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TheStreet Open House

It's Getting Really Quiet at China's Overbuilt Shopping Malls

Stock quotes in this article: WMT, JD, VIP, DANG, SBUX, YUM, MCD

BEIJING (TheStreet) -- Remember how pathetic Main Street looked after Walmart (WMT) opened a big box store near the highway on the outskirts of your hometown?

That's how a lot of shopping malls in China are starting to look in the face of e-commerce competition and a commercial building spree that's responsible for a glut of storefronts.

Bankruptcies are looming for "weaker operators and developers" of shopping malls nationwide, a UBS Securities report said Friday. "Even leaders in the retail segment may have difficulty filling their newly built complexes," the report said, "which may suggest even more challenging situations for weaker operators."

Malls focusing on luxury-brand outlets are particularly vulnerable in the current environment, according to UBS. Not only have commercial developers apparently overestimated Chinese consumer demand for fancy handbags and watches, but increasingly high-end shoppers are using the Internet to buy through e-commerce sites. Goods are delivered within days to a customer's door, and clothing that doesn't fit can be returned. Knock-off issues that hurt the sector two years ago have not re-surfaced since.

Upscale shopping is a key attraction of China's growing e-commerce providers JD.com (JD), Vipshop (VIP), the Tmall division of Alibaba and Dangdang (DANG). The e-commerce companies function as virtual shopping malls for retailers who rent space on their Web sites.

Meanwhile, down at the mall, window shoppers outnumber buyers and the busiest outlets are usually the Starbucks (SBUX), Yum!'s (YUM) KFC or McDonald's (MCD) that most malls are now leaning on to drive foot traffic. Retail business has been so slow at many malls that, according to UBS, some publicly listed mall operators "have not been paying their vendors since December 2013, signifying that cash flow issues may have emerged."

Some Chinese malls operate like American malls with independent storefronts. But many operators work with vendor-retailers through a concessionaire system. Vendors' goods are separately displayed on open floor space, giving it an American department store feel. Vendors own and manage all inventory but the operators collect all customer payments and then pay vendors within 45 days.

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