Someone once said, “If you snooze, you lose, and if you snore, you lose more.” In the face of the emergence of e-commerce, bricks-and-mortar retail outlets, including many shopping centers in China and in Shanghai, have been snoozing for some time. Until recently, this category of retail banked on:

Government policy trying to shift the economy from investment and export-led growth to domestic consumption;

A steady rate in urbanization;

Growth in China’s GDP, household income, personal disposable income and retail sales.

This has been all well and good, but in the past few years, e-commerce has gate-crashed the party and is fast threatening to gobble up a sizeable portion of the party cake.

To provide an understanding of just how much of this cake has been eaten, it has been estimated that online sales in China totaled 1.85 trillion yuan (US$303 billion) in 2013. By 2020, it is expected China’s Internet retailers will shift 3.96 trillion yuan of products.

To further exemplify the increasing power of e-commerce in China, on just one day last year — November 11, dubbed Singles Day — products valued at 35 billion yuan were bought by members of the public via just one e-commerce company — Taobao. Compared with the previous year, this was an 83 percent jump in sales for the company.

So why has bricks-and-mortar retailing in China and in Shanghai been losing out to e-commerce? The underlying issue is the inefficiency of the bricks-and-mortar retail system, not just in Shanghai or China but also generally across many parts of the world. In China, hardly any retailer has a national network with built in efficiencies related to getting a product to the customer quickly and selling it at the cheapest price. Thus, even when products are obtainable in-store, they are generally high-priced. In addition, in many smaller cities and many towns in rural areas in China, desirable products are just not readily available in shops. McKinsey estimated that in these smaller tier cities and towns, as much as 27 percent of disposable income is already spent electronically on the Internet.

Retail sales: Looking at the bigger picture

All is not lost, however. When one looks at the bigger picture and, in particular, total retail sales, then the 2013 absolute figures and  the annual growth rates for China and for Shanghai are 23.44 trillion yuan and 801.9 billion yuan, respectively, up 13.1 percent and 8.6 percent. As we can see in the case of the China absolute figure, the number is staggering. When we reflect on the 2013 absolute figure for e-commerce sales, we can see the chunk of cake taken is relatively small. Therefore, for bricks-and-mortar retailers, there is still a sizable portion to play with, and this slice is still growing at a very respectable pace. But how have retail sales actually affected the Shanghai retail property market recently?

The Shanghai retail property market: Still going strong

The retail property market in Shanghai has continued to see growth, and developers and investment landlords launching new properties or upgrading existing stock. Prime downtown retail property in the city reached 2.1 million square meters at the end of 2013. Times Square on Huaihai Road opened after a period of renovation, with Lane Crawford now occupying four floors of the property. In addition, International APM, also on Huaihai Road, was officially launched, and Plaza 353 on Nanjing Road East was closed from the third floor up for tenant remix and upgrading work.

Because of these developments, prime retail rent in Shanghai’s central retail hubs increased 2.38 percent, quarter on quarter, to 61.43 yuan per square meter per day. Shanghai Times Square and International APM are enjoying high occupancy rates, and there is general improvement in the occupancy level in the submarkets of Nanjing Road West, Huaihai Road and the Xujiahui area. Overall occupancy for Shanghai increased by 0.44 percentage point, quarter on quarter, to 93.21 percent.

On the occupier side, Boucheron opened its second shop in Shanghai in International APM, as did Versace, Longchamp and Tory Burch. MAX & Co. and Calvin Klein opened shops in the Jing’an Kerry Center, and Uniqlo opened a flagship shop on Huaihai Middle Road.

Considering retail sales performance and the positive net absorption of more than 140,000 square meters in the city’s central retail hubs in 2013, the general market condition for Shanghai prime retail was fairly robust for the year.

Bricks and mortar retail in Shanghai: What’s next?

To overcome the increasing threat from e-commerce, shopping centers in Shanghai need to rework themselves. Here are three approaches:

Become lifestyle destinations

Shopping centers should understand which retail products are most sold online and adjust their tenant mix to phase out those retailers that have high online sales and low offline sales.

To attract greater foot traffic, more room should be afforded to events space, backed up by an excellent annual events program, and to a large number of high-quality food and beverage outlets — all catering to both adults and children. When this is done right, more customers  will be drawn to shopping centers. Once inside, this captive audience will invariably filter through to browse in shops, which will improve the shopping centre’s impulse buying hit rate. All in all, shops, cafes, galleries and restaurants need to co-exist in a shopping center that incorporates great architecture and landscaping so that the whole experience is uplifting.

Incorporate more shops offering a second-to-none shopping experience

Shops within the city’s shopping centers will need to upgrade their customer shopping experience by employing staff who know the products inside and out. These shops might also consider including a state-of-the-art customer experience lounge, where the latest technology and exclusive customer service is utilized to sell products to customers as they sit in comfort. This service can be backed up by an innovative customer loyalty program to ensure the overall business keeps ticking along through repeat purchasing.

React faster to product pricing changes

Price is critical to sales, and online product pricing often reacts more quickly than retailing offline. To combat the threat from e-commerce and, in particular, the practice of “showrooming,” where customers visit shops, then use mobile phones to search for cheaper deals elsewhere, bricks-and-mortar shops will need to have faster reaction times to changes in product prices.

One department store in Shanghai that is prepared to lift its service game and address changes wrought by e-commerce is the recently opened Lane Crawford on Huaihai Road. Lane Crawford now has personal concierges on every floor, 65 personal stylists, platinum suites dedicated to a highly personalized shopping experience and a seamless connection between in-store and online experiences. In fact, Lane Crawford’s online shop now has around 1 million visits every month.

Conclusion and outlook: Embrace new ideas, make the change and reap the rewards in 2014

The time window for shopping centers in Shanghai to react remains open. E-commerce is not fully developed. But this window will close as soon as investment in e-commerce in China speeds up. There is no time like the present, and if shopping centers react quickly to the changes, as some are already beginning to do, they will be ahead of the curve.

If this is done and done right, we predict moderate rental growth for the Shanghai market for the rest of 2014.