As Chinese e-commerce grows, logistics companies need to adapt
As online retailing rapidly expands, warehouse businesses need to adjust their strategies
By 2015, China will be home to more than 700 million internet users compared to 500 million today, making it the biggest online population in the world.
The internet is already an integral part of the retail experience for many Chinese consumers, if not for the actual purchase then for conducting research and price comparisons.
In fact, online retail sales in China have grown at a rate of 99 per cent per year over the past five years, compared to only 9 per cent in the United States. And in just one day in 2012 (November 11, known as "Singles' Sunday"), China's e-commerce market giant Taobao and its B2C (business-to-consumer) platform Tmall generated gross sales in excess of 19.2 billion yuan (HK$23.7 billion), 21 times the daily retailing volume of Hong Kong.
As with most things in China, the numbers are staggering. Yet they are far from reaching their full potential. At 37 per cent, internet penetration is still well below that of developed markets, and of this 37 per cent, only one in three are using the internet to shop online.
Estimates show that 30 million consumers, the equivalent of the population of Canada, are expected to make an online purchase for the first time in every single year to 2015.
The online shopping model adds a new dimension to the traditional retail experience, with in-store shopping substituted by direct delivery to consumers' homes.
As e-commerce players attempt to reach a wider geographical pool of consumers, strategic warehouse location and optimum specification become ever more critical.
The e-commerce trend is transforming the role of logistics real estate. Where logistics is traditionally seen as a "support" or "backroom" function, the introduction of the end-consumer into the supply chain places the warehouse centre stage.
This has important ramifications for logistics property in terms of site selection, specification, and location.
E-commerce facilities need to deal with a whole new set of considerations: final product assembly, small batches, high order volumes, and, perhaps most important, order fulfillment and so-called last-mile delivery.
In a country as large as China, with 220 million online shoppers, limited infrastructure in inland areas, and high logistics costs, this last point presents a significant challenge, and competitive edge, for e-commerce retailers.
Adding to this is a severe lack of modern logistics. Major modern logistics facilities account for only 2 per cent of total stock in China.
The vast majority of supply comprises middle- and low-end premises, some converted from factories and others poorly constructed, with insufficient clear height, lack of loading docks and restricted vehicle accessibility.
Lack of supply is fuelling rental growth in tier-I markets, with logistics rents growing by as much as 85 per cent over the past year in some districts of Shanghai.
Faced with these challenges, China's e-commerce giants are adopting a range of logistics models, including build-to-suit, self-managed logistics, and in-house express delivery services.
We consider strategic partnerships between e-commerce companies and third-party logistics (3PL) providers to be the optimum approach, with the majority of retailers expected to adopt a hybrid form of logistics, combining 3PL and self-managed logistics.
Limitations imposed by infrastructure are reflected in the geographic spread of e-commerce warehouse facilities. With a growing online consumer base in central and western China, we see increased demand for modern warehousing supply in these areas as e-commerce companies tap into demand.
