Rising online sales are adversely affecting sales of physical stores. We outline a key retail strategy Asian retail landlords need to adopt to overcome this e-commerce threat.
E-commerce is gaining momentum in Asia, albeit at different paces and under different circumstances in each market. One thing that is true across all markets is the fact that online commerce is adversely affecting sales in physical stores. This not only has an impact on revenues, but can also disrupt the way commercial property is valued and managed. With the rise of online channels, the number and the size of physical stores required by retailers may decrease, likely leading to the demise of less-popular malls.
There are three key strategies that mall operators can employ to mitigate the impact of e-commerce. Firstly, they can raise exposure to food & beverage, entertainment, lifestyle and luxury segments, which are likely to ease the impact from online sales. Another strategy is to implement O2O offerings in the key shopping malls in order to help retailers raise their offline sales. Our analysis shows that most Asian mall operators are adjusting their tenant mix, but O2O offerings are still in an infant stage of development. And lastly, mall operators can focus on large malls in strategic locations, where events and flagship stores can be hosted.
Of these three strategies, the O2O approach seems to us the most likely to lead to durable and viable synergies between traditional retailers and online marketplaces. By directing online customers to offline stores, O2O combines the ease and traceability of online payments for customers with the guarantee of offline foot traffic and purchases for merchants.
In Asia, O2O offerings are still at a nascent stage of development, which is precisely why an early adoption of successful practices can help overcome some of the most pressing challenges brought on by a disruptive digital environment. The retail property sector most at risk is in China, where retail landlords are facing increasing threat from online retailers. Shopping malls with higher exposure to Tier-3 cities and mass market product offerings are suffering the greatest hit. Elsewhere, the impact will be less pronounced in Singapore and Hong Kong due to their well-developed retail infrastructure and shopping convenience. However, we believe that less-popular malls in Singapore and Hong Kong could see some adverse impact.