In Hong Kong, the total sales revenue of online retailing has been growing by more than 50 percent every year since 2009.
While data is not perfect yet, we believe that as a percentage of total retail sales, online sales in the city is about 6 percent.
This is not a small figure, as the latest government numbers show that Australian online sales account for 7.3 percent of the country’s total retail spending, while in the United States it is 11.7 percent.
Assuming the current trend continues, Hong Kong’s online retailing will become as important as Australia’s in three years.
In both the US and Australia, online retailing has disrupted the retailing environment. Some sub-segments, such as book and DVD stores, have already shrunk into insignificance. Department stores and big box retailers are also under pressure.
Having a good anchor tenant is the basis of a mall’s traditional, textbook operating strategy. A good anchor, even if it does not pay rent to the mall, will serve to attract footfall, as shoppers come to the mall for the anchor tenant.
Once the shoppers arrive, they often make additional purchases at other stores. Thus, when the large retailers are under pressure, they lose their ability to serve as an anchor.
In previous cycles, the misfortune of a particular type of anchor tenant has almost always been accompanied by the rise of another anchor type, creating enough anchor tenants to support an ever expanding mall supply.
However, the disruption from online retailing means that this time around there is a lack of new anchor tenants, reducing the number of malls that can be supported.
Thus, even in the largest American and Australian cities, the number of healthy malls has gradually gone down in the last decade. The smaller neighborhood malls, typically with one anchor and a dozen or two smaller stores, have been particularly hard hit.
Even though its online retailing has seen similar phenomenal growth, Hong Kong’s retailing sector has been less disrupted. This is especially true with malls, whose occupancy and rental levels have remained robust even though Hong Kong’s overall retail sales have been falling in the last two years.
We believe that this is due to several factors. First, selected retailing sectors have been under pressure. In particular, the market positioning and competitive advantage of mass market department stores have eroded. But because they never had a major presence in malls, the impact of the weakening of mass market department stores to the malls has been limited.
Second, street shops and other non-mall formats have been a fixture in Hong Kong’s retail landscape. While street shops are also featured in other Asian economies, their market share is much smaller in the Anglo-Saxon economies.
Functionally, neighborhood street shops are often functionally similar to the neighborhood malls in the west, as both serve the local populace for day-to-day retailing and support independent stores. Thus, perhaps online retailing has disproportionally affected these stores, which effectively shielded the malls.
Third, Hong Kong’s traditional retailers have also been expanding their online presence, with some allowing customers to pick up their online purchase in their existing stores. This model reduces the retailer’s operating costs and incentivizes the retailers to maintain their store presence. Some online retailers have also opened physical stores to reach a broader audience, and this creates additional demand for rental spaces.
These two strategies are perhaps helping to maintain a mall’s occupancy and rental levels. Thus, seeing the recent history in the US and Australia has probably helped both the physical retailers and malls in Hong Kong.
Overall, the small presence of mass market department stores in malls, the prevalence of street shops, and the more timely response from the existing physical retailers are some of Hong Kong’s unique characteristics that have helped the city’s retail landlords to navigate through online shopping’s impact so far.
In the next several years, however, as online retailing continues to expand, the mall sector may see further competition.
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