How web retailing boosts demand for logistics space

April 10, 2019 11:00
As web retailing evolves, it develops a need for retail space. Hong Kong's HKTVmall, for instance, now has 46 stores to help increase brand awareness and to serve as goods pick-up points for customers. Photo: Yahoo

Like other modern economies, Hong Kong is seeing respectable growth in web retailing. For example, HKTVmall has now established itself as an online supermarket and vendor of various goods. According to the latest financial announcements, HKTVmall has served 680,000 unique customers in 2018. This translates to a customer base of about one in every 10 adults in Hong Kong.

While the company still posted a net loss in 2018, its customer base has been growing by over 50 percent during the year. It appears it’s only time before HKTVmall and other web retailers become dominant players in the retail space.

In other markets, real estate investors have noted a shift in rental demand from retail to logistics space. Like other retailers and logistics partners, web vendors require distribution centers to manage their operations. When a retailer imports some goods, the items will first need to be transported from the pier to a distribution center.

Once they reach the facility, the goods, especially imported stuff, may need some re-packaging work. For example, current Hong Kong laws require food products to have ingredient and nutrition information, in Chinese or English, on their packaging. If the item is imported from, say, Japan or Korea, the existing package may only have the ingredient and nutrition information in Japanese or Korean. Thus, the goods will get a Chinese or English label in the logistics center.

The logistics center then warehouses the goods until the frontline retail shops are ready to accept the goods. Typically a trucking team is required to move the goods from the distribution centers to the frontline shops. For larger operations, hundreds of trucks may move the same item (a can of sardines, for example) to thousands of shops. This is a complicated exercise and is often designed and aided by state-of-the-art computer systems.

Web retailers, in addition, will also need to package individual orders at the logistics centers. These orders are then loaded onto trucks and sent to individual homes. This means that the storage space required by web retailers will be larger. Other retailers and logistics players are at the “wholesale” level of the distribution network, and thus they typically move the same item in larger quantities. In Hong Kong, for example, items are transported in original boxes or pallets.

But web retailing faces the retail market directly, and the individual orders will include multiple items in smaller quantity. Thus, web retailers often need robots or staff to pick up individual items directly in the warehouse section of the logistics center. This means the warehouse section also needs to be larger, with items loaded from the original boxes or pallets to shelves that are ready for pick up.

Overall this means that web retailers will require more dedicated logistics space for their operation. Amid this, it is no surprise that most advanced economies, from Australia to Japan and from China to Taiwan, have seen the rise of strong logistics landlords or logistics REITS in the last 20 years.

But as web retailing evolves, it also develops a need for retail space. For example, HKTVmall now has 46 stores scattered around Hong Kong. Obviously, 46 stores is a rather small chain for a traditional retailer, but for a web retailer, it seems like an appropriate number of stores to increase brand awareness and to serve as a pick-up point for customers. The latter point is quite significant, because delivery to individual homes is often the biggest cost for a web retailer. Having some orders picked up by customers in a retail store can lower logistics cost for the web retailer.

Nonetheless, retail shops' demand from web retailers will be different from traditional stores. A traditional retail store may allocate 50 percent of its effective space as a store level storage, because the store needs to store a diverse enough set of goods to serve the customers. Multiple sizes of the same shoe design is required, for example. However, a web retailer will need much less space, as they only need to transfer the ordered goods to their frontline stores.

HKTVmall displays some items in their physical shops for advertisement. Even in these cases, customers are encouraged to order the items online, and thus, the store does not need to store too many copies of these items. Thus, overall, a HKTVmall shop will be smaller than those of traditional competitors.

In other words, web retailers are more efficient users of retail space. In the short run, they may merely induce some rise in occupancy. But over the longer term, the stores, despite their relatively small size, could still contribute to a rise in the per-square-foot rents at malls.

– Contact us at [email protected]


Chief Investment Officer, Admiral Investment Ltd.