Saturation in the Retail Market – 2015 The management team for Klepierre examined the latest data on one of their shopping malls, Novy Smichov in Prague, Czech Republic, and the results were not what they wanted to see. After a phenomenal growth rate in square meters of retail space over the past 20 years, retail competition was increasing just as saturation of shopping centers occurred. Prague’s population has fluctuated over the past 35 years between 1.19 million and 1.24 million, but the growth has been small due to lower birth rates. Thus population growth is not likely to increase demand for retail locations. Occupancy rates are still relatively high, and Novy Smichov has remained profitable. But without new customers, each retail center will have to work harder to retain profitability. Some competitors posted losses for consecutive years, and a few smaller centers actually closed. Clearly a new strategy was needed to account for changes in the retailing environment. Background of Retailing in Prague During the 1980’s, many customers in Prague lacked the financial means and/or availability to purchase a variety of goods and services. This changed rapidly as Czechoslovakia emerged from the control of the USSR in 1989 and developed an independent market economy. Years of pent-up demand, combined with international companies ready to do business with newly liberated consumers, led to an explosion of retail and other business in the region. Similar growth occurred in neighboring countries, including East Germany, Poland, and Hungary. Prague remained the capital of the Czech Republic following the split of the country into two separate political entities: Czech Republic and Slovakia. The first shopping centers in Prague opened in the mid 1990s, followed by larger, Western-style malls in the early 2000s. By 2010, retailing in the Czech Republic had nearly caught up with the averages in the rest of the European Union. Czech available retail space had reached 191 square meters per 1,000 citizens, close to the EU average of 231 square meters per 1,000. A few smaller centers were completed in 2012, as a few failures were redeveloped into new concepts. Description of Novy Smichov Novy Smichov was built in 2001 by Delcis, a French firm, and immediately was acquired by Klepierre, a French real estate investment firm controlled by US-based Simon Property and BNP Paribas, a French banking interest. At nearly 60,000 square meters, Novy Smichov is one of the largest retail centers in central Europe. It’s location on the west side of Prague in the Andel neighborhood provides easy access to most of the population of the Prague metro area. Shoppers with cars will find over 2000 parking spaces, and the center is mere blocks away from major highway intersections. The entrance is directly across the street from a subway line, and is also a stop for busses and trams, making it attractive to commuters from all areas of the city. The immediate neighborhood consists of small retailers, restaurants, business-class hotels, banks, a few apartment buildings, and some corporate offices, such as L’Oréal’s European headquarters. The three-story enclosed shopping center contains a hypermarket (Tesco) as its anchor, along with more than 150 shops and restaurants. Other attractions include a 12-theatre movie complex, a health club, a bowling alley and a food court. Tesco ranks second worldwide in retailing (behind Wal-Mart). The Novy Smichov location has a floor devoted entirely to groceries, with additional floors selling a wide variety of general merchandise. With nearly 7,000 stores worldwide, Tesco operates in 12 countries across Asia and Europe, and has a market share of about 30% in the UK. Tesco has over 300 stores of various formats in the Czech Republic, but only 3 are Tesco extra (hypermarket) stores, which gives Novy Smichov some exclusivity. Specialty stores in the center include many international retailers such as Zara (Spain), Marks & Spencer (United Kingdom), Bata (Canada), H & M (Sweden), Tommy Hilfiger (US), L’Occitane (France), Samsung (South Korea) and others, along with local and regional offerings. The food court has a variety of local restaurants and international fast food chains. McDonald’s, KFC, Sbarro and Panda sit alongside creperies, pizza stands, a sushi bar and cafes offering Czech cuisine. Novy Smichov had a major remodel in 2011. The clean, modern building offers free Wi-Fi for shoppers. The enclosed facility keeps customers comfortable during Prague’s cold winters and warm summers. There is little room for expansion at the location, and the high occupancy rate with long-term leases means management will continue to target a mostly middle-class resident market. Management claims over 20 million visitors to the center every year, which suggests local residents shop there frequently. Most shoppers use the local currency, the Czech crown, although major credit cards and Euros are frequently accepted. Competition in Prague Retail Environment Novy Smichov has several competitors in the Prague market. Each major shopping center is spread out around the city geographically, and all are relatively new developments (since 2001). Most are located at subway stations or near public transportation. See chart for details. Palladium is the closest competitor to Novy Smichov in terms of size and offerings. However, they have reported significant losses in recent years and may not have the financial resources to compete with NS.