E-commerce is biting into a bigger chunk of overall retail sales leaving in its wake vacant malls amid a staggering oversupply.
China is now the undisputed biggest e-commerce market in the world and this trend is anticipated to grow by leaps and bounds in the next five years, cornering an even bigger share of total retail sales.
In its wake are more ghost malls and closures – it has been estimated that one-third of China’s shopping malls will close down in 5 years due to online shopping and oversupply.
Between 2012 and 2015, 138 department stores, 262 supermarkets and 6,209 sports stores have closed down. China has nearly 4,000 shopping centers, three times more than the US. Estimates say another 7,000 shopping malls will open by 2025, bringing the total number to over 10,000.
Back in 2014, China’s shopping mall completions made up 44% of the total global number. In the pipeline are even more malls, representing a staggering 60% of the total worldwide.
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Since 2016, China’s retail market has been in a correction phase but it has now started to show signs of recovery, barring any extreme negative factors such as war (trade or otherwise). Despite sluggish physical store sales, overall retail sales are still showing commendable growth with e-commerce leading the way.
A myriad of factors have contributed to the slowdown – the anti-corruption fight, economic uncertainty, oversupply of malls and stores, and the increasing popularity of e-commerce.
“China as a whole is faced with significant oversupply of shopping malls in the short to mid-term, additionally many of them have been designed and developed for outmoded consumer habits,” notes James Macdonald, Head of Savills Research China. “There are also a number of incorrectly situated or positioned projects that find it difficult to find tenants, thus remaining vacant. The vast majority however will have opened but are underperforming.”
SUSTAINED SALES
At the same time, there are favourable factors that will ensure the retail scene will see sustained growth over the long-term. The growing middle-class, the new two-child policy and a trend towards consumption are expected to drive growth in the next 10 years.
Second and third tier cities are being developed as land becomes more expensive in first tier cities. Hence, there is still room to grow in under-served locations. This is borne out by foreign multinationals that have laid out long-term expansion plans n the huge country.
An example is Starbucks which has plans to open 500 new stores every year over the next five years. The number of outlets there will then exceed those in America. Even more impressive is Japanese fashion house, Uniqlo which plans to open 100 stores a year, with a long-term goal of 3,000 stores.
With more entrants into the market, some first tier cities have reached saturation levels in regards to the number of stores and shopping centres. With intense competition and rising operating costs, including rent and labour, some stores were forced to close down, leaving empty or ‘ghost’ malls in their wake.
For those that are able to adapt to the new retail environment however, the narrative can be one of growth and increased sales. Firstly, stores must start implementing an ‘omnichannel’ strategy – where physical stores should have a complementary online store while pure online stores should have physical outlets where goods can be collected. Secondly, retailers should also be able to cater to increasingly price-sensitive and discerning consumers.
What’s clear in China today is that online shopping will grab a bigger chunk of retail sales. Following a 26.2% surge in growth in 2016, the first two months of 2017 saw an even faster growth of 32% representing 11.1% of total retail sales (858 billion yuan).
According to reports, Alibaba (which owns Taobao and Tmall) since last year has handled more transactions than Amazon and eBay combined. China’s November “Singles Day” drew more sales than Black Friday, Thanksgiving, and Cyber Monday combined in the US. In summary, the retail outlook led by e-commerce looks very promising in the medium to long-term with room to grow for malls in second and third-tier cities.[/ihc-hide-content]