Rise of E-Commerce No Death Bell for Traditional Retail
Rise of E-Commerce No Death Bell for Traditional Retail
October 9, 2014
CBRE On How Retail Property Owners Can Break Out of their Current Predicament
October 20, 2014, Beijing - On September 19th, e-commerce giant Alibaba IPO'd on the New York Stock Exchange, stirring up America's capital markets and making the stronger-than-ever e-commerce industry the topic of the day in China. Fifteen years ago Alibaba’s founder Jack Ma predicted that e-commerce would revolutionize business and the industry has been growing since. According to a report published by the Ministry of Commerce, China, online transactions exceeded RMB 10 trillion in 2013, increasing 26.8% y-o-y. Online retail transactions grew by 41.2% during the year to total RMB 1.85 trillion. China's traditional retailers, from department stores to malls to supermarkets, have finally entered a critical phase where change is truly urgent.
"Many people are saying that the wolf has arrived for real this time," says Hsiang-Yun Chu, Senior Director, Retail Services, CBRE China. "Actually, e-commerce is just one of many factors that have contributed to the challenging environment traditional that retailers are facing today."
According to CBRE, some 991,000 sq.m. of new grade A retail space was added to collective supply available in China's major markets during Q2 2014, a 66.6% increase over the previous quarter. A relative plenitude of new supply is also expected to come on line during the second half of the year with more than 400,000 sq.m. forecast respectively for Beijing, Tianjin, Chengdu, Chongqing and other cities.
The twin threats of e-commerce and abundant new supply present a grave test of survival for traditional retailers. Malls such as the Golden Eagle shopping centre in Shanghai and NIC in Nanjing are all making big adjustments in response. The Beijing Wangjing Yokado Mall has closed. Shangtai Department Store has withdrawn from Shenyang MIXC and Meichen Department Store did so too from Dalian Daduhui Shopping Mall. Some newly opened shopping centers and malls in tier-two and tier-three cities have found it difficult to sustain operations due to lack of customers.
No Replacement for Traditional Retail
Even though forecasters say that China will become the world's largest online retail market in 2015 and that some 10% of the country's retail sales will be transacted online, traditional brick and mortar retailers will still account for 90% of all retail sales.
"Annual retail sales in China are increasing at a rate of about 20%, higher than most countries, but over the next 10 to 20 years online sales will grow at an even faster rate" notes Chu. "Even so, this doesn't mean that e-commerce will replace brick and mortar stores."
In a recent consumer behavior survey conducted by CBRE in China's tier-one cities, 76% of respondents said they had made purchases online, their top reasons for doing so being convenience of having the good sent to one's home, overall convenience, and cheap prices. Dining and supermarket shopping were the two most frequent traditional forms of shopping activity among respondents, and also represent their largest monthly expense. Those taking the survey indicated that on average they visit a restaurant or supermarket 1 or 2 times each week, and that they felt shopping environment the most important element of the shopping experience (69.46%), followed by brand quality and ease of transportation.
A separate CBRE survey revealed that 90% of people who shop at traditional brick and mortar stores do so with a partner. This strongly suggests that shopping plays an important role in social and family activities – a role that e-commerce certainly cannot replace.
Chinese Consumer Demand Underestimated
Throughout China, new and renovated retail properties are trending towards innovative models of operation. Increased proportion of dining venues, use of theme events and performances to attract crowds, and O2O commerce are some examples. Chu believes that in the short term, such measures can successfully attract customers and thereby increase sales. Long-term, however, the market will eventually become saturated, and at that point retailers will enter a new kind of struggle for survival. Presently, homogeneity among shopping venues is already starting to become apparent, and this problem is expected to increase in severity in the coming ten years.
"When a shopping center adds a 1,000 sq.m. play area for children, the benefit is immediate and clear," says Chu. "But then all nearby shopping centers will also build play areas, without making any other major improvements to their facilities. It is at this point that developers forget, the purpose of a shopping center is to attract people to shop, not simply enjoy themselves."
Experiential shopping encompasses the shopping environment, the product collection, the service provided before, during and after the sale, and all other elements of the customer experience. In June this year CBRE assisted M&Ms in the opening of its new flagship outlet in the Bailian Shimaoguoji Shopping Mall in Shanghai. The event attracted crowds of people, and it was successful not only because M&Ms managed to create a fabulously delightful shopping experience, but also because the company made customers unable to resist consuming M&Ms products.
“As the level of consumption in China continues to rise, consumer needs continue to become more refined, delicate and diverse. These needs must be met with corresponding improvements in the shopping experience.” Chu says, "In the past a developer needed only to build a shopping center and collect rent to be successful, but those times are now gone for good. The truth is, retailers have tapped only a tiny fraction of China’s consumer consumption potential. We have sufficient space and sufficient reason to create for China's people shopping venues that are safer, friendlier, better organized and better managed, be they convenience stores, food streets, or malls. Such venues offer consumers something that e-commerce can never replace.”
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.