China’s e-commerce market has developed from insignificance just a few years ago to become the world’s second largest. Observing such growth, operators of bricks-and-mortar retail properties could be forgiven for wondering whether they will be left behind as shoppers eschew in-store fitting rooms for digital shopping carts. Considering this question through the lens of the apparel sector, we find that malls with mass market positioning may be most at risk.

China’s online clothing sales already are huge. iResearch estimates that in 2012 apparel was China’s single largest online sector, accounting for RMB 318.8 billion of the country’s RMB 1.18 trillion e-commerce market. Even more significant, Li & Fung has calculated that online apparel sales constitute a 14.3% (and growing) share of China’s overall apparel sales. Even if difficulties in calculating total physical apparel sales may mean this figure is somewhat inflated, it is still impressive for a country where a large majority of the population has yet to start buying products online. iResearch estimates that as China grows richer and more connected, its online apparel market could grow to RMB 920.2 billion by 2016.

Two points about China’s online apparel market stand out. First is demographics: China’s online shoppers are similar to those in developed markets in that they are better-educated and earn higher-than-average incomes, but even at these levels, China’s online consumers are still below middle-class income levels of developed countries. The majority of China’s online shoppers remain squarely mass market, unable to splurge frequently on well-known brands. Second, over 60% of China’s online apparel sales come from consumer-to-consumer (C2C) sites like Taobao.com, according to iResearch. Unlike business-to-consumer (B2C) sites that dominate developed markets and focus on branded goods, the bread and butter of Taobao’s digital shopfronts are cheap, unbranded clothing, which a seller stocks at home and often has self-designed and/or sourced directly from a Guangdong textile factory.

Such mass market offerings are an ideal fit for China’s thrifty online shoppers. They also overlap with a large portion of the products sold at China’s low-end strata-titled shopping malls. These malls are inexpensively built, poorly maintained and often suffer from random tenant mixes, poor maintenance, and unattractive shopping environments. Whereas before they could depend on shelves piled high with low-priced clothing and accessories to draw foot-traffic, today such malls are ill-equipped to compete as their customers migrate to online marketplaces, which offer greater convenience and value. We believe that many markets will be unable to support additional construction of this retail type, particularly malls oriented around clothing or other categories facing competition from e-commerce. Existing properties will need to make adjustments such as enhancing the role of food, entertainment, and services in their tenant mix, and making investments to improve the overall shopping experience.

The consequences that e-commerce may hold for other sectors and property types – as well as strategies to adapt to this new demand landscape – will be discussed in our upcoming white paper on the property implications of e-commerce in China.

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