader to take criticism, even the constructive type, on the chin and then turn it into an action plan for improvement so rapidly. Mr. Rockowitz is a great role model for the rest of us.
Wednesday, May 27, 2009
Wednesday, May 20, 2009
Not So Pure
I sent this letter to the owner and founder of my gym today. A small effort to rectify a daily frustration in life. We'll see what sort of response this provokes.
Bruce Rockowitz
Chairman
Pure Group
15F Asia Standard Tower
59-65 Queens Road Central
Hong Kong
20 May 2009
Dear Bruce,
It may seem slightly obtuse or at the very least atypical to be addressing a comment about the operations of a business to its Non-executive Chairman. However given your strong stewardship and public association with Pure, coupled with my exasperation with Pure’s operational staff, I thought it best to reach out directly to you.
In these difficult economic times we are reminded of core business values that underpin every organisation’s success. One of which is the old mantra: “No matter what business we are in, we are in the people business”. Given Pure is positioned as a “lifestyle” business; one could reasonably assume Pure to be more of a people business than an average business. In this context the growing consensus among members is all the more concerning. There is now an explicit, albeit perhaps unheard or unnoticed, momentum among members moving away from Pure. This movement is manifesting on the street, in offices, around dinner tables and is spreading fast.
The challenge is that members don’t tend to advocate their dissatisfaction or try to ‘fix’ whatever their problem is, instead, they apathetically wait until the end of their contract period and then just don’t extend. Others do make suggestions/comments through the mandated channel, then get frustrated when there is no follow-up, response or impact of their effort to improve things. This may not be considered an immediate problem to management as the membership structure provides the business with predictable long-term income streams. Any erosion of income should be foreseeable and therefore able to be rectified. However, the time is fast approaching for Pure to get back to its core values; the values that drew people from other facilities to Pure in the first instance.
For the purposes of this letter, I’ve tried to organize the myriad of critical commentary from members into a few key themes:
Pure staff (whether on reception, instructors, personal trainers, or cleaners) are generally perceived by members to be rude and arrogant. The terrific recruitment profiling from the business inception has been diluted with a less robust group of people that don’t have appropriate training in customer service/relations. These days the staff have a casual indifference to members - they never smile, never say hello, never offer to help with equipment, never replace weights etc. Instead, they tend to chat among themselves and create an environment where members almost feel they are intruding by being there. “Gangs” of sometimes six personal trainers working out together in the middle of the day is a potent image of this that is highly offensive. Members are the customers. Pure is a premium product. Pure members should be treated in the same way as a customer walking into a luxury retail boutique, or as a guest would be treated in a 5-star hotel.
The change room facilities at most Pure venues are under-designed for peak capacity. No business can afford to design to nth degree, but as usage conditions create greater demand tension, there needs to be a response in the facility capacity. There is also talk from men and women around the town about the lack of cleanliness in Pure’s shower area. One member I spoke with suggested the showers receive a comprehensive clean every quarter even if it meant shutting them down for a day. Ultimately management should decide how to deal with this issue, but it does need to be solved as sanitary dissatisfaction can be a powerful deterrent to extending membership.
The system of reserving a place in group classes has become highly disconcerting for members. Whilst I have no personal experience of this, it is something over a dozen friends have mentioned to me in the last month. The idea that Pure creates an advance booking process to deal with high levels of demand seems reasonable. However, when members are continuing to pay (on a monthly basis) a premium price for a product/service, they expect to be able to use it in the same way as when they bought it. Upon investigation of this issue, I learnt that there is an idiotic system whereby a member must call within a prescribed time period (11:15am or later) to reserve a place for a lunchtime class, not before, as would be a more customary first-come-first-served approach. Understandably for most people who work, it is difficult to always be available to make the vital call at the prescribed time. This is an example of Pure losing its ‘member-centric’ ethos and deteriorating to a disinterested corporate mindset that is self-serving.
The function of this correspondence is not to descend into operational critique of Pure, but rather to highlight a concerning erosion in the quality of the lifestyle experience Pure aspires to provide. Sitting silently in judgment or worse, whining to fellow members will only perpetuate the sense of ill-feeling rising within the member ranks. Instead, I want to help preserve a great business by drawing attention to these issues.
It may be worth considering the creation of an advisory committee whose composition includes selected Pure management and a few ordinary members. This would be seen as a real commitment to customer service. Another way forward might be overhaul the member feedback process and professionalize the manner in which member comments are dealt with (coupled with an open acknowledgment that Pure wants to “better understand what is important to members …”). It’s not too late for Pure to turn this into a positive example of corporate agility in reacting to customer needs.
Please accept my apologies for the presumptive nature of this letter. I hope you will appreciate my only intent is to help your business maintain its premier position as Asia’s leading lifestyle group.
Yours sincerely,
Morgan Parker
Bruce Rockowitz
Chairman
Pure Group
15F Asia Standard Tower
59-65 Queens Road Central
Hong Kong
20 May 2009
Dear Bruce,
It may seem slightly obtuse or at the very least atypical to be addressing a comment about the operations of a business to its Non-executive Chairman. However given your strong stewardship and public association with Pure, coupled with my exasperation with Pure’s operational staff, I thought it best to reach out directly to you.
In these difficult economic times we are reminded of core business values that underpin every organisation’s success. One of which is the old mantra: “No matter what business we are in, we are in the people business”. Given Pure is positioned as a “lifestyle” business; one could reasonably assume Pure to be more of a people business than an average business. In this context the growing consensus among members is all the more concerning. There is now an explicit, albeit perhaps unheard or unnoticed, momentum among members moving away from Pure. This movement is manifesting on the street, in offices, around dinner tables and is spreading fast.
The challenge is that members don’t tend to advocate their dissatisfaction or try to ‘fix’ whatever their problem is, instead, they apathetically wait until the end of their contract period and then just don’t extend. Others do make suggestions/comments through the mandated channel, then get frustrated when there is no follow-up, response or impact of their effort to improve things. This may not be considered an immediate problem to management as the membership structure provides the business with predictable long-term income streams. Any erosion of income should be foreseeable and therefore able to be rectified. However, the time is fast approaching for Pure to get back to its core values; the values that drew people from other facilities to Pure in the first instance.
For the purposes of this letter, I’ve tried to organize the myriad of critical commentary from members into a few key themes:
Pure staff (whether on reception, instructors, personal trainers, or cleaners) are generally perceived by members to be rude and arrogant. The terrific recruitment profiling from the business inception has been diluted with a less robust group of people that don’t have appropriate training in customer service/relations. These days the staff have a casual indifference to members - they never smile, never say hello, never offer to help with equipment, never replace weights etc. Instead, they tend to chat among themselves and create an environment where members almost feel they are intruding by being there. “Gangs” of sometimes six personal trainers working out together in the middle of the day is a potent image of this that is highly offensive. Members are the customers. Pure is a premium product. Pure members should be treated in the same way as a customer walking into a luxury retail boutique, or as a guest would be treated in a 5-star hotel.
The change room facilities at most Pure venues are under-designed for peak capacity. No business can afford to design to nth degree, but as usage conditions create greater demand tension, there needs to be a response in the facility capacity. There is also talk from men and women around the town about the lack of cleanliness in Pure’s shower area. One member I spoke with suggested the showers receive a comprehensive clean every quarter even if it meant shutting them down for a day. Ultimately management should decide how to deal with this issue, but it does need to be solved as sanitary dissatisfaction can be a powerful deterrent to extending membership.
The system of reserving a place in group classes has become highly disconcerting for members. Whilst I have no personal experience of this, it is something over a dozen friends have mentioned to me in the last month. The idea that Pure creates an advance booking process to deal with high levels of demand seems reasonable. However, when members are continuing to pay (on a monthly basis) a premium price for a product/service, they expect to be able to use it in the same way as when they bought it. Upon investigation of this issue, I learnt that there is an idiotic system whereby a member must call within a prescribed time period (11:15am or later) to reserve a place for a lunchtime class, not before, as would be a more customary first-come-first-served approach. Understandably for most people who work, it is difficult to always be available to make the vital call at the prescribed time. This is an example of Pure losing its ‘member-centric’ ethos and deteriorating to a disinterested corporate mindset that is self-serving.
The function of this correspondence is not to descend into operational critique of Pure, but rather to highlight a concerning erosion in the quality of the lifestyle experience Pure aspires to provide. Sitting silently in judgment or worse, whining to fellow members will only perpetuate the sense of ill-feeling rising within the member ranks. Instead, I want to help preserve a great business by drawing attention to these issues.
It may be worth considering the creation of an advisory committee whose composition includes selected Pure management and a few ordinary members. This would be seen as a real commitment to customer service. Another way forward might be overhaul the member feedback process and professionalize the manner in which member comments are dealt with (coupled with an open acknowledgment that Pure wants to “better understand what is important to members …”). It’s not too late for Pure to turn this into a positive example of corporate agility in reacting to customer needs.
Please accept my apologies for the presumptive nature of this letter. I hope you will appreciate my only intent is to help your business maintain its premier position as Asia’s leading lifestyle group.
Yours sincerely,
Morgan Parker
Sunday, April 26, 2009
In the last week I've watched the world celebrate Earth Day and Australians and New Zealanders remember ANZAC Day. In fact I wasn't just watching, I was also feeling the emotion of these two days as I reflected on their meaning.
ANZAC day is now bigger than ever in terms of engaging people's emotions and galvanising our thoughts on all the servicemen who lost their lives. At different points over the last 80 years ANZAC day had almost been forgotten in the annual calendar as people went about their lives with unconscious disassociation. Not any more. It is now seen as a sign of national patriotism to actively participate in the ceremonies of 25 April. When I was growing up I remember seeing the grainy images of Gallipoli each ANZAC day as a handful of Australians, usually direct descendants of soldiers who died there, conducted their own intimate remembrance ceremony. These days going to Gallipoli is the closest thing Australians have to the Islamic pilgrimage to Mecca. So many people now make the trip to Turkey every year that grandstands have been built to accommodate the crowds. People with no particular connection to the place or the armed services, but with a strong sense of national pride and desire to be part a unifying albeit solemn occasion. Ironically Gallipoli and the battle fought there is nothing more than a footnote in military history when one considers the central role played by ANZAC soldiers in defeating the Germans in France, by breaking the Hindenberg Line, and in doing so changing the course of the war. It matters not to me as Gallipoli symbolises all the battles fought, won or lost in the course of two world wars. However, observing the modern day scale and fanfare of the Gallipoli ceremonies does remind me that even the history of war can't escape the meddling self-serving influence of the media. I wonder in another 80 years whether young Australians will even know the relative significance of battle at Gallipoli or what it symbolises? Time has an uncanny way of shaping history.
Earth Day was again both educational and inspiring to me this year. I really feel I'm now an active agent of change for a better environment. I think every human needs to individually come to terms with the environmental devastation we are causing the earth. Its like religion, no one can tell you to believe, each person reaches their own enlightenment in their own time. Luckily today's children are growing up with an environmental consciousness built into their base education. Aria already knows plastic bags clog our ecosystems, cars pollute our air, that she needs to turn off the light when she leaves a room, and not to let the water run while she is brushing her teeth! So it seems we have achieved massive progress in awareness within a single generation. I think I've always been relatively alert to environmental issues from an intellectual perspective, but struggled with the practical side of things, constantly asking myself: "how can I make a real difference, I'm only one person ?". Many people share my disillusionment and feeling of helplessness. So we all persist with our daily lives allowing ourselves to be paralysed into inactivity, yet preaching the environmental mantra in some abstract way to rationale our own sense of morality. I have tried to absorb the scientific teachings over the last 10 years and in Asia I have almost constantly lived with environmental degradation surrounding me (except Japan, which is an amazing social role model, where an environmentally responsible lifestyle has become an accepted way of life). It is easy when you watch An Inconvenient Truth to be physically and emotionally disturbed, but at the same time so daunted by these realities that its easier to turn it off and pretend for just a little bit longer that it happening 'over there', somewhere else, not here in my city or on my street. For the average person the destruction of our world is not a daily thought yet. For me, its fair to say I have been building up to this environmental awakening for a while. Earth Day this year was a culmination not just because I re-learnt how incredibly dire our situation is but because for the first time I felt it is really happening.
For the last 12 months I have been rejecting plastic bags whenever I buy something, instead I just take the items into my own bag or just simply carry them unwrapped. It started out as my own little rebellion against the status quo of shops unnecessarily wrapping everything in plastic, but it then turned into a mini research assignment as I studied the responses of shopkeepers to my request for no wrapping or carry bag. I do it everywhere I go and I've become more and more assertive in my rejection of the plastic bags. I now include an environmental message to the shopkeeper as I reject the bags, hoping other customers will hear me. The looks on faces when I do this range from complete confusion and incomprehension to smiles and congratulations. My secret hope is that by rejecting plastic bags maybe one day the shop keepers I've met might decide to resist the dumb automated process of handing one out to every customer and instead ask "do you need a bag with that?". That would be progress.
I believe we are reaching a tipping point of awareness, more and more people are seeing the light every day, we have got to change the way we live. My guess is sometime in the next 10 years there will be massive social movement globally towards a new way of life. Not to say the change will happen overnight, it will still be gradual but momentum is noticeably picking up. Politics remains the greatest hurdle to overcome. 5 years ago it was politics and economics, but rapidly creative minds are finding a way to make being eco-friendly also financial viable. Now getting politicians to force big business to change is the key.
When I was a kid, "environmentalists" were considered weirdos or alternates, called tree-huggers and looked upon by 'civilised' people as no-hopers or trouble-makers who had nothing better to do with their time. Now I'm sitting here thinking to myself there is no better use for my time.
ANZAC day is now bigger than ever in terms of engaging people's emotions and galvanising our thoughts on all the servicemen who lost their lives. At different points over the last 80 years ANZAC day had almost been forgotten in the annual calendar as people went about their lives with unconscious disassociation. Not any more. It is now seen as a sign of national patriotism to actively participate in the ceremonies of 25 April. When I was growing up I remember seeing the grainy images of Gallipoli each ANZAC day as a handful of Australians, usually direct descendants of soldiers who died there, conducted their own intimate remembrance ceremony. These days going to Gallipoli is the closest thing Australians have to the Islamic pilgrimage to Mecca. So many people now make the trip to Turkey every year that grandstands have been built to accommodate the crowds. People with no particular connection to the place or the armed services, but with a strong sense of national pride and desire to be part a unifying albeit solemn occasion. Ironically Gallipoli and the battle fought there is nothing more than a footnote in military history when one considers the central role played by ANZAC soldiers in defeating the Germans in France, by breaking the Hindenberg Line, and in doing so changing the course of the war. It matters not to me as Gallipoli symbolises all the battles fought, won or lost in the course of two world wars. However, observing the modern day scale and fanfare of the Gallipoli ceremonies does remind me that even the history of war can't escape the meddling self-serving influence of the media. I wonder in another 80 years whether young Australians will even know the relative significance of battle at Gallipoli or what it symbolises? Time has an uncanny way of shaping history.
Earth Day was again both educational and inspiring to me this year. I really feel I'm now an active agent of change for a better environment. I think every human needs to individually come to terms with the environmental devastation we are causing the earth. Its like religion, no one can tell you to believe, each person reaches their own enlightenment in their own time. Luckily today's children are growing up with an environmental consciousness built into their base education. Aria already knows plastic bags clog our ecosystems, cars pollute our air, that she needs to turn off the light when she leaves a room, and not to let the water run while she is brushing her teeth! So it seems we have achieved massive progress in awareness within a single generation. I think I've always been relatively alert to environmental issues from an intellectual perspective, but struggled with the practical side of things, constantly asking myself: "how can I make a real difference, I'm only one person ?". Many people share my disillusionment and feeling of helplessness. So we all persist with our daily lives allowing ourselves to be paralysed into inactivity, yet preaching the environmental mantra in some abstract way to rationale our own sense of morality. I have tried to absorb the scientific teachings over the last 10 years and in Asia I have almost constantly lived with environmental degradation surrounding me (except Japan, which is an amazing social role model, where an environmentally responsible lifestyle has become an accepted way of life). It is easy when you watch An Inconvenient Truth to be physically and emotionally disturbed, but at the same time so daunted by these realities that its easier to turn it off and pretend for just a little bit longer that it happening 'over there', somewhere else, not here in my city or on my street. For the average person the destruction of our world is not a daily thought yet. For me, its fair to say I have been building up to this environmental awakening for a while. Earth Day this year was a culmination not just because I re-learnt how incredibly dire our situation is but because for the first time I felt it is really happening.
For the last 12 months I have been rejecting plastic bags whenever I buy something, instead I just take the items into my own bag or just simply carry them unwrapped. It started out as my own little rebellion against the status quo of shops unnecessarily wrapping everything in plastic, but it then turned into a mini research assignment as I studied the responses of shopkeepers to my request for no wrapping or carry bag. I do it everywhere I go and I've become more and more assertive in my rejection of the plastic bags. I now include an environmental message to the shopkeeper as I reject the bags, hoping other customers will hear me. The looks on faces when I do this range from complete confusion and incomprehension to smiles and congratulations. My secret hope is that by rejecting plastic bags maybe one day the shop keepers I've met might decide to resist the dumb automated process of handing one out to every customer and instead ask "do you need a bag with that?". That would be progress.
I believe we are reaching a tipping point of awareness, more and more people are seeing the light every day, we have got to change the way we live. My guess is sometime in the next 10 years there will be massive social movement globally towards a new way of life. Not to say the change will happen overnight, it will still be gradual but momentum is noticeably picking up. Politics remains the greatest hurdle to overcome. 5 years ago it was politics and economics, but rapidly creative minds are finding a way to make being eco-friendly also financial viable. Now getting politicians to force big business to change is the key.
When I was a kid, "environmentalists" were considered weirdos or alternates, called tree-huggers and looked upon by 'civilised' people as no-hopers or trouble-makers who had nothing better to do with their time. Now I'm sitting here thinking to myself there is no better use for my time.
Wednesday, March 11, 2009
It's Surreal Sliding Sideways
Apart from the deafening thump of bad economic news every hour of every day, the most resonate sense I have is that life has become a series of surreal days where nothing really happens. Sure, we all go to work (or at least some of us do), we go to events, we go to the gym, we pick up our kids from school, we all continue the daily regime and routine of that life we remember, but something doesn't feel right. Its like that dream you have where you're running towards something just out of focus in the distance, running and running, but you never quite get there, you wake up before seeing the destination in definitive reality. Maybe its like a hangover, a semi-permanent one, where that feeling of disorientation, slight depression and fragmented memories of the night before drag on for months. Maybe its the fact that nothing in the business world seems to be moving forward, sure people are talking about the future, even planning the future, but always in the context of a recently toxic past and the desperate reality of the present. There are whole weeks lost as every conversation you're in, or overhearing, is circling around the same topic discussed in the same shell-shocked way.
When this dream-like reality is over, I wonder how we will collectively and individually reflect on these lost days of 2008 and 2009. For many it will be like pages of a flip-calendar that didn't get bound leaving no trace or record, for others the blueish blur of watching a Bloomberg screen for too many hours. For me it will have been the most interesting of times, to observe in real-time a transformation of society around me. Other than my dear grandmother in Australia who at 85 has seen it all before, and Aria at 6 years old who remains focused on school, extra-curricular activities and negotiating for lollies; every other little facet of my life and the world I interact with, seems to have been turned upside down.
There are literally dozens of examples of economic theory playing out in the real world today, a radical one has been at the gym. Many businesses operate under the 80/20 rule: where 20% of your customers account from 80% of your sales. For a gym that means 20% of your members represent 80% of your usage or 'check-ins'. On a separate note, I'm also told that 30% of members who sign up for a 12 month contract, use the gym for the first month and then are never seen again! As you might expect, today gym membership sales are growing at a slower rate than in the heady years of 2005 through 2007, where a mere US$100 per month was chump change even if you only used it once each moon. The monthly cost of having a gym membership was compared to a round of after-work drinks at one of the many trendy bars that popped up around every major city in the world. What's most interesting is that 'check-in' rates at Hong Kong gyms are up 30% in the first three months of 2009. If that doesn't sound radical, try getting on to a running machine or bench press, or worse, getting a hot shower at any waking hour. The gyms are packed because the owners, knowing the 80/20 rule (see above) only design the gym capacity to meet a predictably poultry population of junkies that typically frequent the place. So now that people aren't going out for sit-down lunches or having after-work drinks as often, plus a rising population of out-of-work bankers are trying to work off their greed-bellies, the gyms are like toilets at half time at a rugby match.
Along with the 'budget' and 'mood' factors driving people out of bars and into the gym, I think there is a more subtle change taking place where people are becoming more human again - reflecting on what really matters in life. The thump of the news cycle is matched by a sense of quietness inside people's souls, like that silence in the eye of a tornado when all hell is breaking loose around you. This humane 're-balancing' of society is breaking down barriers that grew while society was single-mindedly pursing wealth and material gratification, where there was an expectation, not an aspiration, for the good life. This new reality is making communication between classes, cultures and genders easier with less hubris, less arrogance and hyped-up testosterone in the mix. Maybe a more tolerant society, focused less on individual progression and more on collective harmony, might be a silver-lining to otherwise surreal sideways slide.
When this dream-like reality is over, I wonder how we will collectively and individually reflect on these lost days of 2008 and 2009. For many it will be like pages of a flip-calendar that didn't get bound leaving no trace or record, for others the blueish blur of watching a Bloomberg screen for too many hours. For me it will have been the most interesting of times, to observe in real-time a transformation of society around me. Other than my dear grandmother in Australia who at 85 has seen it all before, and Aria at 6 years old who remains focused on school, extra-curricular activities and negotiating for lollies; every other little facet of my life and the world I interact with, seems to have been turned upside down.
There are literally dozens of examples of economic theory playing out in the real world today, a radical one has been at the gym. Many businesses operate under the 80/20 rule: where 20% of your customers account from 80% of your sales. For a gym that means 20% of your members represent 80% of your usage or 'check-ins'. On a separate note, I'm also told that 30% of members who sign up for a 12 month contract, use the gym for the first month and then are never seen again! As you might expect, today gym membership sales are growing at a slower rate than in the heady years of 2005 through 2007, where a mere US$100 per month was chump change even if you only used it once each moon. The monthly cost of having a gym membership was compared to a round of after-work drinks at one of the many trendy bars that popped up around every major city in the world. What's most interesting is that 'check-in' rates at Hong Kong gyms are up 30% in the first three months of 2009. If that doesn't sound radical, try getting on to a running machine or bench press, or worse, getting a hot shower at any waking hour. The gyms are packed because the owners, knowing the 80/20 rule (see above) only design the gym capacity to meet a predictably poultry population of junkies that typically frequent the place. So now that people aren't going out for sit-down lunches or having after-work drinks as often, plus a rising population of out-of-work bankers are trying to work off their greed-bellies, the gyms are like toilets at half time at a rugby match.
Along with the 'budget' and 'mood' factors driving people out of bars and into the gym, I think there is a more subtle change taking place where people are becoming more human again - reflecting on what really matters in life. The thump of the news cycle is matched by a sense of quietness inside people's souls, like that silence in the eye of a tornado when all hell is breaking loose around you. This humane 're-balancing' of society is breaking down barriers that grew while society was single-mindedly pursing wealth and material gratification, where there was an expectation, not an aspiration, for the good life. This new reality is making communication between classes, cultures and genders easier with less hubris, less arrogance and hyped-up testosterone in the mix. Maybe a more tolerant society, focused less on individual progression and more on collective harmony, might be a silver-lining to otherwise surreal sideways slide.
Thursday, March 5, 2009
Threshold Resistance
I recently spoke at the Business of Design Week in Hong Kong. It was an honour to be invited given the notable collection of speakers assembled from around the world. Moreover, it was a wonderful opportunity to break from the never ending talk of financial Armageddon and humbly delve into the unadulterated world of design.
I was particularly enthusiastic to discuss design in the context of business, my business, which is the creation and ownership retail space. I titled the presentation “Threshold Resistance” – a phrase coined by Alfred Taubman – founder of Taubman Centres and pioneer of the modern shopping centre business in America.
The audience of roughly 800 people were largely from the design world, be it architecture, product, digital or the environmental fields.
Excerpts of the presentation follow:
Design has always been important in the retail world, but to understand why design is so important today, it helps to look back at how retail venues have evolved throughout history to meet the changing needs of society.
The act of shopping has gone from being a necessary evil often performed by servants, to being the number one leisure activity of the 21st century.
Retail venues were traditionally nothing more than a place where merchants and consumers transacted. The tendency for people to exchange or sell goods in return for other goods led to the creation of the world’s first retail destinations. Sellers discovered they thrived alongside their direct and indirect competitors… the theory being that buyers wanted to compare, and thus, would come in greater numbers to locations where that comparison was possible.
While these rudimentary marketplaces were haphazardly expanding, so were individual retailers in their own right, thus creating a virtuous proliferation of choices for buyers, leading to a dramatic increase in visitation and aggregate consumption. In turn, the venues responded by becoming increasingly large and sophisticated; and for the first time became purpose-built destinations designed for interaction.
Today the shopping centre is the world’s dominant built environment for social exchange. It’s interesting that when you think of the world’s great architectural icons, I doubt anyone here would think of a shopping centre ……..
When considering design we could imagine that it springs from nowhere – the product of inspiration or a muse, and that designers exist in a realm of creativity that others do not. While this may be true in rare cases; it is more legitimate to think of design as a tool to meet the needs of business. For example, while hundreds of chairs may be designed, the ones that are eventually manufactured are the ones that resonate with business minds, as a proxy for the ultimate users. The same can be said for cars, electronic products, almost every subject of a design initiative.
When I think of something like the ubiquitous Blackberry. I wonder whether its origins trace to a spark of inspiration in a designer’s head, or whether it was the result of a consciously devised business strategy to respond to an observed need.
The reality is, good design invariably finds a way into marriage with business and vice versa. The best products are those which are borne from a collaboration of creative design and thoughtful business minds. Nothing in the world is truly new or original. So good design often involves a process of adapting or incrementally improving the product’s aptitude, and occasionally, as is the case with the blackberry and the ipod, making a great leap forward. In either case, it is the instructive interplay with business that helps a designer interpret the requirements of the user. In doing so, providing a rational foundation for the designer to apply creative freedom.
Designing retail space is a study in human psychology. Its not rocket science, but it is very hard to get right and requires a great deal of experience and patience.
The evidence is the hundreds of shopping centres being built today in emerging markets by new developers that fail to succeed. The most common error made when designing a new shopping centre is thinking about it as lines on an architectural plan or rental area that needs to be maximized at all costs. It’s not until you put yourself into the shoes of the customer, the retailer, the delivery man or garbage man that can really conceptualize the right solution for the space.
So good design in a retail sense necessarily becomes a response to and dialogue with the customer / user in all its forms. The challenge remains how to inspire and enthrall in an ever demanding and sophisticated consumer world, but at the same time create a functional venue that will last.
It may be strange for a retail developer to show an image of a coffee machine, but it highlights in one glance, some universal design principles we focus on. It was designed in the 1947 by Robbiati. It is timeless in its aesthetic appeal, simple, easily understood, and extremely functional. Often it is within simplicity that sustainable design is found. These sorts of products rebuff the commonly held view in Asia that new is better. In designing retail venues we strive for this same simplicity and durability. Great malls tend to have timeless design.
Perhaps Taubman’s most highly sought after mall today is Short Hills just outside of Manhattan in New Jersey. This project was built almost 30 years ago. If we think back to 1980 when Taubman was designing this shopping venue …….. Computers were rare. Televisions weren’t flat. Radios needed manual tuning. Music was played on vinyl and cassette tapes, and videos were amazing. There were no mobile phones, no internet, e-commerce, or electronic banking. Shops took notes and coins out of your wallet. So, how has Short Hills stayed relevant and successful over the last 30 years? One of the secrets is logical physical planning that has allowed the venue to evolve as the society evolved around it.
Until recently it has almost always been the more functional venues that were commercially successful and inversely the so-called beautiful malls that have been financially challenged. I say until recently, because we have sort of, just entered a golden age where we are beginning to see a more consistent convergence of form and function to produce beautiful shopping environments that are also doing lots of business. Maybe the powerful synergy of design and business working in unison is being realized?
The whole basis of this event is the interaction of business and design. To that end, I’d like to talk for a moment about the relationship between a retail developer and a retail architect.
In the simplest terms, it’s generally the developer who brings commercial parameters, functionality and urgency to the creative table, and the architect who brings the creativity. However, when a developer becomes an owner of a shopping centre, or dozens of shopping centres, the role definition begins to change. In these instances, the developer brings a wealth of operating experience that is priceless.
Designing a retail venue is not a perfect science, we learn as much through our mistakes as we do through observing what works. The on-going daily custodianship of a mall forces the owner to see the venue through the prism of the retailer and customer. That perspective then gets reflected in future renovations of that mall, and by the developer on the next project.
Contrast that intimate create -> observe -> interpret -> re-create continuum of the developer/owner, with the short-term retained involvement of an architect. No matter how experienced, how intellectually adept or how thoughtful the architect may be, it is a mighty task for he or she to appropriately balance all the nuances of such a complex social organism as a shopping centre, particularly when the architect often has additional aesthetic aspirations influencing their thought process as well. These slightly or widely diverging influences often create tension. But managed correctly, within that tension can come a lasting composition of both form and function. But at the end of the day, it is really the developer / owner that has to live with the property long-term, so in my view it’s the developer that needs to ultimately be responsible for the design.
If I had to distill the hundreds of design rules that Taubman applies to each project down to one axiom, it would be that of Threshold Resistance.
“Threshold resistance is defined as the physical and psychological barriers that stand between a customer and the sale of merchandise - the force that keeps the customer from opening the door and coming in over the threshold. One must understand that force and break down the barriers between art and commerce, between shoppers and merchandise, between high culture and popular taste.”
The best way to examine threshold resistance is to look at examples of it. Many would think that threshold resistance is a consequence of the constraints placed on a developer or designer during the conception process. But ironically, it is usually these very people that are responsible for creating the resistance in the first place.
Of course, different sites and regulatory requirements do heavily influence a developer and designer’s ability to create the ideal environment. To minimize or eliminate threshold resistance is an onerous aspiration that requires a dedication and precision not often associated with real estate developers.
Designing a large shopping centre is a highly iterative process that usually takes 18 months to complete. During the process a developer has literally hundreds of decisions to make. Decisions as major as: how floors should it have? to a decision about the colour of line markings in the car park.
Whatever the decision, we are always trying to reduce threshold resistance. In a sense we are endlessly trying to design the most fluid and seamless shopping experience conceivable. With no obstacles or frustrations built into the design.
Threshold resistance can be obvious, for example stairs. I’m sure everyone could predict the typical human response to being confronted with the option of climbing a flight of stairs. But there is the more subtle nuance of human nature that for every 3 people having a choice to go up or down a level, 2 will choose to go down. These sorts of psychological realities instruct Taubman’s design thinking.
Threshold resistance could also take the form of a sight line that is blocked by a column or lift. The reality being, that if a customer can’t see a store, they probably won’t shop in the store.
Threshold resistance doesn’t always present as a physical barrier, it might be an unfriendly looking shop attendant or a store temperature that is too cold or too hot. A mall that is too congested with merchandise, or too spacious. Whatever it is that reduces the ability for a customer to make a purchase is threshold resistance. To pursue the elimination of such forces is the most worthwhile aspiration when designing retail space.
Great retail design is not about fancy architects or grandiose architecture. Great retail design is about shaping social behaviour. Retail is the world’s biggest business, and shopping is the human race’s most fundamental activity.
What a responsibility to have.
I was particularly enthusiastic to discuss design in the context of business, my business, which is the creation and ownership retail space. I titled the presentation “Threshold Resistance” – a phrase coined by Alfred Taubman – founder of Taubman Centres and pioneer of the modern shopping centre business in America.
The audience of roughly 800 people were largely from the design world, be it architecture, product, digital or the environmental fields.
Excerpts of the presentation follow:
Design has always been important in the retail world, but to understand why design is so important today, it helps to look back at how retail venues have evolved throughout history to meet the changing needs of society.
The act of shopping has gone from being a necessary evil often performed by servants, to being the number one leisure activity of the 21st century.
Retail venues were traditionally nothing more than a place where merchants and consumers transacted. The tendency for people to exchange or sell goods in return for other goods led to the creation of the world’s first retail destinations. Sellers discovered they thrived alongside their direct and indirect competitors… the theory being that buyers wanted to compare, and thus, would come in greater numbers to locations where that comparison was possible.
While these rudimentary marketplaces were haphazardly expanding, so were individual retailers in their own right, thus creating a virtuous proliferation of choices for buyers, leading to a dramatic increase in visitation and aggregate consumption. In turn, the venues responded by becoming increasingly large and sophisticated; and for the first time became purpose-built destinations designed for interaction.
Today the shopping centre is the world’s dominant built environment for social exchange. It’s interesting that when you think of the world’s great architectural icons, I doubt anyone here would think of a shopping centre ……..
When considering design we could imagine that it springs from nowhere – the product of inspiration or a muse, and that designers exist in a realm of creativity that others do not. While this may be true in rare cases; it is more legitimate to think of design as a tool to meet the needs of business. For example, while hundreds of chairs may be designed, the ones that are eventually manufactured are the ones that resonate with business minds, as a proxy for the ultimate users. The same can be said for cars, electronic products, almost every subject of a design initiative.
When I think of something like the ubiquitous Blackberry. I wonder whether its origins trace to a spark of inspiration in a designer’s head, or whether it was the result of a consciously devised business strategy to respond to an observed need.
The reality is, good design invariably finds a way into marriage with business and vice versa. The best products are those which are borne from a collaboration of creative design and thoughtful business minds. Nothing in the world is truly new or original. So good design often involves a process of adapting or incrementally improving the product’s aptitude, and occasionally, as is the case with the blackberry and the ipod, making a great leap forward. In either case, it is the instructive interplay with business that helps a designer interpret the requirements of the user. In doing so, providing a rational foundation for the designer to apply creative freedom.
Designing retail space is a study in human psychology. Its not rocket science, but it is very hard to get right and requires a great deal of experience and patience.
The evidence is the hundreds of shopping centres being built today in emerging markets by new developers that fail to succeed. The most common error made when designing a new shopping centre is thinking about it as lines on an architectural plan or rental area that needs to be maximized at all costs. It’s not until you put yourself into the shoes of the customer, the retailer, the delivery man or garbage man that can really conceptualize the right solution for the space.
So good design in a retail sense necessarily becomes a response to and dialogue with the customer / user in all its forms. The challenge remains how to inspire and enthrall in an ever demanding and sophisticated consumer world, but at the same time create a functional venue that will last.
It may be strange for a retail developer to show an image of a coffee machine, but it highlights in one glance, some universal design principles we focus on. It was designed in the 1947 by Robbiati. It is timeless in its aesthetic appeal, simple, easily understood, and extremely functional. Often it is within simplicity that sustainable design is found. These sorts of products rebuff the commonly held view in Asia that new is better. In designing retail venues we strive for this same simplicity and durability. Great malls tend to have timeless design.
Perhaps Taubman’s most highly sought after mall today is Short Hills just outside of Manhattan in New Jersey. This project was built almost 30 years ago. If we think back to 1980 when Taubman was designing this shopping venue …….. Computers were rare. Televisions weren’t flat. Radios needed manual tuning. Music was played on vinyl and cassette tapes, and videos were amazing. There were no mobile phones, no internet, e-commerce, or electronic banking. Shops took notes and coins out of your wallet. So, how has Short Hills stayed relevant and successful over the last 30 years? One of the secrets is logical physical planning that has allowed the venue to evolve as the society evolved around it.
Until recently it has almost always been the more functional venues that were commercially successful and inversely the so-called beautiful malls that have been financially challenged. I say until recently, because we have sort of, just entered a golden age where we are beginning to see a more consistent convergence of form and function to produce beautiful shopping environments that are also doing lots of business. Maybe the powerful synergy of design and business working in unison is being realized?
The whole basis of this event is the interaction of business and design. To that end, I’d like to talk for a moment about the relationship between a retail developer and a retail architect.
In the simplest terms, it’s generally the developer who brings commercial parameters, functionality and urgency to the creative table, and the architect who brings the creativity. However, when a developer becomes an owner of a shopping centre, or dozens of shopping centres, the role definition begins to change. In these instances, the developer brings a wealth of operating experience that is priceless.
Designing a retail venue is not a perfect science, we learn as much through our mistakes as we do through observing what works. The on-going daily custodianship of a mall forces the owner to see the venue through the prism of the retailer and customer. That perspective then gets reflected in future renovations of that mall, and by the developer on the next project.
Contrast that intimate create -> observe -> interpret -> re-create continuum of the developer/owner, with the short-term retained involvement of an architect. No matter how experienced, how intellectually adept or how thoughtful the architect may be, it is a mighty task for he or she to appropriately balance all the nuances of such a complex social organism as a shopping centre, particularly when the architect often has additional aesthetic aspirations influencing their thought process as well. These slightly or widely diverging influences often create tension. But managed correctly, within that tension can come a lasting composition of both form and function. But at the end of the day, it is really the developer / owner that has to live with the property long-term, so in my view it’s the developer that needs to ultimately be responsible for the design.
If I had to distill the hundreds of design rules that Taubman applies to each project down to one axiom, it would be that of Threshold Resistance.
“Threshold resistance is defined as the physical and psychological barriers that stand between a customer and the sale of merchandise - the force that keeps the customer from opening the door and coming in over the threshold. One must understand that force and break down the barriers between art and commerce, between shoppers and merchandise, between high culture and popular taste.”
The best way to examine threshold resistance is to look at examples of it. Many would think that threshold resistance is a consequence of the constraints placed on a developer or designer during the conception process. But ironically, it is usually these very people that are responsible for creating the resistance in the first place.
Of course, different sites and regulatory requirements do heavily influence a developer and designer’s ability to create the ideal environment. To minimize or eliminate threshold resistance is an onerous aspiration that requires a dedication and precision not often associated with real estate developers.
Designing a large shopping centre is a highly iterative process that usually takes 18 months to complete. During the process a developer has literally hundreds of decisions to make. Decisions as major as: how floors should it have? to a decision about the colour of line markings in the car park.
Whatever the decision, we are always trying to reduce threshold resistance. In a sense we are endlessly trying to design the most fluid and seamless shopping experience conceivable. With no obstacles or frustrations built into the design.
Threshold resistance can be obvious, for example stairs. I’m sure everyone could predict the typical human response to being confronted with the option of climbing a flight of stairs. But there is the more subtle nuance of human nature that for every 3 people having a choice to go up or down a level, 2 will choose to go down. These sorts of psychological realities instruct Taubman’s design thinking.
Threshold resistance could also take the form of a sight line that is blocked by a column or lift. The reality being, that if a customer can’t see a store, they probably won’t shop in the store.
Threshold resistance doesn’t always present as a physical barrier, it might be an unfriendly looking shop attendant or a store temperature that is too cold or too hot. A mall that is too congested with merchandise, or too spacious. Whatever it is that reduces the ability for a customer to make a purchase is threshold resistance. To pursue the elimination of such forces is the most worthwhile aspiration when designing retail space.
Great retail design is not about fancy architects or grandiose architecture. Great retail design is about shaping social behaviour. Retail is the world’s biggest business, and shopping is the human race’s most fundamental activity.
What a responsibility to have.
Tuesday, March 3, 2009
Buffett's analogy of the day
I don't want to make a habit of reciting the news but upon reading Warren Buffett's annual letter to Bershire Hathaway's shareholders today I felt obliged for its sense of reality is rather humorous.
He compared highly leveraged financial dealers seeking to avoid problems "to someone seeking to avoid venereal disease: its not just whom you sleep with, but also whom they are sleeping with. Sleeping around, can usually be useful for large derivatives dealers because it assures them government aid if trouble hits. In other words, only companies having problems that can infect the entire neighbourhood are certain to become a concern of the state. From this irritating reality comes The First Law of Corporate Survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: modest incompetence simply won't do it; it's mind-boggling screw-ups that are required."
He compared highly leveraged financial dealers seeking to avoid problems "to someone seeking to avoid venereal disease: its not just whom you sleep with, but also whom they are sleeping with. Sleeping around, can usually be useful for large derivatives dealers because it assures them government aid if trouble hits. In other words, only companies having problems that can infect the entire neighbourhood are certain to become a concern of the state. From this irritating reality comes The First Law of Corporate Survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: modest incompetence simply won't do it; it's mind-boggling screw-ups that are required."
China’s less than luxurious luxury retail business
This is an article I'm in the process of finalising for a Harvard University publication. The topic of China, its spending patterns, its property business and fasination with luxury are all much discussed these days.
Even as the global economic crisis takes hold, China remains on track to become the largest luxury market in the world within the next decade. Nowhere else are people joining the luxury consumption class as rapidly. Nowhere else are the world’s leading brands opening more stores. So it comes as a paradoxical irony that China really doesn’t have any international quality luxury shopping venues today. To understand why, is to understand the intricate and intimate relationship of developers, banks and government in China.
In the absence of logical ‘drivers’ of development, the very forces that should act as ‘regulators’ or facilitators of responsible development, function as the opposite: ‘stimulators’ of imprudent development. So reckless that it has scarred the very fabric of many Chinese cities for a generation to come. Within a few short years, developers lacking requisite experience, capital or management capabilities have been able to graduate, without merit, from simple residential projects to the most complex mixed-use commercial projects conceivable. These short-term, profit minded developers have borrowed money with ease to undertake enormous shopping center projects. Projects which lack proper planning and design consideration, have no anchors or pre-leasing, and no thought given to on-going property management. The result: ill-conceived and poorly executed projects which have little chance of success, ever.
The huge potential of the Chinese luxury goods market
Currently the third largest luxury market in the world, China is growing faster than both the US and Japan. Since the onset of the global economic crisis the rate of China’s relative growth to these other global giants of luxury has only widened. Various sources and analysis estimate that by 2014 China will have ascended to the leading position, accounting for over 20 percent of the global luxury market.
The fact that China will be the biggest luxury consumer in five years is thrilling, but what’s more, is the velocity at which this metamorphosis has occurred. The Chinese love affair with luxury seems to have even out-paced the meteoric rise of China’s general economy since the early 1990s. Just six or seven years ago there were few signs of China’s latent consumption capacity. Luxury stores were rare and those open were little more than showrooms for curious aspirational passers-by. It was also only a small percentage of Chinese that were travelling to consume luxury goods in those days.
To understand consumption capacity, a distinction should be made between luxury consumption in China and Chinese luxury consumption. The former being a shallower, albeit growing, pool of luxury retail sales occurring in stores within China. The latter being the global aggregate of luxury goods consumption by Chinese nationals. The future of China’s domestic luxury consumption lies in the incremental migration back, of the vast quantum of luxury expenditure made outside China.
Hong Kong is a luxury shopping mecca. Its resident population of approximately 7 million is among the most prolific and sophisticated luxury consumers in the world. Hong Kong is also the most visited destination in the world for Chinese tourists. This has proved to be an astonishing boon for luxury retailers in Hong Kong, who over the last few years have seen Chinese mainlanders account for the majority of their sales.
As a destination for Chinese tourists, Hong Kong is followed by Macau and Singapore, other countries in South-East Asia, then Europe, and finally the US. The propensity for Chinese to consume luxury whilst travelling has compelled luxury stores everywhere to hire mandarin speaking staff and adjust their marketing interface to better accommodate the needs of Chinese customers.
The Chinese economy has enjoyed near double digit annual growth for the last decade. In the midst of the global economic crisis, China’s growth still looks set to outshine the world’s large developed economies. Notwithstanding, China will need to re-engineer itself for the post-crisis global landscape. In doing so, it will perpetuate a culture of persistent wealth creation as China has throughout its economic coming-of-age. This relentless emergence of new wealth pockets as China’s economy flexes, widens and deepens is the driver of continued Chinese luxury consumption. The current economic conditions will only serve to alter the pace of China’s luxury ascendency but not its inevitability.
The lingering question is where will the Chinese luxury feast play out? Today there is a huge gap between global Chinese luxury consumption and China-based luxury sales. There are many persisting reasons for this gap to remain, most notably the imposition of a luxury tax in China that makes purchasing domestically illogically expensive for well-researched and increasingly well-travelled Chinese customers. The only thing more powerful than Chinese brand-consciousness is their value-consciousness.
International travel not only provides Chinese with access to more compelling prices for luxury goods, it also exposes them to better shopping environments and service standards. Shopping is an experience, especially luxury brand shopping. The best sensory experiences excel in providing four key ingredients: an extensive product range, enticing store environments, deft customer service and competitive pricing. These levers of productive retail are rarely evident in China. So it is not surprising that Chinese are already the world’s most prolific tourist shoppers.
The paradox of luxury retail space in China
In China’s economic transformation a luxury customer has been borne. In parallel, we have witnessed the dawn of Chinese urbanization. The birth of cities is perhaps the most profound social change to take place in China’s modern history. The escalation of urbanity has forever impacted the way Chinese perceive themselves. A new set of ideals and aspirations has materialized for a generation seeking a contemporary mode of living, working and shopping. These expectations are high for China’s new luxury class.
Against the backdrop of exploding consumption and urbanization, shopping centers have developed at an unprecedented cadence. Yet despite rampant development and surging demand for luxury goods, matched by strong desire of luxury brands to open more stores, China hasn’t produced a proportionate quota of quality shopping venues.
Developers in China have built over 100 new shopping centers (of varying sizes) per year for the last five or six years, perhaps more than any country has ever built per year in history. However, very few of these centers actually meet mass market retailer or consumer expectations, let alone those of luxury players. After all, the essence of luxury products is to satisfy the highest possible aesthetic expectation.
Why are these centers not succeeding in the face of so much demand? The root of the answer lies in the bedeviled relationship between the industry’s key stakeholders: developers, government, banks, retailers and consumers. The frenetic growth of China’s retail landscape has been its own undoing - perverting the natural market forces that would typically shape the industry. Instead, growth in retail space has been driven by the wrong stimulants.
As part of the enormous national push to modernize, unbridled energy, human resources and financial capital have been allocated to development of cities. Government officials eager for personal advancement have facilitated almost any form of economic development in their district, regardless of its situation or appropriateness. Banks, lending on a relationship basis, have funded almost any real estate development to curry favor and support the broader authoritarian initiative. In this feeding frenzy, two important ‘checks’ to development – government and banks, have joined the chorus of developers, and in doing so fuelled an ill-fated generation of shopping venues that corrode the urban core of many new cities. These venues are known as China’s ‘ghost malls’. Perhaps 90% of China’s shopping centers today are in this category.
Without a stringent responsible urban planning regime administered by knowledgeable and professional government officials, developers have been able to conceive of schemes without a rational development premise. Without arms length credit based lending enforced by experienced professional bankers, developers have been able to build these projects without proper risk mitigants in place. The result of this dizzy feast is lots of venues but still an un-met demand from retailers and consumers.
More thought, less haste
Retail developers are the intermediary between retailers and consumers. They are responsible for not only creating a venue where a transaction takes place but crafting an environment where a lifestyle experience can unfold. There is a social and civic responsibility in this process that goes beyond other forms of real estate. Overzealous developers either underestimate or dismiss this role in their haste to make money.
Developing a successful and sustainable shopping center requires know-how, application and patience. The process starts with logical site selection based on current and future transportation systems, surrounding land uses and the demographics of the trade area; not whatever land is available or where a government official dictates is suitable. An intimate appreciation of end users acquired through experience and thoughtful research is essential. The reality that hundreds of shopping centers have already opened in China yet the research industry remains embryonic gives a sense of the dismissive haste of developers. This dangerously expeditious approach is facilitated by the stimulants above but inherently stems from shopping center developers’ history of rapidly selling out of residential projects before or on completion of construction. In fact the speed at which China’s residential developers have matriculated to retail projects is like jumping from primary school to a PHD.
Physical planning and design is the most important aspect of creating a successful shopping center. It is an onerous and highly iterative task that typically takes 18 to 24 months to complete. A developer only has one chance to get it right as it’s usually impossible to correct mistakes once built. Done properly, a shopping center’s design can become the enduring essence of its commercial success. It is an intuitive process during which a developer has literally hundreds of decisions to make regarding scale, configuration, accessibility, convenience, circulation, materials, retail uses and customer requirements among other things. In China the design process is often short-circuited to around 9 months and rarely entails any consideration or consultation with end users. Many developers make the easy mistake of retaining a prestigious international architect to illustrate their defective ambition, but only long enough to then hand their partially considered schematic to a cheap local design institute to document. No matter how experienced, how intellectually adept or how thoughtful the architect may be, it is a mighty task to appropriately balance all the nuances of such a complex social organism as a shopping center. Today, China possesses 6 of the 10 largest shopping centers in the world, all of which were borne of a flawed vision compounded by a diluted design process and now struggle to survive commercially. Designing a shopping center is a developer’s responsibility not an architect’s. If China is to address the paradox of luxury retail space, its developers cannot continue to abdicate accountability for the outcome.
Apart from appalling design, the most bewildering tendency of retail developers in China is the belated stage at which they think about merchandising and leasing of the space. Instead developers have been inclined to focus simply on building the space, presuming any retailer can use it. This is yet another example where underestimating the complexities of creating a sustainable social venue has contributed to China’s proliferation of ghost malls. Best practice retail development calls for consultation with significant retailers, like anchors and majors well in advance of construction commencement. Yet in China, projects are often only 6 months shy of completion when the first retailer discussions take place. The implications of this haphazard approach are numerous and frequently fatal. It means the space mostly doesn’t meet the retailers’ requirements, therefore the best retailers don’t want to be there, nor can they build their ideal store layout if they do. It means the retail uses, like fashion versus food can’t be organized in the optimal manner. By not being thoughtful about retailer needs upfront, it effectively renders the space inflexible, unusable, and therefore less marketable, or in the most extreme cases, worthless. From an investment perspective, the developer’s disregard for merchandising and leasing makes the project entirely speculative and thus high risk to the very end.
Bad habits die hard
The most successful residential developers are not those with the best product, but those that know how to sell product fast. Without question the most profitable real estate business in China over the last 10 years has been residential development. The ability to sell apartments off-the-plan has created extraordinary wealth for developers, but it has also made them lazy. When a residential developer can make a profit before a project is even completed or been tested in operation, it breeds a mentality that is incongruent with the long-term place-making approach required for shopping center projects.
Over the last 10 years there has been widespread strata-tiling of shopping centers in China. Whether done as a cheap form of construction financing or with a quick profit in mind, the practice of selling off individual shops is disastrous for a shopping center. Creating a patchwork of separate ownership inherently eliminates the developer’s sense of responsibility and stewardship of the venue. Instead, it creates a multitude of landlords with different agendas leading to inevitable conflict. In the average shopping center there can be as many150 different owners after a concerted strata-titling effort.
It is widely accepted, even in China, that operational management of a shopping center is critical to its long-term commercial success. Implicit in effective management though is a coordinated single point of decision-making and accountability. In the hundreds of strata-titled venues in China today, it is abundantly clear there is little consensus on any operational matters. Shops owned by individual owners compete for tenants – driving rents and investment returns down. In the absence of umbrella ownership, the merchandising of the center completely falls apart, with individual shops operating whatever business they can regardless of adjacencies. With no common operational guidelines, shops adopt their own individual standards for signage, fit-out, waste and materials management, and even opening hours. Individual owners end up misaligned on promotional activities, unable to agree of annual budgets for center maintenance, and most alarmingly - not contributing to any sort of sinking fund for major capital works required in the future. The cumulative effect of all these bad practices is a venue that fails to provide a business opportunity for retailers, consumers that don’t want to shop there, and a physically decaying property for the community.
The causative contribution of strata-titling to ghost malls in China is not easily rectified. Re-amalgamation of ownership from dozens, and in some cases hundreds, of non-institutional landlords will be extremely onerous. To recycle the precious urban core of so many Chinese cities tainted by ghost malls is an undertaking befitting governmental action. Perhaps the private sector will navigate the logistical obstacles of remedying strata-titled assets, thereby unlocking the latent value in these prime sites and restoring much needed civic centers to the cities.
Cross roads
Against the backdrop of global recession, China now has the timely opportunity to stimulate domestic consumption and, while the world pauses, to get its urban planning, social infrastructure and lifestyle venues right. Through systemic improvement in all aspects of the retail development industry from site selection to planning and design, financing to merchandising and on-going management, China’s retail industry can add even more to the broader economy. The transition from an export-led to consumption orientated economy is foreseeable and provides the perfect impetus for this industry evolution to occur. International retailers are committed to growing in China, domestic retailers continue to compete across all categories and the public has an increasing propensity to shop. To stem the flow of luxury goods expenditure outside China the industry needs to lobby the government for tax relief, produce higher quality venues, and be committed to long term ownership and responsibility.
China will become the world’s largest luxury goods market at some point in the future. The challenge is to make it the world’s most luxurious.
Even as the global economic crisis takes hold, China remains on track to become the largest luxury market in the world within the next decade. Nowhere else are people joining the luxury consumption class as rapidly. Nowhere else are the world’s leading brands opening more stores. So it comes as a paradoxical irony that China really doesn’t have any international quality luxury shopping venues today. To understand why, is to understand the intricate and intimate relationship of developers, banks and government in China.
In the absence of logical ‘drivers’ of development, the very forces that should act as ‘regulators’ or facilitators of responsible development, function as the opposite: ‘stimulators’ of imprudent development. So reckless that it has scarred the very fabric of many Chinese cities for a generation to come. Within a few short years, developers lacking requisite experience, capital or management capabilities have been able to graduate, without merit, from simple residential projects to the most complex mixed-use commercial projects conceivable. These short-term, profit minded developers have borrowed money with ease to undertake enormous shopping center projects. Projects which lack proper planning and design consideration, have no anchors or pre-leasing, and no thought given to on-going property management. The result: ill-conceived and poorly executed projects which have little chance of success, ever.
The huge potential of the Chinese luxury goods market
Currently the third largest luxury market in the world, China is growing faster than both the US and Japan. Since the onset of the global economic crisis the rate of China’s relative growth to these other global giants of luxury has only widened. Various sources and analysis estimate that by 2014 China will have ascended to the leading position, accounting for over 20 percent of the global luxury market.
The fact that China will be the biggest luxury consumer in five years is thrilling, but what’s more, is the velocity at which this metamorphosis has occurred. The Chinese love affair with luxury seems to have even out-paced the meteoric rise of China’s general economy since the early 1990s. Just six or seven years ago there were few signs of China’s latent consumption capacity. Luxury stores were rare and those open were little more than showrooms for curious aspirational passers-by. It was also only a small percentage of Chinese that were travelling to consume luxury goods in those days.
To understand consumption capacity, a distinction should be made between luxury consumption in China and Chinese luxury consumption. The former being a shallower, albeit growing, pool of luxury retail sales occurring in stores within China. The latter being the global aggregate of luxury goods consumption by Chinese nationals. The future of China’s domestic luxury consumption lies in the incremental migration back, of the vast quantum of luxury expenditure made outside China.
Hong Kong is a luxury shopping mecca. Its resident population of approximately 7 million is among the most prolific and sophisticated luxury consumers in the world. Hong Kong is also the most visited destination in the world for Chinese tourists. This has proved to be an astonishing boon for luxury retailers in Hong Kong, who over the last few years have seen Chinese mainlanders account for the majority of their sales.
As a destination for Chinese tourists, Hong Kong is followed by Macau and Singapore, other countries in South-East Asia, then Europe, and finally the US. The propensity for Chinese to consume luxury whilst travelling has compelled luxury stores everywhere to hire mandarin speaking staff and adjust their marketing interface to better accommodate the needs of Chinese customers.
The Chinese economy has enjoyed near double digit annual growth for the last decade. In the midst of the global economic crisis, China’s growth still looks set to outshine the world’s large developed economies. Notwithstanding, China will need to re-engineer itself for the post-crisis global landscape. In doing so, it will perpetuate a culture of persistent wealth creation as China has throughout its economic coming-of-age. This relentless emergence of new wealth pockets as China’s economy flexes, widens and deepens is the driver of continued Chinese luxury consumption. The current economic conditions will only serve to alter the pace of China’s luxury ascendency but not its inevitability.
The lingering question is where will the Chinese luxury feast play out? Today there is a huge gap between global Chinese luxury consumption and China-based luxury sales. There are many persisting reasons for this gap to remain, most notably the imposition of a luxury tax in China that makes purchasing domestically illogically expensive for well-researched and increasingly well-travelled Chinese customers. The only thing more powerful than Chinese brand-consciousness is their value-consciousness.
International travel not only provides Chinese with access to more compelling prices for luxury goods, it also exposes them to better shopping environments and service standards. Shopping is an experience, especially luxury brand shopping. The best sensory experiences excel in providing four key ingredients: an extensive product range, enticing store environments, deft customer service and competitive pricing. These levers of productive retail are rarely evident in China. So it is not surprising that Chinese are already the world’s most prolific tourist shoppers.
The paradox of luxury retail space in China
In China’s economic transformation a luxury customer has been borne. In parallel, we have witnessed the dawn of Chinese urbanization. The birth of cities is perhaps the most profound social change to take place in China’s modern history. The escalation of urbanity has forever impacted the way Chinese perceive themselves. A new set of ideals and aspirations has materialized for a generation seeking a contemporary mode of living, working and shopping. These expectations are high for China’s new luxury class.
Against the backdrop of exploding consumption and urbanization, shopping centers have developed at an unprecedented cadence. Yet despite rampant development and surging demand for luxury goods, matched by strong desire of luxury brands to open more stores, China hasn’t produced a proportionate quota of quality shopping venues.
Developers in China have built over 100 new shopping centers (of varying sizes) per year for the last five or six years, perhaps more than any country has ever built per year in history. However, very few of these centers actually meet mass market retailer or consumer expectations, let alone those of luxury players. After all, the essence of luxury products is to satisfy the highest possible aesthetic expectation.
Why are these centers not succeeding in the face of so much demand? The root of the answer lies in the bedeviled relationship between the industry’s key stakeholders: developers, government, banks, retailers and consumers. The frenetic growth of China’s retail landscape has been its own undoing - perverting the natural market forces that would typically shape the industry. Instead, growth in retail space has been driven by the wrong stimulants.
As part of the enormous national push to modernize, unbridled energy, human resources and financial capital have been allocated to development of cities. Government officials eager for personal advancement have facilitated almost any form of economic development in their district, regardless of its situation or appropriateness. Banks, lending on a relationship basis, have funded almost any real estate development to curry favor and support the broader authoritarian initiative. In this feeding frenzy, two important ‘checks’ to development – government and banks, have joined the chorus of developers, and in doing so fuelled an ill-fated generation of shopping venues that corrode the urban core of many new cities. These venues are known as China’s ‘ghost malls’. Perhaps 90% of China’s shopping centers today are in this category.
Without a stringent responsible urban planning regime administered by knowledgeable and professional government officials, developers have been able to conceive of schemes without a rational development premise. Without arms length credit based lending enforced by experienced professional bankers, developers have been able to build these projects without proper risk mitigants in place. The result of this dizzy feast is lots of venues but still an un-met demand from retailers and consumers.
More thought, less haste
Retail developers are the intermediary between retailers and consumers. They are responsible for not only creating a venue where a transaction takes place but crafting an environment where a lifestyle experience can unfold. There is a social and civic responsibility in this process that goes beyond other forms of real estate. Overzealous developers either underestimate or dismiss this role in their haste to make money.
Developing a successful and sustainable shopping center requires know-how, application and patience. The process starts with logical site selection based on current and future transportation systems, surrounding land uses and the demographics of the trade area; not whatever land is available or where a government official dictates is suitable. An intimate appreciation of end users acquired through experience and thoughtful research is essential. The reality that hundreds of shopping centers have already opened in China yet the research industry remains embryonic gives a sense of the dismissive haste of developers. This dangerously expeditious approach is facilitated by the stimulants above but inherently stems from shopping center developers’ history of rapidly selling out of residential projects before or on completion of construction. In fact the speed at which China’s residential developers have matriculated to retail projects is like jumping from primary school to a PHD.
Physical planning and design is the most important aspect of creating a successful shopping center. It is an onerous and highly iterative task that typically takes 18 to 24 months to complete. A developer only has one chance to get it right as it’s usually impossible to correct mistakes once built. Done properly, a shopping center’s design can become the enduring essence of its commercial success. It is an intuitive process during which a developer has literally hundreds of decisions to make regarding scale, configuration, accessibility, convenience, circulation, materials, retail uses and customer requirements among other things. In China the design process is often short-circuited to around 9 months and rarely entails any consideration or consultation with end users. Many developers make the easy mistake of retaining a prestigious international architect to illustrate their defective ambition, but only long enough to then hand their partially considered schematic to a cheap local design institute to document. No matter how experienced, how intellectually adept or how thoughtful the architect may be, it is a mighty task to appropriately balance all the nuances of such a complex social organism as a shopping center. Today, China possesses 6 of the 10 largest shopping centers in the world, all of which were borne of a flawed vision compounded by a diluted design process and now struggle to survive commercially. Designing a shopping center is a developer’s responsibility not an architect’s. If China is to address the paradox of luxury retail space, its developers cannot continue to abdicate accountability for the outcome.
Apart from appalling design, the most bewildering tendency of retail developers in China is the belated stage at which they think about merchandising and leasing of the space. Instead developers have been inclined to focus simply on building the space, presuming any retailer can use it. This is yet another example where underestimating the complexities of creating a sustainable social venue has contributed to China’s proliferation of ghost malls. Best practice retail development calls for consultation with significant retailers, like anchors and majors well in advance of construction commencement. Yet in China, projects are often only 6 months shy of completion when the first retailer discussions take place. The implications of this haphazard approach are numerous and frequently fatal. It means the space mostly doesn’t meet the retailers’ requirements, therefore the best retailers don’t want to be there, nor can they build their ideal store layout if they do. It means the retail uses, like fashion versus food can’t be organized in the optimal manner. By not being thoughtful about retailer needs upfront, it effectively renders the space inflexible, unusable, and therefore less marketable, or in the most extreme cases, worthless. From an investment perspective, the developer’s disregard for merchandising and leasing makes the project entirely speculative and thus high risk to the very end.
Bad habits die hard
The most successful residential developers are not those with the best product, but those that know how to sell product fast. Without question the most profitable real estate business in China over the last 10 years has been residential development. The ability to sell apartments off-the-plan has created extraordinary wealth for developers, but it has also made them lazy. When a residential developer can make a profit before a project is even completed or been tested in operation, it breeds a mentality that is incongruent with the long-term place-making approach required for shopping center projects.
Over the last 10 years there has been widespread strata-tiling of shopping centers in China. Whether done as a cheap form of construction financing or with a quick profit in mind, the practice of selling off individual shops is disastrous for a shopping center. Creating a patchwork of separate ownership inherently eliminates the developer’s sense of responsibility and stewardship of the venue. Instead, it creates a multitude of landlords with different agendas leading to inevitable conflict. In the average shopping center there can be as many150 different owners after a concerted strata-titling effort.
It is widely accepted, even in China, that operational management of a shopping center is critical to its long-term commercial success. Implicit in effective management though is a coordinated single point of decision-making and accountability. In the hundreds of strata-titled venues in China today, it is abundantly clear there is little consensus on any operational matters. Shops owned by individual owners compete for tenants – driving rents and investment returns down. In the absence of umbrella ownership, the merchandising of the center completely falls apart, with individual shops operating whatever business they can regardless of adjacencies. With no common operational guidelines, shops adopt their own individual standards for signage, fit-out, waste and materials management, and even opening hours. Individual owners end up misaligned on promotional activities, unable to agree of annual budgets for center maintenance, and most alarmingly - not contributing to any sort of sinking fund for major capital works required in the future. The cumulative effect of all these bad practices is a venue that fails to provide a business opportunity for retailers, consumers that don’t want to shop there, and a physically decaying property for the community.
The causative contribution of strata-titling to ghost malls in China is not easily rectified. Re-amalgamation of ownership from dozens, and in some cases hundreds, of non-institutional landlords will be extremely onerous. To recycle the precious urban core of so many Chinese cities tainted by ghost malls is an undertaking befitting governmental action. Perhaps the private sector will navigate the logistical obstacles of remedying strata-titled assets, thereby unlocking the latent value in these prime sites and restoring much needed civic centers to the cities.
Cross roads
Against the backdrop of global recession, China now has the timely opportunity to stimulate domestic consumption and, while the world pauses, to get its urban planning, social infrastructure and lifestyle venues right. Through systemic improvement in all aspects of the retail development industry from site selection to planning and design, financing to merchandising and on-going management, China’s retail industry can add even more to the broader economy. The transition from an export-led to consumption orientated economy is foreseeable and provides the perfect impetus for this industry evolution to occur. International retailers are committed to growing in China, domestic retailers continue to compete across all categories and the public has an increasing propensity to shop. To stem the flow of luxury goods expenditure outside China the industry needs to lobby the government for tax relief, produce higher quality venues, and be committed to long term ownership and responsibility.
China will become the world’s largest luxury goods market at some point in the future. The challenge is to make it the world’s most luxurious.
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