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 - Get Report), 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 - Get Report), Yum!'s (YUM - Get Report) KFC or McDonald's (MCD - Get Report) 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.
Until recently "cash flow has not been an issue for Chinese department stores (malls) under the concessionaire model," the report said.
Retailer woes can also be blamed on a building spree of recent years that's put, for example, three major shopping malls within walking distance of Renmin University's east gate in Beijing. Mall operators say they're having trouble finding and keeping tenants, and more than 70% of retailers responding to the UBS survey said they're "cautious" about their business prospects.
Despite these shaky conditions, the push to build more malls is continuing in cities nationwide. The amount of new commercial space due to open this year in the nation's biggest cities "could rise by over 60%" from last year's new-space level, UBS predicted.
"We expect retail space expansion in China to continue in 2015, implying cash outflow may not have come to an end yet," the report said, adding that "a large number of operators (will) struggle to fill their newly built retail spaces in 2014 and 2015."
At the time of publication, the author held no positions in any of the stocks mentioned.
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