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Saturday, December 22, 2007

Shopping by Retail

From Property Times

At present, over 30 shopping centers are functioning in Ukraine, and more than 400 network operators of all the product groups are working here.

Ukrainians' infatuation for cheap markets seems to be passing into history. What influences that? Either people are paid better. Or dwellers' mind has altered so they give more credence to shops which have cash registers and provide warranties for products. Or marketing policy of retailers who, for example, launching various actions and clearance sales, reduce prices for their products to the level of the marketplace (or even below it), has improved.

However such as there were, people reach out for shopping centers, at that not only in the capital but in the regions, too. And this means that heterogenous shopping centers and shopping and entertainment centers are necessary and the more of them, the better. According to the calculations of 'Ukrainian Trade Guild*, there is some 170 complexes in Ukraine, which lay claim to be named shopping centers (SC) (31 of them - in Kiev). Though the capital used to be the leader in such complexes' trade space density per individual ratio, yet last year it lost its position - now Kiev is ranked third (after Dnepropetrovsk and Nikolaev), only slightly being ahead of Odessa and Donetsk.

In the words of director of the consulting company "Uvekon" Vladimir Shalaev, three types of retail exist - markets, shops, and cyber-retail. To the "shops" can be referred both traditional formats - a kiosk, a food store, a department store, and modern ones -hypermarkets, Cash&Carry, supermarkets, discounters. Cyber-retail is a mode when goods/services are ordered through the post, by phone, by catalogue, through the Internet. However, as to the markets, the head of the Ukrainian Trade Guild leasing department Sergei Khomenko is putting them into the retail category only nominally, since, though it is a trade, however it is predominantly a network trade, i.e. non-professional.

A trend is observed: Ukrainians gradually become disaccustomed to the marketplace's service. The degree of loyalty towards the contemporary trading modes has grown over the past year in Ukraine. In those commodity sectors, where network operators already put their fingerprints, market trade was noticeably squeezed out. "So, the share of food markets in the regions already shrinked to 20 % of sales, in the household appliances/electronics segment - to 10-15%. The share of markets selling clothes and footwear remains to be large (up to 50 % and more), though even here it has contracted during the year by 10-15 %," UTG discloses in Ukrainian realty market survey 2006.

So, what destiny is in store for capital's markets. Food markets will be step by step declining, yet they will not totally disappear, as many people prefer choosing on their own fruit, vegetables and dairy products originated from the housekeeping, Sergei Tomenko believes. As far as manufacture goods markets are concerned, then the specialist predicts the letter's significant shrinkage, though in the future. In the nearest time, most likely goods of economic assortment will be sold there, i.e. of low quality, or of doubtful origin. As a matter of fact, the customer has already come to a realization that, say, purchasing of clothes and footwear goes better not in the dark "container", but at a well-equipped and generously lit trading floor, with comfortable fitting-rooms and absence of bustling.

Vladimir Shalaev is also judgmental: "Markets' perspective is obvious - being forced out to the town's periphery, both in a sense of market share, and geographically."

Average monthly salary in Ukraine UAH/month

Head of marketing department at the development company "Forent", Andrey Shabayev, suggests the contrary: "At the present time, there is no tendency observed toward more civilized retail modes having very soon forced the capital markets out. Until there is a proper consumer available - the markets will fail to decease."

Still, there is one more reason that will provide impetus for markets' disappearance: they occupy huge, very expensive areas, which are used unpractically, i.e. yielding less income than a multi-story SC at the same territory provides. So, the market's owner can shut it up on his own, deciding on construction at his site of a large commercial facility, or on just selling the land under retail outlet. And the city government will hardly begin objecting it, since they realize that we are significantly falling behind the West Europe and even Russia in this realty segment, Sergei Khomenko suggests.

According to him, there are many SC projects available, which can appear on the spots of the former markets. The question is, when might they be implemented? After all, there is a need in political and economic stability in the country, since creating this kind of realty is a continuous process, which takes on average five years from the moment when it is conceived and up to the moment of its opening: for small complexes it could be 3 years, and for larger ones - 7-10.
Yesterday, today, tomorrow

As is said above, over these several years the people have changed their retail culture. "Whereas 5 years back one could say that most people buy things at the 'natural' markets, now people prefer a more civilized shopping. Parallel to rising incomes, the population is shopping in the stores and supermarkets, as well as in shopping centers. Just SCs today take one of the leading stands in retail development. And this trend will retain its place later on," Andrey Shabaev notes.
Immersing in history a bit, let's recall that the firstling of 1999 was SC "Kvadrat". "It marked the beginning of Ukraine's commercial property market development. Then appeared "Metrograd" and "Karavan" - in some aspect they had been successful, in another - not so, but, at any case, they were the first and enjoyed popularity from the start. The 2004-2005 period was characterized by appearance of a number of developed projects, but they were suspended owing to political situation that became complicated. In the country's crucial moments the owners always poise if they should invest money in commercial property, that's why a large number of projects had never seen their fruition," Sergei Khomenko recalls.

In 2006, an attempt was undertaken to come back to the previous tempo of areas enlargement. In fact, over the five past years a 80 percent of SCs were built in Kiev. As of today, there are above 30 SCs in the city: according to the data provided by Dmitriy Siniukov, Director on Development at LLC "IBT", there are 33 such objects (360 thousand sq. m.), yet according to UTG's statistics -they number 31 (343 thousand sq. m.), 5 of them were commissioned in 2006. But it is less than was expected. According to the statement of Dmitriy Siniukov, yet in the past year it was planned to put into operation over 100 thousand sq. m. of space, however, in reality less than 40 thousand sq. m. were launched. SEC "Komod" at Lunacharskogo st., circumurban SEC at Kharkovskoye shosse, the largest in Ukraine cinema complex with the capacity of 14 hans integrated with SEC "Multiplex-Plaza" at Moskovskiy prospect, "Kva-drat-Avrora" were sure declared for opening, still they are to welcome the customers only this year, at best. As far as circular road SEC at Kharkovskoye shosse is concerned, it might not be finished at all - there is a design for it re-design into the business center.

On the whole, Kiev is steadily lagging behind the majority of European capitals and even large Ukrainian cities of Dnepropetrovsk and Nikolaev as regards trade areas volume per head ratio (126 sq. m. to 1000 dwellers), Ukrainian realty market survey 2006 by UTG reads. Dmitriy Siniukov informs that in Moscow some 150 sq. m. of trade space falls at every thousand citizens, while in the capitals of Eastern Europe countries - around 200-300 sq. m. So, the leaders need to be caught up with. There is a hope that the present year's space accrual may amount to the level of 90 thousand sq. m. - appearance of 7 SCs is expected. In 2008, the construction of yet some 174 thousand sq. m. is awaited - 7 SCs, too, the most interesting of them being SEC "Troitskiy" on Bolshaya Vasilkovskaya st. and SEC "Dneprovskaya pristan" at the Vatutin prospect. Beginning from 2008 on, trade areas growth may start outpacing retail market capacity. As of 2007 year-start, there is known around 60 projects of shopping centers in Kiev, with a total area of over 2,5 mln sq. m., which can be implemented before 2012. But the main bulk of this projects can be put into service already in 2010. Though at present the projects are being implemented slowly, which is moving terms of market saturation away into the future.

The most successful shopping centers in Ukraine (data from network operators' survey)

Incidentally, the opening of SEC "Komod" on the left bank will be a bright event for Kiev inhabitants, Sergei Khomenko is confident. It is going to be a first fashion class shopping center for the left bank. Varied brands will be represented there, both renowned network Ukrainian operators and new ones. Its level is oriented to the people of the category "medium+" and higher. I.e., this facility is being positioned as the most elite complex upon the Kiev's left bank.

As a matter of fact, earlier on, the main trading activities were collected up on the right bank. "Everyone was bent on constructing shops as close to the city center as possible, on the main highways, so that to enjoy an opportunity of "capturing" large flows of potential buyers," Sergei Khomenko explains. - "These shops keep on being in requisition, however for an interesting complex' creation there are, basically, no appropriate land left in the center." Just because of that, the processes of further area redistribution will be going on in favor of SCs' placement in large "bedroom communities" and on the circular road, and not in the city center. For the next two years, a share of trading space in uptown city districts will significantly increase. I.e., if earlier the majority of population were forced to go onto the right bank to shopping centers ("Caravan", "Globus", "Arena"), now they will be able to shop without leaving the left bank.

One more trend, along with trade areas growth and increasing of SCs trade areas share in the uptown, is extending the Kiev shopping centers' format. During 2001-2004, newly built SCs' average size rising could be traced in Kiev, the Survey reads.

Interestingly, in the last year active development of the trade center market was going on in
the regions. The cause lies in that networkers are actively mastering their market segment, but quality areas are in short supply, and the majority of retail operators cannot boast of availability of a clear strategy of development. That's why, given the offering is appropriate, virtually every operator considers coming to any region's central city. The interest of networkers grew stronger towards the cities of Ivano-Frankovsk, Khmelnitskiy, Poltava, Sevastopol, Zhitomir, Nikolayev, Uzhgorod...New SCs and projects appeared in towns with population amount under 200 thousands: a first SC was opened in Alchevsk (the Lugansk region), some projects are assigned to Severodonetsk, Lubny, Shostka and other small towns.

As reported in the Survey, the leading tendency of the commercial property market in 2007-2008 remains the offer increase, on account of new shopping facilities being built. As of the 2007 year-start, over 80 shopping centers are known to have to be built (including as parts of multifunctional complexes), with a total area of over 1.7 mln sq. m. Thus, the number of SCs may increase 1.5-fold, and the total area - more than threefold. If at present in the regional capitals some 50-70 sq. m. of trade space fall at 1000 inhabitants, in 2008, given the declared projects are implemented, this indicator may grow twofold-threefold, and in some cities - four times -five times.

Only the question remains - whether they will be profitable. After all, consumer potential of some cities does not correspond to such an amount of new offerings, even taking into account the retail market growth and Ukrainians' loyalty increase towards contemporary trading modes. First of all it applies to Dnepropetrovsk, Kharkov, Chernovtsy, Nilolaev, Lvov, where particularly many projects of big SCs emerged.

than 30 percent. Out of them 30 percent are clothes operators. In 2006, the networker structure didn't change significantly: just maybe the share of clothes and catering operators had increased a bit, and, else, foreign companies, such as Praktiker, OBI, Auchan, Real, Imax, O'Key were actively getting familiarized with our market.

For example, Imax plans in 2007 opening its first cinema-hall in Kiev, and during next 2-3 years intends to "open up" Ukraine's large million-strong cities. The bright event is the appearance in Ukraine of the first clothes department store "Marks&Spencer", which is to open within SEC "Komod". Over 2 last years, several foreign networks have appeared in Ukraine, with an especially impressive share of Russian operators - "Dikaya Orhidea (Wild Orchid)", "Sbarro", "Krasnyy Kub (Red Cube)", "Shololadnitsa (Chocolate-lover)", "Arbat-Prestige", "Chili-Pizza" etc.

In particular, networkers account for the principal source of demand for quality trade premises. They, developing their own "web", experience lack for trading areas for extending their presence. In 2006, retail networks operating in Ukraine enlarged the number of their shops by 28 percent, as had been declared by them back in 2005. Leaders of the Ukrainian retail in 2006 had increased their turnover by 50-70 percent. According to the very networkers' schedules, in
2007, an increment of shops on average will amount 21 % y-o-y. In absolute values it totals over 900 thousand sq. m. of trade space.

The most successful center in Ukraine three years in a row is named "Caravan" - the opinion of 42 percent of network operators; at the same time 16 percent of them believe that good SC-project are absent in Ukraine.

By the way, the networkers willingly grow roots at the ground-floor shops along the downtown streets -and the so-called street-retail takes form. "Street-retail means separately standing shops of famous brands, companies' boutiques, which can be entered right from the street, for example, on Kreshchatik, Krasnoarmeyskaya, Lesia Ukrainka streets, as well as on the central highways," Sergei Khomenko elucidates.

Andrei Shabayev reckons that nowadays, the street-retail format remains on demand predominantly in the central part of the city, where large flows of pedestrians are observed: in particular, tourists visiting the historic part of the city, as well as Trading Network Population's increased well-being, retail market growth foster development of network operators. "They can be, by convention, divided into two groups: domestic nation-wide, working in several regions of Ukraine, and international. Also, such a notion exists as a city-scale network operator, which works only in a single regional capital. At that, a subcategory to international operators, for example, Russian ones, exists, who, except in Russia and Ukraine, nowhere are presented," Sergei Khomenko explains.

By the beginning of 2007, over 400 network operators in every product niche were present in Ukraine. For the last 1.5 year, their number increased by more city-dwellers who enjoy their leasure time at the center. And, though Soviet-related recollections say that we hardly knew anything else back then besides ground-level shops (except some department stores), street-retail in its contemporary format continues developing, and there are no prerequisites for saturation of this market segment so far, the specialist states.

According to data of Dmitriy Siniukov, Kiev's saturation with SCs remains as high now as in 2006 and reaches a level of 90-100 %. The share of free premises amounts to some 1 %, being situated primarily inside unsuccessful projects.

Trading space market deficiency can be scanned through the trend of ever increasing rental rates. Their highest values in Kiev have long ago outrun the ones in Eastern European capitals - Warsaw, Budapest and Prague.

Rent for trade areas in a SC depends on the letter's classification level, which is determined by its identical compliance with the European standards and by its residence.

For example:
• $150-200 per 1 sq. m. - "Globus", "Mandarin Plaza", "Arena City", "Caravan";
• $100-150 per 1 sq. m. - "Metrograd", some units of "Kvadrat" network, "Ukraina", "Gorodok";
• $60-80 per 1 sq. m. - some units of "Kvadrat" network, TSUM, "Magellan";
• $40-50 per 1 sq. m. - SCs in remote districts. UTG's specialists surmise that, along with the
growth of trading space amount, rental rates are supposed to decrease, finally approaching the European standards. But this is just for the long-run. However that may be, the 2007 market will enjoy its growing phase. The demand for commercial property will keep on rising. Reasons: further economic growth, rising confidence in Ukraine, appearance of new, including Russian, network operators, as well as conserved shortage of specialized trade areas. The next stage of SC development will feature an enlargement of a SCs average size, the latter's recreational sector share going up, as well as an increase of peripheral SCs share and functioning of anchor operators.