Ecommerce sector in China
As investors in the US bet that traditional storeswill not survive the [Amazon effect", bricks andmortar stores in China`s $4.8tn retail market havemaintained annual sales growth of about 10 per centeven as its ecommerce sector has become the world`slargest.
China`s two largest ecommerce platforms Alibabaand JD.com racked up $44bn in gross merchandisevalue during this month`s Singles Day salespromotion. The haul symbolises the explosivegrowth in online sales in China, which last year weretwice that of the US.
Among those Chinese shoppers who use ecommerce, more than 46 per cent of their retailpurchases are made online, analysis by consultancy Mintel suggests. According to consultancyEuromonitor, about 35 per cent of Chinese consumer electronics purchases are made over theinternet. But physical retailers are finding ways to survive and thrive.
Mall operators have responded to the ecommerce onslaught by reducing space devoted toretail and increasing allocations for restaurants,cinemas and outlets offering extracurricularclasses for children. Electronics retailers have added in-store experiences and reallocatedfloorspace for ecommerce distribution.
Growth in both online and offline retail has been made possible byconsistent gains indisposable incomes in China, which while slowing in recent years are still increasing at about 7per cent annually.
Shanghai`s Joy City mall, which last year installed a gigantic Ferris wheelon its top floor toattract customers, was bustling on a recent Sunday. Eating with friends, 24-year-old XiaoMingyue said she spent Rmb300 ($45) online during Singles Day, but prefers to shop inphysical stores. [The discounts online are not really that great?.?.?.?and its hard to be sure ofquality 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 between2014 and 2016, according to China`s chain retail association.
In particular, [department stores are heavily exposed to online categories, such as appareland cosmetics, while their key selling point was range - an advantage which eroded quitequickly", says Alex Shutter, an analyst with consultancy Oliver Wyman.
Electronics stores Suning and Gome - China`s two largest bricks-and-mortar retailers by sales- closed dozens of stores in recent years.
As Gome`s online business took off, same-store revenues at its physical stores declinedbetween 2014 and 2016. [They were clearly impacted by ecommerce," says Dylan Chu, ananalyst at brokerage CLSA.
But this year accelerating Chinese economic growth and rising house prices have underpinneda recovery in consumer confidence that has boosted sales even at department stores. The top50 retailers` revenues swung back to growth this year.
For Gome, the addition of experience-enhancing elements in stores, such as virtual realityzones, 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 4.5per cent to $7.6bn in same period.
Department stores have also been boosted by a recovery in Chineseluxury spending since lastyear, according to Fitch analyst Cathy Chao, and many of them have switched to mall-likeformats.
Convenience stores have a particular edge among offline retailers that have thrived, notchingsales growth of 14 per cent last year, according to China`s retail association. Japanese chainssuch as 7-11 and FamilyMart are opening hundreds of stores a year while Lawson isexpandingits store numbers in China by 40 per cent annually to reach about 1,500 by the end of thisyear.
[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 chilledproducts, 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 pastthree 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 metresadded last year, according to property services company CBRE.
[Shopping malls are becoming theme parks?.?.?.?it`s basically retail,entertainment andcatering," says Matthew Crabbe, an analyst at Mintel.
Those new malls have attracted the likes of Zara, H&M, Uniqlo and Adidas to openhundreds of physical stores in China in recent years - and Jessie Qian, KPMG`s consumer headin 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 bankruptcyin the US this year, says it foresees double-digit sales growth in China, where it plans to open30 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, aregional manager for the US toy chain in Asia. [It`s a very interactive experience, which is whyour footfall is robust."
William Lo, chief financial officer for Kidsland, China`s largest toy retailer by market share, saysecommerce 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 222shops in China and plans 180 new ones over the next three years. [Even Alibaba is investing inphysical stores these days," says Mr Lo. [You need both."
Additional reporting by Wang Xueqiao and Benjamin Bland
SIDE BAR: China: peak ecommerce?
As Chinese ecommerce growth has exploded, averaging 43 per cent a year over the past fiveyears, 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 butboth have been pouring billions into physical retail- most recently Alibaba`s $2.9bninvestment in hypermarket operator Sun Art.
Ecommerce growth slowed to 26 per cent last year, prompting adebate about whetherinternet retail saturation is near. [It`s reached an inflection point where online sales as a totalof total retail sales is stabilising," says Cathy Chao of Fitch.
Analysts say categories such as consumer electronics may have little room to increase theironline sales share, but ecommerce penetration for others such as fresh groceries and fastmoving 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 thisyear at 46 per cent of average overall shopper spending. [Consumers are increasingly buyingexperiences and services online, rather than products," it notes.
That means ecommerce growth will come from increasing the number of China`s 750m internetusers buying online from its current 60 per cent level. [You`ve still got a lot of headroomthere," says Alex Shutter at consultancy Oliver Wyman.
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