Retail in Asia

In Shops

E-commerce not a threat to traditional retail in China, says CBRE

Even with the rapid growth of e-commerce, some 991,000 square meters of new grade A retail space was added to collective supply available in China’s major markets during the second quarter of 2014, a 66.6 percent increase over the previous quarter, according to global real estate services company CBRE.

This, despite a report published by China’s Ministry of Commerce that online transactions exceeded CNY10 trillion (USD1.6 billion) in 2013, increasing 26.8 percent year-on-year. Online retail transactions grew by 41.2 percent during the year to total CNY1.85 trillion (USD302.1 million).

"Many people are saying that the wolf has arrived for real this time," said 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."

CBRE noted that along with e-commerce, a relative plenitude of new supply is also expected to come during the second half of the year with more than 400,000 square meters 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.

In response, CBRE said malls such as the Golden Eagle shopping center in Shanghai and NIC in Nanjing are all making big adjustments. The Beijing Wangjing Yokado Mall, for one, 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 Shangtai Department Store has withdrawn from Shenyang MIXC and Meichen Department Store did so too from Dalian Daduhui Shopping Mall.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.

China’s traditional retailers, from department stores to malls to supermarkets, have finally entered a critical phase where change is truly urgent. However, eventhough forecasters say that China will become the world’s largest online retail market in 2015 and that some 10 percent of the country’s retail sales will be transacted online, traditional brick and mortar retailers will still account for 90 percent of all retail sales.

"Annual retail sales in China are increasing at a rate of about 20 percent, higher than most countries, but over the next 10 to 20 years online sales will grow at an even faster rate," noted 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 percent 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 percent), followed by brand quality and ease of transportation.

A separate CBRE survey revealed that 90 percent 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.

Thus, throughout China, new and renovated retail properties are trending towards innovative models of operation, according to CBRE. 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," said 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 said, "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.”