Mind the Gap

E-commerce will triumph over bricks and mortar in the final frontier of retailing

PUBLISHED : Sunday, 09 July, 2017, 12:39pm
UPDATED : Sunday, 09 July, 2017, 10:14pm

Hong Kong’s retailing and grocery landscape is the land that’s been forgotten by time and technology. Its stubborn resistance to change is formidable. It’s one of the reasons why visitors to the city are astonished to find that a city with so much capital and education is so far behind China in technology.

Last week, I reflected on how the city’s luxury malls and department stores are more reactive than proactive to technology. At their best, they are aware of online trends. At their worst they are stuck in their 1980s profit-per-square-foot model. Being a rent collector is enviable, but uninteresting, because it discourages innovation.

I don’t foresee Hong Kong’s Landmark building, or Pacific Place malls, being converted into tumbleweed infested, skateboard parks like some American structures.

Some of the senior property executives and mall managers I have spoken to, are curious and aware of the unspecified, but real threat of social media and online retailing - especially when combined with a millennial generation that apparently doesn’t value luxury goods. But, they haven’t been able to see the next new thing.

Corporates need to see historical data before they believe. But, the very problem is that you can only envision the future if you are in the middle of changing it.

Back in 2013, beyond Beijing, Shanghai, Shenzhen and Guangzhou, mainland China was a luxury label desert. You could not find high-end malls or boutiques that sell the branded goods sought by mainland shoppers, which is why so many visited Hong Kong. Second tier cities suffer from a luxury goods shortfall due to a lack of upscale malls. More than 50 of these cities have a combined population of over 50 million- enough to sustain luxury brand sales.

Only an internet based distribution system can create access for retailers and buyers. Four years later, companies like SF Express have emerged as logistics and delivery solutions for that crucial “last mile”. And they have enabled large scale “reverse logistics” that allows for efficient refunds - so important for luxury and handcrafted goods across the country.

This improvement enabled the logic for the recent deal between FarFetch and JD.com. Co-founder and CEO Jose Neves said JD’s unique advantage “is that they run their logistics themselves so they don’t outsource.”

Using its newly launched premium service JD Luxury Express, FarFetch hopes to deliver fashion in a way that meets the expectations of luxury consumers.

In light of Amazon’s decisive US$13.1 billion acquisition of Whole Foods, Hong Kong’s local supermarket fiefdom looks downright medieval.

But, there is a glimpse of hope. Since 2015, “U Select by Tesco” entered the fray as a joint venture with mainland conglomerate China Resources Vanguard. One third of the products sold in the store come from Tesco. There are presently no online ordering and delivery services.

The last entrant to challenge the city’s two dominant supermarkets was Carrefour who opened in 1996 and closed in 2000. According to the South China Morning Post’s report, local suppliers quickly said they would no longer deliver products unless the French retailer put a halt to its discounting practices. The Consumer Council quizzed 22 firms, which had allegedly black listed Carrefour. Seven confirmed taking action to enforce minimum prices, 12 denied the charge and three declined on principle.

I presume U Select has been left alone by our local incumbents who don’t want to risk the consequences of driving a mainland company out of….a Chinese city.

And those who lived through internet version 1.0 will recall that local media tycoon Jimmy Lai spent US$120 million over 1999 to 2000 in Admart.

It was arguably Hong Kong’s first pure foray into e-commerce like San Francisco’s Webvan. The business was overwhelmed by the initial demand and the website crashed. Orders had to be taken by phone and delivery delays ensued. Lai alleged that distribution channels were choked off by competitors.

Back then, sceptics used the same arguments as today: Admart was ill suited to densely packed Hong Kong, where a Wellcome and Park’n’Shop or wet market is never far away. And unlike the US, Hong Kong consumers do not have the storage space to shop in bulk. But, much has changed.

Seventeen years after Admart, the online interface has become the final frontier versus the brick-and-mortar shops.

Consultants believe that a combination of the two platforms could actually multiply sales by several times. This remains to be seen.

But it does appear easier for nimble e-commerce companies to benefit from bricks and mortar integration rather than the other way around.

Peter Guy is a financial writer and a former international banker.