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Shoptalk Q3 2013

Confronting the Online Shopping Challenge

China's booming e-commerce market amplifies the importance of embellishing the lifestyle shopping experience.

The Internet is transforming the way people shop around the world. From Manhattan to Melbourne and Mumbai to Munich, developers and retailers are increasingly aware that conducting business along traditional lines in the age of online shopping risks missing opportunities and losing competitiveness.

Nowhere has online purchasing gained more momentum than in China, and the topic is considered in detail in a new Jones Lang LaSalle White Paper, entitled E-commerce in China: online is the New Black.

China's online retail fundamentals are unquestioned. The nation counted 591 million Internet users at the end of August, and online transactions topped RMB754.2 billion in the first half of 2013, a year-on-year rise of 47.3 percent, according to the Hangzhou-based e-Business Research Centre. In 2013, online shopping is predicted to account for around 7 percent of total retail sales in China – which is nearly double the figure in 2010.

Currently valued as the world's second largest online retail market, China's significant potential for growth is likely to see it claim the number one spot from the United States in the next two years. Apparel purchasing alone, which has been a key element of China's online shopping story, is estimated to grow to RMB920.2 billion by 2016.

"As has occurred in other retail markets around the world, Chinese consumers are moving away from non-experiential shopping and onto online, particularly for items like fast fashion, electronic appliances and household goods," says Eugene Tang, Regional Director and Head of Retail Shanghai and Greater China for Jones Lang LaSalle.

The impact for leisure shopping, however, is expected to be transformative rather than revolutionary."The growth of online retailing combined with the oversupply of retail centres in some Chinese cities is providing a timely jolt to mall developers and retailers," says Eugene Tang. "Chinese consumers still enjoy going shopping, but they expect more variety from the shopping experience. It's important to look beyond a mall's tenant mix, and offer a greater range of entertainment, services and interactive elements."

Much of the burden for adapting to the new demand landscape falls on retailers themselves. Brands are experimenting to integrate online strategies into their physical spaces, by opening store websites, allowing in-store pick up of goods and after-sales service for goods purchased online, and developing opportunities for interacting with the store via smartphones.

Retailers will need to embrace "showrooming" – a concept feared in the industry since it relates to shoppers selecting items in stores then returning home to purchase them at mass market online stores like Taobao. Increasingly, savvy brands are re-orienting their store spaces around handling and trying out products, while directing customers who choose to buy online to make their purchases via the brand's own Internet storefront.

Shopping centre developers are watching these evolving retail tactics closely. "In the coming years, mall owners in China will selectively choose brands that are managing the transition to multi-channel strategies successfully, and will diverge from the most impacted retail formats," says Steven McCord, Local Director, China Retail Research, at Jones Lang LaSalle.

High-profile Chinese developer Wanda has already announced that its new malls will eschew fashion speciality tenants, preferring to dedicate more space to lifestyle oriented offerings, such as cinemas, restaurants, karaoke, a gym or spa and a children's playground. These types of quasi-public spaces are increasingly incorporated into retail centre designs and revamps to appeal to families and friends who wish to more spend time together in a mall.

The branding of shopping malls also can also help connect directly with a targeted clientele base. Hong Kong New World's K11 brand – which has opened a mall in Shanghai with another mall under construction in Shenyang – has adopted an art theme, with exhibition space and an atmosphere of sophistication that imbues each mall with a distinctive identity.

Enterprising malls are also seeking to gain competitive advantage by enhancing the social experience of mall shopping. "Chinese customers enjoy seeing how products are made and consumed, and China's middle classes are expressing interest in events like international cooking demonstrations and wine and cheese, and whiskey tastings," adds Colin Dowall, Head of Retail Asset Management, Greater China, Jones Lang LaSalle. For high-end products, exhibitions of luxury cars and historical brand retrospectives are effective at drawing crowds and creating a buzz.

Introducing entertaining promotional events in common spaces helps owners emphasize the community-gathering function of their centres and stand apart from the other malls in the area. Promotional games played on communal video screens, touch-controlled floor guides and opportunities to share information about the mall and shops via social media all elevate the experience beyond the click-and-pay convenience of online shopping.

The transformation of China’s retail environment is only just beginning, but retailers and mall owners are actively confronting the online challenge. While e-commerce will continue to grow and evolve in China, the entire retail market is growing fast enough that opportunities abound for nimble developers that attract winning tenants and design attractive shopping experiences.