Today, shopping malls and department stores in China are not only competing against each other, but also facing changes in consumption patterns that are shifting purchases from traditional retailing to e-commerce. Online retail offers a competitive advantage, including price, selection, distribution and convenience.
The fear that e-commerce would erode the sales of China’s broader retail industry is greater than ever, and that fear is driven by the thriving pace of online shopping sales growth of 66.5% y-o-y over 2012, according to China Internet Network Information Center (CINIC). That same period was also a challenging time for many shopping malls and department stores, some of which saw a decline in both rental growth and sales growth because of the overall slower growth in retail sales and the increased competition from new shopping malls. This competition will continue to increase with the large supply of new shopping malls in the coming years. Take south China as example – there may be as much as 1.5 and 2.2 million sqm of new retail space coming onto Guangzhou and Shenzhen, respectively, over the next five years.
A 2012 study by CINIC showed the shopping habits of China’s online consumers: 81.8% of the respondents said that they have purchased garments last half year through online shops; 31.6% and 29.6% of them have picked daily goods and IT-related products (Chart 1). This illustrates the question of whether anchor or semi-anchor tenants in shopping malls — many of whom are department stores, hypermarkets and IT and home appliance stores — will suffer deteriorating sales as eCommerce grows.
Chart 1
Source: CINIC
One view is that a higher percentage of lifestyle oriented tenants in shopping centres could be a solution. However, while F&B, cinemas, skating rinks and children’s playgrounds are good attractions to drive foot traffic, such occupants pay relatively low rents compared with general retailers. Thus, several domestic property developers becoming more vertically integrated to boost revenue streams and are establishing their own entertainment businesses instead of relying only on rental income. A notable example is Wanda. This famous Chinese developer built their own brand of IMAX cinema, KTV and department store and purchased a major US-based cinema chain to not only to capture a larger share of the revenue but also to secure occupancy in their new malls. However, this type of affiliated business model is reserved for developers who own a large retail asset portfolio and can benefit from economies of scale.
Another area of focus is on differentiation in shopping malls and providing an experience that cannot be easily matched online. The profile of online shoppers gives some clues as to the areas where eCommerce will be a source of the greatest competition. For example, it was found that over 60% of online shoppers are aged between 18-30; 41% are white-collar workers; and only 12.9% come from the highest-income group of over RMB 8,000 per month, from CINIC’s survey. This suggests that retail developers could feature unique and upscale lifestyle-experience positioning in their shopping malls through tenant-mix and architectural design to cater to those who are not currently shopping online and create differentiation between the existing brick-and-mortar players and their online counterparts.
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