Today, there are more than two thousand shopping centers in Russia, and many of them are not doing very well. The Russian Council of Shopping Centers (RSTC) insists that one in three shopping malls is at risk of bankruptcy, with problems dating back to the coronavirus epidemic. The council estimates that the industry employs a total of about 4 million people, including tenant staff. Since the beginning of the war, approximately 450 thousand, or just over 11% of the employees involved in the sector, have already lost their jobs. An average shopping center has about 1.5-2.5 thousand jobs, so about 225 shopping centers have gone into idle time.
“The list of such [pre-bankruptcy] shopping centers has been growing since March 2020 and continues to grow to this day. It is not so easy to quickly fill empty areas,” Oleg Voitsekhovsky, director of the RSTC, told The Insider.
He explained that there is no talk of a real downtime of shopping centers. Even the bankruptcy of a shopping center does not mean that it stops its work – the building simply goes under the control of creditors, usually large banks, and their management begins to optimize all operating costs, including personnel. There are no mass layoffs, he said, while problems may arise with the operation of buildings, up to safety issues.
The Perfect Storm: Traffic Crash and Brand Exodus
Shopping centers have to cut costs in the face of falling revenues, as well as difficulties with tenants, many of whom refuse to pay and leave the occupied areas. RSTC estimates the drop in income of shopping centers at the end of 2022 at the level of 20%. In addition to the departure of foreign brands, these figures were also affected by the Russians' regular transition to a savings model of behavior and the crisis in the film industry. There were two positive moments for malls in 2022: the first was in the spring, when Russians ran to buy products from brands that had not yet left, and the second was that food court revenues increased significantly throughout the year.
Shopping mall revenues down 20% in 2022
McDonalds, IKEA, Zara, Pull&Bear, H&M and dozens of other foreign brands that seemed to have firmly inscribed their names into the Russian consumer routine have left the country. Before the war, more than 360 foreign retailers worked in Russia, by the end of 2022 only 152 brands remained , with the majority representing "unfriendly" countries – the United States, Italy, Germany and France. The loss of almost 60% of foreign brands, coupled with economic uncertainty, falling household incomes and another wave of belt-tightening, hit the retail industry hard. At the end of 2022, the industry sank by 6.7%, in the first quarter of 2023 – by 7.3% .
The exodus of foreign brands should have had a strong impact on traffic: up to 60% of the audience came to the shopping center for their sake, while they also accounted for up to 25% of the space rented in malls, which significantly hit revenues. The owners of large shopping centers even asked for help from the state – however, the authorities ignored the call. Moreover, despite the formal outcome, many companies did not seek to release the occupied space. They exploited poorly drawn up contracts in every possible way, which allowed them not to pay the landlord in case of force majeure, while the company's pavilions themselves were in no hurry to vacate, thus depriving the shopping center of revenue.
The owners of large shopping centers asked for help from the state, but the authorities ignored this call.
“Some lease agreements with closed retailers are still in effect. Some of them pay rent, and some, taking advantage of the gaps in the contractual terms, do not pay at all, but do not vacate the space, ”says Voitsekhovsky.
The departure of brands and the closure of retail outlets have led to an increase in vacant space. In total, at the end of 2022, their share in Russia reached 11%. Since the beginning of 2023, the number of vacant premises in the regions began to slightly decrease, but in Moscow, on the contrary, the downward trend continued and, according to the results of the first quarter of 2023, reached a maximum over the past ten years, exceeding 14%.
At the same time, there are problems even with those tenants who have retained their points in the shopping center. Now they are demanding discounts from the landlord, as the drop in overall traffic within the malls has hit their income sharply, which calls into question their ability to continue paying rent. Some outlets require discounts of up to 70% or offer to switch completely to a percentage of revenue.
The fall in real incomes of Russians has a negative impact on the traffic of shopping centers: people simply stopped visiting them and spending money there. Another reason for the traffic drop is the practically dead cinema industry, because a significant part of Russian cinemas were located in large malls. The lack of a repertoire for screenings led to the closure of about 41% of all cinemas in Russia, which, among other things, had a negative impact on the income of the shopping centers themselves.
The closure of cinema halls also led to an outflow of visitors to the shopping center
At the end of 2022, the largest malls in Moscow and the Moscow region (with an area of more than 80 thousand square meters) compared to 2021 lost 25% of the audience, and if compared with the figures before the pandemic, even 39%. Just large shopping centers (40-80 thousand square meters) lost 7% compared to 2021 and 24% compared to 2019. Average objects (20-40 thousand square meters) in comparison with 2021 remained approximately at last year's level and sank by 26% compared to 2019. The only format that showed a slight increase is small-format malls with an area of up to 20,000 square meters: their audience grew by 1% in 2022, but is still 8% lower than before the pandemic.
The total number of shopping center visitors in Russia last year, according to Focus BI estimates, fell by 8%, but the beginning of 2023 inspires cautious optimism. In April, the audience of shopping centers began to recover. The growth is still insignificant, and experts do not undertake to speak of it as a stable trend. “The average daily audience of shopping centers has shown slight growth over the past few weeks, the effect is strengthened by the low base of last year, when attendance dropped markedly,” says Mikhail Vasiliev, head of research and consulting at Focus Technologies.
A new hope: shopping centers believe in the rise of Russian brands and the arrival of “friendly” brands
Import substitution should sweeten the military pill: in the case of shopping centers, we are talking about both Russian and new foreign companies that were previously poorly represented on the Russian market or were not represented at all. Director of the consulting company CORE.XP Nadezhda Tsvetkova, in a conversation with The Insider, notes that the departure of such large brands as Zara and H&M opened up an opportunity for domestic brands to occupy a vacant niche and expand not only the area, but also the range.
“The most actively developing brands that occupy the sites of departed international retailers are Gloria Jeans, Melon Fashion Group, Lime, Snow Queen and others. In addition, the remaining international brands — Terranova, Calliope, New Yorker, Koton — are increasing their presence in the Russian market,” Tsvetkova said.
Moreover, the Russian mass market has become more in demand in the context of buying clothes for children and teenagers, and some domestic brands have grown so much that they have gone beyond the borders of the country. For example, 12Storeez and L'etoile stores have appeared in Dubai. Focus BI also confirms Tsvetkova's opinion: Russian brands managed to win over part of the audience in their favor in the face of reduced competition.
Russian brands managed to pull over part of the audience
Companies from "friendly" countries – India, China (Li-Ning, Anta Sports), Turkey (Ipekyol, Twist, NetWork, Club, Madame Coco, etc.), Armenia (Alex YVN) and Belarus (Swed House), as well as from "unfriendly", for example, the French JACADI and the Polish PitBull West Coast. To speed up entry into the Russian market, foreign companies often invest in local players by entering into partnership agreements.
Large areas that were previously occupied by the largest retail outlets of departed foreign brands are gradually filling up. So, instead of a two-story H&M flagship store on Tverskaya Street in Moscow, a Gloria Jeans point appeared . Often, import substitutes divide the vacated large pavilions into several small ones. This makes it possible for the shopping center to place several brands at once and receive more rental income.
However, it is too early to talk about positive trends for the shopping center, notes Tsvetkova from CORE.XP. Despite the fact that, according to their calculations, the revenue of the shopping center in 2022 sank insignificantly, it is somewhat premature to say that the worst is over with the arrival of new companies. With regard to shopping center revenue, RSTC has more stringent data – a drawdown of 20%, but they also do not yet talk about a radical trend reversal.
It is too early to talk about positive trends for the shopping center
“It is still too early to judge whether these brands will be able to fully replace the departed ones in terms of the quality and quantity of traffic attracted, as well as the level of turnover. It will be possible to talk about this by the end of 2023, when the brands will work for several seasons,” the expert noted.
Despite the discrepancy in revenue estimates, in any case, they turned out to be an order of magnitude better than experts predicted a year ago. Analysts had expected a 20-30% decline in shopping center rental income, and estimates of a collapse in overall revenues ranged from 30 to 70% in 2022. Difficulties were expected with the timely replacement of brands that left the country with retailers from Russia or other countries. Many noted that new international brands do not have the opportunity to enter the market due to problems with logistics and an incomprehensible situation in the country, which makes it difficult to build a clear business plan for the coming years.
Many market participants considered the development of domestic retailers a more realistic option, but, according to forecasts, it will take two to three years for Russian brands to increase production volumes. There was often an opinion that in order to survive, shopping centers will have to change dramatically – transform into discounters, furniture, entertainment and other specialized formats.
Step back or move in: online shopping, mini-mall and other wartime trends
In the face of the exodus of foreign brands, online platforms suddenly turned out to be the winners, which were able to organize the sale of products from stores that decided to close their business in Russia. Thus, clothing from the brands of the Inditex group (Zara, Pull & Bear, Massimo Dutti and others) appeared on Wildberries, and IKEA products appeared on Yandex.Market. The interception of scarce foreign products spurred website traffic and revenue, but even without them, the sites showed growth. The turnover of Wildberries for 2022 almost doubled – by 98%, to 1.67 trillion rubles. The most demanded goods were clothing and footwear, as well as products, goods for newborns, household items. Approximately similar indicators boasted Ozon and "Yandex.Market".
Another trend that the war consolidated is the reduction in the area of shopping centers and the abandonment of giant malls. This, in particular, is clearly seen from the statistics of complexes opened in the country at the end of 2022: it has become minimal over the past five years. The developers planned to commission 195 thousand square meters, but in the end only 128 thousand were built. Moscow accounted for 58 thousand square meters, while all the new metropolitan centers turned out to be small "district residents". For comparison, the area of the largest Moscow shopping centers "Aviapark" and "Europolis" is 230 thousand and 171.5 thousand square meters, respectively.
The decrease in the area of the shopping center is connected not only with the departure of brands: Tsvetkova notes that the boom in the construction of giant projects has long ceased. There are already enough such shopping centers in Moscow, and the change in consumer preferences has only spurred the development of the trend — during a long quarantine, most Russians are used to shopping close to home and have stopped going to large malls specifically for this. In the regions, the construction of district shopping centers has not acquired an equal scale to the capital, but the area of such facilities has decreased there as well.
During quarantine, most Russians are used to shopping close to home
The decrease in the volume of commissioning of retail space is also directly related to the crisis situations that have taken place in Russia and the world over the past few years. “As a rule, the implementation of a shopping center takes at least two to three years. It often happens that in a crisis situation it is easier to freeze an object than to finish building it, investing money and risking not filling the object or filling it at an extremely low rate,” Tsvetkova said.
The decision of developers to build more compact facilities was also influenced by the fierce struggle between shopping centers and online retail. Serious competition began to develop during the pandemic, when the centers were forced to practically close for a long time. On the other hand, there is a confrontation between shopping centers and street retail. If, after the departure of foreign brands, the shopping centers lost a significant part of the traffic, then there are still many people passing by the shops located on the ground floors of the buildings. At the end of 2022, this type of retail space showed growth: the R4S Group company specializing in street retail concluded 53% more transactions in a year than in 2021. At the same time, the fashion segment has become one of the most popular, although until last year its representatives did not show an active interest in street retail.
Rebound from the bottom: what to expect for shopping centers by the end of 2023
Despite the attraction of customers by other retail formats and the growth of vacant space in the shopping center at the beginning of 2023, mall attendance gradually began to recover. Muscovites are returning to shopping centers more slowly than residents of other cities: according to Focus BI, in the first quarter of this year, traffic in the capital's complexes was 6% lower than in January-March 2022, while in the regions lagging behind last year indicators was only 3%. Experts note that the negative figures are associated with the effect of last year's high base, when people fled to buy the latest from foreign companies, but compared to the previous quarter, there is already a slight increase.
The difference in the dynamics of Moscow and the regions is explained primarily by the size of the capital's market, as well as the paucity of choice of places for leisure in the regions, while in Moscow it is much wider. In addition, it was in Moscow that shopping center attendance was more dependent on international brands, while in the regions their stores occupied less space. For the same reason, the "district residents" as a whole turned out to be more resistant to the disappearance of foreign tenants. In the first quarter of 2023, the Mall Index in small facilities was 6% higher than in the same period in 2022, but for large formats, the indicator decreased by 25%.
Despite this, Vasilyev believes that it is too early to give up on large shopping centers. According to him, such objects in the future clearly have a large target audience. The fate of large and gigantic projects depends on how successful the replacement of the departed players with the stores of Russian chains and companies from "friendly" countries will be. The RSTC said that large malls continue to be in demand due to the opportunities that they provide to tenants.
It's too early to put an end to large shopping centers
“The development of the shopping center market is almost complete, and today it makes sense either to build district shopping centers in places of new compact development, or larger shopping centers to replace old facilities that physically and morally do not meet the requirements of tenants and visitors,” Voitsekhovsky added. According to him, there are not so few shopping centers in need of replacement, and a significant proportion of old shopping centers are affected by reconception. According to Tsvetkova, in the future such objects are waiting for demolition and redevelopment for housing.
Focus BI expects that the Russian shopping center market will partially recover by 2024, provided that the current trends continue (and given the serious problems with the budget , there are no guarantees of this). CORE.XP believes that as early as 2023, the risks of bankruptcy among shopping centers will begin to gradually decrease, when most of the lease contracts with departed retailers will be terminated, and their premises will be able to be occupied by new brands. But it will take time to fill the void that has arisen: shopping centers risk facing downtime of even more areas than in 2022. Because of this, at the end of the current year, the drop in revenue may be more significant than in the past. In addition, analysts expect a reduction in rental rates in the range of 10-15%. At the same time, for retailers whose brands have gone through restructuring, rental payments can be increased – in this way, the shopping center will be able to reduce the risk of shortfall in profits after changing the name of a brand known to visitors.
The outlook for 2023 is still ambiguous, many tenants continue to refuse to cooperate, and it will be possible to assess the real damage to the industry only by the end of the year. But it is already clear that the war has slowed down the commissioning of new retail space and the implementation of ambitious projects that are now waiting for redevelopment or oblivion.
