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Jones Lang LaSalle’s latest whitepaper examines the challenges and opportunities the rise of e-commerce brings to the retail and logistics property sectors
Jones Lang LaSalle (NYSE: JLL), the global leader in real estate services, released a white paper E-commerce in China: Online is the New Black examining what challenges and opportunities the rise of e-commerce in China will present to the retail and logistics property sectors, as well as contributing thoughts about how developers and operators can best take advantage of the new market landscape. Michael Klibaner, Head of Research Greater China at Jones Lang LaSalle says, “We believe that there are risks for some segments of the market, particularly at the low-end of the mass market, but nearly everyone in the retail sector can evolve the way they interact with their customers in order to succeed. Meanwhile, the e-commerce market’s structural reorientation towards business-to-consumer (B2C) platforms makes the logistics sector the most attractive real estate opportunity in China.”
E-commerce has gathered increasing momentum in China. The Boston Consulting Group estimates that in 2011 alone, 61 million Chinese went online for the first time, and 43 million made their first online purchase. By 2020 China’s online market will exceed USD 1 trillion, dwarfing all competitors. In developed markets, the rise of e-commerce has proven a destabilising force for many segments of bricks-and-mortar retail. In China, much of the pessimism currently being expressed regarding the cannibalisation of offline sales by e-commerce and the future of retail real estate is overstated, though there are real risks for some segments of the market. Eugene Tang, Head of Retail Greater China at Jones Lang LaSalle pointed out: “We believe that these concerns both overemphasize the threat posed by e-commerce and underestimate the resilience of many types of physical retail. Physical retail will not wither away in the face of easy online shopping, but some formats are more vulnerable than others. One segment of the market at risk to disruption is low-end mass market apparel, which tends to be highly fragmented and unbranded. Crucially, these goods are basically identical to the items that dominate the small stores that comprise China’s no-frills, mass market shopping centres. This brewing competition means that the archetypical strata-titled shopping mall could be the first to see a substantial portion of its tenant base become obsolete.”Asset managers of wholly-owned retail properties, on the other hand, can take a top-down approach and adopt strategies to stay relevant. Taking themes, positioning, marketing and promotion, tenant mix, and technology into account, shopping mall operators can create an environment that gives consumers experiences that cannot be achieved online. Going shopping will continue to be an important social experience in China. In contrast to the retail sector, e-commerce has been indisputably beneficial for China’s logistics property sector. GLP, China’s largest warehouse developer, estimates in its annual reports that the e-commerce share of its total leased area in Mainland China rose from 14% in the middle of 2011 to 20% by end of 2012. Stuart Ross, Head of Industrial for Jones Lang LaSalle China says, “Developers of logistics property should be aware of on-going structural changes in the online sector that promise to create more opportunities in years to come. Crucial among these is the rise of B2C sites.” China’s traditionally dominant C2C model has not been a significant driver of warehouse demand, and the e-commerce contribution to warehouse demand so far has come from the likes of Amazon, Yihaodian and other B2C sites. More and more retailers are now setting up storefronts on third party platform sites or establishing their own websites, creating demand for warehouse space suited to handling online orders. In addition, online brands and retailers are looking to expand and improve distribution capacity beyond traditional Tier I hubs, and logistics developers are building capacity in these areas in anticipation of rising warehouse demand, with an eye towards major inland cities that lie at the centre of emerging clusters of consumer markets. At same time, the optimisation of supply chain required by offline retailers is creating additional demand for modern logistics space. “Another notable trend in e-commerce distribution is that some of the biggest B2C platform sites are exploring options to build their own logistics networks with self-owned and operated warehouses. Here developers of logistics property will have opportunities to form partnerships with firms to share their expertise,” added Stuart, “Working with e-commerce firms not only provides developers with major tenants, but also an easier time acquiring land from local governments if they can guarantee the presence of a prominent tenant in the e-commerce space.”Michael concludes, "China’s rise as a titan among global e-commerce markets promises to transform the way goods there are shopped for, purchased, stored and delivered. Developers, brands and operators will need to stay ahead of the trends in e-commerce in order to remain competitive in the future."
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