E-Commerce is Changing Hong Kong's Retail Landscape, Consumer Patterns

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Hong Kong retailers and landlords need to embrace change
 
According to JLL's latest retail white paper entitled "Reimagining Retail - Bricks, Mortar and the Evolution of E-Commerce in Hong Kong"  -- the rise of e-commerce is expected to post significant growth and disrupt the local retail market in next few years. Smaller mom and pop shops, regional and smaller shopping centers are expected to face the direct competition of e-commerce. In order to survive in a fiercely competitive market, landlords and retailers have to embrace new technologies, new tools as well as new retail strategies so as to survive, thrive, and ride the wave of the future,

In Hong Kong, online purchases as a proportion of total retail sales have lagged many other leading global cities. Having said that, market statistics from the Hong Kong Trade Development Council show that online sales expanded at a CAGR (Compound Annual Growth Rate) of 15.1% between 2011 and 2016. This compares to a CAGR of just 1.5% for the overall retail sales over the same period. A recent survey of market participants by JLL also reflects a similar level of optimism, in which 72% of retailers and 90% of landlords surveyed believed to see significant growth in online sales over the next five years.

Although there is a growing consensus that online sales are not expected to replace physical stores in Hong Kong in the foreseeable future, notwithstanding their provision of greater variety and more competitive pricing, more and more e-commerce giants are seen moving into bricks and mortar retailing, bringing with them new technologies and the goal of reshaping both the online and offline shopping experience in their quest for a bigger slice of the market. Just to name an example, Chinese online retailer JD.com has partnered with Hong Kong-based Fung Retailing, which operates over 3,000 stores locally and abroad, to develop artificial intelligence-driven retail solutions to smart retail.

Reimagining the mall: Omni-channel retailing

To propel the growth of Hong Kong's retail sector, e-commerce does have an important role to play. However, instead of relying exclusively on online sales, JLL believes the market is well positioned to evolve towards an omni-channel solution, which allows for a variety of retailing platforms and formats - from mobile, social media to physical stores, online stores and search engines - to be seamlessly integrated to provide a rich source of data that can be analyzed to create a personalized marketing and sales funnel for every consumer.

Denis Ma, Head of Research at JLL Hong Kong says, "The future of the retail market of Hong Kong lies in its evolution into omni-channel retailing. From our perspective, the growing popularity of mobile payments and wider adoption of big data analytics will move us in this direction, as well as enhancing the overall shopping experience of consumers. This certainly requires retailers and landlords, such as mall operators, to invest more heavily in technology."

To close the price gap between online and offline stores, a way for the bricks and mortar retailers to excel is provide value-added services, in additional to selling products. These services could encompass personalized products, enhanced warranties, bespoke post-purchase services, loyalty programs, or even special events.

"Experiential retail" is another option to attract shoppers into physical stores. Done correctly, this is not just about elaborate designs or gimmicks within the four walls of a store; it could be a signature scent or soundtrack, technologically advanced fitting rooms, or an optimized checkout process that is more convenient to customers.

However, widespread adoption of these will have implications for the way malls have traditionally operated in Hong Kong. One area of concern is rental benchmarks, as rent in most malls is usually set as a combination of base rent plus an agreed turnover component. This rental model requires visibility into retail sales achieved by individual stores. With mobile payments gathering traction, this data will inevitably become less visible, and landlords and mall operators will hence be required to revise their methodology.

The application of big data analytics also gives rise to similar situation. Retailers are posed with challenges as to how to determine the data, which is the most useful for their business, and have them turned into real insights that will impact productivity and their bottom lines. It is essential for them to invest in the right data storage, analytics platforms and digital analysis talent in a bid to help draw a big picture of how their sales and marketing strategies align.

James Assersohn, Local Director of Retail at JLL in Asia Pacific also commented, "E-commence will get popular in Hong Kong in next few years. But it will not spell the end of bricks and mortar as online retailing cannot offset the shopping experience and enjoyment provided by physical stores. Retailers and landlords, however, should be well-prepared for omni-channel retailing, which will be the future of retailing."

Eric Cheng, Local Director of Retail at JLL Hong Kong also stated, "Store rents in Hong Kong can devour as much as 25%-30% of sales revenue. Following the e-payment getting popular in Hong Kong, increasing retailers are expected to expand their online sales platforms. The most popular e-commerce platforms in the city, which are generally targeted at the lower-end segments of the retail market, have already been competing directly with traditional "mom and pop" shops, as well as with smaller shopping centres built around subdivided shops. The vacancy rate of regional shopping malls in sub-urban districts that rely primarily on local customers would increase as retailers would prefer opening flagship stores in core areas to small shops in various districts."

"However, we are positive that physical stores will be in more demand than ever, but just their purpose and operation will change. The cost of opening a physical store has significantly lowered at this point in time following Hong Kong's three-year slump in retail rentals. This offers a natural window of opportunity for online retailers looking to expand into the bricks and mortar world, allowing them to secure coveted retail spaces with more reasonable rental rates," he says.