As investors in the US bet that traditional stores will not survive the “Amazon effect”, bricks and mortar stores in China’s $4.8tn retail market have maintained annual sales growth of about 10 per cent even as its ecommerce sector has become the world’s largest.
China’s two largest ecommerce platforms Alibaba and JD.com racked up $44bn in gross merchandise value during this month’s Singles Day sales promotion. The haul symbolises the explosive growth in online sales in China, which last year were twice that of the US.
Among those Chinese shoppers who use ecommerce, more than 46 per cent of their retail purchases are made online, analysis by consultancy Mintel suggests. According to consultancy Euromonitor, about 35 per cent of Chinese consumer electronics purchases are made over the internet. But physical retailers are finding ways to survive and thrive.
Mall operators have responded to the ecommerce onslaught by reducing space devoted to retail and increasing allocations for restaurants, cinemas and outlets offering extracurricular classes for children. Electronics retailers have added in-store experiences and reallocated floorspace for ecommerce distribution.
Growth in both online and offline retail has been made possible by consistent gains in disposable incomes in China, which while slowing in recent years are still increasing at about 7 per cent annually.
Shanghai’s Joy City mall, which last year installed a gigantic Ferris wheel on its top floor to attract customers, was bustling on a recent Sunday. Eating with friends, 24-year-old Xiao Mingyue said she spent Rmb300 ($45) online during Singles Day, but prefers to shop in physical stores. “The discounts online are not really that great . . . and its hard to be sure of quality when buying online,” she says.
But it has not been easy going for all retailers. Sales at China’s top 50 chains by revenue — mainly department stores, consumer electronics outlets and supermarkets — shrank between 2014 and 2016, according to China’s chain retail association.
In particular, “department stores are heavily exposed to online categories, such as apparel and cosmetics, while their key selling point was range — an advantage which eroded quite quickly”, says Alex Shutter, an analyst with consultancy Oliver Wyman.
As Gome’s online business took off, same-store revenues at its physical stores declined between 2014 and 2016. “They were clearly impacted by ecommerce,” says Dylan Chu, an analyst at brokerage CLSA.
But this year accelerating Chinese economic growth and rising house prices have underpinned a recovery in consumer confidence that has boosted sales even at department stores. The top 50 retailers’ revenues swung back to growth this year.
For Gome, the addition of experience-enhancing elements in stores, such as virtual reality zones, helped push up its offline sales 10.5 per cent year on year in the first half to $5.1bn, according to CLSA. Gome does not break out offline figures. Suning says offline sales rose 4.5 per cent to $7.6bn in same period.
Department stores have also been boosted by a recovery in Chinese luxury spending since last year, according to Fitch analyst Cathy Chao, and many of them have switched to mall-like formats.
Convenience stores have a particular edge among offline retailers that have thrived, notching sales growth of 14 per cent last year, according to China’s retail association. Japanese chains such as 7-11 and FamilyMart are opening hundreds of stores a year while Lawson is expanding its store numbers in China by 40 per cent annually to reach about 1,500 by the end of this year.
“It’s tough for delivery services to make money on low-cost snack foods,” says Zhang Cheng, head of Lawson’s China operations. “Ecommerce has only 1 per cent of the market for chilled products, so that is a core product for us.”
Total sales at China’s malls have increased more than 8 per cent on average for each of the past three years, according to official statistics — though much of that was driven by new openings, as Chinese mall development has led the world for several years with 5.75m square metres added last year, according to property services company CBRE.
“Shopping malls are becoming theme parks . . . it’s basically retail, entertainment and catering,” says Matthew Crabbe, an analyst at Mintel.
Those new malls have attracted the likes of Zara, H&M, Uniqlo and Adidas to open hundreds of physical stores in China in recent years — and Jessie Qian, KPMG’s consumer head in China, says these outlets are taking market share from department stores.
Toy chains for their part remain bullish on offline retail. Toys R Us, which filed for bankruptcy in the US this year, says it foresees double-digit sales growth in China, where it plans to open 30 to 40 stores a year “for the next few years” to add to its current 150.
“Physical stores are crucial to our investment strategy to maintaining growth,” says Jo Hall, a regional manager for the US toy chain in Asia. “It’s a very interactive experience, which is why our footfall is robust.”
William Lo, chief financial officer for Kidsland, China’s largest toy retailer by market share, says ecommerce is generally less effective for toy sales because “kids need to experience the toys”.
Kidsland, which raised $40m in a Hong Kong initial public offering this month, operates 222 shops in China and plans 180 new ones over the next three years. “Even Alibaba is investing in physical stores these days,” says Mr Lo. “You need both.”
Additional reporting by Wang Xueqiao and Benjamin Bland
China: peak ecommerce?
As Chinese ecommerce growth has exploded, averaging 43 per cent a year over the past five years, online sales now account for about a fifth of total retail.
Alibaba and its smaller rival JD.com take about 80 per cent of consumer ecommerce sales but both have been pouring billions into physical retail — most recently Alibaba’s $2.9bn investment in hypermarket operator Sun Art.
Ecommerce growth slowed to 26 per cent last year, prompting a debate about whether internet retail saturation is near. “It’s reached an inflection point where online sales as a total of total retail sales is stabilising,” says Cathy Chao of Fitch.
Analysts say categories such as consumer electronics may have little room to increase their online sales share, but ecommerce penetration for others such as fresh groceries and fast moving consumer goods remains low, at 3 per cent and 7 per cent, respectively.
According to Mintel, the average online retail spending of China’s online shoppers will peak this year at 46 per cent of average overall shopper spending. “Consumers are increasingly buying experiences and services online, rather than products,” it notes.
That means ecommerce growth will come from increasing the number of China’s 750m internet users buying online from its current 60 per cent level. “You’ve still got a lot of headroom there,” says Alex Shutter at consultancy Oliver Wyman.