E-commerce has grown rapidly over the past five years, with expansion accelerating since the pandemic. Though growth has moderated from pandemic highs as restrictions on activity recede, the property services firm CBRE expects future expansion in Asia-Pacific to continue to outpace the rest of the world.
The retail industry as a whole continues to evolve towards an omni-channel model, and so too will the role and functions of physical stores. Retailers and landlords need to reinvent themselves to prepare for this evolution.
The growth of e-commerce is also driving robust industrial and logistics property demand, although the supply pipeline is unlikely to meet future demand.
CBRE forecasts the e-commerce penetration rate in Asia-Pacific will reach 35% of total sales by 2026, from around 23% in 2021, led by South Korea, mainland China, Indonesia, Australia and Taiwan.
However, penetration will vary across product categories. And while physical stores will remain essential, the rise of omni-channel is prompting many traditional brick-and-mortar retailers to consider new strategies and locations.
Meanwhile, between 100 million and 130 million square metres of additional dedicated e-commerce logistics space will be required between now and 2026 to support the growth of online sales in Asia-Pacific.
The global retail market was worth an estimated US$15.6 trillion in 2021, with Asia-Pacific accounting for a 40% share. While the pandemic has accelerated the growth of e-commerce, offline retail remains the dominant sales channel.
CBRE has identified six factors that are determining the extent of e-commerce penetration. By predicting how these six drivers will evolve over time, it has formulated a forecast for the e-commerce penetration rate in each market:
- Percentage of urban population;
- Mobile internet sales ratio;
- Debit and credit card use/adoption of digital wallets;
- Digital technology skills;
- Dominant e-commerce player;
- Fixed broadband subscriptions.
Of the six key drivers, Asia-Pacific possesses a distinct advantage in three:
Demographics: Asia-Pacific continues to see strong growth in its urban population, with solid demand for upgraded consumption from a growing middle-class population.
Digital payments: Emerging markets with large young populations are seeing faster growth in the use of digital wallets.
E-commerce ecosystem: Domestic and regional e-commerce platforms are investing heavily in new infrastructure and marketing.
BIG PLATFORMS
The Asia-Pacific e-commerce market is dominated by several large regional and local platforms. Intense competition among local platforms has stimulated investment in consumer education, experience and infrastructure, which has facilitated growth of the e-commerce market.
The e-commerce penetration rate varies across different product categories, but clothing, especially value products, and consumer electronics will remain the two top categories. Groceries will see the strongest growth following strong uptake among consumers since the onset of the pandemic.
CBRE also expects more retailers to set up their own direct-to-consumer e-commerce channels to reduce reliance on third-party marketplaces. This will ensure retailers gain more and better customer data, which can be used to develop more targeted online sales and marketing strategies.
While online retail is expected to grow further and increase its overall market share, offline sales will remain the dominant retail sales channel in 2026.
Recent years have seen a steady increase in customer acquisition costs for online retail. At the same time, retail rents in many markets have been flat or have fallen sharply since the onset of the pandemic. Now is therefore an opportune moment for online retailers to expand into brick-and-mortar stores.
Physical stores are still seen as more effective in engaging consumers and for cross-selling. But the retail store of the future is set to evolve.
Brick-and-mortar stores will be redesigned as places for storytelling and centres to showcase brand experiences. Retailers are advised to enhance in-store experiences in flagship stores by providing food and beverage offers, installing unique designs and hosting in-store events. Luxury brands are currently leading in this area.
Meanwhile, opportunities to considerably reduce last-mile delivery costs have prompted a growing number of e-commerce companies to partner with brick-and-mortar retailers for in-store pick-up services.
Many retailers now place a small volume of online-only goods in brick-and-mortar stores to let consumers try products before ordering.
REDUCING RETURNS
While in-store inventory for such purposes is limited, this model helps to reduce returns of online purchases. In the US, data shows online orders have a higher return rate, reaching 20% in 2021.
While many consumers view free returns as essential for online orders, the cost to retailers is considerable. A recent study in the US found that reverse logistics costs amount to 66% of the original sales price of an item.
Offering in-store returns can entice consumers to spend more in-store while helping to reduce re-stocking periods and lower costs for reverse logistics.
E-commerce supply chain operations, meanwhile, need more warehouse and logistics space. These requirements are typically three times greater than for a traditional brick-and-mortar supply chain.
CBRE's analysis suggests that every $1 billion of additional e-commerce sales requires an additional 92,900 sq m of logistics space. Based on this calculation, a further 100 million to 130 million sq m of e-commerce-dedicated logistics space will be required in Asia-Pacific between 2021 and 2026.
With other industries continuing to expand, the tight supply environment is unlikely to be alleviated. This will support further rental growth.
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