Retailing in Prague: a Strategy for Novy Smichov

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 remains 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 is 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, and a few failures were redeveloped into new concepts, but no major construction is planned.
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-screen theater complex, a health club, a bowling alley and a food court.  Tesco ranks second worldwide in retailing (behind Wal-Mart).  Within the Novy Smichov location, Tesco sells groceries on the first floor, and general merchandise on the second floor.  With nearly 7,000 stores worldwide, Tesco operates in 12 countries across Asia and Europe.  Their market share for groceries is 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 that European shoppers would expect in a shopping center that targets middle class to upscale shoppers (but not luxury stores).  For example, Zara is a Spanish clothing and accessories retailer that controls design, manufacturing and distributions of its unique merchandise.  Zara has over 2000 stores located in 88 countries worldwide.  Marks and Spencer is a Brithish department store.  Founded in the late 1800s, Marks and Spencer has stores across Europe, Asia and Africa.  Bata is a shoe retailer with over 5,000 stores in over 70 countries, manufacturing their products in 26 countries.  H & M (Sweden), Tommy Hilfiger (US), L’Occitane (France), Samsung (South Korea)are among the other global retailers featured at NovySmichov, along with local and regional offerings.  Most stores would be familiar to shoppers in Prague, as well as visitors from other countries in the European Union and the region.
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.  Dining options are convenient for shoppers, as well as for people who work and live in the neighborhood.
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.
Table 1:  Major Shopping Centers in Prague, Czech Republic

Shopping Center Features Location
Arkady Pankrac
 
Built in 2008
Supermarket, drugstore, food court, many specialty stores Across from Pankrac metro station (red line)
Palac Flora
 
Built in 2003
4 Floors of shopping with over 120 stores, food court, multiplex with IMAX theater Across from Flora metro station (green line)
Palladium
 
Redeveloped from old Army barracks near Old Town
5 Floors with over 170 shops and 30+ restaurants.  Many specialty stores are the same as at Novy Smichov, as well as other popular international brands, including ECCO, Foot Locker, Puma and Starbucks Central location connected to metro namesti Republiky station.
 
Over 900 underground parking spaces

 
In addition, the center city has several streets near Wenceslas Square that are lined with shops targeting visitors.  Tourism is a growing part of Prague’s economy, so the downtown location is close to local attractionswhere tours congregate.  Offerings are a combination of pricy designer labels and local souvenirs.  Neither category is considered to be a threat for NovySmichov’scurrent target market.
Constraints and Interconnectedness
NovySmichov has a high occupancy rate with little turnover in stores.  Tenants have long-term contracts, which contributes to the stability of the center.  This limits the ability to recruit many new retailers over the next several years.  Keeping the existing shoppers satisfied is paramount.  Strategies to attract new shoppers cannot put the existing business at risk.  Finally, each retailer has its own brand strategy.  While global retailers make adjustments to accommodate local tastes and needs, the general brand image and product offering cannot be modified for a single location.  Retailers are impacted by worldwide demand for their merchandise, manufacturing costs, and competition.  So the retail strategy of the individual tenants is beyond the control of NovySmichov’s management.  New strategies for NovySmichov must fit the consumers you want to attract, but you cannot alter the existing store mix to attract a different market segment.
Need for Solution
Moving forward, Klepierre needs a strategy that will retain their dominant position with local shoppers.  Any future growth will most likely come at the expense of other large shopping centers, since population growth is not very high, and the average age is increasing.  Klepierre is not considering expansion to other locations in Prague, or any major changes to their existing store mix.  They have identified three possible strategies to increase sales at Novy Smichov.
Options
Option 1 is market penetration.  Novy Smichov will need to find ways to increase frequency of visits or obtain a higher share of wallet for their existing customers.  The presence of a large grocery store (Tesco), entertainment (movies, health club) and restaurants already provide reasons for multiple visits per month.  Convenience for drivers and those taking public transportation remove some barriers for repeat business.  Option 1 will need to develop a strategy to deepen the loyalty of existing customers.
Option 2 is to target business travelers as an additional revenue stream.  Prague has research facilities for numerous multinational corporations, including Honeywell, Sun Microsystems and Siemens, along with pharmaceutical companies and 12 universities.  With over 30 hotels located in less than a half mile of Novy Smichov, the shopping center is a convenient place to pick up forgotten telephone chargers, replace a stained shirt, or pick up a meal after meetings.  Presumably many of the hotel guests will stay in Andel’s business district to be close to their customers or business associates.  Option 2 will require determining where business travelers stay, which companies they are visiting, and how to reach them with advertising once they arrive in Prague.
Option 3 is to target tourists who are vacationing in Prague, which has become a popular tourist destination since the fall of the Iron Curtain.  Tourists come from all over the world to enjoy Prague’s architecture and art, historic attractions, museums and entertainment.  Half of the tourist dollars spent in the Czech Republic are spent in Prague.  Germany, Russia, the United States and Italy are the home countries for most visitors.  Option 3 will require an understanding of what tourists buy and what barriers they face in shopping, such as language and currency exchange.  It will also require a feel for the relative attractiveness of NovySmichov’s merchandise relative to product and price comparisons from the tourists’ home countries.  Much of the merchandise will be familiar to tourists from nearby countries, while the prices could be higher or lower than at home.
Instructions for Case – worth 10% of your grade.  Due Monday, April 11.

  1. Read the Retailing in Prague case thoroughly and decide which Option to investigate and make recommendations about. Imagine a meeting where at least three possible strategies will be considered, and your task is to investigate one of them.
  2. Research the feasibility of your option, based on situational, demographic, and socio-cultural aspects affecting consumer behavior. Research should include (1) information on population characteristics and how they impact demand for products and services, and (2) information on the Czech culture and how it impacts consumption.
  3. Write a 2 to 3 page (single spaced/double between paragraphs) memo that addresses specific issues mentioned above. Use the format below:
    1. Name and Option investigated
    2. Situation analysis covering points in 2 above
    3. Discussion of how retailing in Prague is inter-connected with people/corporations in other cultures/countries.
    4. Evaluate advantages and disadvantages of your option to increase business at Novy Smichov.
    5. Conclude with a yes/no recommendation on whether to proceed with your chosen option. Include an explanation of how to proceed if you vote yes.

Include a reference list of appropriate sources that you used in your investigation, cited in APA style.  Appropriate sources are defined the same way as in the team project.  Reference list is not counted in the page limit for your mem

 
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